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Prospectus
$300,000,000
AMERICAN AXLE & MANUFACTURING, INC.
OFFER TO EXCHANGE ALL OUTSTANDING 9 3/4% SENIOR SUBORDINATED NOTES DUE
2009 FOR 9 3/4% SENIOR SUBORDINATED NOTES DUE 2009, WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933
UNCONDITIONALLY GUARANTEED ON A SENIOR SUBORDINATED BASIS BY
AMERICAN AXLE & MANUFACTURING HOLDINGS, INC.
THE EXCHANGE OFFER
o We will exchange all outstanding Notes that are validly tendered and not
validly withdrawn for an equal principal amount of exchange Notes that are
freely tradeable.
o You may withdraw tenders of outstanding Notes at any time prior to the
expiration of the exchange offer.
o The exchange offer expires at 5:00 p.m., New York City time, on June 7,
1999, unless extended. We do not currently intend to extend the expiration
date.
o The exchange of outstanding Notes for exchange Notes in the exchange offer
will not be a taxable event for U.S. federal income tax purposes.
o We will not receive any proceeds from the exchange offer.
THE EXCHANGE NOTES
o The exchange Notes are being offered in order to satisfy certain of our
obligations under the exchange and registration rights agreement entered
into in connection with the placement of the outstanding Notes.
o The terms of the exchange Notes to be issued in the exchange offer are
substantially identical to the outstanding Notes, except that the exchange
Notes will be freely tradeable.
RESALES OF EXCHANGE NOTES
o The exchange Notes may be sold in the over-the-counter market, in negotiated
transactions or through a combination of such methods.
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If you are a broker-dealer and you receive exchange Notes for your own
account, you must acknowledge that you will deliver a prospectus in connection
with any resale of such exchange Notes. By making such acknowledgment, you will
not be deemed to admit that you are an "underwriter" under the Securities Act of
1933 (the "Securities Act").
Broker-dealers may use this prospectus in connection with any resale of
exchange Notes received in exchange for outstanding Notes where such outstanding
Notes were acquired by the broker-dealer as a result of market-making activities
or trading activities.
We will make this prospectus available to any broker-dealer for use in any
such resale for a period of up to 90 days after the date of this prospectus.
A broker-dealer may not participate in the exchange offer with respect to
outstanding Notes acquired other than as a result of market-making activities or
trading activities.
If you are an affiliate of American Axle & Manufacturing, Inc. or are
engaged in, or intend to engage in, or have an agreement or understanding to
participate in, a distribution of the exchange Notes, you cannot rely on the
applicable interpretations of the Securities and Exchange Commission and you
must comply with the registration requirements of the Securities Act of 1933 in
connection with any resale transaction.
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YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 13 OF THIS
PROSPECTUS BEFORE PARTICIPATING IN THE EXCHANGE OFFER.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this prospectus is May 6, 1999.
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TABLE OF CONTENTS
PAGE
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Summary....................................... 1
Risk Factors.................................. 13
The Recapitalization.......................... 22
Use of Proceeds............................... 23
Capitalization................................ 24
Selected Consolidated Financial
and Other Data.............................. 25
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................. 27
Business...................................... 34
Management.................................... 45
Principal Stockholders........................ 55
Related Party Transactions.................... 55
PAGE
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Description of Certain Indebtedness........... 58
The Exchange Offer............................ 62
Description of Notes.......................... 71
Registration Rights Agreement................. 112
Book-Entry; Delivery and Form................. 114
Certain United States Federal Income Tax
Consequences of the Exchange Offer.......... 118
Other Tax Considerations...................... 118
Plan of Distribution.......................... 120
Legal Matters................................. 121
Experts....................................... 121
Available Information......................... 121
Index to Consolidated Financial Statements.... F-1
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FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). These forward-looking statements are
subject to a number of risks and uncertainties, many of which are beyond our
control. All statements other than statements of historical facts included in
this prospectus, including the statements under the headings "Summary,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Business," and located elsewhere herein regarding our
financial position, plans to increase revenues, reduce expenses and any
statements regarding other future events or our future prospects, are
forward-looking statements. When used in this prospectus, the words "believe,"
"anticipate," "intend," "estimate," "expect," "project" and similar expressions
are intended to identify forward-looking statements, although not all
forward-looking statements contain such words. These forward-looking statements
speak only as of the date hereof. Neither we nor the initial purchasers
undertake any obligation to update or revise publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
Although management believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
expectations will prove to be correct or that savings or other benefits
anticipated in the forward-looking statements will be achieved. Important
factors, some of which may be beyond our control, that could cause actual
results to differ materially from management's expectations ("cautionary
statements") are disclosed in this prospectus, including in conjunction with the
forward-looking statements included in this prospectus and under "Risk Factors."
Prospective purchasers are cautioned not to place undue reliance on these
forward-looking statements. All subsequent written and oral forward-looking
statements attributable to us are expressly qualified in their entirety by the
cautionary statements. See "Risk Factors." These forward-looking statements are
subject to risks, uncertainties and assumptions about us, including, among other
things:
o Our high degree of leverage and significant debt service obligations
o Our dependence on domestic automotive production and the cyclical nature
of the automotive industry
o Our reliance on revenues derived from sales to GM
o The successful transition from a single component supply agreement to a
series of supply agreements with GM, including the related transition of
purchasing activities from GM to us
o Risks related to labor relations, labor expenses and work stoppages
affecting GM or us
o The highly competitive nature of the automotive component manufacturing
and supply industry
o Our reliance on single source suppliers for component parts
o Our ability to retain existing and obtain new customers
o Risks related to environmental costs, liabilities or claims
o The potential effect of Year 2000 computer issues
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SUMMARY
This summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements
(including the notes thereto) appearing elsewhere in this prospectus. Statements
concerning the automotive industry contained in this prospectus are based on
information compiled by us or derived from public sources which we believe to be
reliable, including J.D. Power & Associates, Inc. ("J.D. Power") and Autofacts
Automotive Outlook. As used in this prospectus, unless the context otherwise
requires, references to "we", "us" or "American Axle" shall mean collectively
(i) American Axle & Manufacturing, Inc. ("AAM Inc." or the "Issuer"), a Delaware
corporation, and its predecessor and direct and indirect subsidiaries and
(ii) American Axle & Manufacturing Holdings, Inc. and its predecessor
("Holdings" or the "Guarantor"), a Delaware corporation and the direct parent
corporation of the Issuer. Holdings has no material operations or assets other
than its ownership of 100% of the issued and outstanding common stock of the
Issuer.
THE COMPANY
We are a Tier I supplier to the automotive industry and a world leader in
the design, engineering and manufacturing of driveline systems for light trucks
and sport-utility vehicles ("SUVs"). The driveline system includes all of the
components that transfer power from the transmission and deliver it to the drive
wheels. Driveline products produced by us include axles, propeller shafts,
chassis components and forged products. We are the leading independent supplier,
with an estimated 33% market share (by 1997 sales), of driveline components for
light trucks and SUVs manufactured in North America and sold in the United
States. The light truck and SUV segment is the fastest growing segment of the
light vehicle market. We also manufacture axles, propeller shafts and other
products for rear-wheel drive ("RWD") passenger cars. Additionally, we have the
second largest (by sales) automotive forging operation in North America.
We are General Motors Corporation's ("GM") principal supplier of driveline
components for light trucks, SUVs and RWD passenger cars manufactured in North
America, supplying substantially all of GM's rear axle and front four-wheel
drive ("4WD") axle requirements and over 75% of its propeller shaft requirements
for these vehicle platforms in 1997. Approximately 93% of our 1998 net sales of
$2.04 billion were to various divisions and subsidiaries of GM. Our second
largest customer is the Ford Motor Company ("Ford"), for which we produce axle
shafts and double cardan joints for light trucks and SUVs manufactured by Ford
in North America. Net sales and Adjusted Net Sales (as defined) were
$2.04 billion and $2.28 billion, respectively, and EBITDA and Adjusted EBITDA
(each as defined) were $119.2 million and $241.9 million, respectively, for the
year ended December 31, 1998.
We, through our October 1998 acquisition of Albion Automotive (Holdings)
Limited ("Albion"), supply 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. Albion's results after the October 1998 acquisition
date have been included in our consolidated financial results for the year ended
December 31, 1998.
COMPANY BACKGROUND
We are the successor to the former Final Drive and Forge Business Unit of
the Saginaw Division of GM (the "Business Unit" or "Predecessor") and have
produced driveline components and forged products for over 75 years. We were
formed in March 1994 when a private investor group led by Richard E. Dauch
purchased the Business Unit from GM (the "1994 Acquisition"). In connection with
the 1994 Acquisition, we entered into a Component Supply Agreement (the "CSA")
with GM under which we became the sole-source supplier to GM of all the products
and components previously supplied to GM by the Business Unit. In September
1997, we signed an additional binding agreement with GM, the Amended and
Restated Memorandum of Understanding (the "MOU"), which became operative after
our recapitalization described below. Under the MOU, we have agreed with GM to
transition the CSA into a number of separate Lifetime Program Contracts
("LPCs"), substantially all of which have been entered into and under which we
will supply products and components for the life of each GM vehicle program
covered by an LPC. These LPCs will ultimately replace the CSA. See
"Business--Contractual Arrangements with GM."
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Our management team, which was formed in connection with the 1994
Acquisition, is led by Mr. Dauch as Chairman of the Board, Chief Executive
Officer and President and was carefully selected on the basis of its management
expertise in the automotive industry. Mr. Dauch has over 34 years of experience
in the industry and was an Executive Vice President for Chrysler Corporation
("Chrysler") from 1980 to 1991, and was instrumental in Chrysler's manufacturing
and financial turnaround. As an executive of GM, he also managed the Business
Unit's largest manufacturing plant (Detroit Gear & Axle) from 1974 to 1976. Our
senior management team is comprised of 13 executives with an average of
25 years experience in the automotive industry, including both automotive
original equipment manufacturer ("OEM") and supplier operations.
POST-ACQUISITION IMPROVEMENTS
Since the 1994 Acquisition, we have dramatically improved product quality
and manufacturing efficiency through a combination of management leadership,
significant investments in new equipment and technology, workforce training, and
process improvements resulting in increased capacity utilization. From
March 1994 through December 1998, we have invested approximately $825 million in
capital expenditures and 1.4 million labor hours for training and education of
our associates and have received and maintained ISO/QS 9000 certification for
each of our facilities. As a result:
o the average number of axles produced per production day increased from
approximately 10,000 in March 1994 to approximately 14,000 in December
1998;
o discrepant parts shipped to GM (as measured by GM) decreased from
approximately 13,400 parts per million ("PPM") during the six months
ended December 31, 1994 to approximately 118 PPM during the six months
ended December 31, 1998; and
o parts returned by GM decreased from 5,136 PPM during the ten months ended
December 31, 1994 to 223 PPM during the twelve months ended December 31,
1998.
In February 1996, we were chosen as the design, development and production
supplier for the GMT-800 Program, which represents the new generation of GM's
full-size pickup trucks and SUVs, including the GMC and Chevrolet full-size
pickup trucks and the Suburban, Tahoe and Yukon SUVs. GM began to phase in
production of GMT-800 vehicles in June 1998. Additionally, in June 1997, we were
chosen as the supplier for the next generation of GM's mid-size SUVs, including
the Blazer, Bravada and Jimmy (the "M-SUV Program"). These new programs replace
existing programs supplied by us that accounted for approximately 65% of our
1997 net sales, thereby extending our contract privileges for the life of these
new programs (which typically run six to twelve years). These new programs also
are expected to generate greater revenues for us through higher "Sales-Dollar
Content" per vehicle (our revenue per vehicle containing our products) as a
result of engineering enhancements and product improvements. This increase in
Sales-Dollar Content per vehicle is already being realized with the GMT-800
Program, for which we have designed and engineered significant improvements in
the quality and reliability of its driveline products that have improved the
ride and handling of these light trucks and SUVs.
In August 1998, we were awarded the mid-size pick-up truck replacement
program (the "MST Program") for the GMT-325 Program, for which we will supply
front and rear axles for future generation mid-sized pick-up trucks to be
manufactured by GM in North America and Brazil. These axles are new product
offerings for us.
THE RECAPITALIZATION
Blackstone Capital Partners II Merchant Banking Fund L.P. and certain of
its affiliates (collectively, "Blackstone") acquired a controlling interest in
Holdings in a leveraged recapitalization transaction consummated in
October 1997. See "The Recapitalization."
INDUSTRY
The automotive industry has been and continues to be significantly
influenced by several industry trends which we believe will enhance our
strategic position and growth prospects. First, consumer demand for light trucks
and SUVs continues to grow both in the United States and worldwide. In fact, in
November 1998, sales of light trucks and SUVs exceeded 50% of all light vehicle
sales in the United States for the first time ever. We benefit directly from
this trend due to our leading United States market share position as an
independent supplier of driveline components for the light truck and SUV
segment. Second, sales penetration of 4WD vehicles in the
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United States light vehicle market has increased from 7% in 1990 to over 15% in
1997 and, according to J.D. Power, is expected to continue to rise. We benefit
from this trend since our Sales-Dollar Content per vehicle is approximately 80%
higher on a 4WD vehicle than on a comparable two-wheel drive vehicle. Third,
automotive OEMs continue to outsource component manufacturing as a result of
competitive pressures to improve quality and reduce capital expenditures,
production costs and inventory levels. A significant portion of driveline
components are currently manufactured by OEMs, representing a substantial
outsourcing opportunity for us. Fourth, in connection with this outsourcing
trend, OEMs are placing greater reliance on large Tier I full-service suppliers
that are capable of supplying integrated systems. It is anticipated that as this
trend continues, the number of suppliers will substantially decrease. As the
16th largest (by sales) North American automotive OEM parts supplier (according
to the March 30, 1998 Automotive News), we believe we are well positioned to
compete successfully as a systems integrator in the consolidating supplier
market. Fifth, OEMs are expanding manufacturing operations into global markets,
thereby providing Tier I suppliers the opportunity to follow OEMs into those
markets. We have participated in this trend by being awarded contracts to supply
components to GM's operations in South America, Indonesia and Mexico.
BUSINESS STRATEGY
We plan to leverage our competitive advantages and actively pursue the
following strategies to increase revenue and profitability:
Improve Product Quality and Manufacturing Efficiency. Since the 1994
Acquisition, we have dramatically improved product quality and efficiency. We
are committed to continue reducing operating costs by developing new
manufacturing processes and by investing in new equipment, technologies and
improvements in product designs. We believe that the significant modernization
of our manufacturing equipment and facilities which has been completed over the
last four years, as well as initiatives to be undertaken in connection with the
GMT-800, the M-SUV and the MST Programs, will generate enhanced productivity and
operating efficiency. From March 1994 through December 1998, we have invested
approximately $825 million in the modernization of our equipment and facilities.
Diversify, Strengthen and Globalize OEM Customer Base. We currently provide
axle shafts and double cardan joints to Ford and have begun to pursue strategic
initiatives to further diversify our customer base by providing products for
vehicles manufactured by Isuzu, Nissan, CAMI (a joint venture between GM and
Suzuki), and DaimlerChrysler. Through our diversification efforts (including our
acquisition of Albion), we have increased our sales to customers other than GM
to approximately $134 million in 1998. We will continue to seek new business
from existing customers, as well as develop relationships with new customers
worldwide. We sell our products primarily in North America and Europe. In 1997
and 1998, we established sales offices in Tokyo, Japan and Ulm, Germany,
respectively, in order to access new markets for our products. Additionally, we
are establishing a sales office and constructing a manufacturing facility in
Guanajuato, Mexico, which is currently scheduled to begin production in the fall
of 2000.
Expand Systems Integrator Capability. OEMs continue to consolidate their
supplier base and shift the design, engineering and manufacturing functions of
complete systems to their remaining Tier I suppliers. We currently supply axles,
propeller shafts, chassis components and forged products for light trucks and
SUVs. Through our recently acquired Albion subsidiary, we also supply front
steerable and rear axles, driving heads, crankshafts, chassis components and
transmission parts used primarily in medium-duty trucks and buses. We intend to
provide additional driveline components through a combination of developing new
technologies and other capabilities, managing Tier II and Tier III suppliers and
acquiring other suppliers in order to offer our customers more fully-integrated
driveline systems.
Develop New Products. We intend to diversify our product portfolio by
designing and developing new products and systems. As part of our commitment to
product development, we opened our Technical Center in 1995 which provides
resources to our engineers to improve the design of our existing products and to
design new products. We invested $29.5 million and $27.8 million in research and
development in 1998 and 1997, respectively. To date, these initiatives have
resulted in several new products such as the new 11.5" axle (initially being
used in the GMT-800 Program), multi-link rear axles, an integral oil pan front
axle, precision steering system joints (which utilize lash free/low lash idlers
and radiax pivot sockets) and improved propeller shaft "U-Joints." We are also
in the process of developing other new products such as independent rear drive
system
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modules, traction-enhancing advanced differentials, banjo-style axles, aluminum
rear axle carriers, axle cooler covers, spherical differential cases and near
net/net shaped forgings.
Pursue Selected Acquisition Opportunities. We are pursuing an acquisition
strategy which is intended to advance the implementation of our strategic
initiatives. This acquisition strategy will enhance our efforts to diversify our
customer base, expand our product offerings, selectively globalize our
operations and/or leverage our design, engineering and validation expertise. We
have established strict criteria in our assessment of potential acquisition
candidates focused primarily on strong operating potential, complementary
product platforms and strong existing management teams. The acquisition
candidates we are evaluating include:
o suppliers of driveline components which complement our current product
offerings;
o companies in the highly fragmented forging industry, which will allow us
to capitalize upon the trend toward OEM supplier consolidation; and
o other automotive parts suppliers.
We recently completed the acquisitions of Colfor Manufacturing, Inc.
("Colfor") and MSP Industries Corporation ("MSP") as described below, and are
currently in various stages of discussions or negotiations with acquisition
candidates of the types described above. It is possible that an agreement with
respect to an acquisition could be reached in the near future. We do not expect
that any such acquisition, if consummated, would have a material impact on our
financial condition. As of the date of this prospectus, no definitive agreement
with any such acquisition candidate has been entered into and there can be no
assurance that any such acquisition will be successfully negotiated, financed or
consummated. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" and "Description of
Certain Indebtedness--Senior Secured Credit Facilities."
Our October 1998 acquisition of Albion illustrates how the implementation
of our strategic initiatives can be advanced through an acquisition, as it
provides us with diversified product lines, a broader customer base and expanded
geographic presence. 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. This acquisition adds product offerings for vehicle classes
in gross vehicle weight ("GVW") 4-8, expanding our product portfolio to include
vehicle classes GVW 1-8. This acquisition also broadens our customer base by
adding Caterpillar (Perkins), LDV, PACCAR (Leyland and DAF), Renault,
Rolls-Royce, Rover and Volvo. Finally, Albion expands our geographic presence by
adding manufacturing capabilities in Europe which will complement our existing
sales office in Ulm, Germany.
RECENT DEVELOPMENTS
On February 3, 1999, we consummated our IPO. The net proceeds to us from
the IPO totaled approximately $108 million, and were used to reduce outstanding
borrowings (but not the related commitments) under the Revolving Credit
Facility.
On April 1, 1999, we announced the closing of our purchase of two forging
companies, Colfor and MSP, for an aggregate cash purchase price of approximately
$223 million. 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 1998 sales would have been approximately $126 million. MSP manufactures
precision forged powertrain, driveline, chasis and other components for the
automotive industry using cold and warm forging processes at three manufacturing
facilities in Michigan. MSP's 1998 sales were $56 million.
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SUMMARY OF TERMS OF THE EXCHANGE OFFER
On March 5, 1999, the Issuer completed the private offering of the
outstanding Notes. References to the "Notes" in this prospectus are references
to both the outstanding Notes and the exchange Notes.
The Issuer and the Guarantor entered into an exchange and registration
rights agreement with the initial purchasers in the private offering in which
the Issuer and the Guarantor agreed to deliver to you this prospectus as part of
the exchange offer and the Issuer agreed to complete the exchange offer within
210 days after the date of original issuance of the outstanding Notes. You are
entitled to exchange in the exchange offer your outstanding Notes for exchange
Notes which are identical in all material respects to the outstanding Notes
except:
o the exchange Notes have been registered under the Securities Act,
o the exchange Notes are not entitled to certain registration rights which
are applicable to the outstanding Notes under the exchange and
registration rights agreement, and
o certain contingent interest rate provisions are no longer applicable.
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The Exchange Offer........................ The Issuer is offering to exchange up to $300 million aggregate
principal amount of outstanding Notes for up to $300 million
aggregate principal amount of exchange Notes. Outstanding Notes may
be exchanged only in integral multiples of $1,000.
Resale.................................... Based on an interpretation by the staff of the Securities and
Exchange Commission (the "Commission") set forth in no-action letters
issued to third parties, we believe that the exchange Notes issued
pursuant to the exchange offer in exchange for outstanding Notes may
be offered for resale, resold and otherwise transferred by you
(unless you are an "affiliate" of American Axle & Manufacturing, Inc.
within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery provisions
of the Securities Act, provided that you are acquiring the exchange
Notes in the ordinary course of your business and that you have not
engaged in, do not intend to engage in, and have no arrangement or
understanding with any person to participate in, a distribution of
the exchange Notes.
Each participating broker-dealer that receives exchange Notes for its
own account pursuant to the exchange offer in exchange for
outstanding Notes that were acquired as a result of market-making or
other trading activity must acknowledge that it will deliver a
prospectus in connection with any resale of the exchange Notes. See
"Plan of Distribution."
Any holder of outstanding Notes who:
o is an affiliate of American Axle & Manufacturing, Inc.;
o does not acquire exchange Notes in the ordinary course of its
business; or
o tenders in the exchange offer with the intention to participate, or
for the purpose of participating, in a distribution of exchange
Notes;
cannot rely on the position of the staff of the Commission enunciated
in Exxon Capital Holdings Corporation, Morgan Stanley & Co.
Incorporated or similar no-action letters and, in the absence of an
exemption therefrom, must comply with the registration and
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prospectus delivery requirements of the Securities Act in connection
with the resale of the exchange Notes.
Expiration Date; Withdrawal of
Tender.................................. The exchange offer will expire at 5:00 p.m., New York city time, on
June 7, 1999, or such later date and time to which the Issuer extends
it (the "expiration date"). The Issuer does not currently intend to
extend the expiration date. A tender of outstanding Notes pursuant to
the exchange offer may be withdrawn at any time prior to the
expiration date. Any outstanding Notes not accepted for exchange for
any reason will be returned without expense to the tendering holder
promptly after the expiration or termination of the exchange offer.
Certain Conditions to the Exchange
Offer................................... The exchange offer is subject to customary conditions, which the
Issuer may waive. Please read the section captioned "The Exchange
Offer--Certain Conditions to the Exchange Offer" of this prospectus
for more information regarding the conditions to the exchange offer.
Procedures for Tendering Outstanding
Notes................................... If you wish to participate in the exchange offer, you must complete,
sign and date the accompanying letter of transmittal, or a facsimile
of the letter of transmittal, according to the instructions contained
in this prospectus and the letter of transmittal. You must also mail
or otherwise deliver the letter of transmittal, or a facsimile of the
letter of transmittal, together with your outstanding Notes and any
other required documents, to the exchange agent at the address set
forth on the cover page of the letter of transmittal. If you hold
outstanding Notes through The Depository Trust Company ("DTC") and
wish to participate in the exchange offer, you must comply with the
Automated Tender Offer Program procedures of DTC, by which you will
agree to be bound by the letter of transmittal. By signing, or
agreeing to be bound by, the letter of transmittal, you will
represent to us that, among other things:
o you acquired your outstanding Notes in the ordinary course of your
business;
o you have no arrangement or understanding with any person or entity
to participate in the distribution of the exchange Notes;
o if you are a broker-dealer that will receive exchange Notes for
your own account in exchange for outstanding Notes that were
acquired as a result of market-making activities, that you will
deliver a prospectus, as required by law, in connection with any
resale of such exchange Notes; and
o you are not an "affiliate," as defined in Rule 405 of the
Securities Act, of American Axle & Manufacturing, Inc. or, if you
are an affiliate, that you will comply with any applicable
registration and prospectus delivery requirements of the Securities
Act.
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Special Procedures for Beneficial
Owners.................................. If you are a beneficial owner of outstanding Notes which are
registered in the name of a broker, dealer, commercial bank, trust
company or other nominee, and you wish to tender such outstanding
Notes in the exchange offer, you should contact such registered
holder promptly and instruct such registered holder to tender on your
behalf. If you wish to tender on your own behalf, you must, prior to
completing and executing the letter of transmittal and delivering
your outstanding Notes, either make appropriate arrangements to
register ownership of the outstanding Notes in your name or obtain a
properly completed bond power from the registered holder. The
transfer of registered ownership may take considerable time and may
not be able to be completed prior to the expiration date.
Guaranteed Delivery Procedures............ If you wish to tender your outstanding Notes and your outstanding
Notes are not immediately available or you cannot deliver your
outstanding Notes, the letter of transmittal or any other documents
required by the letter of transmittal or comply with the applicable
procedures under DTC's Automated Tender Offer Program, prior to the
expiration date, you must tender your outstanding Notes according to
the guaranteed delivery procedures set forth in this prospectus under
"The Exchange Offer--Guaranteed Delivery Procedures."
Effect on Holders of Outstanding
Notes................................... As a result of the making of, and upon acceptance for exchange of all
validly tendered outstanding Notes pursuant to the terms of the
exchange offer, we will have fulfilled a covenant contained in the
registration rights agreement and, accordingly, there will be no
increase in the interest rate on the outstanding Notes under the
circumstances described in the registration rights agreement. If you
are a holder of outstanding Notes and you do not tender your
outstanding Notes in the exchange offer, you will continue to hold
such outstanding Notes and you will be entitled to all the rights and
limitations applicable to the outstanding Notes in the indenture,
except for any rights under the registration rights agreement that by
their terms terminate upon the consummation of the exchange offer.
To the extent that outstanding Notes are tendered and accepted in the
exchange offer, the trading market for outstanding Notes could be
adversely affected.
Consequences of Failure to Exchange....... All untendered outstanding Notes will continue to be subject to the
restrictions on transfer provided for in the outstanding Notes and in
the indenture. In general, the outstanding Notes may not be offered
or sold, unless registered under the Securities Act, except pursuant
to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. Other than in
connection with the exchange offer, the Issuer does not currently
anticipate that it will register the outstanding Notes under the
Securities Act.
Certain U.S. Federal Income Tax
Considerations.......................... The exchange of outstanding Notes for exchange Notes in the exchange
offer will not be a taxable event for United States federal
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
income tax purposes. See "Certain United States Federal Income Tax
Consequences of the Exchange Offer."
Use of Proceeds........................... We will not receive any cash proceeds from the issuance of exchange
Notes pursuant to the exchange offer.
Exchange Agent............................ IBJ Whitehall Bank & Trust Company is the exchange agent for the
exchange offer. The address and telephone number of the exchange
agent are set forth in the section captioned "Exchange Offer--
Exchange Agent" of this prospectus.
</TABLE>
SUMMARY OF TERMS OF THE EXCHANGE NOTES
<TABLE>
<S> <C>
Issuer.................................... American Axle & Manufacturing, Inc.
Securities Offered........................ $300,000,000 aggregate principal amount of 9 3/4% Senior Subordinated
Notes due 2009.
Maturity.................................. March 1, 2009.
Interest.................................. Annual rate 9 3/4%.
Payment frequency: every six months on March 1 and September 1.
First payment: September 1, 1999.
Sinking Fund.............................. None.
Optional Redemption....................... Except as described below, the Issuer may not redeem the Notes prior
to March 1, 2004. After such date, the Issuer may redeem the Notes,
in whole or in part, at any time at the redemption prices set forth
herein, together with accrued and unpaid interest and liquidated
damages, if any, to the date of redmeption. In addition, at any time
and from time to time on or prior to March 1, 2002, the Issuer may,
subject to certain requirements, redeem up to 35% of the original
aggregate principal amount of the Notes with the net cash proceeds
received from one or more equity offerings:
o by the Issuer; or
o by Holdings to the extent the net cash proceeds thereof are
contributed to the Issuer or are used to purchase certain capital
stock of the Issuer, at a redemption price equal to 109.75% of the
principal amount of the Notes to be redeemed, together with accrued
and unpaid interest and liquidated damages, if any, to the date of
redemption, provided that at least 65% of the original aggregate
principal amount of the Notes remains outstanding immediately after
each such redemption, and provided further that such redemption
shall occur within 90 days after the date on which such equity
offering is consummated. See "Description of Notes--Optional
Redemption."
Change of Control......................... Upon the occurrence of a change of control you will have the right to
require the Issuer to repurchase your Notes at a price equal to 101%
of the principal amount together with accrued and unpaid interest and
liquidated damages, if any, to the date of repurchase. See
"Description of Notes--Change of Control."
</TABLE>
8
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<TABLE>
<S> <C>
Guarantees................................ The outstanding Notes are, and the exchange Notes when issued will
be, guaranteed by Holdings. The Notes and the guarantee are unsecured
senior subordinated debts. None of the Issuer's subsidiaries have
guaranteed the outstanding Notes. In the future, each of the Issuer's
direct and indirect restricted subsidiaries organized under the laws
of the United States or any state thereof that incurs or guarantees
certain indebtedness will guarantee the Notes on a senior
subordinated basis. See "Description of Notes--Guarantees."
Ranking................................... The Notes are unsecured and rank behind all of the Issuer's current
and future senior indebtedness, including all borrowings of the
Issuer under its credit facilities. The Notes will rank equally in
right of payment with all senior subordinated debts of the Issuer and
will rank senior in right of payment to all subordinated debts of the
Issuer. The Indenture governing the Notes will permit the Issuer and
its subsidiaries to incur additional indebtedness including senior
indebtedness, subject to certain limitations. See "Description of
Notes--Ranking."
Assuming the Issuer had completed its IPO and the private placement
of the outstanding Notes on December 31, 1998 and applied the
proceeds as intended (but without giving effect to any borrowings to
finance the acquisition of Colfor or MSP):
o the Issuer would have had $407.4 million aggregate principal amount
of senior indebtedness outstanding (excluding unused commitments)
all of which would have been secured indebtedness;
o the Issuer would have had no debt that ranked equally with the
Notes outstanding other than the Notes and no indebtedness that is
junior in right of payment to the Notes; and
o the Issuer's subsidiaries would have had total liabilities
(excluding intercompany liabilities) of $56.5 million. None of the
Issuer's subsidiaries have guaranteed the Notes as of the date
hereof.
See "--Recent Developments," "Description of Notes--Ranking" and
"Description of Certain Indebtedness--Senior Secured Credit
Facilities."
Certain Covenants......................... The Issuer issued the outstanding Notes and will issue the exchange
Notes under an Indenture with IBJ Whitehall Bank & Trust Company, the
trustee. The Indenture, among other things, restricts our ability and
the ability of our subsidiaries to:
o borrow money;
o issue disqualified stock and preferred stock;
o pay dividends on and redeem capital stock;
o redeem debt that is junior to the Notes;
o make certain other restricted payments and investments;
o sell certain assets;
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
o enter into certain transactions with affiliates;
o create certain liens; and
o enter into certain consolidations, mergers and transfers of all or
substantially all of the Issuer's assets.
In addition, the Indenture also prohibits certain restrictions on
distributions from the Restricted Subsidiaries.
However, all of these limitations are subject to a number of
important qualifications and exceptions.
For more details, see "Description of Notes--Certain Covenants."
Absence of a Public Market for the
Notes................................... The exchange Notes will generally be freely transferable but will be
new securities for which there will not initially be a market.
Accordingly, there can be no assurance as to the development or
liquidity of any market for the exchange Notes. The initial
purchasers in the private placement of the outstanding Notes have
advised us that they currently intend to make a market in the
exchange Notes. However, they are not obligated to do so, and any
market making with respect to the exchange Notes may be discontinued
at any time without notice.
</TABLE>
RISK FACTORS
Prospective participants in the exchange offer should carefully consider
the risk factors set forth under the caption "Risk Factors" and the other
information included in this prospectus prior to tendering their outstanding
Notes. See "Risk Factors."
------------------------
The Issuer and Holdings are Delaware corporations. Our principal offices
are located at 1840 Holbrook Avenue, Detroit, Michigan 48212, and our telephone
number is (313) 974-2000.
10
<PAGE>
SUMMARY HISTORICAL AND ADJUSTED CONSOLIDATED FINANCIAL DATA
The following summary historical consolidated financial data at and for the
years ended December 31, 1995, 1996 and 1997 and the two months and ten months
ended February 28, 1994 and December 31, 1994, respectively, were derived from
audited consolidated financial statements of Holdings and its subsidiaries,
which have been audited by Ernst & Young LLP, independent auditors. The summary
historical consolidated financial data at and for the year ended December 31,
1998 were derived from audited consolidated financial statements of Holdings and
its subsidiaries, which have been audited by Deloitte & Touche LLP, independent
auditors. Holdings is a guarantor of the Notes and the Credit Facilities and has
no material operations or assets other than the capital stock of the Issuer. As
a result, the consolidated financial position, results of operations and cash
flows of Holdings are substantially the same as those of the Issuer. The column
below titled "As Adjusted Year Ended December 31, 1998" gives effect to certain
adjustments to the financial information to reflect the impact of (i) the IPO
and the application of the net proceeds therefrom and the offering of the
outstanding Notes and the application of the net proceeds therefrom and (ii)
except in the case of interest expense, the EBITDA to pro forma interest expense
ratio and Balance Sheet Data, certain events that affected the Company's results
during the year ended December 31, 1998 that are based in part on estimates made
by the Company, but does not give effect to the acquisition of Colfor or MSP or
the financing thereof as described in "--The Company--Recent Developments." 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, and the other financial
information included elsewhere in this prospectus.
<TABLE>
<CAPTION>
HISTORICAL AS ADJUSTED
----------------------------------------------------------------------------- -----------------
PREDECESSOR
TWO MONTHS TEN MONTHS YEAR ENDED
ENDED ENDED DECEMBER 31,
FEBRUARY 28, DECEMBER 31, ---------------------------------------------- YEAR ENDED
1994(a) 1994(b) 1995 1996 1997 1998 DECEMBER 31, 1998
-------------- ------------- ---------- ---------- ---------- ---------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <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
Gross profit (loss)........ (17,386) 141,997 179,488 176,550 220,087 156,381
Operating income (loss).... (21,921) 73,880 108,885 93,478 116,133 50,190
Interest expense........... 1,371 1,566 340 8,956 44,784 $ 67,195(c)
OTHER DATA:
Net cash provided by
operating activities..... N/A $ 196,990 $ 196,886 $ 65,687 $ 200,830 $ 81,353
EBITDA(d).................. N/A 96,038 144,779 134,740 152,838 119,194
Adjusted EBITDA............ $ 241,889(e)
Depreciation and
amortization............. $ 4,682 16,846 25,242 36,076 50,177 71,730
Capital expenditures ...... 9,600 25,168 147,077 162,317 282,625 209,993
SELECTED RATIOS:
Ratio of earnings to fixed
charges(f)............... N/A N/A 5.2 3.4 3.4 1.0
EBITDA to pro forma interest expense..................................................................... 1.8x
Adjusted EBITDA to pro forma interest expense............................................................ 3.6x
Pro forma total debt to Adjusted EBITDA(g)............................................................... 2.9x
BALANCE SHEET DATA:
Cash and equivalents....... $ 20,000 $ 120,822 $ 170,339 $ 126,034 $ 17,285 $ 4,547 $ 115,867(h)
Total assets............... 316,466 534,108 736,997 771,222 1,017,653 1,226,232 1,345,892(h)
Total debt(f).............. 82,192 11,192 1,000 2,368 507,043 693,368 705,028(i)
Stockholders' equity....... 20,500 88,101 168,572 250,168 37,231 40,468 148,468(j)
</TABLE>
(Footnotes on next page)
11
<PAGE>
NOTES TO SUMMARY HISTORICAL AND ADJUSTED CONSOLIDATED FINANCIAL DATA
(a) The accompanying statement of income data of the Predecessor for the two
months ended February 28, 1994 reflect its historical cost basis prior to
the 1994 Acquisition. Accordingly, the statement of income data for the
periods subsequent to the 1994 Acquisition are not comparable to the periods
prior to the 1994 Acquisition. The accompanying balance sheet data is as of
March 1, 1994 and include the accounts of the Company after adjustment of
the corresponding assets and liabilities to their estimated fair value to
reflect the allocation of the purchase price in connection with the 1994
Acquisition.
(b) Results are for the ten-month period beginning on the closing date of the
1994 Acquisition and ending on December 31, 1994.
(c) Pro forma interest expense represents interest expense adjusted as if the
IPO and the offering of the outstanding Notes occurred on January 1, 1998
and the Company used a portion of the aggregate net proceeds therefrom to
repay all outstanding borrowings under the Revolving Credit Facility and the
Receivables Facility. The following table reflects the calculation of such
pro forma interest expense. See note (h) below.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
Interest expense................................................................... $ 44,784
Deduct: Interest on the Revolving Credit Facility and Receivables Facility
(weighted average interest rate of 7.8%), net of amounts capitalized............. (8,562)
Add: Interest on the Notes (9.75%)................................................. 29,250
Add: Amortization of discount on the Notes and deferred financing costs (over 10
years)........................................................................... 1,068
Add: Net increase in commitment fees on unused amounts under the Revolving Credit
Facility and the Receivables Facility............................................ 655
--------
Pro forma interest expense......................................................... $ 67,195
--------
--------
</TABLE>
(d) EBITDA represents income from continuing operations before interest expense,
income taxes, depreciation and amortization. EBITDA should not be construed
as income from operations, net income or cash flow from operating activities
as determined by generally accepted accounting principles. Other companies
may calculate EBITDA differently.
(e) Adjusted EBITDA represents EBITDA adjusted to add back: (i) net sales (and
related gross profit and operating income) estimated by the Company to have
been lost as a result of the GM work stoppage which occurred during June and
July of 1998 that 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, and (ii) temporary reductions of
certain payments previously agreed to be made by GM to the Company as part
of the commercial arrangements between them. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Company
Overview."
<TABLE>
<CAPTION>
HISTORICAL AS ADJUSTED
----------------- ESTIMATED IMPACT TEMPORARY REDUCTIONS -----------------
YEAR ENDED OF 1998 GM WORK IN CERTAIN PAYMENTS YEAR ENDED
DECEMBER 31, 1998 STOPPAGE FROM GM DECEMBER 31, 1998
----------------- ---------------- -------------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales.................... $ 2,040,578 $187,656 $ 51,503 $ 2,279,737(1)
Gross profit................. 156,381 71,192 51,503 279,076
Operating income............. 50,190 71,192 51,503 172,885
EBITDA....................... 119,194 71,192 51,503 241,889(1)
</TABLE>
- -----------------
(1) Referred to in this prospectus as "Adjusted Net Sales" and "Adjusted
EBITDA", respectively.
(f) 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. Pro forma 1998 earnings, after giving effect (as if such
events occurred on January 1, 1998) to the IPO and the offering of the
outstanding notes and the application of a portion of the aggregate net
proceeds therefrom to repay all outstanding borrowings under the Revolving
Credit Facility and the Receivables Facility, would have been insufficient
to cover fixed charges by $20.6 million. See "Capitalization."
(g) Total debt includes capital lease obligations.
(h) Pro forma cash and equivalents and pro forma total assets represent cash and
equivalents and total assets, respectively, each adjusted as if the IPO and
the application of the net proceeds therefrom and the offering of the
outstanding Notes and the application of the estimated net proceeds
therefrom occurred on December 31, 1998 (resulting in repayment of
Indebtedness under the Revolving Credit Facility and the replacement of
financing provided by the Receivables Facility, together totaling an assumed
$286.0 million, and the addition of the remainder of such aggregate
estimated net proceeds of $111.3 million to cash and equivalents), but does
not give effect to the acquisition of Colfor or MSP which the Company
financed with cash and borrowings under the Credit Facilities. See
"Capitalization."
(i) Pro forma total debt represents total debt adjusted as if the IPO and the
application of the net proceeds therefrom and the offering of the
outstanding Notes and the application of the net proceeds therefrom
occurred on December 31, 1998 (including repayment of Indebtedness under
the Revolving Credit Facility and the replacement of financing provided by
the Receivables Facility, together totaling an assumed $286.0 million), but
does not give effect to the acquisition of Colfor or MSP, which the Company
financed with cash and borrowings under the Credit Facilities. See
"Capitalization." The Company may, in the future, incur additional
indebtedness, including to meet its working capital and capital expenditure
requirements and to finance acquisitions. The Company also intends to enter
into certain sale/leaseback transactions. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources," "Business--Business Strategy--Pursue Selected
Acquisition Opportunities" and "Description of Certain Indebtedness."
(j) Pro forma stockholders' equity represents stockholders' equity adjusted as
if the IPO occurred on December 31, 1998, but does not give effect to the
acquisition of Colfor or MSP.
12
<PAGE>
RISK FACTORS
Prior to tendering your outstanding Notes, you should consider carefully
all of the information set forth in this prospectus and, in particular, should
evaluate the following risks. The risks described below are not the only ones we
may face. Additional risks not presently known to us or that we currently deem
immaterial may also impair our business operations.
FAILURE TO EXCHANGE--THERE MAY BE ADVERSE CONSEQUENCES IF YOU DO NOT EXCHANGE
YOUR OUTSTANDING NOTES
If you do not exchange your outstanding Notes for exchange Notes in the
exchange offer, then you will continue to be subject to the transfer
restrictions on the outstanding Notes as set forth in the offering memorandum
distributed in connection with the private placement of the outstanding Notes.
In general, the outstanding Notes may not be offered or sold unless they are
registered or exempt from registration under the Securities Act and applicable
state securities laws. Except as required by the registration rights agreement,
we do not intend to register resales of the outstanding Notes under the
Securities Act. You should refer to "Prospectus Summary--Summary of the Exchange
Offer" and "The Exchange Offer" for information about how to tender your
outstanding Notes.
The tender of outstanding Notes under the exchange offer will reduce the
principal amount of the outstanding Notes outstanding, which may have an adverse
effect upon, and increase the volatility of, the market price of the outstanding
Notes due to a reduction in liquidity.
SUBSTANTIAL LEVERAGE AND DEBT SERVICE--WE HAVE SUBSTANTIAL INDEBTEDNESS AND HAVE
SIGNIFICANT INTEREST PAYMENT REQUIREMENTS
We are, and will be, significantly leveraged. As of December 31, 1998, on a
pro forma basis after giving effect to the IPO and the application of the net
proceeds therefrom and the private placement of the outstanding Notes and the
application of the net proceeds therefrom (but without giving effect to the
borrowings to finance the acquisition of Colfor and MSP), we would have had
outstanding $705.0 million in aggregate principal amount of indebtedness
(excluding unused commitments), of which $407.4 million would have been senior
indebtedness, and stockholders' equity of $148.5 million. In addition, we
incurred approximately $65 million of additional borrowings under our Credit
Facilities which were used, together with cash, to finance the acquisition of
Colfor and MSP. We may incur additional indebtedness (including certain senior
indebtedness) in the future, including to meet our working capital and capital
expenditure requirements and to finance acquisitions, subject to certain
limitations contained in the instruments governing our indebtedness.
Accordingly, we will have significant debt service obligations. On a pro forma
basis after giving effect to the IPO and the application of the net proceeds
therefrom and the private placement of the outstanding Notes and the application
of the net proceeds therefrom, as if each had occurred on January 1, 1998, our
earnings would have been insufficient to cover our fixed charges by
$20.6 million for the year ended December 31, 1998. In addition, we intend to
enter into sale/leaseback transactions with respect to approximately
$200 million of our existing machinery and equipment during 1999, and such
sale/leaseback transactions and any additional sale/leaseback transactions we
may enter into are permitted by the terms of the Notes. We also refinanced the
Receivables Facility on similar terms and in connection therewith increased its
size to approximately $153 million. See "Capitalization," "Selected Consolidated
Financial and Other Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources,"
"Business--Business Strategy--Pursue Selected Acquisition Opportunities,"
"Description of Certain Indebtedness" and "Description of Notes."
Our high level of debt could have important consequences for you, including
the following:
o a substantial portion of cash flow from operations will be dedicated
to the payment of principal and interest on our indebtedness,
thereby reducing the funds available to us for operations, future
business opportunities and other purposes;
o indebtedness under our Credit Facilities and under our Receivables
Facility are at variable rates of interest, and therefore we will be
vulnerable to increases in prevailing interest rates;
13
<PAGE>
o our ability to obtain additional financing for working capital,
capital expenditures, acquisitions, general corporate purposes or
other purposes may be impaired, which may adversely affect, among
other things, our ability to successfully implement our acquisition
strategy;
o we may be substantially more leveraged than certain of our
competitors, which may place us at a competitive disadvantage;
o our operations are restricted by the agreements governing our
long-term indebtedness, including the Indenture with respect to the
Notes, which contain certain financial and operating covenants;
o all of the indebtedness outstanding under the Credit Facilities is
secured by substantially all our assets; and
o our substantial degree of leverage may limit our flexibility to
adjust to changing market conditions, reduce our ability to
withstand competitive pressures and make us more vulnerable to a
downturn in general economic conditions or our business.
o the degree to which we are leveraged could prevent us from
repurchasing all of the Notes tendered to us upon a Change of
Control.
See "--Limitations on Change of Control," "Description of Certain
Indebtedness--Senior Secured Credit Facilities" and "Description of Notes."
Our ability to make scheduled payments of principal of, or to pay interest
on, or to refinance our indebtedness (including the Notes) and to make scheduled
payments under our operating leases or to fund planned capital expenditures or
to finance acquisitions will depend on our future operating performance, which
to a certain extent is subject to economic, financial, competitive and other
factors beyond our control. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
If our cash flow and capital resources are insufficient to fund our debt service
obligations, lease obligations, capital expenditures or acquisition financing
needs, we could be required to:
o reduce or delay planned capital expenditures;
o obtain additional equity capital;
o refinance all or a portion of amounts outstanding under the Credit
Facilities at or prior to their maturity, which is prior to the
maturity of the Notes; and/or
o sell material assets or operations.
No assurance can be given that any such transaction would be possible or would
not contain terms and conditions that could have a material adverse effect on us
and our financial condition or results of operations. In addition, our ability
to raise funds by selling assets is restricted by the Credit Facilities, and our
ability to effect equity financings is dependent on our results of operations
and market conditions. In the event that we are unable to refinance such
indebtedness or raise funds through asset sales, sales of equity or otherwise,
our ability to pay principal of, and interest on, the Notes could be adversely
affected.
Additionally, if we were to sustain a decline in our operating results or
available cash, we could experience difficulty in complying with the covenants
contained in the Credit Facilities or the Indenture or any other agreements
governing future indebtedness. The failure to comply with such covenants could
result in an event of default under these agreements, thereby permitting
acceleration of such indebtedness as well as indebtedness under other
instruments that contain cross-acceleration and cross-default provisions.
We believe, based on current circumstances, that our cash flow, together
with available borrowings under the Credit Facilities, will be sufficient to
permit us to meet our operating expenses and to service our debt requirements.
Significant assumptions underlie this belief, including, among other things,
that we will succeed in implementing our business and growth strategies and
there will be no material adverse developments in our business, liquidity or
capital requirements. It is anticipated that we will increase our leverage to
meet our working capital and capital expenditure requirements in the future or
to finance future acquisitions. The impact of work
14
<PAGE>
stoppages at GM has had and may in the future have a significant adverse impact
on our results of operations and liquidity and has contributed and may
contribute in the future to an increase in our leverage.
SUBORDINATION--THE NOTES ARE JUNIOR TO OUR SENIOR DEBT
The Notes will be general unsecured obligations of the Issuer that will be
subordinated to all existing and future Senior Indebtedness of the Issuer. As of
December 31, 1998 on a pro forma basis after giving effect to the IPO and the
application of the net proceeds therefrom and the private placement of
outstanding Notes and the application of the net proceeds therefrom (but without
giving effect to approximately $65 million of borrowings used to finance the
acquisition of Colfor and MSP):
o the Issuer would have had $407.4 million aggregate principal amount
of senior indebtedness outstanding (excluding unused commitments),
all of which would have been secured indebtedness;
o the Issuer would have had no debt that ranked equally with the Notes
outstanding other than the Notes and no indebtedness that is junior
in right of payment to the Notes;
o Holdings, the only guarantor of the Notes on the Issue Date, would
have had no senior indebtedness outstanding (exclusive of its
guarantee of the Credit Facilities);
o Holdings would have had no debt that ranked equally with its
Guarantee outstanding (exclusive of its Guarantee) and no
indebtedness that is junior in right of payment to its Guarantee and
no outstanding liabilities (excluding its guarantee of the Credit
Facilities and indebtedness and liabilities owed to the Issuer); and
o the subsidiaries of the Issuer (none of which are guarantors of the
Notes on the Issue Date) would have had total liabilities (excluding
intercompany liabilities) of $56.5 million.
As of December 31, 1998, the Issuer's subsidiaries had total liabilities
(excluding intercompany liabilities) of $119.5 million. See "Description of
Notes--Ranking" and "Description of Certain Indebtedness--Senior Secured Credit
Facilities." Although the Indenture contains limitations on the amount of
additional indebtedness which the Issuer and its subsidiaries may incur, under
certain circumstances the amount of such indebtedness could be substantial and
such indebtedness may be senior indebtedness. See "Description of Notes." The
Indenture provides that the Issuer and its restricted subsidiaries that become
Guarantors may not incur or otherwise become liable for any indebtedness that is
junior in right of payment to any senior indebtedness and senior in any respect
in right of payment to the Notes.
The Issuer may not pay principal, premium (if any), interest or other
amounts on account of the Notes in the event of a payment default or certain
other defaults in respect of certain designated senior indebtedness unless such
indebtedness has been paid in full or the default has been cured or waived. In
addition, in the event of certain other defaults with respect to designated
senior indebtedness, the Issuer may not be permitted to make any payment on
account of the Notes for a designated period of time. See "Description of
Notes." In the event of our insolvency, liquidation, reorganization, dissolution
or other winding-up or upon a default in payment with respect to, or the
acceleration of, any senior indebtedness, any indebtedness owed to the holders
of such senior indebtedness, to any other creditors who are holders of senior
indebtedness and to creditors of subsidiaries must be paid in full before the
assets of the Issuer may be applied to pay obligations on the Notes. There can
be no assurance that there will be sufficient assets to pay amounts due on all
or any of the Notes.
ASSET ENCUMBRACES--OUR ASSETS ARE PLEDGED TO SECURE PAYMENT OF THE SENIOR CREDIT
FACILITIES
In addition to being contractually subordinated, the Notes and the
Guarantees are unsecured and thus will effectively rank junior to any secured
indebtedness of Holdings, the Issuer or its restricted subsidiaries, including
the indebtedness outstanding under the Credit Facilities. We have granted the
lenders under the Credit Facilities first priority security interests in
substantially all of the tangible and intangible current and future assets of
Holdings, the Issuer and its domestic subsidiaries (excluding receivables
related to the Receivables Facility), including a pledge of all of the issued
and outstanding shares of capital stock of the Issuer and all the capital stock
of, or other equity interests in, the Issuer's existing or subsequently acquired
or organized direct or indirect domestic subsidiaries and 65% of the capital
stock of, or other equity interests in, each direct foreign subsidiary
15
<PAGE>
of the Issuer. In the event of a default on such indebtedness (whether as a
result of the failure to comply with a payment or other covenant, a
cross-default or otherwise), the parties granted such security interests will
have a prior secured claim on the capital stock that was pledged and our assets.
If such parties should attempt to foreclose on their collateral, our financial
condition and the value of the Notes would be materially adversely affected. See
"Description of Certain Indebtedness--Senior Secured Credit Facilities."
WE DEPEND ON THE AUTOMOTIVE INDUSTRY WHICH IS A CYCLICAL INDUSTRY
Our operations are cyclical because they are directly related to domestic
automotive production, which is itself cyclical and dependent on general
economic conditions and other factors. Sales of products for light trucks and
SUVs constituted approximately 90% of our revenues in 1998. There can be no
assurance that positive trends in sales of these vehicles, or that the
increasing penetration of 4WDs as a percentage of the light vehicle market, will
continue. A decrease in consumer demand for the models that generate the most of
our sales, our failure to obtain sales orders for new or redesigned models or
pricing pressure from our customers or competitors could have a material adverse
effect on us. Government regulations, including those relating to Corporate
Average Fuel Economy regulations, could impact vehicle mix and volume which
could adversely affect the demand for our existing products.
In addition, we may be unable to pass on raw material price increases to
our customers due to pricing pressure to remain competitive. There is
substantial and continuing pressure from the major automotive companies to
reduce the number of outside suppliers and reduce costs. Management believes
that our ability to control our own costs and to develop new products will be
essential to remain competitive. There can be no assurance that we will be able
to improve or maintain our profitability on product sales.
WE RELY ON GM FOR BUSINESS
Sales to GM constituted approximately 93% of our sales in 1998 and 96% of
our sales in 1997 and 1996. See "Business--Contractual Arrangements with GM." In
connection with the purchase of the Business Unit, GM agreed pursuant to the
Component Supply Agreement (the "CSA") to continue to purchase all of the
components that were supplied to GM by the Business Unit at the time of the 1994
Acquisition. In 1997, we entered into a binding Amended and Restated Memorandum
of Understanding (the "MOU") with GM which provides for transitioning the CSA
into a number of separate Lifetime Program Contracts ("LPCs"), substantially all
of which have been entered into, applicable for the life of each GM vehicle
program covered by an LPC. Such programs typically run 6 to 12 years. Although
pricing has been established for products sold under the LPCs, we must remain
competitive with respect to technology, design and quality. There can be no
assurance that we will remain competitive with respect to technology, design and
quality to GM's reasonable satisfaction. We will have to compete for future GM
business upon the termination of the LPCs. In addition, pricing negotiated for
future programs may be more or less favorable than currently applicable terms.
If we lose any significant portion of our sales to GM, or if GM significantly
reduces its production of light trucks or SUVs, it would have a material adverse
effect on our results of operations and financial condition. Disputes arising
under any current or future agreements between GM and ourselves could have a
material adverse effect on our relations or our results of operations or
financial condition. Moreover, prolonged labor disruptions involving GM and its
workers have had and could in the future have a negative impact upon us.
In addition, GM provides purchasing services to us pursuant to various
agreements executed by GM or one of GM's subsidiaries and ourselves in
connection with the 1994 Acquisition. We expect to begin transitioning this
purchasing function from GM to ourselves during 1999. See "Business--Contractual
Arrangements with GM."
WE PLAN TO TRANSITION CERTAIN PURCHASING ACTIVITIES FROM GM TO OURSELVES
We currently purchase through GM's purchasing network certain materials for
use in the manufacture of products sold under the Component Supply Agreement
(the "CSA") and the Lifetime Program Contracts ("LPCs"). While we pay current
market prices for such materials, 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 to us by GM for our
products, thereby protecting us from increases in the costs of such
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<PAGE>
materials while such purchasing arrangement is in effect. We have agreed with GM
to develop a mutually satisfactory plan to terminate this purchasing arrangement
no later than December 2002, although we will continue to be eligible to
participate in GM's then current steel resale program and pricing adjustment
policy for non-ferrous metals. We expect to begin transitioning this purchasing
function from GM to ourselves during 1999. See "Business--Contractual
Arrangements with GM."
While the prices at which we sell our products under the CSA and the LPCs
have been established, under the LPCs, upon termination of the purchasing
arrangement described above, we 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 we will be able to pass
on any increased labor, materials or other costs to GM in the future as we have
from time to time in the past pursuant to the above-described terms of the CSA
or by certain additional payments agreed to as part of the commercial
arrangements between GM and ourselves (subject to certain temporary reductions
described in "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Company Overview"). LPCs have been entered into for
substantially all GM vehicle programs supplied by us, including the GMT-800 and
the M-SUV Programs.
Under the CSA, we are not liable for warranty costs for our products after
the relevant vehicle has been sold to a retail purchaser unless it is determined
that the frequency or total cost of warranty claims for a given period
significantly exceeds the historical frequency of such claims for a comparable
model. Under the LPCs, our products are subject to the warranty provisions of
GM's standard purchase order, including warranties as to the absence of defects
and as to fitness and sufficiency for the particular purposes for which such
products are to be used by GM.
WE ARE AFFECTED BY WORK STOPPAGES AT GM
Over the past four years, there have been labor strikes against GM which
have resulted in work stoppages at GM. It is estimated that work stoppages at GM
resulted in lost sales to us of approximately $95 million and $60 million in
1996 and 1997, respectively. We estimate that the work stoppage at GM during
June and July of 1998 resulted in lost sales to us of approximately
$188 million and lost operating income (including related start-up
inefficiencies in our operations in August 1998) of approximately $71 million.
Since GM accounted for approximately 93% of our 1998 net sales, future work
stoppages at GM could materially and adversely affect our financial condition,
results of operations and the conduct of our business.
WE ARE AFFECTED BY OUR LABOR RELATIONS
Our current national collective bargaining agreements with the United
Automobile, Aerospace and Agricultural Implement Workers of America ("UAW") and
the International Association of Machinists ("IAM") run through February 25,
2000 and May 5, 2000, respectively. Since the 1994 Acquisition, we have not
experienced any strikes. In addition, associates at our recently acquired Albion
subsidiary are represented by labor unions under various collective bargaining
agreements, certain of which may be terminated upon six-months' notice. Although
we believe our relations with our unions are positive, there can be no assurance
that future issues with our labor unions will be resolved favorably to us or
that we will not experience a work stoppage which could adversely affect our
business.
WE ARE AFFECTED BY OUR LABOR EXPENSES
Our associates represented by the UAW or IAM are currently paid at wage
levels commensurate with wages paid to such union-represented employees of GM,
which are higher than the wages generally paid to similar employees of other
Tier I suppliers. Upon the expiration of the current collective bargaining
agreements, either union may demand a continuation of GM-level compensation,
while we may be unwilling or unable to continue to pay wages at the GM level. If
negotiations reach an impasse, a work stoppage could result.
To the extent we continue to pay GM-level wages, we may find ourselves at a
competitive disadvantage if other suppliers with whom we compete have lower
labor expenses and are able to offer their products at lower prices or on more
attractive terms. To the extent our labor expenses increase in future years,
profitability could be
17
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adversely affected. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Company Overview."
WE ARE SUBJECT TO CERTAIN RESTRICTIVE DEBT COVENANTS
The Indenture imposes restrictions on us and our restricted subsidiaries.
These restrictions include, among other things:
o the incurrence of additional indebtedness;
o the issuance of disqualified stock and preferred stock;
o the payment of dividends on, and redemption of, capital stock;
o the redemption of indebtedness that is junior in right of payment to
the Notes;
o certain other restricted payments and investments;
o certain sales of assets;
o certain transactions with affiliates;
o the creation of certain liens and
o consolidations, mergers and transfers of all or substantially all of
our assets.
The Indenture also prohibits certain restrictions on distributions from our
restricted subsidiaries.
The Credit Agreement contains other and more restrictive covenants and
prohibits us from prepaying our other indebtedness (including the Notes) while
indebtedness under the Credit Agreement is outstanding. See "Description of
Notes--Certain Covenants" and "Description of Certain Indebtedness--Senior
Secured Credit Facilities." The Credit Facilities also require us to comply with
financial covenants relating to interest coverage, leverage, retained earnings
and capital expenditures. Our ability to meet those financial ratios and tests
can be affected by events beyond our control, and there can be no assurance that
we will meet those tests. A breach of any of these covenants, ratios or tests
could result in a default under the Credit Facilities and/or the Indenture. We
are currently in compliance with the covenants and restrictions contained in the
Credit Facilities. However, our ability to continue to comply may be affected by
events beyond our control, including prevailing economic, financial and industry
conditions. Certain events of default under the Credit Facilities would prohibit
the Issuer from making payments on the Notes, including payment of interest when
due. In addition, upon the occurrence of an event of default under the Credit
Facilities, the lenders could elect to declare all amounts outstanding under the
Credit Facilities, together with accrued interest, to be immediately due and
payable. If we were unable to repay those amounts, the lenders could proceed
against the collateral granted to them to secure that indebtedness. If the
lenders under the Credit Facilities accelerate the payment of the indebtedness,
there can be no assurance that our assets would be sufficient to repay in full
such indebtedness and our other indebtedness, including the Notes. See
"--Subordination; Asset Encumbrance" and "Description of Certain
Indebtedness--Senior Secured Credit Facilities."
WE PLAN TO IMPLEMENT CERTAIN PRODUCT PROGRAMS
GM began to phase in the launch of a new light truck product program in
June 1998, known as the GMT-800 Program. Although we have installed and
certified the equipment needed to produce products for the GMT-800 Program in
time for the start of production, there can be no assurance that GM will phase
in the GMT-800 Program on schedule. In addition, there can be no assurance that
the transitioning of manufacturing facilities and resources to full production
under the GMT-800 Program, or any other future product programs, will not impact
production rates or other operational efficiency measures at our facilities. GM
has also announced that it plans to launch a new truck product program, referred
to herein as the M-SUV Program and we have been awarded the mid-size pick-up
truck replacement program for the GMT-325, referred to as the MST Program.
Engineering changes necessitated by the M-SUV Program and the MST Program will
require us to make capital investments currently estimated to be approximately
$115 million and approximately $65 million, respectively. There can be no
assurance that we will be able to install and certify the equipment needed to
produce products for
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the M-SUV Program or MST Program in time for the start of production. Moreover,
there can be no assurance that GM will execute the M-SUV Program or MST Program,
or that GM or any of our future significant customers will execute any other
additional future program for which we may supply components, on schedule.
WE FACE SUBSTANTIAL COMPETITION
The automotive OEM supply industry is highly competitive with a number of
other manufacturers that produce competitive products. Quality, service and
price, as well as technological innovation, are the primary elements of
competition. There can be no assurance that our products will compete
successfully with those of our competitors. These competitors include driveline
component manufacturing facilities of existing OEMs, as well as independent
domestic and international suppliers. Certain competitors are more diversified
and have greater access to financial resources. There can be no assurance that
our business will not be adversely affected by increased competition, or that we
will be able to maintain our profitability, if the competitive environment
changes.
WE ARE DEPENDENT ON KEY PERSONNEL
Our success depends, in part, on the efforts of our executive officers and
other key associates, including Richard E. Dauch, Chairman of the Board, Chief
Executive Officer and President. In addition, our future success depends on,
among other factors, our ability to continue to attract and retain qualified
personnel. We do not have employment agreements with, or "key man" life
insurance on, any of our associates other than Mr. Dauch. The loss of the
services of any of our key associates or the failure to attract or retain
associates could have a material adverse effect on our financial condition and
results of operations. See "Management."
WE ARE SUBJECT TO ENVIRONMENTAL REGULATION AND COULD BECOME INVOLVED WITH
CERTAIN LEGAL PROCEEDINGS
Our operations are subject to federal, state, local and foreign laws and
regulations governing, among other things, emissions to air, discharges to
waters, the generation, handling, storage, transportation, treatment and
disposal of waste and other materials and the cleanup of any contaminated
properties. We believe that our business, operations and facilities have been
and are being operated in compliance in all material respects with applicable
environmental and health and safety laws and regulations, many of which provide
for substantial fines and criminal sanctions for violations. The operation of
automotive parts manufacturing plants entails risks in these areas, however, and
there can be no assurance that we will not incur material costs, liabilities or
claims with respect to our existing operations or with respect to operations or
facilities acquired by us in connection with acquisitions. In addition,
potentially significant expenditures could be required in order to comply with
evolving environmental and health and safety laws, regulations or requirements
that may be adopted or imposed in the future.
We believe that the overall impact of compliance with regulations and
legislation protecting the environment will not have a material effect on our
future financial position or results of operations, although no assurance can be
given in this regard. Capital expenditures and expenses in 1997 and 1998
attributable to compliance with such regulations and legislation were not
material. See "Business--Environmental Matters."
INVENTORY MANAGEMENT--WE RELY ON SINGLE SOURCE SUPPLIERS
We have, since the 1994 Acquisition, purchased through GM's purchasing
network certain materials for use in the manufacture of products sold under the
CSA and LPCs. We have agreed with GM to terminate this arrangement and, in
anticipation of such termination, we have initiated a policy of strengthening
our supplier relationships by concentrating our productive material purchases
with a limited number of suppliers. We believe that this policy contributes to
quality and cost controls and increases the suppliers' commitments to us. We
rely upon, and expect to continue to rely upon, single source suppliers for
certain critical components that are not readily available in sufficient volume
from other sources. There can be no assurance that the suppliers of these
productive materials will be able to meet our future needs on a timely basis, or
be willing to continue to be our suppliers, or that a disruption in a supplier's
business would not disrupt the supply of productive materials that could not
easily be replaced.
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We have an agreement with General Motors of Canada Limited ("GMCL"), an
affiliate of GM, whereby GMCL has agreed to provide axles to us for resale to
GM. This agreement, as amended, expires in September 1999. An interruption in
production of the axles supplied by GMCL could have a material adverse effect on
us. See "Business--Contractual Arrangements with GM."
YEAR 2000--WE MAY BE ADVERSELY AFFECTED BY THE YEAR 2000 PROBLEM
While we believe that we are taking appropriate steps so that our computer
systems and software will be "Year 2000" compliant, we are dependent on
third-party software and computer technology, used internally, which, if not
Year 2000 compliant, may have a material impact on us. Further, our operations
may be at risk if our suppliers, customers or other third parties fail to
adequately address the problem or our software conversions or other
modifications result in system incompatibilities with these third parties. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Compliance."
WE ARE CONTROLLED BY A PRINCIPAL STOCKHOLDER
Blackstone owns approximately 54.3% of Holdings' Common Stock, on a fully
diluted basis. In addition, we are parties to a stockholders' agreement with
Blackstone, Jupiter Capital Corporation ("Jupiter"), Richard E. Dauch, Morton E.
Harris, Michael D. Alexander and Gary J. Witosky (the "Stockholders' Agreement")
executed in connection with the Recapitalization. Generally, pursuant to the
Stockholders' Agreement, so long as Blackstone owns at least one-third of the
Common Stock held by it at the closing of the Recapitalization:
o if Blackstone receives and accepts an offer from a person to
purchase all, or substantially all, of the Common Stock held by
Blackstone, Jupiter and Messrs. Dauch, Alexander, Witosky and
Harris, then Jupiter and Messrs. Dauch, Alexander, Witosky and
Harris are required to offer their shares of Common Stock in any
such sale; and
o if Blackstone proposes to transfer all or a portion of its shares of
Common Stock, other than to its affiliates or in connection with a
public offering registered under the Securities Act, Jupiter and
Messrs. Dauch, Alexander, Witosky and Harris have the right to
require the transferee to purchase a proportional share of their
respective shares.
Moreover, Blackstone's ownership of approximately 54.3% of the outstanding
Common Stock, on a fully diluted basis, will enable it to control the election
of Holdings' Board of Directors and the outcome of votes on all matters
submitted to Holdings' stockholders for approval (other than matters for which a
supermajority is required). See "Related Party Transactions--Stockholders'
Agreement and Recapitalization."
FRAUDULENT CONVEYANCE AND PREFERENTIAL TRANSFER LAW MAY INTERFERE WITH PAYMENT
OF THE NOTES
If the court in a lawsuit brought by an unpaid creditor or representative
of creditors, such as a trustee in bankruptcy, were to find under relevant
federal and state fraudulent conveyance statutes that the Issuer did not receive
fair consideration or reasonably equivalent value for incurring the indebtedness
represented by the Notes, and that, at the time of such incurrence, the Issuer:
o was insolvent;
o was rendered insolvent by reason of such incurrence;
o was engaged in a business or transaction for which the assets
remaining with the Issuer constituted unreasonably small capital; or
o intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they matured,
then such court, subject to applicable statutes of limitation, could void the
Issuer's obligations under the Notes, subordinate the Notes to other
indebtedness of the Issuer or take other action detrimental to the holders of
the Notes.
The measure of insolvency for these purposes will vary depending upon the
law of the jurisdiction being applied. Generally, however, a company will be
considered insolvent for these purposes if the sum of that company's debts is
greater than all of that company's assets at a fair valuation, or if the present
fair saleable value of that company's assets is less than the amount that will
be required to pay its probable liability on its existing debts as they become
absolute and matured. Moreover, regardless of solvency, a court could avoid an
incurrence
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of indebtedness, including the Notes, if it determined that such transaction was
made with the intent to hinder, delay or defraud creditors, or a court could
subordinate the indebtedness, including the Notes, to the claims of all existing
and future creditors on similar grounds. Based upon financial and other
information currently available to it, management believes the Issuer is solvent
and will continue to be solvent after the consummation of the Exchange Offer.
However, there can be no assurance as to what standard a court would apply in
order to determine whether the Issuer was "insolvent".
Additionally, under federal bankruptcy or applicable state insolvency law,
if certain bankruptcy or insolvency proceedings were initiated by or against the
Issuer within 90 days after any payment by the Issuer with respect to the Notes
or if the Issuer anticipated becoming insolvent at the time of such payment or
incurrence, all or a portion of such payment could be avoided as a preferential
transfer and the recipient of such payment could be required to return such
payment.
LACK OF A PUBLIC MARKET--YOU MAY NOT BE ABLE TO SELL YOUR EXCHANGE NOTES
The exchange Notes are new securities for which there is no existing
market. Accordingly, there can be no assurance as to the development or
liquidity of any market for the exchange Notes. The Notes are eligible for
trading in the PORTAL market. The initial purchasers of the outstanding Notes
have advised us that they currently intend to make a market in the exchange
Notes. However, the initial purchasers of the outstanding Notes are not
obligated to do so, and any market making with respect to the exchange Notes may
be discontinued at any time without notice. We do not intend to apply for a
listing of the exchange Notes on any securities exchange or on any automated
dealer quotation system.
No assurance can be given to non-exchanging holders of outstanding Notes as
to the liquidity of the trading market for the outstanding Notes following the
Exchange Offer.
The liquidity of, and trading market for, the exchange Notes also may be
adversely affected by general declines in the market for similar securities.
Such a decline may adversely affect such liquidity and trading markets
independent of our financial performance and prospects.
LIMITATION ON CHANGE OF CONTROL--WE MAY NOT BE ABLE TO FINANCE A CHANGE OF
CONTROL OFFER REQUIRED BY THE INDENTURE
The Indenture requires the Issuer, in the event of a Change of Control, to
repurchase any Notes that holders thereof desire to have repurchased at 101% of
the principal amount thereof, plus accrued and unpaid interest and liquidated
damages, if any, to the Change of Control repurchase date. See "Description of
Notes--Change of Control." The provisions of the Indenture may not, however,
afford holders of the Notes protection in the event of a highly leveraged
transaction, reorganization, restructuring, merger or similar transaction
involving us that may adversely affect holders of the Notes, if such transaction
does not result in a Change of Control.
The occurrence of a Change of Control may also result in a default, or
otherwise require repayment of indebtedness, under the Credit Facilities. The
exercise by the respective holders of the outstanding Notes and the exchange
Notes of their right to require the Issuer to repurchase the outstanding Notes
and the exchange Notes upon the occurrence of a Change of Control could also
cause a default under our other indebtedness, even if the Change of Control
itself does not, because of the financial effect of such repurchase on us. In
addition, the Credit Facilities prohibit the repayment of the Notes by the
Issuer upon the occurrence of a Change of Control, unless and until such time as
the indebtedness under the Credit Facilities is repaid in full or the Issuer
obtains the consent of the lenders. The Issuer's failure to make such repayments
in such instances or to obtain the consent of the lenders would result in a
default under both the Indenture and the Credit Facilities. Our future
indebtedness may also contain restrictions or repayment requirements with
respect to certain events or transactions that could constitute a Change of
Control. In the event of a Change of Control, there can be no assurance that we
would have sufficient assets to satisfy all of our obligations under the Notes
and the Credit Facilities. See "Description of Notes--Change of Control" and
"Description of Certain Indebtedness--Senior Secured Credit Facilities."
Furthermore, the Change of Control purchase feature of the Notes may in
certain circumstances discourage or make more difficult a sale or takeover of
Holdings.
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THE RECAPITALIZATION
On September 17, 1997, AAM Acquisition, Inc., an entity organized by
Blackstone, Jupiter, Mr. Dauch, Mr. Harris and the Issuer, then the parent of
Holdings, entered into an agreement (the "Recapitalization Agreement") pursuant
to which Blackstone acquired control of Holdings on October 29, 1997 (the
"Recapitalization"). Prior to the Recapitalization, Holdings was a wholly-owned
subsidiary of the Issuer. Pursuant to the Recapitalization, Holdings acquired a
100% ownership interest in the Issuer by exchanging shares of its own stock, on
a one-for-one basis, for the outstanding shares of common stock of the Issuer.
The exchange of shares has been accounted for in a manner similar to a pooling
of interest since both Holdings and the Issuer were under common control.
Following the exchange of shares, on October 29, 1997, pursuant to the
Recapitalization Agreement, Blackstone acquired shares of Holdings' Common Stock
from Jupiter and Mr. Dauch. We used approximately $474 million of aggregate
proceeds from certain financings described below (the "Financings"), to:
o repay certain indebtedness of the Issuer;
o redeem all of the issued and outstanding shares of Class A Preferred
Stock of the Issuer;
o repurchase certain shares of Holdings' Common Stock held by Jupiter and
Mr. Harris;
o pay costs and expenses incurred in connection with the Recapitalization,
including fees, expenses and payments relating to certain of Holdings'
then existing stock options; and
o fund the working capital requirements of Holdings.
Immediately after the closing of the Recapitalization, on a fully diluted basis
Blackstone owned approximately 63.9% of the Common Stock, members of our senior
management owned approximately 29.0% of the Common Stock and Jupiter and Mr.
Harris collectively owned approximately 5.5% of the Common Stock. See "Principal
Stockholders" and Notes 2 and 11 to the Consolidated Financial Statements.
The Financings included:
o 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;
o a senior secured term loan facility (the "Tranche B Term Loan
Facility" and, together with the Tranche A Term Loan Facility, the
"Term Loan Facility") providing for term loans in an aggregate
principal amount of $375 million;
o a $250 million senior secured revolving credit facility (the
"Revolving Credit Facility" and, together with the Term Loan
Facility, each as amended, the "Credit Facilities"), of which
$474 million was drawn at the closing of the Recapitalization; and
o a $125 million receivables purchase facility (the "Receivables
Facility") of which $75 million was drawn at the closing of the
Recapitalization.
See "Description of Certain Indebtedness."
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USE OF PROCEEDS
The net proceeds from the sale of the outstanding Notes was approximately
$289 million after deduction of discounts to the initial purchasers and other
fees and expenses. A portion of such net proceeds was used to repay existing
debt under the Revolving Credit Facility and replace financing provided by the
Receivables Facility, with the remainder of such net proceeds used for general
corporate purposes, including financing acquisitions and capital expenditures.
Any such capital expenditures will be used for machinery and equipment necessary
to support new product programs, construction of our production facility in
Guanajuato, Mexico or other cost, quality and productivity initiatives. Pending
such uses, we invested the net proceeds from the sale of the outstanding Notes
in short-term investment grade, interest bearing securities. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Business--Business
Strategy--Pursue Selected Acquisition Opportunities."
As of December 31, 1998, we had an aggregate of $598.0 million of
indebtedness outstanding under the Credit Facilities, including $223.0 million
outstanding under the Revolving Credit Facility, and had an aggregate of
$63.0 million of indebtedness outstanding under the Receivables Facility. See
"Description of Certain Indebtedness." Borrowings under the Tranche A Term Loan
Facility due October 2004, the Tranche B Term Loan Facility due April 2006, the
Revolving Credit Facility which terminates on October 30, 2005 and the
Receivables Facility which terminates in October 2003, each bear interest, at
our option, at rates based on LIBOR or the Base Rate (each as defined in the
Credit Facilities and Receivables Facility, respectively) plus, in each case, an
applicable margin. The weighted average interest rate under the Revolving Credit
Facility and the Receivables Facility at December 31, 1998 were approximately
8.5% and 7.2%, respectively.
We will not receive any cash proceeds from the issuance of the exchange
Notes. In consideration for issuing the exchange Notes as contemplated in this
prospectus, we will receive in exchange a like principal amount of outstanding
Notes, the terms of which are identical in all material respects to the exchange
Notes. The outstanding Notes surrendered in exchange for the exchange Notes will
be retired and canceled and cannot be reissued. Accordingly, issuance of the
exchange Notes will not result in any change in our capitalization.
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CAPITALIZATION
The following table sets forth the cash and equivalents and capitalization
of the Company at December 31, 1998, as adjusted to give effect to the IPO and
the application of the net proceeds therefrom and as further adjusted to give
effect to sale of the outstanding Notes and the application of the net proceeds
therefrom as described under "Use of Proceeds." The following table does not
give effect to (i) the acquisition of Colfor or MSP, each of which the Company
financed with cash and approximately $65 million of borrowings under the Credit
Facilities or (ii) the sale/leaseback transactions the Company intends to enter
into during 1999 with respect to approximately $200 million of its existing
machinery and equipment. The Company may incur additional indebtedness in the
future, including to meet its working capital and capital expenditure
requirements and to finance acquisitions. The following table should be read in
conjunction with the historical consolidated financial statements of the Company
and the notes thereto which are included elsewhere in this prospectus. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Business--Business
Strategy--Pursue Selected Acquisition Opportunities."
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
------------------------------------------
AS FURTHER
ADJUSTED
AS ADJUSTED FOR THIS
HISTORICAL FOR THE IPO OFFERING
---------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash and equivalents.................................................. $ 4,547 $ 4,547 $ 115,867
-------- --------- ---------
-------- --------- ---------
Long-term debt and capital lease obligations:
Revolving Credit Facility(a)........................................ $223,000 $ 115,000 $ --
Term Loan Facility(b)............................................... 375,000 375,000 375,000
Receivables Facility(c)............................................. 63,000 63,000 --
Other............................................................... 32,368 32,368 32,368
Notes, net of discount.............................................. -- -- 297,660
-------- --------- ---------
Total long-term debt and capital lease obligations............. 693,368 585,368 705,028
-------- --------- ---------
Stockholders' equity:
Common Stock, par value $.01 per share; 150,000,000 shares
authorized; 32,456,107 shares issued and outstanding, historical;
39,456,107 shares issued and outstanding, as adjusted and as
further adjusted................................................. 1 395 395
Paid-in capital..................................................... 92,527 200,133 200,133
Accumulated deficit................................................. (51,467) (51,467) (51,467)
Cumulative translation adjustment................................... (593) (593) (593)
-------- --------- ---------
Total stockholders' equity..................................... 40,468 148,468 148,468
-------- --------- ---------
Total capitalization........................................... $733,836 $ 733,836 $ 853,496
-------- --------- ---------
-------- --------- ---------
</TABLE>
- ------------------
(a) The Revolving Credit Facility provides for borrowings of up to
$250.0 million.
(b) The Term Loan Facility consists of a delayed draw Tranche A Term Loan
Facility of up to $125.0 million, which is available for borrowings until
October 1999, and a fully drawn Tranche B Term Loan Facility of
$375.0 million.
(c) The Receivables Facility provides for borrowings of up to $125.0 million,
based on availability of eligible receivables. Based on eligible
receivables, the Company would have had available borrowing capacity under
the Receivables Facility of approximately $66 million as of December 31,
1998, after giving pro forma effect to the IPO and the application of the
net proceeds therefrom and the Offering of the outstanding Notes and the
application of the net proceeds therefrom. See "Description of Certain
Indebtedness--Receivables Facility."
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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth selected consolidated historical financial
and other data of Holdings and its subsidiaries 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 Holdings and
its subsidiaries, 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 Holdings and its subsidiaries, 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 and the other financial information included
elsewhere in this prospectus.
<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)
25
<PAGE>
NOTES TO SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(a) The accompanying statement of income data of the Predecessor for the two
months ended February 28, 1994 reflect its historical cost basis prior to
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. Pro forma 1998 earnings, after giving effect (as if such
events occurred on January 1, 1998) to the IPO and the offering of the
outstanding notes and the application of a portion of the aggregate net
proceeds therefrom to repay all outstanding borrowings under the Revolving
Credit Facility and the Receivables Facility, would have been insufficient
to cover fixed charges by $20.6 million. See "Capitalization."
(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 United States manufacturing
facilities divided by the number of U.S. associates.
(g) Represents the number of United States associates.
26
<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 our results of operations and cash flows during the three years ended
December 31, 1998, and our 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 prospectus.
COMPANY OVERVIEW
We are a Tier I supplier to the automotive industry and a world leader in
the design, engineering and manufacturing of driveline systems for light trucks
and SUVs. The driveline system includes all of the components that transfer
power from the transmission and deliver it to the drive wheels. The driveline
products produced by us include axles, propeller shafts, chassis components and
forged products. We are GM's principal supplier of driveline components for
light trucks, SUVs and RWD passenger cars. Sales to GM were approximately 93%,
96% and 96% of our net sales in 1998, 1997 and 1996, respectively.
In March 1994, we purchased the assets of the Final Drive and Forge
Business Unit of the Saginaw Division of GM. In connection with our acquisition
of the Business Unit, we entered into the Component Supply Agreement (the "CSA")
with GM under which we became the sole-source supplier to GM of all the products
and components previously supplied to GM by the Business Unit. In October 1997,
we entered into a Recapitalization Agreement pursuant to which Blackstone
acquired control of us. In connection with the Recapitalization, we entered into
an additional binding agreement with GM, the Amended and Restated Memorandum of
Understanding (the "MOU"). Under the MOU, we have agreed with GM 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 us, including the GMT-800 and the M-SUV
Programs.
In order to induce GM to enter into the MOU and commit to enter into the
LPCs, in 1997, we agreed to temporary reductions of certain payments previously
agreed to be made by GM to us as part of the commercial arrangements between us,
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.
We sell most of our 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, we must remain competitive with respect to technology,
design and quality. We currently purchase 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, we pay 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 to us by GM for our products, thereby protecting us from increases
in the costs of such materials while such purchasing arrangement is in effect.
We have agreed with GM to develop a mutually satisfactory plan to terminate this
purchasing arrangement no later than December 2002. Thus, while the prices at
which we sell our products under the CSA and the LPCs have been established,
under the LPCs, upon termination of the purchasing arrangement described above,
we 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 we will be able to pass on any increased labor,
materials or other costs to GM in the future as we have from time to time in the
past pursuant to the above-described terms of the CSA or by certain additional
payments agreed to as part of the commercial arrangements between GM and
ourselves. LPCs have terms equal to the lives of the relevant vehicle programs,
which typically run 6 to 12 years. We will have to compete for future GM
business upon the termination of the LPCs. See "Risk Factors--Reliance on GM,"
"--Transition of Agreements with GM" and "--Labor Expenses" and
"Business--Contractual Arrangements with GM."
ALBION ACQUISITION
In October 1998, we completed the acquisition of 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
27
<PAGE>
(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 our
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 our operations in June and July 1998 and also resulted in related
start-up inefficiencies in our operations in August 1998. We estimate 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
Our operations are cyclical because they are directly related to domestic
automotive production, which is itself cyclical and dependent on general
economic conditions and other factors. The axle and related driveline systems
segment of the automotive industry is highly competitive. The current trend in
the automotive industry is for OEMs to shift research and development ("R&D"),
design and testing responsibility to suppliers to take advantage of certain
efficiencies. The OEMs have also been reducing the number of their suppliers,
preferring stronger relationships with fewer suppliers. As a result, the Tier I
supplier market has been undergoing consolidation over the past three to four
years. This trend is expected to continue, leaving the industry with only a
small number of dominant, worldwide suppliers.
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>
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. We estimate 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. We estimate 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 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:
o higher average Sales-Dollar Content per vehicle for the GMT-800 Program
versus the GMT-400 Program; and
o 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 we
have obtained. We 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.
28
<PAGE>
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 our increase in personnel to support our growth and continued investments
for information systems as we complete our 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.
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. Our 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:
o a slight increase in the volume of our products for GM light trucks, SUVs
and vans (excluding front-wheel drive mini-vans); and
o 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 our 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. We 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 we 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
29
<PAGE>
1996. These increases were principally due to our increase in personnel to
support our growth, investments made for information systems as we transition
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 our initiative to expand our 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, we had excess cash invested in short-term investments and
limited outstanding debt.
Recapitalization Expenses. We 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. Our effective income tax rate was 41.3%
for 1997 compared to 37.2% for 1996. The increase in the effective tax rate for
1997 was primarily due to non-deductible permanent items related to stock
compensation.
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 our liquidity in terms of our overall ability to
mobilize cash to support business needs and to fund growth. We rely primarily
upon cash flow from operations and borrowings under our Credit Facilities and
Receivables Facility to finance operations and capital expenditures. See
"Description of Certain Indebtedness" and Note 3 to the Consolidated Financial
Statements.
The acquisition price for Albion was approximately $42 million in cash,
provided by borrowings under our 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, we 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 our funding of working
capital. We anticipate that this working capital increase will be funded from
available sources including cash flow from operations and our 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 our 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
30
<PAGE>
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. We estimate that we will invest approximately
$360 million in capital expenditures during 1999.
We intend to fund our capital expenditures by borrowing under the Credit
Facilities or the Receivables Facility. We believe our lines of credit are
adequate to support ongoing operational requirements. Beyond that, we believe we
have sufficient financial flexibility to attract long-term funding on acceptable
terms as may be needed to support our growth objectives.
On February 3, 1999, Holdings consummated its 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).
We also intend to enter into sale/leaseback transactions with respect to
approximately $200 million of our existing machinery and equipment in 1999. On
March 31, 1999, we announced the closing of one such sale/leaseback transaction
involving approximately $49 million of machinery and equipment. This
sale/leaseback transaction was financed under an operating lease that will have
a negative impact on our operating income and will result in lower depreciation
and amortization, but will have no material impact on our net income. Additional
sale/leaseback transactions, which together with the March 31, 1999 transaction,
would involve approximately $200 million of machinery and equipment, would be
structured in a similar manner and would have a similar effect on operating
income, depreciation and amortization and net income. Additionally, if such
transactions are consummated they would provide us with additional financial
flexibility. The terms of the Notes do not restrict our ability to enter into
sale/leaseback transactions that are financed under operating leases.
On March 31, 1999, we announced the closing of the refinancing of the
Receivables Facility. This refinancing was accomplished through the
resyndication of a revolving receivables facility by AAM Receivables Corp., our
indirect wholly owned subsidiary, under similar terms as the preexisting
Receivables Facility. In addition, this facility has been expanded from $125
million to $153 million. See "Description of Certain Indebtedness--Receivables
Facility."
On April 1, 1999, we announced the closing of our purchase of two forging
companies, Colfor and MSP, for an aggregate cash purchase price of approximately
$223 million. 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 1998 sales would have been approximately $126 million. MSP manufactures
precision forged powertrain, driveline, chasis and other components using cold
and warm forging processes at three manufacturing facilities in Michigan. MSP's
1998 sales were $56 million.
We are currently in various stages of discussions or negotiations with
additional acquisition candidates. It is possible that an agreement with respect
to an acquisition could be reached in the near future. We do not expect that any
such acquisition, if consummated, would have a material impact on our financial
condition. We expect that the aggregate purchase price for Colfor, MSP and these
other potential acquisition candidates would be less than the amount of
permitted acquisitions under the Credit Facilities, which, after giving effect
to the private placement of the outstanding Notes, would be approximately $400
million. As of the date of this prospectus, no definitive agreement with any
such acquisition candidate has been entered into, and there can be no assurance
that any such acquisition will be successfully negotiated, financed or
consummated. See "Description of Certain Indebtedness--Senior Secured Credit
Facilities."
We may also incur additional indebtedness (including certain Senior
Indebtedness) in the future, including to finance future acquisitions, subject
to certain limitations contained in the instruments governing our indebtedness.
See "Business--Business Strategy--Pursue Selected Acquisition Opportunities,"
"Description of Certain Indebtedness--Senior Secured Credit Facilities" and
"Description of Notes."
SEASONALITY
Our business is moderately seasonal as our 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.
EFFECTS OF INFLATION
Inflation generally affects us by increasing the cost of labor, equipment
and raw materials. We believe that the relatively moderate rate of inflation
over the past few years has not had a significant impact on our operations as we
offset the increases by realizing improvements in operating efficiency or by
passing through certain increases in the cost of raw materials to GM under the
terms of the CSA. See "Business--Contractual Arrangements with GM."
31
<PAGE>
FINANCIAL INSTRUMENTS MARKET RISK
Our business and financial results are affected by fluctuations in world
financial markets, including interest rates and currency exchange rates. Our
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. We hedge our interest rate risks by utilizing swaps and collars. We do
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. We do not hold financial instruments for trading or
speculative purposes.
The Credit Facilities required us to enter into interest rate hedging
arrangements with a notional value of $112.5 million. The arrangements entered
into by us, which terminate in December 2000, require us 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 our risk-management program, we perform
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 our weighted
average interest rate) affecting our debt obligations, related interest rate
swaps and collars (based on balances existing at December 31, 1998), would
impact our 1998 pretax earnings by approximately $5.9 million. See Note 5 to the
Consolidated Financial Statements.
Currency Risk. We do not currently have material exposures to currency
exchange-rate risk as most of our business is denominated in U.S. dollars.
Future business operations and opportunities, including the construction of our
new manufacturing facility in Guanajuato, Mexico and our recently acquired
Albion operations in Europe, may expose us to the risk that the eventual net
dollar cash inflows resulting from these activities may be adversely affected by
changes in currency exchange rates. We intend to manage these risks by utilizing
various types of foreign exchange contracts where appropriate.
YEAR 2000 COMPLIANCE
We have implemented a program to identify Year 2000 compliance issues and
develop detailed project plans so that our 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 us 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 our systems and process interfaces with third-party
suppliers and customers. To date, we have named a Year 2000 compliance program
team leader, established a project team covering all locations worldwide,
completed our assessment of all systems which we believe could be significantly
affected by the Year 2000 issue, defined plans for remediation and issued
communications to all our 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.
Our 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 our Year 2000 compliance program, we have 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 of such suppliers, customers or other third
parties to interact with and support our operations effectively. Issues
identified as a result of these communications have been addressed in our Year
2000 compliance program remediation and contingency planning actions.
Costs incurred by us 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 our 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
we do not expect amounts required to be expensed in the future to have a
material effect on our financial position or results of operations.
If the modifications and conversions planned by us to address Year 2000
compliance are not completed on a timely basis, or if our 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 our
operations. Potential sources of risk include:
o 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;
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o 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;
o systems incompatabilities with key suppliers or customers resulting
from software conversions or other modifications; and
o our inability to modify or replace systems on a timely basis, which
could result in manufacturing process delays that interrupt product
shipments.
We are presently developing contingency plans for all significant
components of our 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
We are involved in various legal proceedings incidental to our 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.
GM has agreed to indemnify and hold harmless the Issuer 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 Issuer,
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 our Buffalo facility has been
designated by the New York Department of Environmental Conservation ("NYDEC") as
a Class 3 Inactive Hazardous Waste Disposal Site due to the presence of
polychlorinated 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 our Tonawanda facility as a result
of the presence of polychlorinated biphenyls in the soil. The contamination of
both sites took place prior to our acquiring the properties and is the
responsibility of GM.
Based on our assessment of costs associated with our 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 our
financial condition, results of operations, cash flows or competitive position.
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. We are currently
analyzing the impact SFAS No. 133 will have on our 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. We have 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. We do not expect the adoption of SOP 98-5 to have a material effect on our
financial condition or results of operations.
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BUSINESS
GENERAL
We are a Tier I supplier to the automotive industry and a world leader in
the design, engineering and manufacturing of driveline systems for light trucks
and SUVs. The driveline system includes all of the components that transfer
power from the transmission and deliver it to the drive wheels. Driveline
products produced by us include axles, propeller shafts, chassis components and
forged products. We are the leading independent supplier, with an estimated 33%
market share (by 1997 sales), of driveline components for light trucks and SUVs
manufactured in North America and sold in the United States. The light truck and
SUV segment is the fastest growing segment of the light vehicle market. We also
manufacture axles, propeller shafts and other products for RWD passenger cars.
Additionally, we have the second largest (by sales) automotive forging operation
in North America.
We are General Motors Corporation's ("GM") principal supplier of driveline
components for light trucks, SUVs and RWD passenger cars manufactured in North
America, supplying substantially all of GM's rear axle and front 4WD axle
requirements and over 75% of its propeller shaft requirements for these vehicle
platforms in 1997. Approximately 93% of our 1998 net sales of $2.04 billion were
to various divisions and subsidiaries of GM. Our second largest customer is
Ford, for which we produce axle shafts and double cardan joints for light trucks
and SUVs manufactured by Ford in North America.
We, through our October 1998 acquisition of Albion, supply 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.
COMPANY BACKGROUND
We are the successor to the former Final Drive and Forge Business Unit of
the Saginaw Division of GM and have produced driveline components and forged
products for over 75 years. We were formed in March 1994 when a private investor
group led by Richard E. Dauch purchased the Business Unit from GM and
consummated the 1994 Acquisition. In connection with the 1994 Acquisition, we
entered into the Component Supply Agreement (the "CSA") with GM under which we
became the sole-source supplier to GM of all the products and components
previously supplied to GM by the Business Unit. In September 1997, we signed an
additional binding agreement with GM, the Amended and Restated Memorandum of
Understanding (the "MOU"), which became operative after our recapitalization.
Under the MOU, we have agreed with GM to transition the CSA into a number of
separate Lifetime Program Contracts ("LPCs"), under which we will supply
products and components 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 us, including the GMT-800 and
the M-SUV programs. See "Contractual Arrangements with GM."
Our management team, which was formed in connection with the 1994
Acquisition, is led by Mr. Dauch as Chairman of the Board, Chief Executive
Officer and President and was carefully selected on the basis of its management
expertise in the automotive industry. Mr. Dauch has over 34 years of experience
in the industry and was an Executive Vice President for Chrysler from 1980 to
1991, and was instrumental in Chrysler's manufacturing and financial turnaround.
As an executive of GM, he also managed the Business Unit's largest manufacturing
plant (Detroit Gear & Axle) from 1974 to 1976. Our senior management team is
comprised of 13 executives with an average of 25 years experience in the
automotive industry and experience in both automotive original equipment
manufacturer ("OEM") and supplier operations.
POST-ACQUISITION IMPROVEMENTS
Since the 1994 Acquisition, we have dramatically improved product quality
and manufacturing efficiency through a combination of management leadership,
significant investments in new equipment and technology, workforce training, and
process improvements resulting in increased capacity utilization. From
March 1994 through December 1998, we have invested approximately $825 million in
capital expenditures and 1.4 million labor hours for training and education of
its associates and have received and maintained ISO/QS 9000 certification for
each of its facilities. As a result:
o the average number of axles produced per production day increased from
approximately 10,000 in March 1994 to approximately 14,000 in December
1998;
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o discrepant parts shipped to GM (as measured by GM) decreased from
approximately 13,400 parts per million ("PPM") during the six months
ended December 31, 1994 to approximately 118 PPM during the six months
ended December 31, 1998; and
o parts returned by GM decreased from 5,136 PPM during the ten months ended
December 31, 1994 to 223 PPM during the twelve months ended December 31,
1998.
INDUSTRY OVERVIEW
The automotive industry has been and continues to be significantly
influenced by several trends which we believe will enhance our strategic
position and growth prospects.
Demand for Light Trucks and SUVs. From 1990 to 1997, domestic unit sales
of light trucks and SUVs increased as a percentage of total U.S. light vehicle
unit sales from 33% to 45%. During the same period, GM's sales of light trucks
and SUVs followed a similar trend, increasing to 43% in 1997. Despite this
increase, GM still trailed Chrysler and Ford which had penetrations of 68% and
58%, respectively, in 1997. Increased consumer demand for light trucks and SUVs
increases the demand for our products.
4WD Penetration. Between 1990 and 1997, 4WD sales penetration of the U.S.
light vehicle market doubled, from 7% to over 15% and, according to J.D. Power,
is expected to continue to rise. The increasing penetration of 4WD vehicles is
also evident in the sales of GM light trucks and SUVs. For example, in 1990, 4WD
penetration of GM light truck and SUV sales was 31%. By 1997, this penetration
rate had risen to nearly 42%. We benefit from this trend to increased 4WD
penetration since our Sales-Dollar Content per vehicle is approximately 80%
higher on a 4WD vehicle than on a comparable two-wheel drive vehicle.
Outsourcing. In recent years, OEMs have been shifting research and
development, design, testing and validation responsibilities to suppliers to
take advantage of suppliers' lower cost structures, allocate engineering
resources more efficiently, and realize the synergistic benefits of a systems
approach. The trend has also been driven by the competitive pressures on OEMs to
improve product quality and to reduce capital expenditures, production costs and
inventory levels. A significant portion of driveline components are currently
manufactured by OEMs, representing a substantial outsourcing opportunity for us.
Supplier Consolidation and Systems Integration. The OEMs have been
reducing the number of their suppliers, establishing stronger relationships with
large Tier I full-service suppliers. In conjunction with this trend, OEMs are
transitioning from purchasing components to shifting complete responsibility for
design, engineering and manufacturing full component systems to their remaining
Tier I suppliers. In response to this trend, suppliers have combined with other
suppliers to gain the critical mass to support research and development and
realize economies of scale. Furthermore, these combinations have been pursued to
add capabilities to manufacture complementary components and achieve more
complete systems supplier capabilities. We believe that this trend toward
multi-component system integrators will compel further consolidation, leaving
the industry with only a small number of dominant, worldwide suppliers.
Globalization. Tier I suppliers are increasingly following their OEM
customers as they expand manufacturing into global markets. Shipping costs,
import duties and local content laws make it advantageous for OEMs to purchase
from Tier I suppliers with a local presence. We are positioning ourselves to
follow the industry as it expands globally. We are establishing a sales office
and constructing a manufacturing facility in Guanajuato, Mexico; this facility
is currently scheduled to begin production in the fall of 2000.
We believe that as a result of our leading U.S. market position as an
independent supplier of driveline systems for the light truck and SUV segment,
management expertise, strong OEM and labor relationships, full service
engineering capabilities, high quality products, critical mass and access to
capital, we are well positioned to take advantage of trends in the industry and
to compete successfully as both a sub-assembly supplier and as a manufacturing
process specialist in the consolidating OEM supplier market.
BUSINESS STRATEGY
We plan to leverage our competitive advantages and actively pursue the
following strategies to increase revenue and profitability:
Improve Product Quality and Manufacturing Efficiency. Since the 1994
Acquisition, we have dramatically improved product quality and efficiency. We
are committed to continue reducing operating costs by developing
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new manufacturing processes and by investing in new equipment, technologies and
improvements in product designs. We believe that the significant modernization
of our manufacturing equipment and facilities which has been completed over the
last four years, as well as initiatives to be undertaken in connection with the
GMT-800, the M-SUV and the MST Programs, will generate enhanced productivity and
operating efficiency. From March 1994 through December 1998, we have invested
approximately $825 million in the modernization of our equipment and facilities.
Diversify, Strengthen and Globalize OEM Customer Base. We currently provide
axle shafts and double cardan joints to Ford and have begun to pursue strategic
initiatives to further diversify our customer base by providing products for
vehicles manufactured by Isuzu, Nissan, CAMI (a joint venture between GM and
Suzuki), and DaimlerChrysler. Through our diversification efforts (including our
acquisition of Albion), we have increased our sales to customers other than GM
to approximately $134 million in 1998. We will continue to seek new business
from existing customers, as well as develop relationships with new customers
worldwide. We sell our products primarily in North America and Europe. In 1997
and 1998, we established sales offices in Tokyo, Japan and Ulm, Germany,
respectively, in order to access new markets for our products. Additionally, we
are establishing a sales office and constructing a manufacturing facility in
Guanajuato, Mexico, which is currently scheduled to begin production in the fall
of 2000.
Expand Systems Integrator Capability. OEMs continue to consolidate their
supplier base and shift the design, engineering and manufacturing functions of
complete systems to their remaining Tier I suppliers. We currently supply axles,
propeller shafts, chassis components and forged products for light trucks and
SUVs. Through our recently acquired Albion subsidiary, we also supply front
steerable and rear axles, driving heads, crankshafts, chassis components and
transmission parts used primarily in medium-duty trucks and buses. We intend to
provide additional driveline components through a combination of developing new
technologies and other capabilities, managing Tier II and Tier III suppliers and
acquiring other suppliers in order to offer our customers more fully-integrated
driveline systems.
Develop New Products. We intend to diversify our product portfolio by
designing and developing new products and systems. As part of our commitment to
product development, we opened our Technical Center in 1995 which provides
resources to our engineers to improve the design of our existing products and to
design new products. We invested $29.5 million and $27.8 million in research and
development in 1998 and 1997, respectively. To date, these initiatives have
resulted in several new products such as the new 11.5" axle (initially being
used in the GMT-800 Program), multi-link rear axles, an integral oil pan front
axle, precision steering system joints (which utilize lash free/low lash idlers
and radiax pivot sockets) and improved propeller shaft "U-Joints." We are also
in the process of developing other new products such as independent rear drive
system modules, traction-enhancing advanced differentials, banjo-style axles,
aluminum rear axle carriers, axle cooler covers, spherical differential cases
and near net/net shaped forgings.
Pursue Selected Acquisition Opportunities. We are pursuing an acquisition
strategy which is intended to advance the implementation of our strategic
initiatives. This acquisition strategy will enhance our efforts to diversify our
customer base, expand our product offerings, selectively globalize our
operations and/or leverage our design, engineering and validation expertise. We
have established strict criteria in our assessment of potential acquisition
candidates focused primarily on strong operating potential, complementary
product platforms and strong existing management teams. The acquisition
candidates we are evaluating include:
o suppliers of driveline components which complement our current product
offerings;
o companies in the highly fragmented forging industry, which will allow us
to capitalize upon the trend toward OEM supplier consolidation; and
o other automotive parts suppliers.
On April 1, 1999, we announced the closing of our purchase of two forging
companies, Colfor and MSP, for an aggregate cash purchase price of approximately
$223 million. 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 1998 sales would have been approximately $126 million. MSP manufactures
precision forged powertrain, driveline, chasis and other components for the
automotive industry using cold and warm forging processes at three manufacturing
facilities in Michigan. MSP's 1998 sales were $56 million.
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We are currently in various stages of discussions or negotiations with
additional acquisition candidates of the types described above. It is possible
that an agreement with respect to an acquisition could be reached in the near
future. We do not expect that any such acquisition, if consummated, would have a
material impact on our financial condition. We expect that the aggregate
purchase price for Colfor, MSP and these other potential acquisition candidates
would be less than the amount of permitted acquisitions under the Credit
Facilities, which, after giving effect to the private placement of the
outstanding Notes, would be approximately $400 million. As of the date of this
prospectus, no definitive agreement with any such acquisition candidate has been
entered into and there can be no assurance that any such acquisition will be
successfully negotiated, financed or consummated. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" and "Description of Certain Indebtedness--Senior Secured
Credit Facilities."
Our October 1998 acquisition of Albion illustrates how the implementation
of our strategic initiatives can be advanced through an acquisition, as it
provides us with diversified product lines, a broader customer base and expanded
geographic presence. 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. This acquisition adds product offerings for vehicle classes
in GVW 4-8, expanding our product portfolio to include vehicle classes GVW 1-8.
This acquisition also broadens our customer base by adding Caterpillar
(Perkins), LDV, PACCAR (Leyland and DAF), Renault, Rolls-Royce, Rover and Volvo.
Finally, Albion expands our geographic presence by adding manufacturing
capabilities in Europe which will complement our existing sales office in Ulm,
Germany.
PRODUCTS
We design, engineer and manufacture components for driveline systems. The
driveline system includes all the components that transfer power from the
transmission and deliver it to the drive wheels. Driveline products produced by
us include axles, propeller shafts, chassis components and forged products. The
following chart sets forth the percentage of total revenues attributable to our
products for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------------
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Rear Axles........................................................... 53.9% 53.0% 53.5%
Front Axles.......................................................... 15.2 16.5 16.3
Propeller shafts..................................................... 8.7 8.8 8.6
Chassis components................................................... 10.5 9.8 8.8
Forged products...................................................... 8.9 9.2 8.9
Other................................................................ 2.8 2.7 3.9
----- ----- -----
100.0% 100.0% 100.0%
----- ----- -----
----- ----- -----
</TABLE>
Rear Axles. Rear axles are rigid, integral drive axle modules for use on
light trucks, SUVs and RWD passenger cars. We offer a range of axle sizes, gear
ratios, differentials, brakes and anti-corrosion coatings. Each unit is
assembled, tested and shipped as an integrated system to minimize noise and
vibration. The products are available in semi-floating models for economy or
full-floating models for higher shaft torque and load capacity. Through Albion,
we produce rear axles used primarily in medium-duty trucks and buses in vehicle
classes GVW 4-8.
Front Axles. Independent front axles are chassis-mounted drive axles for
all-wheel and 4WD vehicles with independent front suspensions. Typical vehicle
applications include light trucks and SUVs. We produce a "shift-on-the-fly"
disconnect system that allows shifting into and out of 4WD while the vehicle is
moving. This innovation reduces system wear and extends service life by making
it easy to disconnect the front-drive system when not needed. Components are
matched and balanced to reduce noise and vibration. Through Albion, we produce
front steerable axles used primarily in medium-duty trucks.
Propeller Shafts. Propeller shafts, also referred to as driveshafts,
transmit power from the transmission to the axle. We produce one- and two-piece
propeller shafts for RWD vehicles and front-auxiliary shafts for 4WD and
all-wheel drive systems. Propeller shafts can be designed and manufactured to
meet customer requirements for torque, packaging, speed, size, joint type and
special configuration. Each propeller shaft can be system
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balanced with its corresponding axle or marked for future match-mounting
considerations. For applications requiring faster rotation speed, lighter weight
or longer distances, metal composites and all aluminum designs are also
manufactured.
Chassis Components. Chassis components consist of steering linkage
assemblies, stabilizer bars and other components. Steering linkage assemblies
convert the circular motion of the steering wheel into the linear motion which
is used to turn the front wheels and control the direction of the vehicle.
Stabilizer bars are used for anti-roll systems. Our chassis components also
include brake drums, front suspensions, rods, ball studs and stabilizer bar
links.
Forged Products. Our forge division designs and manufactures a wide
variety of forged light truck, SUV and passenger car products for sale to
external customers and for internal use in our driveline products. We have the
second largest (by sales) automotive forging operation in North America and have
invested significant capital in equipment and tooling which enables it to
produce large volumes of its products. Our forged products include: net shaped
differential gears, axle shafts, output shafts, hypoid driving gears, pinions,
weld yokes, tie rod sockets, relay rods, wheel spindles, hubs, struts,
connecting rods and caps, toe links, torsion bars and trunnions. Our forging
operations are designed to optimize material usage and provide a low cost, high
volume source for all forming needs. Computerized tool design, metal flow
simulation and computerized video gauging are all used to design products
quickly and efficiently, eliminating the costly trial and error process used by
other methods. We have developed advanced net-shape forging capabilities that
allow parts to be forged close to finished size greatly reducing machining
requirements after the forging process and reducing materials waste.
Other. Our other sales revenue is comprised of service parts and
aftermarket sales, and driving heads, crankshafts and transmission parts
produced by Albion.
CUSTOMERS
We are GM's principal supplier of driveline components for light trucks,
SUVs and RWD passenger cars manufactured in North America, supplying
substantially all of GM's rear axle and front 4WD axle requirements and over 75%
of its propeller shaft requirements for these vehicle platforms in 1997.
Approximately 93% of our 1998 sales were to various divisions and subsidiaries
of GM. Our second largest customer is Ford, for which we produce axle shafts and
double cardan joints for its light trucks and SUVs manufactured in North
America.
GM programs currently supplied and to be supplied by us include:
<TABLE>
<CAPTION>
VEHICLE PLATFORM VEHICLE DESCRIPTION VEHICLE NAMEPLATE
- ------------------------------------- ------------------------ ---------------------
<S> <C> <C>
C/K (GMT-400/GMT-800) Full-size Pick-up and Silverado, Sierra,
SUV Suburban, Tahoe and
Yukon
S/T (GMT-330/M-SUV and GMT-325/MST) SUV and Mid-size Pick-up Blazer, Jimmy,
Bravada, S-10 Pick-up
and Sonoma
M/L Mid-size Van Astro and Safari
G-VAN (GMT-600) Full-size Van Savana and Chevrolet
Express
F-CAR RWD Passenger Car Camaro and Firebird
P-TRUCK Medium-Duty Commercial Commercial trucks and
Truck motorhomes
</TABLE>
We have been chosen as the design, development and production supplier for
the GMT-800 and M-SUV Programs and, more recently, the MST Program. The GMT-800
Program represents the new generation of GM's full-size pickup trucks, and the
Suburban, Tahoe and Yukon SUVs. GM began to phase in production of GMT-800
vehicles in June 1998. The M-SUV Program represents the next generation of GM's
compact SUVs, including the Blazer, Bravada and Jimmy. The MST Program is the
future generation of mid-sized pick-up trucks for GM. See "Risk Factors--We plan
to implement certain product programs."
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While we are working to continue expanding our business with GM, we are
also pursuing strategic initiatives to diversify our customer base. In addition
to our business with Ford, we also currently supply products for vehicles
manufactured by Isuzu, Nissan, CAMI (a joint venture between Suzuki and GM), and
DaimlerChrysler. Through our diversification efforts (including our acquisition
of Albion), we have increased our sales to customers other than GM to
approximately $134 million in 1998. We will continue to seek new business from
existing customers, as well as develop relationships with new customers
worldwide. We currently have sales offices in Tokyo, Japan and Ulm, Germany and
are in the process of opening a sales office in Guanajuato, Mexico.
CONTRACTUAL ARRANGEMENTS WITH GM
In connection with our acquisition of the Business Unit in 1994, we entered
into the Component Supply Agreement (the "CSA") with GM pursuant to which we
became the sole-source supplier to GM of all products and components that were
supplied to GM by the Business Unit at such time. Substantially all of our 1997
sales to GM were under the CSA. In connection with the Recapitalization in 1997,
we entered into the Amended and Restated Memorandum of Understanding (the "MOU")
with GM. Under the MOU, which is a binding agreement, we have agreed with GM to
replace the CSA with separate sole-source Lifetime Program Contracts ("LPCs")
for each of the GM vehicle programs covered by the CSA. LPCs have been entered
into for substantially all GM vehicle programs supplied by us, including the
GMT-800 and M-SUV Programs described above. The material terms and conditions of
the CSA and the MOU as well as of the standard form LPCs entered into pursuant
to the MOU are discussed below.
The CSA has an initial term of seven years, expiring March 2001, and is
automatically extended for successive one-year periods unless otherwise
terminated. During the term of the CSA, GM has agreed to purchase all of its
requirements for the products and components subject to the CSA so long as GM
continues regular production of the applicable vehicle models or requires the
products or components for service parts. LPCs have terms equal to the lives of
the relevant vehicle programs, which typically run six to twelve years.
Prices for products sold under the CSA were established at the time the
parties entered into the agreement and are subject to adjustment for engineering
changes that result from changes in GM's component specifications. Prices for
products sold under the LPCs have been agreed to for existing programs,
including the GMT-800 and M-SUV Programs. Prices for future programs will be
negotiated at the time such programs are awarded, as was done for the MST
Program.
We currently purchase through GM's purchasing network certain materials for
use in the manufacture of products sold under the CSA and the LPCs. While we pay
current market prices for such materials, 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 us for our
products, thereby protecting us from increases in the costs of such materials
while such purchasing arrangement is in effect. We have agreed with GM to
develop a mutually satisfactory plan to terminate this purchasing arrangement no
later than December 2002, although we will continue to be eligible to
participate in GM's then current steel resale program and pricing adjustment
policy for non-ferrous metals. We expect to begin transitioning this purchasing
function from GM to ourselves during 1999.
While the prices at which we sell our products under the CSA and the LPCs
have been established, under the LPCs, upon termination of the purchasing
arrangement described above, we will no longer have a contractual right to pass
on any future increases in the cost of such materials. There can be no assurance
that we will be able to pass on any increased labor, materials or other costs to
GM in the future as we have from time to time in the past pursuant to the
above-described terms of the CSA or by certain additional payments agreed to as
part of the commercial arrangements between GM and ourselves (subject to certain
temporary reductions described in "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Company Overview"). See "Risk
Factors--We are affected by our labor expenses." LPCs have been entered into for
substantially all GM vehicle programs supplied by us, including the GMT-800 and
M-SUV Programs.
Under the CSA, we have agreed with GM to share certain savings in costs
resulting from our mutual efforts or from labor contract negotiations. To date,
such shared cost savings have been minimal. Other cost savings resulting from
our management expertise and knowledge or contributions from our associates,
without input from
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<PAGE>
GM, are not included in any such cost savings computations and are not shared
with GM. Sharing of cost savings under the LPCs is substantially similar as
under the CSA, but does not include savings resulting from labor contract
negotiations.
Under the CSA, we are not liable for warranty costs for our products after
the relevant vehicle has been sold to a retail purchaser unless it is determined
that the frequency or total cost of warranty claims for a given period
significantly exceeds the historical frequency of such claims for a comparable
model. Under the LPCs, our products are subject to the warranty provisions of
GM's standard purchase order, including warranties as to the absence of defects
and as to fitness and sufficiency for the particular purposes for which such
products are to be used by GM.
Under the terms of the CSA, if GM determines that a family of products (as
defined in the CSA) produced by us under the CSA is no longer competitive in
terms of quality, service or price and, following notice from GM, we fail to
remedy the noncompetitive condition within a specified period, then GM may elect
to discontinue purchasing such family of products from us beginning March 2001.
GM also may terminate the CSA in the event we become insolvent or enter into
bankruptcy or similar proceedings or if a significant portion of our assets
become subject to attachment, embargo or expropriation. Pursuant to the MOU, the
CSA will terminate when the materials purchasing arrangements described above
have been terminated and all products currently supplied under the CSA are
included in LPCs, but in any event no earlier than March 2001.
Under the terms of the standard form LPC, if GM determines that products
produced by us under an LPC are no longer competitive in terms of technology,
design or quality and, following notice from GM, we fail to remedy the
noncompetitive condition within a specified period, then GM may elect to
terminate such LPC. Termination with respect to such products becomes effective
one year after GM gives us notice of termination. Under the LPCs, we have agreed
not to sue GM or its other suppliers in the event GM terminates the LPC and
obtains similar products from other sources.
At the time of the 1994 Acquisition we also entered into a supply agreement
(the "GMCL Agreement") with General Motors of Canada, Limited ("GMCL"), an
affiliate of GM, whereby axles produced at GMCL's St. Catharines, Ontario
facility are purchased by us for resale to GM. The GMCL Agreement, as amended,
expires in September 1999. The axles produced at St. Catharines accounted for
less than 10% of our revenues in 1998. In addition, we have an irrevocable
option to purchase for a nominal amount the equipment used by GMCL at this
facility to produce axles.
SALES AND BUSINESS DEVELOPMENT
Our sales and business development organization is structured into three
groups. The first group manages the commercial sales to GM's North American
operations, the second group supports Ford, DaimlerChrysler and all forged
products customers while the third supports all other customers worldwide
(focusing on Asia, Europe and South America), including GM's international
divisions. Sales and business development associates work closely with customers
and our engineers to identify product needs and anticipate customer program
initiatives and timing in order to position us to support new programs,
beginning with the design and the development and continuing through product
launch.
As GM and other OEMs expand globally, we intend to support our customers
through regional sales offices. We currently have sales offices in Tokyo, Japan
and Ulm, Germany to support our customers and pursue business development
opportunities in Asia and Europe. We will consider sales offices in other
regions of the world in order to support OEM programs worldwide and provide
access to new markets for our products. We are constructing a manufacturing
facility, which includes a sales office, in Guanajuato, Mexico. Production in
this facility currently is scheduled to begin in the fall of 2000. The
Guanajuato sales office will pursue business development opportunities in Mexico
and South America.
RESEARCH AND DEVELOPMENT
Our research and development efforts are intended to facilitate our ability
to respond to the technological demands of the market and to support our
customers. In July 1995, we completed construction of our Technical Center in
Rochester Hills, Michigan, employing approximately 150 engineers, designers and
technicians,
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<PAGE>
specializing in design, development and process engineering. The Technical
Center is located near GM's Truck Group Headquarters, as well as the technical
centers of other major OEMs, which facilitates communications between us and our
customers. The Technical Center includes a materials laboratory and complete
product testing and development equipment, including four-wheel drive chassis
and driveline dynamometers in semi-anechoic noise chambers to analyze complete
driveline systems for sources of noise and vibration. We engage in a multi-phase
program of management processes and product launch review to ensure product
readiness. We believe that this rigorous program of research and development,
testing and validation provides our customers with full-service design services
and high quality engineering and manufacturing.
Approximately $29.5 million and $27.8 million was invested in research and
development expenses, product enhancement and new designs during the years ended
December 31, 1998 and 1997, respectively, in order for us to maintain and expand
our technological expertise in both product and process. Our engineering design
involves the use of highly sophisticated analytical tools, computer-aided design
techniques and simultaneous engineering processes based on close communications
and teamwork among design engineers, manufacturing engineers and the customer.
We promote a cross-functional product team approach with respect to product and
process development that utilizes engineering tools such as:
o computer-aided design, manufacturing and engineering;
o computer-integrated manufacturing;
o engineering analysis;
o design validation plans and reports; and
o a fully integrated LAN/WAN computer network.
MANUFACTURING
We continue to expand and implement a flexible manufacturing strategy that
improves quality, delivery integrity and cost reduction ability. All of our
manufacturing plants, our Technical Center and our corporate headquarters have
received ISO/QS 9000 certifications, which are international and industry
quality standards.
We utilize the latest technology such as computer-aided design and
manufacturing to reduce lead time and to assure dimensional accuracy and quality
of our final products. For example, computer integrated manufacturing allows us
to validate tooling before release to actual production. Reductions in cost are
expected to result from newer flexible equipment, our ability to perform several
manufacturing processes at the same facility, less inventory, reduction in
defects and fewer returned sales. From March 1994 to December 1998, we have
invested approximately $825 million to upgrade our equipment and facilities.
We are committed to reducing operating costs by developing new
manufacturing processes, improving product design and investing in new equipment
and technology. Management continues to identify and implement new cost
reduction initiatives and believes that additional improvements can be achieved
through improved manufacturing methods, many of which involve minimal capital
expenditures. These initiatives have been focused on key capacity and efficiency
issues such as reducing equipment downtime, improving product and material
workflow, eliminating bottleneck operations and upgrading personnel through
training and hiring.
Another important element of our manufacturing strategy and a key to our
future success is the strategic investment of capital for new technology. Any
new machinery and equipment purchased by us is analyzed for its flexibility,
speed and reliability and must be capable of achieving maximum throughput at
world-class quality levels.
We (excluding Albion) produce on average approximately 14,000 axles, 15,000
propeller shafts, 9,000 steering linkages, 21,500 stabilizer bars and forgings
in excess of 250,000 each production day in December 1998. We have successfully
increased production of axles per production day from approximately 10,000 in
March 1994 to approximately 14,000 in December 1998 while reducing manufacturing
space requirements and improving quality. We have reduced discrepant parts
shipped to GM, as measured by GM, from approximately 13,400 PPM during the six
months ended December 31, 1994 to approximately 118 PPM during the six months
ended December 31, 1998, and parts returned by GM decreased from 5,136 PPM
during the ten months ended
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<PAGE>
December 31, 1994 to 223 PPM during the twelve months ended December 31, 1998.
See "Risk Factors--We plan to implement certain product programs." Our
manufacturing facilities have adequate production capacity for our current
needs, and management believes our present facilities, enhanced by currently
budgeted capital expenditures for equipment additions and improvements, will be
adequate to meet currently anticipated customer requirements.
ASSOCIATES
We believe that one of our most important assets is our workforce. Since
the 1994 Acquisition, we have focused on making significant improvements in our
labor relations through improving working conditions, incentive programs and
town hall meetings with our hourly associates. We have also implemented a
program of continuous training whereby our associates are taught the skill sets
important to producing products of precision quality. In each of the past three
years, we have invested approximately 300,000 labor hours annually in various
training and educational programs.
We also recognize that a key element of our long-term competitiveness is
developing a constructive working relationship with our unions. In 1997, our
management negotiated, and our workers ratified, our first agreements with the
UAW and the IAM after our separation from GM in the 1994 Acquisition.
Significantly, the unions have committed to assist us in achieving both quality
and productivity gains over the life of the contract.
As of December 31, 1998, we employed approximately 8,500 associates in the
United States. Approximately 6,900 of our U.S.-based hourly associates are
represented by the UAW under a collective bargaining agreement which runs
through February 25, 2000. Our approximately 300 remaining U.S.-based hourly
associates are represented by the IAM under a collective bargaining agreement
which runs through May 5, 2000. In addition, we employ approximately 1,100
associates at our recently acquired Albion subsidiary who are represented by
labor unions under various collective bargaining agreements, certain of which
may be terminated upon six-months' notice. We believe our relationships with our
associates and their unions are positive.
As part of the 1994 Acquisition, our hourly associates were given the
option to transition back to GM as jobs at GM became available. Of the 6,500
hourly associates that were employed on March 1, 1994, approximately 2,900 have
returned to GM and as of December 31, 1998, approximately 1,500 associates are
eligible to return to GM. Such associates may transition back to GM once a
requested position becomes available on a schedule to be determined by us. Such
associates may also elect to remain with us. Many of those who returned to GM
were high seniority workers who were at or near retirement age. As a result of
this turnover, the average age of hourly associates has decreased and the level
of education of hourly associates in the workforce has increased.
COMPETITION
Our primary competitors in the North American light truck and SUV driveline
systems market are:
o the internal "captive" operations of Ford and DaimlerChrysler; and
o independent, publicly-traded Dana Corporation.
The Ford and DaimlerChrysler operations are strictly internal and do not
manufacture products for outside customers at this time. Several foreign firms
have niche driveline businesses which primarily supply foreign transplant auto
manufacturers.
The automotive industry is highly competitive. We compete based on
technology, quality, price, durability, reliability and overall customer
service. Our competitors include driveline component manufacturing facilities of
existing OEMs, as well as a small number of independent suppliers of driveline
systems and several independent suppliers of forged products. Certain of these
OEMs are also our customers. Our principal competitors are large and have
substantial resources, including those competitors that are owned by
OEMs. There can be no assurance that competitors will not be able to take
actions, including developing new technology or products, or offering prolonged
reduced pricing, which could adversely affect us.
We believe that the trend in the industry is for OEMs to reduce the number
of their suppliers and develop close ties and long term, partnership-style
relationships with those suppliers similar to the relationship developed between
GM and us.
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<PAGE>
PRODUCTIVE MATERIALS
We believe we have adequate sources for the supply of productive materials
and components for our manufacturing needs. Our suppliers are located primarily
in North America. We have, since the 1994 Acquisition, purchased through GM's
purchasing network certain materials for use in the manufacture of products sold
under the CSA and LPCs. We have agreed with GM to terminate this arrangement
and, in anticipation of such termination, we have initiated a policy of
strengthening our supplier relationships by concentrating our productive
material purchases with a limited number of suppliers. We believe that this
policy contributes to quality and cost control and increases a supplier's
committment to us. We rely upon, and expect to continue to rely upon, single
source suppliers for certain critical components. See "Risk Factors--We rely on
GM for business" and "--Inventory Management--We rely on single source
suppliers."
PATENTS AND TRADEMARKS
We maintain and have pending various U.S. and foreign patents and other
rights to intellectual property relating to our business, which we believe are
appropriate to protect our interest in existing products, new inventions,
manufacturing processes and product developments. We do not believe any single
patent is material to our business nor would the expiration or invalidity of any
patent have a material adverse effect on our business or our ability to compete.
We are not currently engaged in any material infringement litigation, nor are
there any material claims pending by or against us.
PROPERTIES
Since the 1994 Acquisition, we have dedicated substantial resources to
improving the functionality and physical appearance of our facilities, making
renovations including painting, lighting, roofing, insulation, ventilation, fire
protection, fencing, parking lot, railroad and dock upgrades, and office
improvements. We have also purchased numerous buildings surrounding our
facilities and subsequently demolished these buildings and landscaped the areas.
Working with state and local governments, we have been successful in securing
infrastructure improvements surrounding the Detroit and Buffalo facilities,
including road, sewer and utility upgrades.
The following is a summary of our principal facilities:
<TABLE>
<CAPTION>
APPROX. TYPE OF
NAME SQ. FEET INTEREST FUNCTION
- ------------------------------------------ ---------------- ------- ------------------------------------------
<S> <C> <C> <C>
Detroit Gear & Axle ...................... 1,660,000 Owned Rear and front axles, front suspensions,
Detroit, MI brake assemblies, and rear brake drums
Buffalo Gear & Axle ...................... 1,165,000 Owned Rear axles and steering linkages
Buffalo, NY
Three Rivers Plant ....................... 750,000 Owned Rear propeller shafts, front auxiliary
Three Rivers, MI propeller shafts, and universal joints
Detroit Forge ............................ 710,000 Owned Forged products
Detroit, MI
Tonawanda Forge .......................... 470,000 Owned Forged products
Tonawanda, NY
Scotstoun Plant .......................... 460,000 Leased Front and rear axles for medium-duty
Glasgow, Scotland trucks and vans
Farington Plant .......................... 367,000 Leased Front and rear axles for buses and chassis
Leyland, England components
Guanajuato Gear & Axle ................... 335,000 Owned Rear axles
Guanajuato, Mexico (in construction
phase)
Spurrier Plant ........................... 290,000 Leased Crankshafts and fabricated parts
Leyland, England
Technical Center ......................... 66,000 Leased Research and development, design
Rochester Hills, MI engineering, metallurgy, testing,
validation, materials purchasing and sales
Corporate Headquarters ................... 31,000 Owned Executive and administrative offices
Detroit, MI located at the Detroit Gear & Axle
facility
</TABLE>
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<PAGE>
The Detroit Gear & Axle, Detroit Forge, Three Rivers Plant and Corporate
Headquarters facilities are each subject to a mortgage executed in favor of the
several lenders party to the Credit Facilities. Such mortgages expire upon
satisfaction of all borrowings under the Credit Facilities.
SEASONALITY
Our business is moderately seasonal as we typically shut down our
operations for two weeks each July and approximately one week at the end of
December consistent with the work schedule of our principal customers. Our third
and fourth quarter results reflect the effects of these shutdowns. In addition,
our principal customers have incurred lower production rates in the third
quarter as model changes enter production.
ENVIRONMENTAL MATTERS
In connection with the 1994 Acquisition, GM has agreed to indemnify and
hold harmless the Issuer 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 Issuer, 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 our Buffalo facility has been
designated by the New York Department of Environmental Conservation ("NYDEC") as
a Class 3 Inactive Hazardous Waste Disposal Site due to the presence of
polychlorinated biphenyls in subsurface soil and groundwater below existing
pavement, and an elevated level of lead in the soil. A Class 3 designation is
given to a site which does not present a significant threat to the public health
or the environment and at which action may be deferred. The 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 our Tonawanda facility
as a result of the presence of polychlorinated biphenyls in the soil. The
contamination of both sites took place prior to our acquiring the properties and
is the responsibility of GM.
LITIGATION
We are involved in various legal proceedings incidental to our 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 adverse effect on our financial condition,
results of operations or cash flows.
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<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our management team has proven leadership and extensive automotive industry
experience. The management team has been a critical factor in the turnaround of
our operations since the 1994 Acquisition. The directors and executive officers
of Holdings and the Issuer are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------ ---- -----------------------------------------------------
<S> <C> <C>
Richard E. Dauch(3)....................... 56 Chairman of the Board of Directors, Chief Executive
Officer and President*
B.G. Mathis(2)............................ 66 Executive Vice President--Administration and Chief
Administrative Officer*; Director
Joel D. Robinson.......................... 56 Executive Vice President--Operations and Chief
Operating Officer**
Marion A. Cumo, Sr........................ 56 Vice President--Materials Management**
David C. Dauch............................ 34 Vice President--Sales, Marketing and Capacity
Planning**
Richard F. Dauch.......................... 38 Vice President--Manufacturing**
George J. Dellas.......................... 56 Vice President--Quality Assurance and Customer
Satisfaction**
David J. Demos............................ 49 Vice President--Procurement**
Patrick S. Lancaster...................... 51 Vice President, General Counsel and Secretary*
Allan R. Monich........................... 45 Vice President--Human Resources**
Daniel V. Sagady, P.E..................... 49 Vice President--Engineering and Product Development**
Michael D. Straney........................ 56 Vice President--Europe**
Robert A. Krause.......................... 43 Treasurer and Chief Financial Officer*
Forest J. Farmer Sr.(1) 58 Director***
Robert L. Friedman(2) 56 Director***
Glenn H. Hutchins(3)...................... 43 Director****
Bret D. Pearlman(2)....................... 32 Director****
David A. Stockman(3)...................... 52 Director****
</TABLE>
- ------------------
* Executive Officer of Holdings and the Issuer
** Executive Officer of the Issuer
*** Director of Holdings
**** Director of Holdings and the Issuer
(1) Class I Director
(2) Class II Director
(3) Class III Director
Richard E. Dauch has been our Chief Executive Officer, President and a
member of the Board of Directors since the 1994 Acquisition. In October 1997, he
was named Chairman of the Board of Directors. Prior to March 1994, he spent
12 years at Chrysler. He left Chrysler in 1991 as Executive Vice President of
Worldwide Manufacturing. Mr. Dauch also served as group vice president of
Volkswagen of America, where he established the manufacturing facilities for the
first automotive transplant in the United States. Mr. Dauch has over 34 years of
experience in the automotive industry. In 1996, Mr. Dauch was recognized as the
Worldwide Automotive Industry Leader of the Year by the Automotive Hall of Fame
and was recently named the 1997 Manufacturer of the Year by the Michigan
Manufacturer's Association. He has lectured extensively on the subject of
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<PAGE>
manufacturing and authored the book, Passion for Manufacturing, which is
distributed in 80 countries in several languages.
B. G. Mathis became Executive Vice President--Administration and Chief
Administrative Officer in January 1999. From August 1998 to January 1999,
Mr. Mathis served as our Executive Vice President--Special Projects of the
Company and previously was Executive Vice President and Chief Administrative
Officer since November 1997 and was Vice President--Administration and Chief
Administrative Officer since we were purchased in the 1994 Acquisition.
Mr Mathis has also served as one of our directors since October 1997.
Mr. Mathis spent 28 years at Chrysler and held increasingly responsible
executive administrative positions, including Manager of Personnel for all
Chrysler Manufacturing Operations. He retired from Chrysler in 1988.
Joel D. Robinson has been Executive Vice President and Chief Operating
Officer since August 1998 and most recently was Vice President--Manufacturing
since April 1997. Mr. Robinson joined us in March 1994 and has held various
positions, including, most recently, Executive Director of the GMT-800 Program.
Mr. Robinson began his career in the automotive industry at Ford in 1963, where
he held a series of technical and manufacturing management positions.
Mr. Robinson also worked for American Motors Corporation, serving as Director of
Vehicle Assembly, and later, at Chrysler, where he was responsible for all car
body programs.
Marion A. Cumo, Sr. has been Vice President--Materials Management since May
1996 and was Vice President--Quality Assurance and Customer Satisfaction from
March 1994 to May 1996. Prior to joining us, Mr. Cumo spent 11 years from 1980
to 1991 working as a manufacturing executive at Chrysler. His most recent title
at Chrysler was General Plants Manager of Assembly Operations. After leaving
Chrysler in 1991, Mr. Cumo became President of Tri-County Chrysler Products in
Peebles/West Union, Ohio, and also worked as an automotive manufacturing
consultant.
David C. Dauch has been Vice President--Sales, Marketing and Capacity
Planning since August 1998 and most recently was Director of Sales--GM Full-Size
Truck Programs since May 1996, and previously was Manager--Sales Administration
since joining us in July 1995. Prior to joining us, Mr. Dauch held various
positions at Collins & Aikman Products Company, including Sales Manager, from
September 1987. David C. Dauch is a son of Richard E. Dauch.
Richard F. Dauch has been Vice President--Manufacturing since August 1998
and most recently was Director--Strategic and Capacity Planning since February
1998, and previously was Plant Manager for the Detroit Gear & Axle Plant since
May 1996 and was Corporate Manager--Labor Relations since joining the firm in
May 1995. Prior to joining us, Mr. Dauch worked as a Senior Business Manager and
as a Business Unit Manager with United Technologies Corporation from February
1992. Prior to his automotive career, Mr. Dauch served in the U.S. Army for
nine-years with assignments including platoon leader and company commander.
Richard F. Dauch is a son of Richard E. Dauch.
George J. Dellas has been Vice President--Quality Assurance and Customer
Satisfaction since May 1996 and prior thereto was Vice President--Procurement
and Material Management since the 1994 Acquisition. Prior to joining us,
Mr. Dellas spent 11 years in executive positions of increasing responsibility at
Chrysler. Before leaving Chrysler in 1991, he served as the Director of Advanced
Planning for the Assembly Division. Mr. Dellas has over 30 years experience in
the automotive industry.
David J. Demos has been Vice President--Procurement since August 1998 and
most recently was Vice President--Sales and Business Development since November
1997 and previously was Vice President--Sales since May 1996. Prior to joining
us, Mr. Demos worked for GM for 21 years in various engineering, quality and
sales positions in the United States and overseas. In his most recent position
with GM he was chief engineer for the European business unit of GM's Saginaw
Division and chief engineer of GM final drive systems. Since joining us he has
held the positions of Executive Director, Sales and Marketing, and Director,
Sales, Marketing and Planning.
Patrick S. Lancaster has been Vice President, General Counsel and Secretary
since November 1997, and previously was General Counsel and Secretary since June
1994. Prior to joining us, Mr. Lancaster worked at Fruehauf Trailer Corporation
and its predecessor company from 1981 to 1994 where he last served as General
Counsel and Assistant Secretary from March 1990.
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<PAGE>
Allan R. Monich has been Vice President--Human Resources since August 1998
and most recently was Vice President--Personnel since November 1997. Mr. Monich
served as plant manager for the Buffalo Gear & Axle plant since our formation in
March 1994. Prior to joining us in March 1994, Mr. Monich worked for GM for
21 years in the areas of manufacturing, quality, sales and engineering,
including four years as a GM plant manager.
Daniel V. Sagady, P.E. has been Vice President--Engineering and Product
Development since November 1997 and previously was Executive Director of Product
Engineering since May 1996. Prior to his promotion, Mr. Sagady served as
Director of Product Engineering from March 1994. He began his career at GM in
1967 and has spent over 30 years in the automotive industry with both Ford and
GM where he has held various positions in manufacturing, quality, testing and
developmental engineering. Mr. Sagady is a licensed Professional Engineer.
Michael D. Straney has been Vice President--Europe since October 1998 and
most recently was Vice President--Mergers and Acquisitions since August 1998 and
previously was Vice President--Procurement since November 1997. Prior to his
current position, Mr. Straney served as Executive Director of Procurement from
May 1996 and Executive Director of Strategic Planning from August 1995 and
Director of Capacity, Planning, Modernization and Investment since joining us in
March 1994. Mr. Straney began his career in 1960 with GM and has served in
various capacities, including Plant Manager at our Buffalo facilities while they
were owned by GM, and as the Operations Manager of all driveline facilities.
Robert A. Krause has been our Treasurer since January 1998. Prior to
joining us, Mr. Krause worked for Baxter International Inc. from 1985 to 1997
where he served in various positions in treasury and corporate controller
functions including Director--International Treasury and Director--Corporate
Reporting. In addition, Mr. Krause spent several years in public accounting and
is a Certified Public Accountant. On May 1, 1999, Mr. Krause was appointed
acting Chief Financial Officer.
Forest J. Farmer Sr. was elected to be a director of Holdings in April
1999. Mr. Farmer is the Chairman, CEO and President of the Farmer Group, a
holding company of four technology and manufacturing corporations. Prior to
that, Mr. Farmer served as President and CEO of Bing Manufacturing Inc., LLC.
Mr. Farmer retired from Chrysler Corporation in 1994 after 26 years including
six years as President of its automotive parts subsidiary, Acustar. Mr. Farmer
serves on the board of directors of more than a dozen corporations and
organizations including The Lubrizol Corporation and Saturn Electronics
Corporation.
Robert L. Friedman was elected to be a director of Holdings in April 1999.
Mr. Friedman joined The Blackstone Group L.P. in 1999 after a 32 year career
with Simpson Thacher & Bartlett. While working at Simpson Thacher & Bartlett,
Mr. Friedman served as lead counsel to The Blackstone Group L.P. since 1985.
Glenn H. Hutchins was elected one of our directors in connection with the
Recapitalization. Mr. Hutchins is a founder of Silver Lake Partners, a private
equity firm focused on technology and related investments. From 1994 until
January 31, 1999 he was a Senior Managing Director of The Blackstone Group L.P.
Mr. Hutchins was a Managing Director of Thomas H. Lee Co. ("THL") from 1987
until 1994 and, while on leave from THL during parts of 1993 and 1994, was a
Special Advisor in the White House. Mr. Hutchins is a member of the boards of
directors of Clark Refining & Marketing, Inc., Clark USA, Inc., CommNet Cellular
Inc., Corp Banca (Argentina) S.A. and Corp Group C.V.
Bret D. Pearlman was elected one of our directors in May 1998.
Mr. Pearlman became a Managing Director of The Blackstone Group L.P. in 1998,
and has been involved in the firm's principal activities since 1989.
David A. Stockman was elected one of our directors in connection with the
Recapitalization. He is a member of the limited liability company which acts as
the general partner of Blackstone. He is a Senior Managing Director of The
Blackstone Group L.P. and has been with Blackstone since 1988. Mr. Stockman is
also a Co-Chairman of the board of directors of Collins & Aikman Corporation and
a member of the boards of directors of Bar Technologies Inc., Clark Refining &
Marketing, Inc., Clark USA, Inc., and Haynes International, Inc.
Directors of each of Holdings and the Issuer hold office until the
expiration of their respective terms and until their successors have been
elected and qualified, or until their earlier death, resignation or removal.
Executive officers and other officers are elected or appointed by, and serve at
the pleasure of, the Board of Directors. Pursuant to Mr. Dauch's employment
agreement with Holdings (as successor by merger to AAMM),
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<PAGE>
Holdings has agreed that he will serve as Chairman of the Board, President and
Chief Executive Officer until the termination of the agreement. See
"--Employment Agreement."
COMMITTEES
Audit Committee. Holdings has established an Audit Committee. Presently,
Mr. Farmer is the only member of the Audit Committee. The Audit Committee shall
consider and recommend to the Board of Directors the engagement of independent
auditors to audit annually the books and records of Holdings and the terms of
such engagement; to review the reports of such independent auditors; the
appropriateness of the accounting principles followed in preparation of
Holdings' financial statements; to review the performance of Holdings' program
of internal control to ensure Holdings' compliance with legal requirements; and
to perform such other duties related to the foregoing as may be directed by the
Board of Directors. It is intended that Holdings will appoint one additional
independent director to serve on this committee.
Executive Committee. Holdings has established an Executive Committee
consisting of Messrs. Dauch (Committee Chairman), Stockman and Hutchins. The
Executive Committee has the authority to exercise the powers of the full Board
between Board meetings.
Compensation Committee. Holdings has established a Compensation Committee
consisting of Messrs. Farmer, Hutchins and Stockman. The duties of the
Compensation Committee are generally to review employment, development,
reassignment and compensation matters involving corporate officers and such
other executive level associates as may be appropriate, including, without
limitation, issues relative to salary, bonus, stock options and other incentive
arrangements. The Compensation Committee also oversees Holdings' and the
Issuer's pension and employee benefit plans. It is intended that Holdings will
appoint one additional independent director to serve on this committee.
DIRECTOR COMPENSATION
Holdings expects to pay its non-employee and non-affiliated directors an
annual fee of $20,000, plus $1,000 for each regularly scheduled meeting attended
and an additional annual fee of $2,500 for service on each Board committee (or
$5,000 for chairing a Board committee).
EXECUTIVE COMPENSATION OF HOLDINGS AND THE ISSUER
The following tables set forth the compensation awarded or paid to, or
earned by, Holdings' and the Issuer's Chief Executive Officer and each of
Holdings' and the Issuer's other four most highly compensated executive officers
during 1998 (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------- -------------
SECURITIES ALL OTHER
NAME AND SALARY BONUS UNDERLYING COMPENSATIONS
PRINCIPAL POSITION ($) ($)(1) OPTIONS(#) ($)(2)
- -------------------------------------------------------- -------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
Richard E. Dauch........................................ $750,000 $1,200,000 -- $ 22,700
Chairman of the Board, Chief Executive Officer and
President
B. G. Mathis............................................ 325,000 325,000 -- 8,499
Executive Vice President--Administration and Chief
Administrative Officer
Joel D. Robinson........................................ 220,837 250,000 -- 7,590
Executive Vice President--Operations and Chief
Operating Officer
Marion A. Cumo, Sr...................................... 200,000 200,000 -- 7,590
Vice President--Materials Management
George J. Dellas........................................ 200,000 200,000 -- 3,150
</TABLE>
48
<PAGE>
Vice President--Quality Assurance and Customer
Satisfaction
- ------------------
(1) Bonuses are paid in the year subsequent to the year in which they are
earned.
(2) The amounts shown represent the Issuer matching contributions in the
Issuer's qualified section 401(k) plan and the dollar value of life
insurance premiums and benefits. These amounts, expressed in the same order
as identified above, for the Named Executive Officers are as follows: Mr.
Dauch--$4,800 and $17,900; Mr. Mathis--$4,719 and $3,780; Messrs. Robinson
and Cumo, Sr.--$4,800 and $2,790; and Mr. Dellas--$0 and $3,150.
AGGREGATED OPTION/SAR EXERCISE IN LAST FISCAL YEAR AND FY-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS/ IN-THE-MONEY OPTIONS/
SARS AT FISCAL YEAR-END (#) SARS AT FISCAL YEAR-END ($)
------------------------------ ------------------------------
NAME EXERCISEABLE UNEXERCISEABLE EXERCISEABLE UNEXERCISEABLE
- ------------------------------------------------------ ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C>
Richard E. Dauch...................................... 7,015,551 1,730,639 $118,737,678 $ 22,048,341
B. G. Mathis.......................................... 578,337 419,539 9,566,917 5,344,927
Joel D. Robinson...................................... 8,995 125,862 114,596 1,603,482
Marion C. Cumo........................................ 336,430 125,862 5,599,132 1,603,482
George J. Dellas...................................... 336,430 125,862 5,599,132 1,603,482
</TABLE>
STOCK OPTIONS
Management Stock Option Plan
Holdings has adopted The Amended and Restated American Axle & Manufacturing
of Michigan, Inc. Management Stock Option Plan (the "Option Plan") under which
Holdings is authorized to grant options to purchase up to 5,621,625 shares of
Common Stock.
The Option Plan provides for the issuance of shares of authorized but
unissued or reacquired shares of Common Stock, subject to adjustment to reflect
certain events such as stock dividends, stock splits, mergers or reorganizations
of or by Holdings. The Option Plan is intended to assist Holdings in attracting
and retaining employees of outstanding ability and to promote the identification
of their interests with those of the stockholders of Holdings. The Option Plan
permits the grant of non-qualified stock options to purchase shares of Common
Stock. Unless sooner terminated by the Holdings' Board of Directors, the Option
Plan will terminate on December 31, 2004. Such termination will not affect the
validity of any outstanding grants on the date of the termination.
The Compensation Committee of the Board of Directors of Holdings
administers the Option Plan. The Board of Directors may from time to time amend
the terms of any grant of options, but, except for adjustments made upon a
change in the Common Stock by reason of a stock split, spin-off, stock dividend,
recapitalization, reorganization or similar event, such action will not
adversely affect the rights of any participant under the Option Plan without
such participant's consent. The Board of Directors will retain the right to
amend, suspend or terminate the Option Plan.
49
<PAGE>
In November 1997, Holdings granted certain options (the "Options") to key
employees to purchase an aggregate, less subsequently forfeited shares, of
approximately 5,203,220 shares of Common Stock (the "Option Shares") at a
purchase price of $4.26 per share. One-third of the Options vest and become
exercisable ratably over 5 years; provided, however, that such Options will
become immediately vested and exercisable upon the earlier of a Change of
Control, for certain participants, or a participant's termination of employment
due to death or disability, without Cause or voluntary termination of employment
for Good Reason, as those terms are defined in the Option Plan. The remaining
two-thirds of the Options vest and become exercisable on the seventh anniversary
of the grant date; provided, however, that such options may become exercisable
sooner upon the achievement of certain performance targets as specified in the
Option Plan. The Compensation Committee of Holdings has authorized the grant of
approximately 407,000 additional options under the Management Stock Option Plan
in 1999. The purchase price of such options will be the fair market value of the
Common Stock at the date the options are granted.
Replacement Plan
Holdings has also adopted the 1997 American Axle & Manufacturing of
Michigan, Inc. Replacement Plan (the "Replacement Plan") under which Holdings is
authorized to grant options to purchase up to 1,858,095 shares of Common Stock
at a nominal exercise price.
The purpose of the Replacement Plan is to provide the award of Replacement
Stock Options (as defined in the Replacement Plan) to certain current or former
executive officers or directors ("Eligible Holders") of Holdings whose awards
under the American Axle & Manufacturing, Inc. Phantom Stock Plan dated March 1,
1994 (the "PSP Plan") were voluntarily canceled in connection with the
Recapitalization. Following the Recapitalization, the PSP Plan was terminated.
The Replacement Stock Options are intended to preserve the economic value of the
cancelled awards. We expect that we will benefit from the added interest which
such Eligible Holders will have in our welfare as a result of their proprietary
interest in our success. Holdings has granted options to purchase an aggregate
of 1,858,095 shares of Common Stock under the Replacement Plan, subject to
adjustment to reflect certain events such as stock dividends, stock splits,
mergers or reorganizations of or by us. No further options may be granted under
the Replacement Plan.
The Compensation Committee of the Board of Directors administers the
Replacement Plan. The Board of Directors may from time to time amend the terms
of any grant of options, but, except for adjustments made upon a change in the
Common Stock by reason of a stock split, spin-off, stock dividend,
recapitalization, reorganization or similar event, such action will not
adversely affect the rights of any participant under the Replacement Plan
without such participants consent. The Board of Directors retains the right to
amend, suspend or terminate the Replacement Plan. The Replacement Stock Options
are non-qualified options and are fully vested and exercisable.
Nonqualified Stock Option Agreement
AAM, Inc. and Richard E. Dauch are parties to a nonqualified stock option
agreement dated February 27, 1994 and amended as of December 21, 1994. Pursuant
to the agreement, AAM, Inc. granted Mr. Dauch an option to purchase shares of
common stock of AAM, Inc. (the "AAM, Inc. Option"), with such number of shares
to be adjusted to reflect certain events such as stock dividends, stock splits,
mergers or reorganizations. In connection with the Recapitalization, Holdings
agreed to provide Mr. Dauch with an option to purchase 6,891,915 shares of
Holdings' Common Stock (the "Exchange Option") at a nominal exercise price per
share in exchange for the AAM, Inc. Option. The terms of the Exchange Option are
set forth in a nonqualified option agreement dated as of October 30, 1997 (the
"Nonqualified Option Agreement") (as amended by the Amendatory Agreement dated
December 11, 1998) between American Axle & Manufacturing of Michigan, Inc. and
Mr. Dauch. The Exchange Option expires 10 years after the date such Exchange
Option was granted, and is fully vested and exercisable.
The 1999 Stock Incentive Plan
The following are the material terms of the 1999 Stock Incentive Plan (the
"Incentive Plan"), approved by the Board of Directors as of January 8, 1999. The
purpose of the Incentive Plan is to provide our directors, officers and key
employees ("Participants") an opportunity to benefit from an appreciation in the
value of the
50
<PAGE>
Common Stock, thus providing an increased incentive for the Participants to
contribute to our future success and prosperity, enhancing the value of the
Common Stock for the benefit of the stockholders and increasing our ability to
attract and retain highly qualified individuals. The total number of shares of
Common Stock that may be issued under the Incentive Plan is 3,500,000 shares.
The maximum number of shares of Common Stock for which awards may be granted
during a calendar year to any Participant shall be 1,500,000 shares.
The Incentive Plan is administered by the Compensation Committee of the
Board of Directors or a subcommittee thereof. The Compensation Committee has the
authority to select the Participants to be granted awards under the Incentive
Plan, to determine the size and terms of an award and to determine the time when
grants of awards will be made. The Compensation Committee also is authorized to
interpret the Incentive Plan, to establish, amend and rescind any rules and
regulations relating to the Incentive Plan and to make any other determinations
that it deems necessary or desirable for the administration of the Incentive
Plan.
Under the Incentive Plan, the Compensation Committee may grant awards in
the form of options, which may be incentive stock options within the meaning of
Section 422 of the Code or non-qualified stock options; stock appreciation
rights; or other awards that are valued in whole or in part by reference to, or
are otherwise based on, the value of the Common Stock.
The terms and conditions of options granted under the Incentive Plan shall
be established by the Compensation Committee and set forth in a stock option
agreement with the Participant. The option price per share of Common Stock shall
be determined by the Compensation Committee but shall not be less than the fair
market value of the Common Stock on the date of the grant. Options granted under
the Incentive Plan shall be exercisable at such time and upon such terms and
conditions as may be determined by the Compensation Committee, but in no event
shall an option be exercisable more than ten years after the date it is granted.
The Compensation Committee may grant a stock appreciation right independent
of or in conjunction with an option or designated portion thereof at the time
the related option is granted or at any time prior to the exercise or
cancellation of the related option. The exercise price shall be an amount
determined by the Compensation Committee but in no event shall such amount be
less than the greater of:
(i) the fair market value of a share on the date the stock
appreciation right is granted or, in the case of a stock appreciation right
granted in conjunction with an option, or a portion thereof, the option
price of the related option; and
(ii) an amount permitted by applicable laws, rules, by-laws or
policies of applicable regulatory authorities or stock exchanges.
Upon the exercise of a stock appreciation right, the Participant shall be
entitled to receive with respect to each share to which such stock appreciation
right relates an amount in cash and/or shares, as the case may be, equal to the
excess of:
(i) the fair market value of a share of Common Stock on the date of
exercise, over
(ii) the exercise price of the stock appreciation right.
The Compensation Committee may impose conditions upon the exercisability of
stock appreciation rights.
The Compensation Committee may grant, in its sole discretion, other awards
of shares and awards that are valued in whole or in part by reference to, or are
otherwise based on the fair market value of, shares of Common Stock. Certain of
such other share-based awards may be granted in a manner that is deductible by
us under Section 162(m) of the Code and may be based upon stock price, market
share, sales, earnings per share, return on equity, costs or other performance
goals approved by the Compensation Committee. The Compensation Committee also
has the authority to grant other stock-based awards not specifically described
above, including awards of Common Stock subject to vesting conditions or
restrictions on transfer.
Except as otherwise provided in the Incentive Plan or in an award
agreement, an award may be exercised for all, or from time to time any part, of
the shares of Common Stock for which it is then exercisable. The purchase price
for the shares of Common Stock subject to an award may be paid to us in full at
the time of exercise at the election of the Participant:
51
<PAGE>
(i) in cash,
(ii) in shares of Common Stock having a fair market value equal to the
aggregate option price for the shares of Common Stock being purchased and
satisfying such other requirements as may be imposed by the Compensation
Committee,
(iii) partly in cash and partly in such shares of Common Stock, or
(iv) through the delivery of irrevocable instructions to a broker to
deliver promptly to us an amount equal to the aggregate exercise price for
the shares of Common Stock being purchased.
Each award will be non-transferable during the lifetime of the Participant
unless otherwise provided by the Compensation Committee. The Compensation
Committee may establish the terms and conditions, if any, under which awards may
be exercised by Participants following the termination of their employment or
service on the Board, as applicable.
The Board of Directors may suspend, amend or terminate the Incentive Plan,
in whole or in part. No amendment may be made without approval of the
stockholders, however, if such approval is required by stock exchange rules or
by law. Furthermore, no amendment, suspension or termination of the Incentive
Plan may, without the consent of a Participant, impair any of the rights under
any award previously granted to such Participant under the Incentive Plan.
In the event of any change in the outstanding shares of Common Stock by
reason of any stock dividend or split, reorganization, recapitalization, merger,
consolidation, spin-off, combination or exchange of shares of Common Stock or
other corporate exchange, or any distribution to stockholders of shares of
Common Stock, the Compensation Committee may make such substitution or
adjustment as it deems to be equitable to any affected terms of such awards. In
the event of a change of control, as defined in the Incentive Plan, the award
may provide that the nonvested portion thereof shall vest and become exercisable
in full.
RETIREMENT PROGRAM
The retirement program for our executives consists of the American Axle &
Manufacturing, Inc. Retirement Program for Salaried Employees, which is a
tax-qualified plan and subject to ERISA, as well as one non-qualified plan
(collectively the American Axle & Manufacturing Supplemental Executive
Retirement Program). The contributory portion of the tax-qualified plan provides
defined benefits under a formula based on eligible years of credited service,
and upon the average monthly remuneration received in the highest sixty months
out of the final ten years of service, subject to certain Code limitations which
change from time to time. In addition, employees receive an annual retirement
benefit which is equal to the sum of 100% of their contributions upon retirement
at or after age 65. If employees do not elect to contribute to the tax-qualified
plan, they are entitled to receive only basic retirement benefits equal to a
flat dollar amount per year of credited service, essentially equivalent to the
American Axle & Manufacturing Hourly-Rate Employees Pension Plan. All
participants in the plan are entitled to this flat dollar benefit. In accordance
with its terms, benefits under the tax-qualified plan fully vest after five
years of credited service and are payable at the normal retirement age of 65, or
earlier at the election of the participant, either in the form of a single life
annuity or in a reduced amount, in joint and survivor form. Supplemental early
retirement benefits are available for certain employees hired before 1998.
If executives made the required contributions to the tax-qualified plan,
they may also be eligible to receive the regular form of a supplemental
executive benefit. The regular form of the supplemental executive retirement
benefit will provide the executive with total monthly retirement benefits equal
to 2% of the average monthly base salary received in the highest sixty months
out of the final ten years of service, times the years of credited service
calculated for purposes of the contributory portion of the qualified plan, less
the sum of all benefits payable under this plan before reduction for any
survivor option plus 2% times the years of credited service times the maximum
monthly Social Security benefit payable to a person retiring at age 65. Table I
shows the regular form of the estimated total annual retirement benefit related
to final average base salary as of December 31, 1997, that would be payable in
12 equal monthly installments per annum as a single life annuity to executives
retiring in 1998 at age 65 (the benefits shown are based upon maximum annual
Social Security benefits of $16,104 payable to persons retiring in 1998). If the
executive elects to receive benefits in the form of 60% joint and survivor
annuity,
52
<PAGE>
the amounts shown would generally be reduced by 5%, subject to certain
adjustments depending on the age differential between spouses.
TABLE I
PROJECTED TOTAL ANNUAL SUPPLEMENTAL EXECUTIVE RETIREMENT BENEFITS
ASSUMING EXECUTIVE QUALIFIES FOR REGULAR RETIREMENT PROGRAM BENEFITS
<TABLE>
<CAPTION>
YEARS OF ELIGIBLE CONTRIBUTORY CREDITED SERVICE
- ---------------------------------------------------------------------
HIGHEST FIVE-YEAR
ANNUAL SALARY 15 YEARS 25 YEARS 35 YEARS 45 YEARS
- ----------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
$ 150,000 $ 44,540 $ 74,240 $103,940 $133,640
200,000 55,169 91,948 128,727 165,506
300,000 85,169 141,948 198,727 255,506
400,000 115,169 191,948 268,727 345,506
500,000 145,169 241,948 338,727 435,506
600,000 175,169 291,948 408,727 525,506
</TABLE>
The annual base salaries for the most recent year(s) considered in the
calculations of the averages in Table I above are those reported in the Summary
Compensation Table in the column labeled "Salary."
An executive may be eligible to receive the alternative form of the
supplemental executive retirement benefit in lieu of the regular form of the
supplemental executive retirement benefit. The executive will receive the
greater of the regular form or alternative form of the supplemental executive
retirement benefit. The sum of the qualified plan benefits and the alternative
supplemental retirement benefit will provide the executive with total annual
retirement benefits that are equal to 1.5% times eligible years of credited
service times the average monthly compensation of the executive's highest five
years of total direct compensation (i.e., the average of the 60 highest months
of base salary plus the average monthly compensation of the five highest years
of bonus and/or restricted stock units awarded) out of the last ten years, less
100% of the maximum monthly Social Security benefit payable to a person in the
year of retirement. Table II shows the alternative form of the estimated total
supplemental executive annual retirement benefit related to final average total
direct compensation as of December 31, 1997, that would be payable in 12 equal
monthly installments per annum as a single annuity to executives retiring in
1998 at age 65 (the benefits shown are based upon the maximum Social Security
benefits of $16,104 payable to persons retiring in 1998). The amounts shown
would be reduced as described above if the executive were to elect joint and
survivor benefits.
TABLE II
PROJECTED TOTAL ANNUAL ALTERNATIVE RETIREMENT BENEFITS
ASSUMING EXECUTIVE QUALIFIES FOR ALTERNATIVE SUPPLEMENTAL
EXECUTIVE RETIREMENT PROGRAM BENEFITS
<TABLE>
<CAPTION>
YEARS OF ELIGIBLE CONTRIBUTORY CREDITED SERVICE
- --------------------------------------------------------------------------
HIGHEST FIVE-YEAR
AVERAGE ANNUAL TOTAL
DIRECT COMPENSATION 15 YEARS 25 YEARS 35 YEARS 45 YEARS
- -------------------- -------- -------- -------- ----------
<S> <C> <C> <C> <C>
$ 400,000 $ 76,916 $139,166 $201,416 $ 263,666
500,000 96,396 171,396 246,396 321,396
1,000,000 208,896 358,896 508,896 658,896
1,200,000 253,896 433,896 613,896 793,896
1,500,000 321,396 546,396 771,396 996,396
1,800,000 388,896 658,896 928,896 1,198,896
</TABLE>
The annual total direct compensation for the most recent year considered in
the calculation of average annual total direct compensation in Table II above
consists of salaries and bonuses as reported in the Summary Compensation Table
in the column labeled "Salary" and in the column labeled "Bonus."
53
<PAGE>
The regular or alternative form of the supplemental executive retirement
benefit is provided under a program which is non-qualified for tax purposes and
not pre-funded. Supplemental executive retirement benefits under the regular and
alternative formula can be reduced or eliminated for both retirees and active
employees by the Compensation Committee and the Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
For a discussion of certain business relationships between Richard E. Dauch
and us, see "Certain Transactions--Transactions with Management." Holdings has
established a Compensation Committee and intends to appoint two independent
directors to serve on this Committee.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
As permitted by the Delaware General Corporation Law ("Delaware Law"),
Holdings' Certificate of Incorporation eliminates the personal liability of a
director of Holdings for monetary damages for breach of fiduciary duty of care
as a director, except for:
(i) any breach of the director's duty of loyalty to Holdings or its
stockholders,
(ii) acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
(iii) unlawful payment of dividends or stock purchases or redemptions
pursuant to Section 174 of the Delaware Law, and
(iv) any transaction from which the director derived an improper
personal benefit.
In addition, Holdings' Certificate of Incorporation provides for
indemnification, to the full extent specifically authorized under the Delaware
Law, of directors and officers of Holdings and persons who serve at the request
of Holdings as a director, officer, employee, agent or trustee of another
corporation, partnership, joint venture, trust or other enterprise. Holdings
also maintains an insurance policy that insures directors and officers of
Holdings and its subsidiaries against claims arising from alleged wrongful acts
in their respective capacities as directors and officers.
EMPLOYMENT AGREEMENT
Holdings' has an employment agreement with Mr. Dauch, which expires on
December 31, 2004, subject to periodic renewal, and provides for an annual base
salary of $750,000. Pursuant to the agreement, Mr. Dauch will be a voting member
of the Board of Directors for the term of his employment. Mr. Dauch's employment
agreement also provides, among other things, (i) for an annual bonus payable on
or before the March 15th following the year in which such bonus was earned and
(ii) participation in the Option Plan. Under the terms of his employment
agreement, Mr. Dauch is bound by confidentiality and non-competition covenants
for a period of two years following the expiration of the employment agreement.
Holdings may terminate Mr. Dauch's employment agreement for Cause (as defined
therein).
The Issuer has purchased a $5.0 million life insurance policy for the
benefit of Mr. Dauch, which the Issuer will maintain during employment and for
two years after termination other than for cause.
In connection with the commencement of his employment with American Axle &
Manufacturing, Inc., Mr. Dauch received an option to purchase shares of AAM,
Inc. In connection with the Recapitalization, Holdings agreed to provide Dauch
with an option to purchase 6,891,915 shares of Holdings' Common Stock (the
"Exchange Option") at a nominal exercise price per share in exchange for the
AAM, Inc. Option. The terms of the Exchange Option are set forth in a
nonqualified option agreement dated as of October 30, 1997 between American
Axle & Manufacturing of Michigan, Inc. and Mr. Dauch. The Exchange Option
expires 10 years after the date such Exchange Option was granted, and is fully
vested and exercisable.
54
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of February 1, 1999 (after giving effect to the
issuance by Holdings of 7,000,000 shares of Common Stock in connection with the
IPO) by (i) each person known by us to be the beneficial owner of 5% or more of
the outstanding Common Stock, (ii) each of the directors of Holdings and
(iii) all of Holdings' directors and our executive officers as a group. The
following table does not reflect additional shares of Common Stock that may have
been purchased by such persons in connection with the IPO. Unless otherwise
indicated, we believe that the beneficial owner has sole voting and investment
power over such shares. Holdings, Blackstone, Jupiter and Messrs. Dauch,
Alexander, Witosky and Harris are parties to a Stockholders' Agreement that
provides for certain tag-along and drag-along rights, the operation of which
could result in a change of control in American Axle. See "Related Party
Transactions--Stockholders' Agreement and Recapitalization."
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL OWNERSHIP PERCENT
NAME AND ADDRESS OF (NUMBER OF SHARES OF
BENEFICIAL OWNER BENEFICIALLY OWNED) CLASS
- ------------------------------------------------------------------------------ ------------------------- ---------
<S> <C> <C>
Blackstone(1)................................................................. 26,510,992 54.3%
Richard E. Dauch(2)(3)........................................................ 10,538,436 21.6
Glenn H. Hutchins(4).......................................................... -- --
B.G. Mathis(3)................................................................ 578,337 1.2
Bret D. Pearlman(5)........................................................... 26,510,992 54.3
David A. Stockman(5).......................................................... 26,510,992 54.3
All directors of Holdings and executive officers of the Company as a group
(18 persons)(6)............................................................. 38,797,970 79.5%
</TABLE>
- ------------------
(1) 26,510,992 shares, or 54.3%, of the outstanding shares are held collectively
by Blackstone Capital Partners II Merchant Banking Fund L.P., Blackstone
Offshore Capital Partners II L.P. and Blackstone Family Investment
Partnership II L.P. Blackstone Management Associates II L.L.C. ("BMA") is
the general partner of each of such entities. Messrs. Peter G. Peterson and
Stephen A. Schwarzman are the founding members of BMA and as such may be
deemed to share beneficial ownership of the shares owned by Blackstone.
Blackstone's business address is 345 Park Avenue, 31st Floor, New York, New
York 10154.
(2) Mr. Dauch's business address is 1840 Holbrook Avenue, Detroit, Michigan
48212. Includes 10,367,870 shares held by the Dauch Annuity Trust 2001, the
Dauch Annuity Trust 2004 and the Dauch Annuity Trust 2007 (collectively, the
"Trusts"). Mr. Dauch is Trustee of the Trusts and has the power to sell,
transfer or otherwise dispose of shares owned by the Trusts. Mr. Dauch
disclaims beneficial ownership of such shares.
(3) Includes 7,015,551 and 578,337 shares issuable pursuant to options that are
currently exercisable by Mr. Dauch and Mr. Mathis, respectively.
(4) Until January 31, 1999 Mr. Hutchins was a Senior Managing Director of The
Blackstone Group L.P.
(5) Each such person's business address is 345 Park Avenue, 31st Floor, New
York, New York 10154. Mr. Stockman is a member of BMA, which has investment
and voting control over the shares held or controlled by Blackstone.
Beneficial ownership of shares by such two individuals include the shares
beneficially owned by Blackstone. Each of such persons disclaims beneficial
ownership of such shares.
(6) Includes options to purchase 8,598,404 shares of Common Stock, and shares of
Common Stock beneficially owned by Blackstone as described in notes (1) and
(5) above.
RELATED PARTY TRANSACTIONS
TRANSACTIONS WITH BLACKSTONE AFFILIATES
In connection with the Recapitalization, we entered into a monitoring
agreement dated as of October 29, 1997 with Blackstone Management Partners L.P.
("Blackstone Management"), an affiliate of Blackstone (the "Monitoring
Agreement"), pursuant to which Blackstone Management will provide certain
advisory and consulting services to us in connection with our ongoing strategic
and operational affairs. The term of the Monitoring Agreement expires when
Blackstone ceases to own at least one-half of the Common Stock held by it
55
<PAGE>
at the closing of the Recapitalization. Under the Monitoring Agreement, we paid
Blackstone $2.4 million and $0.8 million during the years ended December 31,
1998 and 1997. On each of March 31 and September 30 after December 31, 1998, we
will pay Blackstone Management $1.0 million. In addition, on each March 31,
commencing in 1999, we will pay Blackstone an amount equal to 1.0% of EBITDA (as
defined in the Monitoring Agreement) for the most recently completed fiscal year
less $2.0 million (if such amount is positive). In addition, in 1997 we paid
Blackstone Management a $9.3 million transaction fee for services provided in
connection with the Recapitalization. Pursuant to the Recapitalization
Agreement, we paid approximately $5.4 million of legal, accounting and financial
advisory fees and expenses incurred in connection with the Recapitalization on
behalf of Blackstone. In 1998 we paid a $0.3 million transaction fee to
Blackstone Management for services provided in connection with the Albion
acquisition. David A. Stockman, who serves as one of our directors, is a senior
managing director of The Blackstone Group L.P., an affiliate of Blackstone
Management. Bret D. Pearlman, who also serves as one of our directors, is a
managing director of The Blackstone Group L.P. Another director, Glenn H.
Hutchins, was formerly a senior managing director of The Blackstone Group L.P.
STOCKHOLDERS' AGREEMENT AND RECAPITALIZATION
In connection with the Recapitalization, we entered into the Stockholders'
Agreement with Blackstone, Jupiter and Richard E. Dauch, Michael D. Alexander,
Gary J. Witosky and Morton E. Harris which provides for, among other things, the
matters described below:
Tag-Along Rights. So long as Blackstone owns not less that one-third of
the Common Stock held by it at the closing of the Recapitalization, the
Stockholders' Agreement grants each of Jupiter and Messrs. Dauch, Alexander,
Witosky and Harris the right, subject to certain exceptions, in connection with
a proposed transfer of Common Stock by Blackstone, to require the proposed
transferee to purchase a certain percentage of the Common Stock owned by them at
the same price and upon the same terms and conditions.
Drag-Along Rights. So long as Blackstone owns not less than one-third of
the Common Stock held by it at the closing of the Recapitalization, the
Stockholders' Agreement grants Blackstone the right, in connection with an offer
by a third party to purchase all of the Common Stock held by Blackstone, Jupiter
and Messrs. Dauch, Alexander, Witosky and Harris, to require Jupiter and Messrs.
Dauch, Alexander, Witosky and Harris to transfer all of the Common Stock owned
by them to such third party on the terms of the offer so accepted by Blackstone,
subject to certain restrictions.
Registration Rights. The Stockholders' Agreement grants "piggy-back"
registration rights to Blackstone, Jupiter and Messrs. Dauch, Harris, Alexander
and Witosky, subject to certain limitations, each time Holdings files a
registration statement in connection with the sale of Common Stock by Holdings.
The Stockholders' Agreement also grants "demand" registration rights to
Blackstone, Jupiter and Messrs. Dauch and Harris, subject to certain
limitations.
Participation Rights. The Stockholders' Agreement grants to Jupiter and
Messrs. Dauch, Alexander, Witosky and Harris the right, upon any issuance by
Holdings of additional Common Stock to Blackstone (other than pursuant to a
public offering or a pro rata issuance to all holders of Common Stock), to
subscribe for additional Common Stock at the same price and upon the same
conditions so that, after giving effect to the issuance and the exercise of such
rights, the Common Stock owned by each represents the same percentage of the
total outstanding Common Stock on a fully diluted basis as was owned by each
immediately prior thereto.
Approval of Affiliate Transactions. The Stockholders' Agreement generally
provides that, subject to certain conditions, Holdings will not, and will cause
its subsidiaries not to, enter into any transaction with an affiliate of
Holdings (other than Holdings and its subsidiaries) (an "Affiliate") for the
benefit of such an Affiliate that would require consent of the banks under the
Credit Facilities among us and the lenders thereto unless such transaction
o is approved by the Board of Directors of Holdings;
o is contemplated by the Recapitalization Agreement; or
o is the payment of certain management and monitoring fees or
customary investment banking fees to Blackstone.
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Such transactions with an Affiliate requiring the consent of the banks under the
Credit Facilities generally include
o the sale or transfer to, or purchase or acquisition of assets from
or any other transaction with, an Affiliate, subject to specified
exceptions; and
o the payment of monitoring or management fees to Blackstone or its
affiliates in an amount exceeding in any fiscal year the greater of:
o $2,000,000; or
o an amount equal to 1% of EBITDA (as defined under the Credit
Facilities) for the prior fiscal year.
Termination. The Stockholders' Agreement will terminate on the earliest
date on which Blackstone and its affiliates do not collectively own one-fifth or
more of the Common Stock on a fully diluted basis. See "Principal Stockholders."
In connection with the Recapitalization:
o Holdings repurchased shares of Common Stock held by Jupiter and
Morton E. Harris for an aggregate purchase price of approximately
$195.0 million and $21.3 million, respectively;
o Holdings redeemed all of the outstanding shares of Class A Preferred
Stock of the Issuer held by Jupiter for approximately $170.2
million;
o Holdings made a $74.2 million payment to Jupiter related to certain
tax payments; and
o the Issuer paid to James W. McLernon, the former chairman of the
board of directors of the Issuer, a bonus of approximately
$7.2 million pursuant to a letter agreement dated July 29, 1997.
Disposition Agreement. In December 1998, we entered into a disposition
agreement with Mr. Dauch ("Disposition Agreement"), which provides that upon the
termination of Mr. Dauch's employment due to death or Disability (as defined in
the Disposition Agreement) and subject to certain conditions, Mr. Dauch, his
estate or a trust acting on behalf of Mr. Dauch or the beneficiaries of his
estate (collectively the "Selling Entity"), will have the right to sell any
shares of Common Stock held by the Selling Entity for a period up to six months
after such termination, notwithstanding restrictions on transfer set forth in
the Stockholders' Agreement. If the Selling Entity offers such shares in a
registered offering pursuant to the demand rights provided for in the
Stockholders' Agreement during such six-month period, the Selling Entity would
be entitled to include its shares in such registered offering prior to shares,
if any, to be offered by Holdings or a third party. If the Selling Entity wishes
to accept an offer for such shares from a third party, first Holdings, and then
Blackstone, would have a right of first refusal to purchase such shares. In the
event of any conflicts between the Disposition Agreement and the Stockholders
Agreement, the Disposition Agreement shall control.
TRANSACTIONS WITH PARK CORPORATION
Immediately after the closing of the Recapitalization, Jupiter, a wholly
owned subsidiary of Park Corporation, owned 5.1% of the Common Stock. Prior to
the Recapitalization, Park Corporation provided the Issuer cash management
services whereby available cash balances of the Issuer were invested on its
behalf. Park Corporation received $12,536,288 from the Issuer in consideration
for services it provided to the Issuer from March 1994 to September 1997. In
addition, prior to the Recapitalization, the Issuer purchased certain
manufacturing equipment from Motch Corporation, an affiliate of Park
Corporation. During 1997, payments to Motch Corporation from the Issuer for such
equipment totaled approximately $9.6 million.
TRANSACTIONS WITH MANAGEMENT
In connection with the Recapitalization, the Issuer paid a bonus of
$11.0 million to Richard E. Dauch. In connection with this payment, Mr. Dauch
agreed to repay to the Issuer any refund, overpayment or other redistribution of
Election Taxes to be received by him from Jupiter in an amount up to
$11.0 million. The "Election Taxes" were corporate taxes due by Jupiter as a
result of the Section 338(h)(10) of the Internal Revenue Code election. The
amount of the tax payment was estimated at the closing of the Recapitalization
and
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was prefunded by Holdings. The final Election Taxes were paid by Jupiter as the
parent of the Issuer and the overpayment was refunded to the shareholders of the
Issuer. At Mr. Dauch's direction, Jupiter paid the Issuer approximately
$7.2 million due to Mr. Dauch in May 1998 in full satisfaction of such
agreement.
Holdings made a loan of $13.0 million in the third quarter of 1998 to
Richard E. Dauch, Chairman, pursuant to a $15.0 million Senior Secured
Promissory Note facility (the "Note"). The Note and interest payable at six
month LIBOR plus 2% was repaid in 1999.
Two sons of Richard E. Dauch and a son of Mr. Mathis are employed by us.
David C. Dauch serves as Vice President--Sales, Marketing and Capacity Planning,
Richard F. Dauch serves as Vice President--Manufacturing and Robert Mathis
serves as Manager, Human Resources Operations.
DESCRIPTION OF CERTAIN INDEBTEDNESS
SENIOR SECURED CREDIT FACILITIES
In connection with the Recapitalization, The Chase Manhattan Bank ("Chase")
and a group of other lenders provided us with Credit Facilities in an aggregate
principal amount not to exceed $750 million of which as of December 31, 1998:
o $375 million is borrowed under the Tranche B Term Loan Facility (as
defined below);
o $125 million is available under the Tranche A Term Loan Facility (as
defined below) to finance Capital Expenditures as defined in the
Credit Facilities and refinance the Revolving Credit Facility; and
o $223 million was borrowed and $27 million is available under the
Revolving Credit Facility (as defined below) for general corporate
purposes, each subject to customary borrowing conditions.
The Credit Facilities consist of:
o 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;
o a Senior Secured Term Loan Facility (the "Tranche B Term Loan
Facility" and, together with the Tranche A Term Loan Facility, the
"Term Loan Facility")) providing for term loans in an aggregate
principal amount of $375 million; and
o a Senior Secured Revolving Credit Facility (the "Revolving Credit
Facility") providing for revolving loans and the issuance of letters
of credit in an aggregate principal and stated amount not to exceed
$250 million (of which not more than $30 million may be represented
by letters of credit).
Except as set forth below, the full amount of the Tranche B Term Loan
Facility was drawn in a single drawing at the closing of the Recapitalization
and amounts repaid and prepaid under any Term Loan Facility may not be
reborrowed. Loans under the Tranche A Term Loan Facility are available at any
time prior to October 1999. Loans and letters of credit under the Revolving
Credit Facility are available at any time prior to October 30, 2004. In
connection with the Revolving Credit Facility, we may make short-term borrowings
of up to $20 million of swing-line loans. Any such swing-line loans will reduce
the amount available under the Revolving Credit Facility on a dollar-for-dollar
basis.
Loans made under the Tranche A Term Loan Facility will amortize
semi-annually and mature on October 30, 2004. The Tranche B Term Loan Facility
amortizes semi-annually and matures on April 30, 2006. Assuming the Tranche A
Term Loan Facility is fully drawn, annual payments for such facility total $15.0
million in 2000, $20.0 million in 2001, $25.0 million in 2002, $30.0 million in
2003, concluding with $35.0 million in 2004. Annual payments for the Tranche B
Term Loan Facility total $1.0 million from and including 2000 through 2003,
$21.0 million in 2004, $175.0 million in 2005, concluding with a final payment
in 2006 of $175.0 million on the maturity date.
We are required to make mandatory prepayments of term loans, and
commitments will be mandatorily reduced, in amounts, at specified times and
subject to certain exceptions:
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o in respect of:
(i) 75% of our consolidated excess cash flow and our subsidiaries;
or
(ii) 50% of our consolidated excess cash flow and our subsidiaries
if we meet specified financial performance tests (in each case after
giving effect to debt service on the Credit Facilities);
o in respect of 100% of the net proceeds of:
(i) certain dispositions by us or any of our subsidiaries of assets
or the stock of subsidiaries (other than asset sales effected pursuant
to certain lease financings and the Receivables Facility); or
(ii) the incurrence of certain indebtedness by our subsidiaries or
us; and
o in respect of 50% of the net proceeds of certain sales of our equity
securities other than the net proceeds of the sale of the first
$175.0 million of such equity securities (of which the IPO
constituted approximately $108 million).
Amounts outstanding under the Credit Facilities are unconditionally and
irrevocably guaranteed by Holdings and certain of its subsidiaries. In addition,
the Credit Facilities are secured by first priority security interests in
substantially all of our tangible and intangible assets and those of our
subsidiaries (excluding receivables related to the Receivables Facility),
including all the capital stock of, or other equity interests in, our domestic
subsidiaries and its existing or subsequently acquired or organized direct or
indirect domestic subsidiaries and 65% of the capital stock of, or other equity
interests in, each of our foreign subsidiaries.
At our option, the interests rates applicable to the Credit Facilities are
either based on Chase's alternate base rate plus a margin ranging from 0.50% to
1.50% or the eurodollar rate plus a margin ranging from 1.50% to 2.50%. The
alternate base rate is the higher of Chase's Prime Rate and the federal funds
effective rate plus 0.50%.
We pay a per annum fee equal to the applicable margin with respect to the
eurodollar rate then in effect under the Revolving Credit Facility multiplied by
the aggregate face amount of outstanding letters of credit under the Revolving
Credit Facility and a per annum fee ranging from 0.375% to 0.50% multiplied by
the undrawn portion of the commitments under the Tranche A Term Loan Facility
and the Revolving Credit Facility.
The Credit Facilities contain various operating covenants which, among
other things, impose certain limitations on our ability to redeem or repurchase
capital stock, incur liens, incur indebtedness, or merge, make acquisitions or
sell assets. The Credit Facilities also restrict the payment of dividends on, or
other distributions with respect to, our capital stock, other than:
o dividends or distributions payable solely in Common Stock; and
o subject to certain dollar limitations, payable to employee benefit
plans or to officers and employees in connection with stock option
and similar employee benefit plans. In addition, the Credit
Facilities require us to comply with financial covenants relating to
interest coverage, leverage, retained earnings and capital
expenditures.
Our Credit Facilities previously permitted acquisitions in an amount up to
the amount of new equity raised by us. We have obtained a modification to our
Credit Facilities increasing the amount of permitted acquisitions by the amount
of new subordinated financing raised by us, subject to a maximum increase of
$290 million. Therefore, our Credit Facilities permit us to complete up to
approximately $400 million of acquisitions. See "Use of Proceeds,"
"Capitalization," "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" and
"Business--Business Strategy--Pursue Selected Acquisition Opportunities."
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RECEIVABLES FACILITY
The following is a summary of the material terms of the Receivables
Facility and is qualified in its entirety by reference to the Receivables Sale
Agreement and the Pooling Agreement (each as defined below).
General
We established AAM Receivables Corp. ("AAM Receivables") as a wholly-owned,
special purpose, bankruptcy-remote subsidiary that purchases all receivables
(the "Receivables") generated by the Issuer (in such capacity, the "Seller")
pursuant to a receivables sale agreement (the "Receivables Sale Agreement"). The
Receivables Sale Agreement contains customary terms for similar transactions,
including representations and warranties of the Seller as to the Receivables and
certain corporate matters, affirmative and negative covenants and purchase
termination events, and is limited recourse to the Seller for breach of
representations, warranties and covenants and as described below.
AAM Receivables also entered into a pooling agreement (the "Pooling
Agreement") with Chase as trustee (the "Trustee") pursuant to which AAM
Receivables transferred to a trust (the "Trust") all the Receivables, and
certain purchasers (in such capacity, the "Purchaser") provided financing to AAM
Receivables (which in turn used such financing to pay a portion of the purchase
price of the Receivables purchased from the Seller) through the purchase of an
undivided percentage ownership interest in the Trust ("Transferred Interests").
The Receivables Facility is supported by a commitment of the Purchasers, subject
to the terms and conditions of the Pooling Agreement, to purchase Transferred
Interests through the Trust on a revolving basis in an amount not to exceed
$153 million. The availability of the Receivables Facility is subject to the
Trust holding Receivables meeting certain eligibility requirements equal to the
amount of the outstanding Transferred Interests and required reserves. At
December 31, 1998, approximately $66 million was available under the Receivables
Facility, of which $63 million was utilized. The sale of Receivables to AAM
Receivables, the transfer of Receivables to the Trust and the sale of
Transferred Interests are without recourse to the Seller, except:
o to the extent a Receivable or portion thereof becomes subject to an
asserted defense, dispute, off-set or counterclaim (including by GM)
as a result of any action taken by, any failure to take action by or
any other event relating to the Seller;
o for claims arising from a breach of representations and warranties
or covenants; and
o for dilution adjustments arising from time to time in respect of
rebates, adjustments, returns or modifications of Receivables.
The Trust, on behalf of the Purchasers, has a first priority perfected
security interest in the Receivables, the rights of AAM Receivables under the
Receivables Sales Agreement and cash collections and other proceeds received in
respect of the Receivables.
The Receivables are not available to our general creditors. However, GM is
also a vendor to the Seller and, in certain circumstances, may be able to offset
amounts payable by the Seller against the Seller's trade receivables from GM,
which in each case would result in AAM Receivables having a claim against the
Seller for such offset amounts. Accordingly, the Receivables Facility has been
accounted for as if it were a secured borrowing and therefore is included in our
consolidated financial statements.
Pursuant to a servicing agreement entered into by the Issuer, AAM
Receivables and the Trust, the Issuer agreed to service the Receivables for the
Trust; provided, that, upon the occurrence of certain events, the servicing
agreement may be terminated by the Trustee.
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Interest
The Receivables Facility bears interest determined, at our option, at rates
based on Chase's alternate base rate or LIBOR, plus, in each case, an applicable
margin.
Fees
AAM Receivables pays certain fees with respect to the Receivables Facility,
including a commitment fee (the "Commitment Fee") to the Purchasers in an amount
equal to the excess of the average aggregate purchase commitment for any monthly
period over the average aggregate Transferred Interests for such period and a
monthly program fee.
Facility Reductions
The Receivables Facility is supported by a commitment of the Purchasers,
subject to the terms and conditions of the Pooling Agreement, providing for the
purchase of Receivables through November 2003 to purchase Transferred Interests
on a revolving basis. After such time, all collections in respect of Receivables
purchased by AAM Receivables from the Seller will be used to reduce the
Transferred Interests of the Purchasers in the Receivables. Additionally, at any
time, AAM Receivables at its option may reduce the purchase commitment upon
notice to the Purchaser or terminate the purchases of Transferred Interests by
the Purchasers.
Early Termination Events
The Pooling Agreement contains certain early amortization events which
would cause the termination of, or permit the Purchasers to terminate, the
revolving period and effectively reduce the amount of financing available under
the Receivables Facility to zero. Early amortization events include nonpayment
of amounts when due, violation of covenants, inaccuracy of representations and
warranties in any material respect, failure to comply with specified Receivables
performance tests, purchase termination events under the Receivables Sale
Agreement, bankruptcy, material judgments, imposition of PBGC liens or material
tax liens, and actual or asserted invalidity of the Purchaser's ownership
interest in the Receivables. Purchase termination events under the Receivables
Sales Agreement relating to the Seller include nonpayment of amounts when due,
violation of covenants, inaccuracy of representations and warranties in any
material respect, bankruptcy, ERISA events, imposition of PBGC liens or material
environmental or tax liens, and certain cross-defaults to the Credit Facilities.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
We have entered into an exchange and registration rights agreement with the
initial purchasers of the outstanding Notes in which we agreed, under certain
circumstances, to file a registration statement relating to an offer to exchange
the outstanding Notes for exchange Notes. We also agreed to use our reasonable
best efforts to cause such offer to be consummated within 210 days following the
original issue of the outstanding Notes. The exchange Notes will have terms
substantially identical to the outstanding Notes except that the exchange Notes
will not contain terms with respect to transfer restrictions, registration
rights and additional interest for failure to observe certain obligations in the
registration rights agreement. The outstanding Notes were issued on March 5,
1999.
Under the circumstances set forth below, we will use our reasonable best
efforts to cause the Securities and Exchange Commission to declare effective a
shelf registration statement with respect to the resale of the outstanding Notes
and keep the statement effective for up to two years after the effective date of
the shelf registration statement. These circumstances include:
o if any changes in law, Commission rules or regulations or applicable
interpretations thereof by the staff of the Commission do not permit us
to effect the exchange offer as contemplated by the registration rights
agreement;
o if any outstanding Notes validly tendered in the exchange offer are not
exchanged for exchange Notes within 210 days after the original issue of
the outstanding Notes;
o if any initial purchaser of the outstanding Notes so requests (but only
with respect to any outstanding Notes not eligible to be exchanged for
exchange Notes in the exchange offer); or
o if any holder of the outstanding Notes notifies us that it is not
permitted to participate in the exchange offer or would not receive fully
tradeable exchange Notes pursuant to the exchange offer; or
o if the Issuer elects to file a shelf registration statement with respect
to the resale of the outstanding Notes.
If we fail to comply with certain obligations under the registration rights
agreement, we will be required to pay additional interest to holders of the
outstanding Notes. Please read the section captioned "Registration Rights
Agreement" for more details regarding the registration rights agreement.
Each holder of outstanding Notes that wishes to exchange such outstanding
Notes for transferable exchange Notes in the exchange offer will be required to
make the following representations:
o any exchange Notes will be acquired in the ordinary course of its
business;
o such holder has no arrangement with any person to participate in the
distribution of the exchange Notes; and
o such holder is not our "affiliate," as defined in Rule 405 of the
Securities Act, or if it is our affiliate, that it will comply with
applicable registration and prospectus delivery requirements of the
Securities Act.
RESALE OF EXCHANGE NOTES
Based on interpretations of the Commission staff set forth in no action
letters issued to unrelated third parties, we believe that exchange Notes issued
under the exchange offer in exchange for outstanding Notes may be offered for
resale, resold and otherwise transferred by any exchange Note holder without
compliance with the registration and prospectus delivery provisions of the
Securities Act, if:
o such holder is not our "affiliate" within the meaning of Rule 405 under
the Securities Act;
o such exchange Notes are acquired in the ordinary course of the holder's
business; and
o the holder does not intend to participate in the distribution of such
exchange Notes.
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Any holder who tenders in the exchange offer with the intention of
participating in any manner in a distribution of the exchange Notes:
o cannot rely on the position of the staff of the Commission enunciated in
"Exxon Capital Holdings Corporation" or similar interpretive letters; and
o must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction.
This prospectus may be used for an offer to resell, resale or other
retransfer of exchange Notes only as specifically set forth in this prospectus.
With regard to broker-dealers, only broker-dealers that acquired the outstanding
Notes as a result of market-making activities or other trading activities may
participate in the exchange offer. Each broker-dealer that receives exchange
Notes for its own account in exchange for outstanding Notes, where such
outstanding Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of the exchange Notes.
Please read the section captioned "Plan of Distribution" for more details
regarding the transfer of Exchange Notes.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this prospectus
and in the letter of transmittal, we will accept for exchange any outstanding
Notes properly tendered and not withdrawn prior to the expiration date. The
Issuer will issue $1,000 principal amount of exchange Notes in exchange for each
$1,000 principal amount of outstanding Notes surrendered under the exchange
offer. Outstanding Notes may be tendered only in integral multiples of $1,000.
The form and terms of the exchange Notes will be substantially identical to
the form and terms of the outstanding Notes except the exchange Notes will be
registered under the Securities Act, will not bear legends restricting their
transfer and will not provide for any additional interest upon failure of the
Issuer to fulfill its obligations under the registration rights agreement to
file, and cause to be effective, a registration statement. The exchange Notes
will evidence the same debt as the outstanding Notes. The exchange Notes will be
issued under and entitled to the benefits of the same indenture that authorized
the issuance of the outstanding Notes. Consequently, both series will be treated
as a single class of debt securities under that indenture. For a description of
the indenture, see "Description of Notes" below.
The exchange offer is not conditioned upon any minimum aggregate principal
amount of outstanding Notes being tendered for exchange.
As of the date of this prospectus, $300 million aggregate principal amount
of the outstanding Notes are outstanding. This prospectus and the letter of
transmittal are being sent to all registered holders of outstanding Notes. There
will be no fixed record date for determining registered holders of outstanding
Notes entitled to participate in the exchange offer.
The Issuer intends to conduct the exchange offer in accordance with the
provisions of the registration rights agreement, the applicable requirements of
the Securities Act and the Securities Exchange Act of 1934 and the rules and
regulations of the Commission. Outstanding Notes that are not tendered for
exchange in the exchange offer will remain outstanding and continue to accrue
interest and will be entitled to the rights and benefits such holders have under
the indenture relating to the outstanding Notes.
The Issuer will be deemed to have accepted for exchange properly tendered
outstanding Notes when it has given oral or written notice of the acceptance to
the exchange agent. The exchange agent will act as agent for the tendering
holders for the purposes of receiving the exchange Notes from us and delivering
the exchange Notes to such holders. Subject to the terms of the registration
rights agreement, the Issuer expressly reserves the right to amend or terminate
the exchange offer, and not to accept for exchange any outstanding Notes not
previously accepted for exchange, upon the occurrence of any of the conditions
specified below under the caption "--Certain Conditions to the Exchange Offer."
Holders who tender outstanding Notes in the exchange offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the letter of transmittal, transfer taxes with respect to the exchange of
outstanding Notes. We will pay all charges and expenses, other than certain
applicable taxes
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described below, in connection with the exchange offer. It is important that you
read the section labeled "--Fees and Expenses" below for more details regarding
fees and expenses incurred in the exchange offer.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The exchange offer will expire at 5:00 p.m., New York City time on June 7,
1999, unless in its sole discretion, the Issuer extends it.
In order to extend the exchange offer, the Issuer will notify the exchange
agent orally or in writing of any extension. The Issuer will notify the
registered holders of outstanding Notes of the extension no later than 9:00
a.m., New York City time, on the business day after the previously scheduled
expiration date.
The Issuer reserves the right, in its sole discretion:
o to delay accepting for exchange any outstanding Notes;
o to extend the exchange offer or to terminate the exchange offer and to
refuse to accept outstanding Notes not previously accepted if any of the
conditions set forth below under "--Certain Conditions to the Exchange
Offer" have not been satisfied, by giving oral or written notice of such
delay, extension or termination to the exchange agent; or
o subject to the terms of the registration rights agreement, to amend the
terms of the exchange offer in any manner.
Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof to the
registered holders of outstanding Notes. If the Issuer amends the exchange offer
in a manner that it determines to constitute a material change, the Issuer will
promptly disclose such amendment in a manner reasonably calculated to inform the
holders of outstanding Notes of such amendment.
Without limiting the manner in which it may choose to make public
announcements of any delay in acceptance, extension, termination or amendment of
the exchange offer, the Issuer shall have no obligation to publish, advertise,
or otherwise communicate any such public announcement, other than by making a
timely release to a financial news service.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Despite any other term of the exchange offer, the Issuer will not be
required to accept for exchange, or exchange any exchange Notes for, any
outstanding Notes, and the Issuer may terminate the exchange offer as provided
in this prospectus before accepting any outstanding Notes for exchange if in the
Issuer's reasonable judgment:
o the exchange Notes to be received will not be tradeable by the holder,
without restriction under the Securities Act, the Securities Exchange Act
of 1934 and without material restrictions under the blue sky or
securities laws of substantially all of the states of the United States;
o the exchange offer, or the making any exchange by a holder of outstanding
Notes, would violate applicable law or any applicable interpretation of
the staff of the Commission; or
o any action or proceeding has been instituted or threatened in any court
or by or before any governmental agency with respect to the exchange
offer that, in our judgment, would reasonably be expected to impair the
ability of the Issuer to proceed with the exchange offer.
In addition, the Issuer will not be obligated to accept for exchange the
outstanding Notes of any holder that has not made to the Issuer:
o the representations described under "--Purpose and Effect of the Exchange
Offer," "--Procedures for Tendering" and "Plan of Distribution"; and
o such other representations as may be reasonably necessary under
applicable Commission rules, regulations or interpretations to make
available to the Issuer an appropriate form for registration of the
exchange Notes under the Securities Act.
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The Issuer expressly reserves the right, at any time or at various times,
to extend the period of time during which the exchange offer is open.
Consequently, the Issuer may delay acceptance of any outstanding Notes by giving
oral or written notice of such extension to their holders. During any such
extensions, all outstanding Notes previously tendered will remain subject to the
exchange offer, and the Issuer may accept them for exchange. The Issuer will
return any outstanding Notes that it does not accept for exchange for any reason
without expense to their tendering holder as promptly as practicable after the
expiration or termination of the exchange offer.
The Issuer expressly reserves the right to amend or terminate the exchange
offer, and to reject for exchange any outstanding Notes not previously accepted
for exchange, upon the occurrence of any of the conditions of the exchange offer
specified above. The Issuer will give oral or written notice of any extension,
amendment, non-acceptance or termination to the holders of the outstanding Notes
as promptly as practicable. In the case of any extension, such notice will be
issued no later than 9:00 a.m., New York City time, on the business day after
the previously scheduled expiration date.
These conditions are solely for the benefit of the Issuer and the Issuer
may assert them regardless of the circumstances that may give rise to them or
waive them in whole or in part at any or at various times in our sole
discretion. If the Issuer fails at any time to exercise any of the foregoing
rights, this failure will not constitute a waiver of such right. Each such right
will be deemed an ongoing right that we may assert at any time or at various
times.
In addition, the Issuer will not accept for exchange any outstanding Notes
tendered, and will not issue exchange Notes in exchange for any such outstanding
Notes, if at such time any stop order will be threatened or in effect with
respect to the registration statement of which this prospectus constitutes a
part or the qualification of the indenture under the Trust Indenture Act of
1939.
PROCEDURES FOR TENDERING
Only a holder of outstanding Notes may tender such outstanding Notes in the
exchange offer. To tender in the exchange offer, a holder must:
o complete, sign and date the letter of transmittal, or a facsimile of the
letter of transmittal; have the signature on the letter of transmittal
guaranteed if the letter of transmittal so requires; and mail or deliver
such letter of transmittal or facsimile to the exchange agent prior to
the expiration date; or
o comply with DTC's Automated Tender Offer Program procedures described
below.
In addition, either:
o the exchange agent must receive outstanding Notes along with the letter
of transmittal; or
o the exchange agent must receive, prior to the expiration date, a timely
confirmation of book-entry transfer of such outstanding Notes into the
exchange agent's account at DTC according to the procedure for book-
entry transfer described below or a properly transmitted agent's message;
or
o the holder must comply with the guaranteed delivery procedures described
below.
To be tendered effectively, the exchange agent must receive any physical
delivery of the letter of transmittal and other required documents at the
address set forth below under "--Exchange Agent" prior to the expiration date.
The tender by a holder that is not withdrawn prior to the expiration date
will constitute an agreement between such holder and the Issuer in accordance
with the terms and subject to the conditions set forth in this prospectus and in
the letter of transmittal.
The method of delivery of outstanding Notes, the letter of transmittal and
all other required documents to the exchange agent is at the holder's election
and risk. Rather than mail these items, the Issuer recommends that holders use
an overnight or hand delivery service. In all cases, holders should allow
sufficient time to assure delivery to the exchange agent before the expiration
date. Holders should not send the letter of transmittal or outstanding Notes to
us. Holders may request their respective brokers, dealers, commercial banks,
trust companies or other nominees to effect the above transactions for them.
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Any beneficial owner whose outstanding Notes are registered in the name of
a broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct it to
tender on the owner's behalf. If such beneficial owner wishes to tender on its
own behalf, it must, prior to completing and executing the letter of transmittal
and delivering its outstanding Notes, either:
o make appropriate arrangements to register ownership of the outstanding
Notes in such owner's name; or
o obtain a properly completed bond power from the registered holder of
outstanding Notes.
The transfer of registered ownership may take considerable time any may not
be completed prior to the expiration date.
Signatures on a letter of transmittal or a notice of withdrawal described
below must be guaranteed by a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the United
States or another "eligible institution" within the meaning of Rule 17Ad-15
under the Exchange Act, unless the outstanding Notes tendered pursuant thereto
are tendered:
o by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the letter
of transmittal; or
o for the account of an eligible institution.
If the letter of transmittal is signed by a person other than the
registered holder of any outstanding Notes listed on the outstanding Notes, such
outstanding Notes must be endorsed or accompanied by a properly completed bond
power. The bond power must be signed by the registered holder as the registered
holder's name appears on the outstanding Notes and an eligible institution must
guarantee the signature on the bond power.
If the letter of transmittal or any outstanding Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing. Unless waived by the
Issuer, they should also submit evidence satisfactory to the Issuer of their
authority to deliver the letter of transmittal.
The exchange agent and DTC have confirmed that any financial institution
that is a participant in DTC's system may use DTC's Automated Tender Offer
Program to tender. Participants in the program may, instead of physically
completing and signing the letter of transmittal and delivering it to the
exchange agent, transmit their acceptance of the exchange offer electronically.
They may do so by causing DTC to transfer the outstanding Notes to the exchange
agent in accordance with its procedures for transfer. DTC will then send an
agent's message to the exchange agent. The term "agent's message" means a
message transmitted by DTC, received by the exchange agent and forming part of
the book-entry confirmation, to the effect that:
o DTC has received an express acknowledgment from a participant in its
Automated Tender Offer Program that is tendering outstanding Notes that
are the subject of such book-entry confirmation;
o such participant has received and agrees to be bound by the terms of the
letter of transmittal (or, in the case of an agent's message relating to
guaranteed delivery, that such participant has received and agrees to be
bound by the applicable notice of guaranteed delivery); and
o the agreement may be enforced against such participant.
The Issuer will determine in its sole discretion all questions as to the
validity, form, eligibility (including time of receipt), acceptance of tendered
outstanding Notes and withdrawal of tendered outstanding Notes. The Issuer's
determination will be final and binding. The Issuer reserves the absolute right
to reject any outstanding Notes not properly tendered or any outstanding Notes
the acceptance of which would, in the opinion of the Issuer's counsel, be
unlawful. The Issuer also reserves the right to waive any defects,
irregularities or conditions of tender as to particular outstanding Notes. The
Issuer's interpretation of the terms and conditions of the exchange offer
(including the instructions in the letter of transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of outstanding Notes must be cured within such time as
the Issuer shall determine. Although the Issuer intends to notify holders of
defects or irregularities with respect to tenders of outstanding Notes, neither
the Issuer, the exchange agent nor any other person will incur any liability for
failure to give such notification. Tenders of outstanding Notes will not be
deemed made
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until such defects or irregularities have been cured or waived. Any outstanding
Notes received by the exchange agent that are not properly tendered and as to
which the defects or irregularities have not been cured or waived will be
returned to the exchange agent without cost to the tendering holder, unless
otherwise provided in the letter of transmittal, as soon as practicable
following the expiration date.
In all cases, the Issuer will issue exchange Notes for outstanding Notes
that we have accepted for exchange under the exchange offer only after the
exchange agent timely receives:
o outstanding Notes or a timely book-entry confirmation of such outstanding
Notes into the exchange agent's account at DTC; and
o a properly completed and duly executed letter of transmittal and all
other required documents or a properly transmitted agent's message.
By signing the letter of transmittal, each tendering holder of outstanding
Notes will represent to us that, among other things:
o any exchange Notes that the holder receives will be acquired in the
ordinary course of its business;
o the holder has no arrangement or understanding with any person or entity
to participate in the distribution of the exchange Notes;
o if the holder is not a broker-dealer, that it is not engaged in and does
not intend to engage in the distribution of the exchange Notes;
o if the holder is a broker-dealer that will receive exchange Notes for its
own account in exchange for outstanding Notes that were acquired as a
result of market-making activities or other trading activities, that it
will deliver a prospectus, as required by law, in connection with any
resale of such exchange Notes (see "Plan of Distribution"); and
o the holder is not an "affiliate," as defined in Rule 405 of the
Securities Act, of American Axle & Manufacturing, Inc. or, if the holder
is an affiliate, it will comply with any applicable registration and
prospectus delivery requirements of the Securities Act.
BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account with respect
to the outstanding Notes at DTC for purposes of the exchange offer promptly
after the date of this prospectus; and any financial institution participating
in DTC's system may make book-entry delivery of outstanding Notes by causing DTC
to transfer such outstanding Notes into the exchange agent's account at DTC in
accordance with DTC's procedures for transfer. Holders of outstanding Notes who
are unable to deliver confirmation of the book-entry tender of their outstanding
Notes into the exchange agent's account at DTC or all other documents required
by the letter of transmittal to the exchange agent on or prior to the expiration
date must tender their outstanding Notes according to the guaranteed delivery
procedures described below.
GUARANTEED DELIVERY PROCEDURES
Holders wishing to tender their outstanding Notes but whose outstanding
Notes are not immediately available or who cannot deliver their outstanding
Notes, the letter of transmittal or any other required documents to the exchange
agent or comply with the applicable procedures under DTC's Automated Tender
Offer Program prior to the expiration date may tender if:
o the tender is made through an eligible institution;
o prior to the expiration date, the exchange agent receives from such
eligible institution either a properly completed and duly executed notice
of guaranteed delivery (by facsimile transmission, mail or hand delivery)
or a properly transmitted agent's message and notice of guaranteed
delivery:
o setting forth the name and address of the holder, the registered
number(s) of such outstanding Notes and the principal amount of
outstanding Notes tendered;
o stating that the tender is being made thereby; and
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o guaranteeing that, within three (3) New York Stock Exchange trading
days after the expiration date, the letter of transmittal (or
facsimile thereof) together with the outstanding Notes or a
book-entry confirmation, and any other documents required by the
letter of transmittal will be deposited by the Eligible Institution
with the exchange agent; and
o the exchange agent receives such properly completed and executed
letter of transmittal (or facsimile thereof), as well as all
tendered outstanding Notes in proper form for transfer or a
book-entry confirmation, and all other documents required by the
letter of transmittal, within three (3) New York State Exchange
trading days after the expiration date.
Upon request to the exchange agent, a notice of guaranteed delivery will be
sent to holders who wish to tender their outstanding Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, holders of outstanding
Notes may withdraw their tenders at any time prior to the expiration date.
For a withdrawal to be effective:
o the exchange agent must receive a written notice (which may be by
telegram, telex, facsimile transmission or letter) of withdrawal at one
of the addresses set forth below under "--Exchange Agent"; or
o holders must comply with the appropriate procedures of DTC's Automated
Tender Offer Program system.
Any such notice of withdrawal must:
o specify the name of the person who tendered the outstanding Notes to be
withdrawn;
o identify the outstanding Notes to be withdrawn (including the principal
amount of such outstanding Notes); and
o where certificates for outstanding Notes have been transmitted, specify
the name in which such outstanding Notes were registered, if different
from that of the withdrawing holder.
If certificates for outstanding Notes have been delivered or otherwise
identified to the exchange agent, then, prior to the release of such
certificates, the withdrawing holder must also submit:
o the serial numbers of the particular certificates to be withdrawn; and
o a signed notice of withdrawal with signatures guaranteed by an eligible
institution unless such holder is an eligible institution.
If outstanding Notes have been tendered pursuant to the procedure for
book-entry transfer described above, any notice of withdrawal must specify the
name and number of the account at DTC to be credited with the withdrawn
outstanding Notes and otherwise comply with the procedures of such facility. The
Issuer will determine all questions as to the validity, form and eligibility
(including time of receipt) of such notices, and our determination shall be
final and binding on all parties. The Issuer will deem any outstanding Notes so
withdrawn not to have validity tendered for exchange for purposes of the
exchange offer. Any outstanding Notes that have been tendered for exchange but
that are not exchanged for any reason will be returned to their holder without
cost to the holder (or, in the case of outstanding Notes tendered by book-entry
transfer into the exchange agent's account at DTC according to the procedures
described above, such outstanding Notes will be credited to an account
maintained with DTC for outstanding Notes) as soon as practicable after
withdrawal, rejection of tender or termination of the exchange offer. Properly
withdrawn outstanding Notes may be retendered by following one of the procedures
described under "--Procedures for Tendering" above at any time on or prior to
the expiration date.
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EXCHANGE AGENT
IBJ Whitehall Bank & Trust Company has been appointed as exchange agent for
the exchange offer. You should direct questions and requests for assistance,
requests for additional copies of this prospectus or of the letter of
transmittal and requests for the notice of guaranteed delivery to the exchange
agent addressed as follows:
<TABLE>
<S> <C>
For Delivery by Registered or Certified Mail: For Overnight Delivery Only or by Hand:
IBJ Whitehall Bank & Trust Company IBJ Whitehall Bank & Trust Company
P.O. Box 84 One State Street
Bowling Green Station New York, NY 10004
New York, NY 10274-0084 Attn: Securities Processing Window
Attn: Reorganization Operations Department Subcellar One, (SC-1)
</TABLE>
By Facsimile Transmission (for eligible institutions only):
IBJ Whitehall Bank & Trust Company
(212) 858-2611
Attn: Reorganization Operations Department
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT
CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF TRANSMITTAL.
FEES AND EXPENSES
The Issuer will bear the expenses of soliciting tenders. The principal
solicitation is being made by mail; however, we may make additional solicitation
by telegraph, telephone or in person by our officers and regular employees and
those of our affiliates.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to broker-dealers or others soliciting
acceptances of the exchange offer. The Issuer will, however, pay the exchange
agent reasonable and customary fees for its services and reimburse it for its
related reasonable out-of-pocket expenses.
The Issuer will pay the cash expenses to be incurred in connection with the
exchange offer. The expenses are estimated in the aggregate to be approximately
$400,000. They include:
o Commission registration fees;
o fees and expenses of the exchange agent and trustee;
o accounting and legal fees and printing costs; and
o related fees and expenses.
TRANSFER TAXES
The Issuer will pay all transfer taxes, if any, applicable to the exchange
of outstanding Notes under the exchange offer. The tendering holder, however,
will be required to pay any transfer taxes (whether imposed on the registered
holder or any other person) if:
o certificates representing outstanding Notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be
issued in the name of, any person other than the registered holder of
outstanding Notes tendered;
o tendered outstanding Notes are registered in the name of any person other
than the person signing the letter of transmittal; or
o a transfer tax is imposed for any reason other than the exchange of
outstanding Notes under the exchange offer.
If satisfactory evidence of payment of such taxes is not submitted with the
letter of transmittal, the amount of such transfer taxes will be billed to that
tendering holder.
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CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of outstanding Notes who do not exchange their outstanding Notes
for exchange Notes under the exchange offer will remain subject to the
restrictions on transfer of such outstanding Notes:
o as set forth in the legend printed on the outstanding Notes as a
consequence of the issuance of the outstanding Notes pursuant to the
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws;
and
o otherwise set forth in the offering memorandum distributed in connection
with the private offering of the outstanding Notes.
In general, you may not offer or sell the outstanding Notes unless they are
registered under the Securities Act, or if the offer or sale is exempt from
registration under the Securities Act and applicable state securities laws.
Except as required by the registration rights agreement, we do not intend to
register resales of the outstanding Notes under the Securities Act. Based on
interpretations of the Commission staff, exchange Notes issued pursuant to the
exchange offer may be offered for resale, resold or otherwise transferred by
their holders (other than any such holder that is our "affiliate" within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that the holders acquired the exchange Notes in the ordinary course of the
holders' business and the holders have no arrangement or understanding with
respect to the distribution of the exchange notes to be acquired in the exchange
offer. Any holder who tenders in the exchange offer for the purpose of
participating in a distribution of the exchange Notes:
o can not rely on the applicable interpretations of the Commission; and
o must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction.
ACCOUNTING TREATMENT
The Issuer will record the exchange Notes in its accounting records at the
same carrying value as the outstanding Notes, which is the aggregate principal
amount, as reflected in the Issuer's accounting records on the date of exchange.
Accordingly, the Issuer will not recognize any gain or loss for accounting
purposes in connection with the exchange offer. The Issuer will record the
expenses of the exchange offer as incurred.
OTHER
Participation in the exchange offer is voluntary, and you should carefully
consider whether to accept. You are urged to consult your financial and tax
advisors in making your own decision on what action to take.
The Issuer may in the future seek to acquire untendered outstanding Notes
in open market or privately negotiated transactions, through subsequent exchange
offers or otherwise. The Issuer has no present plans to acquire any outstanding
Notes that are not tendered in the exchange offer or to file a registration
statement to permit resales of any untendered outstanding Notes.
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DESCRIPTION OF NOTES
GENERAL
The outstanding Notes were issued and the exchange Notes will be issued
under an Indenture, dated as of March 5, 1999, among the Issuer, Holdings and
IBJ Whitehall Bank & Trust Company, as Trustee (the "Trustee"), a copy of which
has been filed as an exhibit to the registration statement of which this
prospectus is a part. References to the "Notes" herein are references to both
the outstanding Notes and the exchange Notes.
The following summary of certain provisions of the Indenture and the Notes
does not purport to be complete and is subject to, and is qualified in its
entirety by reference to, all the provisions of the Indenture, including the
definitions of certain terms therein and those terms made a part thereof by the
Trust Indenture Act of 1939. Capitalized terms used in this "Description of
Notes" section and not otherwise defined have the meanings set forth in the
section "--Certain Definitions." As used in this "Description of Notes" section,
o the "Issuer" means American Axle & Manufacturing, Inc.; and
o "Holdings" means American Axle & Manufacturing Holdings, Inc.
The Indenture provides for the issuance of up to $100 million aggregate
principal amount of additional Notes having identical terms and conditions to
the Notes, subject to compliance with the covenants contained in the Indenture.
Any additional Notes will be part of the same issue as the Notes and will vote
on all matters with the Notes.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Issuer in the Borough of Manhattan, The City of New York (which initially shall
be the principal corporate trust office of the Trustee, at 1 State Street, 10th
Floor, New York, NY 10004), except that, at the option of the Issuer, payment of
interest may be made by check mailed to the Holders at their registered
addresses.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. No service charge
will be made for any registration of transfer or exchange of Notes, but the
Issuer may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
TERMS OF THE NOTES
The Notes are unsecured senior subordinated obligations of the Issuer and
will mature on March 1, 2009. Each Note will bear interest at a rate per annum
shown on the front cover of this prospectus from March 5, 1999 or from the most
recent date to which interest has been paid or provided for, payable
semiannually to Holders of record at the close of business on the February 15 or
August 15 immediately preceding the interest payment date on March 1 and
September 1 of each year, commencing September 1, 1999.
Liquidated damages are payable with respect to the outstanding Notes if
certain conditions are not satisfied, all as further described under
"Registration Rights Agreement".
OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the Notes will not be
redeemable at the option of the Issuer prior to March 1, 2004. Thereafter, the
Notes will be redeemable, at the Issuer's option, in whole or in part upon not
less than 30 nor more than 60 days' prior notice mailed by first-class mail to
each Holder's registered address, at the following redemption prices (expressed
as a percentage of principal amount), plus accrued and unpaid interest and
liquidated damages, if any, to the redemption date (subject to the right of
Holders of record on
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the relevant record date to receive interest due on the relevant interest
payment date), if redeemed during the 12-month period commencing on March 1 of
the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
- ----------------------------------------------------------------------- ----------
<S> <C>
2004................................................................... 104.875%
2005................................................................... 103.250%
2006................................................................... 101.625%
2007 and thereafter.................................................... 100.000%
</TABLE>
In addition, at any time and from time to time prior to March 1, 2002, the
Issuer may redeem in the aggregate up to 35% of the original aggregate principal
amount of the Notes (calculated after giving effect to any issuance of
Additional Notes) with the net cash proceeds of one or more Equity Offerings (1)
by the Issuer or (2) by Holdings to the extent the net cash proceeds thereof are
contributed to the Issuer or used to purchase Capital Stock (other than
Disqualified Stock) of the Issuer from the Issuer, at a redemption price
(expressed as a percentage of principal amount thereof) of 109.75% plus accrued
and unpaid interest and liquidated damages, if any, to the redemption date
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date); provided, however,
that at least 65% of the original aggregate principal amount of the Notes
(calculated after giving effect to any issuance of Additional Notes) must remain
outstanding after each such redemption and provided further that such redemption
shall occur within 90 days after the date on which any such Equity Offering is
consummated upon not less than 30 nor more than 60 days' notice mailed to each
holder of Notes being redeemed and otherwise in accordance with the procedures
set forth in the Indenture.
SELECTION
In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee in compliance with the requirements of
the principal national securities exchange, if any, on which such Notes are
listed, or if such Notes are not so listed, on a pro rata basis, by lot or by
such other method as the Trustee shall deem fair and appropriate (and in such
manner as complies with applicable legal requirements); provided that no Notes
of $1,000 or less shall be redeemed in part. If any Note is to be redeemed in
part only, the notice of redemption relating to such Note shall state the
portion of the principal amount thereof to be redeemed. A new Note in principal
amount equal to the unredeemed portion thereof will be issued in the name of the
Holder thereof upon cancellation of the original Note. On and after the
redemption date, interest will cease to accrue on Notes or portions thereof
called for redemption so long as the Issuer has deposited with the Paying Agent
funds sufficient to pay the principal of, plus accrued and unpaid interest and
liquidated damages (if any) on, the Notes to be redeemed.
RANKING
The indebtedness evidenced by the Notes will be unsecured senior
subordinated indebtedness of the Issuer, will be subordinated in right of
payment, as set forth in the Indenture, to all existing and future Senior
Indebtedness of the Issuer, will rank pari passu in right of payment with all
future Pari Passu Indebtedness of the Issuer and will be senior in right of
payment to all future Subordinated Indebtedness of the Issuer. The Notes will
also be effectively subordinated to any Secured Indebtedness of the Issuer to
the extent of the value of the assets securing such Indebtedness. However,
payment from the money or the proceeds of U.S. Government Obligations held in
any defeasance trust described under "--Defeasance" below is not subordinated to
any Senior Indebtedness or subject to the restrictions described herein.
The indebtedness evidenced by the Guarantees will be unsecured senior
subordinated indebtedness of the applicable Guarantor, will be subordinated in
right of payment, as set forth in the Indenture, to all future Senior
Indebtedness of such Guarantor, will rank pari passu in right of payment with
all future Pari Passu Indebtedness of such Guarantor and will be senior in right
of payment to all existing and future Subordinated Indebtedness of such
Guarantor. The Guarantees will also be effectively subordinated to any Secured
Indebtedness of the applicable Guarantor to the extent of the value of the
assets securing such Indebtedness.
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As of December 31, 1998, on a pro forma basis after giving effect to the
IPO and the application of the net proceeds therefrom and the private placement
of the outstanding Notes and the application of the net proceeds therefrom (but
without giving effect to the borrowings to finance the acquisition of Colfor or
MSP):
o the Issuer would have had $407.4 million aggregate principal amount of
Senior Indebtedness outstanding (excluding unused commitments), all of
which would have been Secured Indebtedness;
o the Issuer would have had no Pari Passu Indebtedness outstanding other
than the Notes and no indebtedness that is subordinate or junior in right
of payment to the Notes, and
o the Issuer's subsidiaries would have had total liabilities (excluding
intercompany liabilities) of $56.5 million.
Although the Indenture will contain limitations on the amount of additional
Indebtedness which the Issuer and its subsidiaries may Incur, under certain
circumstances the amount of such Indebtedness could be substantial and, in any
case, such Indebtedness may be Senior Indebtedness. See "--Limitation on
Incurrence of Indebtedness and Issuance of Disqualified Stock and Preferred
Stock" below.
Certain of the operations of the Issuer are conducted through its
subsidiaries. Unless the subsidiary is a Guarantor, claims of creditors of such
subsidiaries, including trade creditors, and claims of preferred stockholders
(if any) of such subsidiaries generally will have priority with respect to the
assets and earnings of such subsidiaries over the claims of creditors of the
Issuer, including holders of the Notes. The Notes, therefore, will be
effectively subordinated to creditors (including trade creditors) and preferred
stockholders (if any) of subsidiaries of the Issuer that are not Guarantors.
None of the Issuer's subsidiaries will be Guarantors as of the Issue Date. At
December 31, 1998, the total liabilities (excluding intercompany liabilities) of
the Issuer's subsidiaries were approximately $119.5 million, including trade
payables. Although the Indenture will limit the Incurrence of Indebtedness by
and the issuance of Disqualified Stock and Preferred Stock of certain of the
Issuer's subsidiaries, such limitation is subject to a number of significant
qualifications.
"Senior Indebtedness" with respect to the Issuer or any Guarantor means:
o all Indebtedness and any Receivables Repurchase Obligation of the Issuer
or such Guarantor, including interest thereon (including interest
accruing on or after the filing of any petition in bankruptcy or for
reorganization relating to the Issuer or any Subsidiary of the Issuer at
the rate specified in the documentation with respect thereto whether or
not a claim for post-filing interest is allowed in such proceeding) and
other amounts (including fees, expenses, reimbursement obligations under
letters of credit and indemnities) owing in respect thereof, whether
outstanding on the Issue Date or thereafter Incurred, unless in the
instrument creating or evidencing the same or pursuant to which the same
is outstanding it is provided that such obligations are not superior, or
are subordinated, in right of payment to the Notes or such Guarantor's
Guarantee, as applicable;
Notwithstanding anything to the contrary in the foregoing, Senior Indebtedness
shall not include:
o any obligation of the Issuer to any Subsidiary of the Issuer (other than
any Receivables Repurchase Obligation), or of such Guarantor to the
Issuer or any other Subsidiary of the Issuer;
o any liability for Federal, state, local or other taxes owed or owing by
the Issuer or such Guarantor;
o any accounts payable or other liability to trade creditors arising in the
ordinary course of business (including guarantees thereof or instruments
evidencing such liabilities);
o any Indebtedness or obligation of the Issuer or such Guarantor which is
subordinate or junior in any respect to any other Indebtedness or
obligation of the Issuer or such Guarantor, as applicable, including any
Pari Passu Indebtedness and any Subordinated Indebtedness;
o any obligations with respect to any Capital Stock;
o any Indebtedness Incurred in violation of the Indenture.
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If any Senior Indebtedness is disallowed, avoided or subordinated pursuant to
the provisions of Section 548 of Title 11 of the United States Code or any
applicable state fraudulent conveyance law, such Senior Indebtedness
nevertheless will constitute Senior Indebtedness.
Only Indebtedness of the Issuer or a Guarantor that is Senior Indebtedness
will rank senior to the Notes or the relevant Guarantee in accordance with the
provisions of the Indenture. The Notes and each Guarantee will in all respects
rank pari passu with all other Pari Passu Indebtedness of the Issuer and the
relevant Guarantor, respectively.
The Issuer may not pay principal of, premium (if any) or interest on, the
Notes or make any deposit pursuant to the provisions described under
"--Defeasance" below and may not otherwise purchase, redeem or otherwise retire
any Notes (except that Holders may receive and retain (a) Permitted Junior
Securities and (b) payments made from the trust described under "--Defeasance"
below) (collectively, "pay the Notes") if:
(1) a default in the payment of the principal of, premium, if any, or
interest on any Designated Senior Indebtedness occurs and is continuing or
any other amount owing in respect of any Designated Senior Indebtedness is
not paid when due, or
(2) any other default on Designated Senior Indebtedness occurs and the
maturity of such Designated Senior Indebtedness is accelerated in
accordance with its terms unless, in either case, the default has been
cured or waived and any such acceleration has been rescinded or such
Designated Senior Indebtedness has been paid in full in cash or Cash
Equivalents.
However, the Issuer may pay the Notes without regard to the foregoing if the
Issuer and the Trustee receive written notice approving such payment from the
Representative of the Designated Senior Indebtedness with respect to which
either of the events set forth in clause (1) or (2) of the immediately preceding
sentence has occurred and is continuing. During the continuance of any default
(other than a default described in clause (1) or (2) of the second preceding
sentence) with respect to any Designated Senior Indebtedness pursuant to which
the maturity thereof may be accelerated immediately without further notice
(except such notice as may be required to effect such acceleration) or the
expiration of any applicable grace periods, the Issuer may not pay the Notes for
a period (a "Payment Blockage Period") commencing upon the receipt by the
Trustee (with a copy to the Issuer) of written notice (a "Blockage Notice") of
such default from the Representative of the Designated Senior Indebtedness
specifying an election to effect a Payment Blockage Period and ending 179 days
thereafter (or earlier if such Payment Blockage Period is terminated:
o by written notice to the Trustee and the Issuer from the Person or
Persons who gave such Blockage Notice;
o by repayment in full in cash or Cash Equivalents of such Designated
Senior Indebtedness; or
o because the default giving rise to such Blockage Notice is no longer
continuing).
Notwithstanding the provisions described in the immediately preceding sentence
(but subject to the provisions contained in the first sentence of this paragraph
and in the succeeding paragraph), unless the holders of such Designated Senior
Indebtedness or the Representative of such holders have accelerated the maturity
of such Designated Senior Indebtedness, the Issuer may resume payments on the
Notes after the end of such Payment Blockage Period. Not more than one Blockage
Notice may be given in any consecutive 360-day period, irrespective of the
number of defaults with respect to Designated Senior Indebtedness during such
period. However, if any Blockage Notice within such 360-day period is given by
or on behalf of any holders of Designated Senior Indebtedness other than the
Bank Indebtedness, the Representative of the Bank Indebtedness may give one
additional Blockage Notice within such period. In no event, however, may the
total number of days during which any Payment Blockage Period or Periods is in
effect exceed 179 days in the aggregate during any 360 consecutive day period.
For purposes of this paragraph, no default or event of default that existed or
was continuing on the date of the commencement of any Payment Blockage Period
with respect to the Designated Senior Indebtedness initiating such Payment
Blockage Period shall be, or be made, the basis of the commencement of a
subsequent Payment Blockage Period by the Representative of such Designated
Senior Indebtedness, whether or not within a period of 360 consecutive days,
unless such default or event of default shall have been cured or waived for a
period of not less than 90 consecutive days.
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Upon any payment or distribution of the assets of the Issuer upon a total
or partial liquidation or dissolution or reorganization of or similar proceeding
relating to the Issuer or its property, the holders of Senior Indebtedness will
be entitled to receive payment in full in cash or Cash Equivalents of the Senior
Indebtedness (including interest accruing after, or which would accrue but for,
the commencement of any such proceeding at the rate specified in the applicable
Senior Indebtedness, whether or not a claim for such interest would be allowed)
before the Noteholders are entitled to receive any payment and until the Senior
Indebtedness is paid in full in cash or Cash Equivalents, any payment or
distribution to which Noteholders would be entitled but for the subordination
provisions of the Indenture will be made to holders of the Senior Indebtedness
as their interests may appear (except that Holders of Notes may receive and
retain (1) Permitted Junior Securities, and (2) payments made from the trust
described under "--Defeasance" so long as, on the date or dates the respective
amounts were paid into the trust, such payments were made with respect to the
Notes without violating the subordination provisions described herein). If a
distribution is made to Noteholders that due to the subordination provisions of
the Indenture should not have been made to them, such Noteholders are required
to hold it in trust for the holders of Senior Indebtedness and pay it over to
them as their interests may appear.
If payment of the Notes is accelerated because of an Event of Default, the
Issuer or the Trustee shall promptly notify the holders of the Designated Senior
Indebtedness (or their Representative) of the acceleration. If any Designated
Senior Indebtedness is outstanding, the Issuer may not pay the Notes until five
Business Days after such holders or the Representative of the Designated Senior
Indebtedness receive notice of such acceleration and, thereafter, may pay the
Notes only if the subordination provisions of the Indenture otherwise permit
payment at that time.
By reason of such subordination provisions contained in the Indenture, in
the event of insolvency, creditors of the Issuer who are holders of Senior
Indebtedness may recover more, ratably, than the Noteholders, and creditors of
the Issuer who are not holders of Senior Indebtedness or of Pari Passu
Indebtedness (including the Notes) may recover less, ratably, than holders of
Senior Indebtedness and may recover more, ratably, than the holders of Pari
Passu Indebtedness.
The Indenture will contain substantially similar subordination provisions
relating to each Guarantor's obligations under its Guarantee.
GUARANTEES
Holdings and certain domestic Restricted Subsidiaries of the Issuer that
Incur or guarantee certain Indebtedness (as described below), as primary
obligors and not merely as sureties, will jointly and severally irrevocably and
unconditionally guarantee on an unsecured senior subordinated basis (in the same
manner and to the same extent that the Notes are subordinated to Senior
Indebtedness) the performance and punctual payment when due, whether at Stated
Maturity, by acceleration or otherwise, of all obligations of the Issuer under
the Indenture and the Notes, whether for payment of principal of, premium, if
any, or interest or liquidated damages on the Notes, expenses, indemnification
or otherwise (all such obligations guaranteed by such Guarantors being herein
called the "Guaranteed Obligations"). Such Guarantors will agree to pay, in
addition to the amount stated above, any and all expenses (including reasonable
counsel fees and expenses) Incurred by the Trustee or the Holders in enforcing
any rights under the Guarantees. Each Guarantee will be limited in amount to an
amount not to exceed the maximum amount that can be guaranteed by the applicable
Guarantor without rendering the Guarantee, as it relates to such Guarantor,
voidable under applicable law relating to fraudulent conveyance or fraudulent
transfer or similar laws affecting the rights of creditors generally. After the
Issue Date, the Issuer will cause each Restricted Subsidiary (unless such
Subsidiary is a Receivables Subsidiary) organized under the laws of the United
States of America or any state or territory thereof that Incurs or guarantees
certain Indebtedness or issues shares of Disqualified Stock or Preferred Stock
to execute and deliver to the Trustee a supplemental indenture pursuant to which
such Restricted Subsidiary will guarantee payment of the Notes on the same
unsecured senior subordinated basis. See "--Future Guarantors" below.
Each Guarantee is a continuing guarantee and shall:
o remain in full force and effect until payment in full of all the
Guaranteed Obligations;
o subject to the next succeeding paragraph, be binding upon each such
Guarantor and its successors; and
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o inure to the benefit of and be enforceable by the Trustee, the Holders
and their successors, transferees and assigns.
A Guarantee made by any Restricted Subsidiary will be automatically
released upon the sale (including through merger or consolidation) of the
Capital Stock, or all or substantially all the assets, of the applicable
Guarantor if:
o such sale is made in compliance with the covenant described under
"--Certain Covenants--Assets Sales;" and
o such Guarantor is released from its guarantees of, and all pledges and
security granted in connection with, the Credit Agreement and any other
Indebtedness of the Issuer or any Subsidiary of the Issuer.
A Guarantee also will be automatically released upon the applicable Subsidiary
ceasing to be a Subsidiary as a result of any foreclosure of any pledge or
security interest securing Bank Indebtedness or other exercise of remedies in
respect thereof if such Subsidiary is released from its guarantees of, and all
pledges and security interests granted in connection with, the Credit Agreement.
In addition, a Guarantee made by any Restricted Subsidiary will be automatically
released if the Issuer designates such Guarantor as an Unrestricted Subsidiary
and such designation complies with the other applicable provisions of the
Indenture.
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each, a "Change of
Control"), each Holder will have the right to require the Issuer to repurchase
all or any part of such Holder's Notes at a purchase price in cash equal to 101%
of the principal amount thereof, plus accrued and unpaid interest, if any, to
the date of repurchase (subject to the right of Holders of record on the
relevant record date to receive interest due on the relevant interest payment
date):
(1) the sale, lease or transfer, in one or a series of related
transactions, of all or substantially all the assets of the Issuer and its
Subsidiaries, taken as a whole, to a Person other than the Permitted
Holders;
(2) (A) the Issuer becomes aware (by way of a report or any other
filing pursuant to Section 13(d) of the Exchange Act, proxy, vote,
written notice or otherwise) of the acquisition by any Person or group
(within the meaning of Section 13(d)(3) or Section 14(d)(2) of the
Exchange Act, or any successor provision), including any group acting
for the purpose of acquiring, holding or disposing of securities (within
the meaning of Rule 13d-5(b)(1) under the Exchange Act), other than the
Permitted Holders, in a single transaction or in a related series of
transactions, by way of merger, consolidation or other business
combination or purchase of beneficial ownership (within the meaning of
Rule 13d-3 under the Exchange Act, or any successor provision), of 35%
or more of the total voting power of the Voting Stock of the Issuer or
Holdings; and
(B) the Permitted Holders beneficially own (as defined above),
directly or indirectly, in the aggregate a lesser percentage of the
total voting power of the Voting Stock of the Issuer or Holdings, as
applicable, than such other Person or group and do not have the right or
ability by voting power, contract or otherwise to elect or designate for
election a majority of the Board of Directors; or
(3) during any one year period, individuals who at the beginning of
such period constituted the board of directors of the Issuer or Holdings
(together with any new directors whose election by such board of directors
or whose nomination for election by the shareholders of the Issuer or
Holdings, as applicable, was approved by a vote of a majority of the
directors of the Issuer or Holdings, as applicable, then still in office
who were either directors at the beginning of such period or whose election
or nomination for election was previously so approved) cease for any reason
to constitute a majority of the board of directors of the Issuer or
Holdings, as applicable, then in office.
In the event that at the time of such Change of Control the terms of the
Bank Indebtedness restrict or prohibit the repurchase of Notes pursuant to this
covenant, then prior to the mailing of the notice to Holders provided for in the
immediately following paragraph but in any event within 30 days following any
Change of Control, the Issuer shall:
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o repay in full all Bank Indebtedness or offer to repay in full all Bank
Indebtedness and repay the Bank Indebtedness of each lender who has
accepted such offer; or
o obtain the requisite consent under the agreements governing the Bank
Indebtedness to permit the repurchase of the Notes as provided for in the
immediately following paragraph.
Within 30 days following any Change of Control, unless the Issuer has
exercised its right to redeem the Notes as described under "--Optional
Redemption", the Issuer shall mail a notice (a "Change of Control Offer") to
each Holder with a copy to the Trustee stating:
(1) that a Change of Control has occurred and that such Holder has the
right to require the Issuer to purchase such Holder's Notes at a purchase
price in cash equal to 101% of the principal amount thereof, plus accrued
and unpaid interest and liquidated damages, if any, to the date of purchase
(subject to the right of Holders of record on a record date to receive
interest on the relevant interest payment date);
(2) the circumstances and relevant facts and financial information
regarding such Change of Control;
(3) the repurchase date (which shall be no earlier than 30 days nor
later than 60 days from the date such notice is mailed); and
(4) the instructions determined by the Issuer, consistent with this
covenant, that a Holder must follow in order to have its Notes purchased.
The Issuer will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set forth
in the Indenture applicable to a Change of Control Offer made by the Issuer and
purchases all Notes validly tendered and not withdrawn under such Change of
Control Offer.
The Issuer will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
in connection with the repurchase of Notes pursuant to this covenant. To the
extent that the provisions of any securities laws or regulations conflict with
provisions of this covenant, the Issuer will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under this paragraph by virtue thereof.
The Change of Control purchase feature is a result of negotiations between
the Issuer and the Initial Purchasers. Management has no present intention to
engage in a transaction involving a Change of Control, although it is possible
that the Issuer could decide to do so in the future. Subject to the limitations
discussed below, the Issuer could, in the future, enter into certain
transactions, including acquisitions, refinancings or other recapitalizations,
that would not constitute a Change of Control under the Indenture, but that
could increase the amount of indebtedness outstanding at such time or otherwise
affect the Issuer's capital structure or credit ratings.
The occurrence of events which would constitute a Change of Control would
constitute a default under the Credit Agreement. Future Senior Indebtedness of
the Issuer may contain prohibitions on certain events which would constitute a
Change of Control or require such Senior Indebtedness to be repurchased upon a
Change of Control. Moreover, the exercise by the Holders of their right to
require the Issuer to repurchase the Notes could cause a default under such
Senior Indebtedness, even if the Change of Control itself does not, due to the
financial effect of such repurchase on the Issuer. Finally, the Issuer's ability
to pay cash to the Holders upon a repurchase may be limited by the Issuer's then
existing financial resources. There can be no assurance that sufficient funds
will be available when necessary to make any required repurchases.
The definition of Change of Control includes a phrase relating to the sale,
lease or transfer of "all or substantially all" the assets of the Issuer and its
Subsidiaries taken as a whole. Although there is a developing body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
Holder of Notes to require the Issuer to repurchase such Notes as a result of a
sale, lease or transfer of less than all of the assets of the Issuer and its
Subsidiaries taken as a whole to another Person or group may be uncertain.
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CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
Limitation on Incurrence of Indebtedness and Issuance of Disqualified Stock
and Preferred Stock. The Indenture provides that:
(1) the Issuer will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, Incur any Indebtedness (including
Acquired Indebtedness) or issue any shares of Disqualified Stock; and
(2) the Issuer will not permit any of its Restricted Subsidiaries to
issue any shares of Preferred Stock;
provided, however, that the Issuer and any Restricted Subsidiary that is a
Guarantor may Incur Indebtedness (including Acquired Indebtedness) or issue
shares of Disqualified Stock and any Restricted Subsidiary that is a Guarantor
may issue shares of Preferred Stock, in each case if the Fixed Charge Coverage
Ratio of the Issuer for the most recently ended four full fiscal quarters for
which internal financial statements are available immediately preceding the date
on which such additional Indebtedness is Incurred or such Disqualified Stock or
Preferred Stock is issued would have been at least 2.00 to 1.00 determined on a
pro forma basis (including a pro forma application of the net proceeds
therefrom), as if the additional Indebtedness had been Incurred, or the
Disqualified Stock or Preferred Stock had been issued, as the case may be, and
the application of proceeds therefrom had occurred at the beginning of such
four-quarter period.
The foregoing limitations will not apply to:
(a) the Incurrence by the Issuer or its Restricted Subsidiaries of
Indebtedness under the Credit Agreement and the issuance and creation of
letters of credit and bankers' acceptances thereunder (with letters of
credit and bankers' acceptances being deemed to have a principal amount
equal to the face amount thereof) up to an aggregate principal amount of
$850.0 million outstanding at any one time;
(b) the Incurrence by the Issuer and the Guarantors of Indebtedness
represented by the Notes (not including any Additional Notes) and the
Guarantees, as applicable;
(c) Indebtedness existing on the Issue Date (other than Indebtedness
described in clauses (a) and (b));
(d) Indebtedness (including Capitalized Lease Obligations) Incurred by
the Issuer or any of its Restricted Subsidiaries to finance the purchase,
lease or improvement of property (real or personal) or equipment (whether
through the direct purchase of assets or the Capital Stock of any Person
owning such assets) in an aggregate principal amount which, when aggregated
with the principal amount of all other Indebtedness then outstanding and
Incurred pursuant to this clause (d), does not exceed 5.0% of Total Assets
at the time of Incurrence;
(e) Indebtedness Incurred by the Issuer or any of its Restricted
Subsidiaries constituting reimbursement obligations with respect to letters
of credit issued in the ordinary course of business, including without
limitation letters of credit in respect of workers' compensation claims,
health, disability or other employee benefits or property, casualty or
liability insurance or self-insurance, or other Indebtedness with respect
to reimbursement type obligations regarding workers' compensation claims;
provided, however, that upon the drawing of such letters of credit, such
obligations are reimbursed within 30 days following such drawing;
(f) Indebtedness arising from agreements of the Issuer or a Restricted
Subsidiary providing for indemnification, adjustment of purchase price or
similar obligations, in each case, Incurred in connection with the
disposition of any business, assets or a Subsidiary of the Issuer in
accordance with the terms of the Indenture, other than guarantees of
Indebtedness Incurred by any Person acquiring all or any portion of such
business, assets or Subsidiary for the purpose of financing such
acquisition;
(g) Indebtedness of the Issuer to a Restricted Subsidiary of the
Issuer; provided that any such Indebtedness is subordinated in right of
payment to the Notes; provided further that any subsequent issuance or
transfer of any Capital Stock or any other event which results in any such
Restricted Subsidiary ceasing to be a Restricted Subsidiary of the Issuer
or any other subsequent transfer of any such Indebtedness (except to the
Issuer or another Restricted Subsidiary) shall be deemed, in each case to
be an Incurrence of such Indebtedness;
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(h) shares of Preferred Stock of a Restricted Subsidiary issued to the
Issuer or another Restricted Subsidiary of the Issuer; provided that any
subsequent issuance or transfer of any Capital Stock or any other event
which results in any such Restricted Subsidiary ceasing to be a Restricted
Subsidiary or any other subsequent transfer of any such shares of Preferred
Stock (except to the Issuer or another Restricted Subsidiary of the Issuer)
shall be deemed, in each case, to be an issuance of shares of Preferred
Stock;
(i) Indebtedness of a Restricted Subsidiary to the Issuer or another
Restricted Subsidiary of the Issuer; provided that:
(A) any such Indebtedness is made pursuant to an intercompany note;
and
(B) if a Guarantor incurs such Indebtedness to a Restricted
Subsidiary that is not a Guarantor such Indebtedness is subordinated in
right of payment to the Guarantee of such Guarantor; provided further
that any subsequent issuance or transfer of any Capital Stock or any
other event which results in any Restricted Subsidiary lending such
Indebtedness ceasing to be a Restricted Subsidiary or any other
subsequent transfer of any such Indebtedness (except to the Issuer or
another Restricted Subsidiary of the Issuer) shall be deemed, in each
case, to be an Incurrence of such Indebtedness;
(j) Hedging Obligations that are Incurred in the ordinary course of
business:
(1) for the purpose of fixing or hedging interest rate risk with
respect to any Indebtedness that is permitted by the terms of the
Indenture to be outstanding:
(2) for the purpose of fixing or hedging currency exchange rate
risk with respect to any currency exchanges or
(3) for the purpose of fixing or hedging commodity price risk with
respect to any commodity purchases;
(k) obligations in respect of performance, bid and surety bonds and
completion guarantees provided by the Issuer or any Restricted Subsidiary
in the ordinary course of business;
(l) Indebtedness or Disqualified Stock of the Issuer or any Restricted
Subsidiary not otherwise permitted hereunder in an aggregate principal
amount, which when aggregated with the principal amount or liquidation
preference of all other Indebtedness and Disqualified Stock then
outstanding and Incurred pursuant to this clause (l), does not exceed
$125.0 million at any one time outstanding (it being understood that any
Indebtedness Incurred under this clause (l) shall cease to be deemed
Incurred or outstanding for purposes of this clause (l) but shall be deemed
Incurred for purposes of the first paragraph of this covenant from and
after the first date on which the Issuer could have Incurred such
Indebtedness under the first paragraph of this covenant without reliance
upon this clause (l));
(m) any guarantee by the Issuer or a Guarantor of Indebtedness or
other obligations of the Issuer or any of its Restricted Subsidiaries so
long as the Incurrence of such Indebtedness Incurred by the Issuer or such
Restricted Subsidiary is permitted under the terms of the Indenture;
provided that if such Indebtedness is by its express terms subordinated in
right of payment to the Notes or the Guarantee of such Restricted
Subsidiary, as applicable, any such guarantee of such Guarantor with
respect to such Indebtedness shall be subordinated in right of payment to
such Guarantor's Guarantee with respect to the Notes substantially to the
same extent as such Indebtedness is subordinated to the Notes or the
Guarantee of such Restricted Subsidiary, as applicable;
(n) the Incurrence by the Issuer or any of its Restricted Subsidiaries
of Indebtedness which serves to refund or refinance any Indebtedness
Incurred as permitted under the first paragraph of this covenant and
clauses (b), (c), (d) and (o) of this paragraph or any Indebtedness issued
to so refund or refinance such Indebtedness (subject to the following
proviso, "Refinancing Indebtedness") prior to its respective maturity;
provided, however, that such Refinancing Indebtedness:
(i) has a Weighted Average Life to Maturity at the time such
Refinancing Indebtedness is Incurred which is not less than the
remaining Weighted Average Life to Maturity of the Indebtedness being
refunded or refinanced;
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(ii) has a Stated Maturity which is no earlier than the Stated
Maturity of the Indebtedness being refunded or refinanced:
(iii) to the extent such Refinancing Indebtedness refinances
Indebtedness pari passu with the Notes or the Guarantee of such
Restricted Subsidiary, as applicable, is pari passu with the Notes or
the Guarantee of such Restricted Subsidiary, as applicable;
(iv) is Incurred in an aggregate principal amount (or if issued
with original issue discount, an aggregate issue price) that is equal to
or less than the aggregate principal amount (or if issued with original
issue discount, the aggregate accreted value) then outstanding of the
Indebtedness being refinanced plus premium and fees Incurred in
connection with such refinancing; and
(v) shall not include:
(x) Indebtedness of a Restricted Subsidiary that is not a
Guarantor that refinances Indebtedness of the Issuer; or
(y) Indebtedness of the Issuer or a Restricted Subsidiary that
refinances Indebtedness of an Unrestricted Subsidiary;
and provided further that subclauses (i) and (ii) of this clause (n) will
not apply to any refunding or refinancing of any Senior Indebtedness;
(o) Indebtedness or Disqualified Stock of Persons that are acquired by
the Issuer or any of its Restricted Subsidiaries or merged into a
Restricted Subsidiary in accordance with the terms of the Indenture;
provided, however, that such Indebtedness or Disqualified Stock is not
Incurred in contemplation of such acquisition or merger or to provide all
or a portion of the funds or credit support required to consummate such
acquisition or merger; provided further, however, that after giving effect
to such acquisition and the Incurrence of such Indebtedness either:
(i) the Issuer would be permitted to Incur at least $1.00 of
additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test
set forth in the first sentence of this covenant: or
(ii) the Fixed Charge Coverage Ratio would be greater than
immediately prior to such acquisition;
(p) Indebtedness Incurred by a Receivables Subsidiary in a Qualified
Receivables Financing that is not recourse to the Issuer or any Restricted
Subsidiary of the Issuer (except for Standard Securitization Undertakings);
(q) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument drawn against
insufficient funds in the ordinary course of business, provided that such
Indebtedness is extinguished within two Business Days of its Incurrence;
(r) Indebtedness of the Issuer or any Restricted Subsidiary of the
Issuer supported by a letter of credit issued pursuant to the Credit
Agreement, in a principal amount not in excess of the stated amount of such
letter of credit; and
(s) Contribution Indebtedness.
Notwithstanding the foregoing, neither the Issuer nor any Guarantor may
Incur any Indebtedness pursuant to the immediately preceding paragraph if the
proceeds thereof are used, directly or indirectly, to repay, prepay, redeem,
defease, retire, refund or refinance any Subordinated Indebtedness unless such
Indebtedness will be subordinated to the Notes or such Guarantor's Guarantee, as
applicable, to at least the same extent as such Subordinated Indebtedness. For
purposes of determining compliance with this covenant, in the event that an item
of Indebtedness meets the criteria of more than one of the categories of
permitted Indebtedness described in clauses (a) through (s) above or is entitled
to be Incurred pursuant to the first paragraph of this covenant, the Issuer
shall, in its sole discretion, classify or reclassify such item of Indebtedness
in any manner that complies with this covenant and such item of Indebtedness
will be treated as having been Incurred pursuant to only one of such clauses or
pursuant to the first paragraph hereof. Accrual of interest, the accretion of
accreted value and the payment of interest in the form of additional
Indebtedness will not be deemed to be an Incurrence of Indebtedness for purposes
of this covenant.
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Limitation on Restricted Payments. The Indenture provides that the Issuer
will not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly:
(i) declare or pay any dividend or make any distribution on account of
the Issuer's or any of its Restricted Subsidiaries' Equity Interests,
including any payment made in connection with any merger or consolidation
involving the Issuer (other than:
(A) dividends or distributions by the Issuer payable solely in
Equity Interests (other than Disqualified Stock) of the Issuer; or
(B) dividends or distributions by a Restricted Subsidiary so long
as, in the case of any dividend or distribution payable on or in respect
of any class or series of securities issued by a Restricted Subsidiary
other than a Wholly Owned Restricted Subsidiary, the Issuer or a
Restricted Subsidiary receives at least its pro rata share of such
dividend or distribution in accordance with its Equity Interests in such
class or series of securities);
(ii) purchase or otherwise acquire or retire for value any Equity
Interests of Holdings or the Issuer;
(iii) make any principal payment on, or redeem, repurchase, defease or
otherwise acquire or retire for value, in each case prior to any scheduled
repayment or scheduled maturity, any Subordinated Indebtedness (other than
the payment, redemption, repurchase, defeasance, acquisition or retirement
of:
(A) Subordinated Indebtedness in anticipation of satisfying a
sinking fund obligation, principal installment or final maturity, in
each case due within one year of the date of such payment, redemption,
repurchase, defeasance, acquisition or retirement and
(B) Indebtedness permitted under clauses (g) and (i) of the second
paragraph of the covenant described under "--Limitation on Incurrence of
Indebtedness and Issuance of Disqualified Stock and Preferred Stock");
or
(iv) make any Restricted Investment (all such payments and other
actions set forth in clauses (i) through (iv) above being collectively
referred to as "Restricted Payments"), unless, at the time of such
Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof;
(b) immediately after giving effect to such transaction on a pro
forma basis, the Issuer could Incur $1.00 of additional Indebtedness
under the provisions of the first paragraph of "--Limitation on
Incurrence of Indebtedness and Issuance of Disqualified Stock and
Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate amount of
all other Restricted Payments made by the Issuer and its Restricted
Subsidiaries after the Issue Date (including Restricted Payments
permitted by clauses (i), (iv) (only to the extent of one-half of the
amounts paid pursuant to such clause), (vi) and (viii) of the next
succeeding paragraph, but excluding all other Restricted Payments
permitted by the next succeeding paragraph), is less than the sum of,
without duplication,
(i) 50% of the Consolidated Net Income of the Issuer for the
period (taken as one accounting period) from January 1, 1999 to the
end of the Issuer's most recently ended fiscal quarter for which
internal financial statements are available at the time of such
Restricted Payment (or, in the case such Consolidated Net Income for
such period is a deficit, minus 100% of such deficit), plus
(ii) 100% of the aggregate net proceeds, including cash and the
Fair Market Value (as determined in accordance with the next
succeeding sentence) of property other than cash, received by the
Issuer since the Issue Date from the issue or sale of Equity
Interests of the Issuer (excluding Refunding Capital Stock (as
defined below), Designated Preferred Stock, Excluded Contributions
and Disqualified Stock), including Equity Interests issued upon
conversion of Indebtedness or upon exercise of warrants or options
(other than an issuance or sale to a Subsidiary of the Issuer or an
employee stock ownership plan or trust established by the Issuer or
any of its Subsidiaries), plus
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(iii) 100% of the aggregate amount of contributions to the
capital of the Issuer received in cash and the Fair Market Value (as
determined in accordance with the next succeeding sentence) of
property other than cash since the Issue Date (other than Excluded
Contributions, Refunding Capital Stock, Designated Preferred Stock,
Disqualified Stock and the Cash Contribution Amount), plus
(iv) 100% of the aggregate amount received in cash and the Fair
Market Value (as determined in accordance with the next succeeding
sentence) of property (other than cash) received from:
(A) the sale or other disposition (other than to the Issuer
or a Restricted Subsidiary) of Restricted Investments made by the
Issuer and its Restricted Subsidiaries and from repurchases and
redemptions of such Restricted Investments from the Issuer and
its Restricted Subsidiaries by any Person (other than the Issuer
or any of its Subsidiaries) and from repayments of loans or
advances which constituted Restricted Investments,
(B) the sale (other than to the Issuer or a Restricted
Subsidiary) of the Capital Stock of an Unrestricted Subsidiary or
(C) a distribution or dividend from an Unrestricted
Subsidiary, plus
(v) in the event any Unrestricted Subsidiary has been
redesignated as a Restricted Subsidiary or has been merged,
consolidated or amalgamated with or into, or transfers or conveys its
assets to, or is liquidated into, the Issuer or a Restricted
Subsidiary, the Fair Market Value (as determined in good faith by the
Issuer) of the Investment of the Issuer in such Unrestricted
Subsidiary at the time of such redesignation, combination or transfer
(or of the assets transferred or conveyed, as applicable), after
deducting any Indebtedness associated with the Unrestricted
Subsidiary so designated or combined or any Indebtedness associated
with the assets so transferred or conveyed.
The Fair Market Value of property other than cash covered by clauses (c)(ii),
(iii), (iv) and (v) above shall be determined in good faith by the Issuer and
(A) in the event of property with a Fair Market Value in excess of
$5.0 million, shall be set forth in an Officers' Certificate or (B) in the event
of property with a Fair Market Value in excess of $10.0 million, shall be set
forth in a resolution approved by at least a majority of the Board of Directors.
The foregoing provisions will not prohibit:
(i) the payment of any dividend or distribution within 60 days after
the date of declaration thereof, if at the date of declaration such payment
would have complied with the provisions of the Indenture;
(ii) (a) the repurchase, retirement or other acquisition of any Equity
Interests ("Retired Capital Stock") or Subordinated Indebtedness of the
Issuer or Holdings in exchange for, or out of the proceeds of the
substantially concurrent sale of, Equity Interests of the Issuer or
contributions to the equity capital of the Issuer (other than any
Disqualified Stock or any Equity Interests sold to a Subsidiary of the
Issuer or to an employee stock ownership plan or any trust established
by the Issuer or any of its Subsidiaries) (collectively, including any
such contributions, "Refunding Capital Stock") and
(b) the declaration and payment of accrued dividends on the Retired
Capital Stock out of the proceeds of the substantially concurrent sale
(other than to a Subsidiary of the Issuer or to an employee stock
ownership plan or any trust established by the Issuer or any of its
Subsidiaries) of Refunding Capital Stock;
(iii) the redemption, repurchase or other acquisition or retirement of
Subordinated Indebtedness of the Issuer made by exchange for, or out of the
proceeds of the substantially concurrent sale of, new Indebtedness of the
Issuer which is Incurred in accordance with the covenant described under
"--Limitation on Incurrence of Indebtedness and Issuance of Disqualified
Stock and Preferred Stock" so long as
(A) the principal amount of such new Indebtedness does not exceed
the principal amount of the Subordinated Indebtedness being so redeemed,
repurchased, acquired or retired for value (plus the
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amount of any premium required to be paid under the terms of the
instrument governing the Subordinated Indebtedness being so redeemed,
repurchased, acquired or retired),
(B) such Indebtedness is subordinated to Senior Indebtedness and
the Notes at least to the same extent as such Subordinated Indebtedness
so purchased, exchanged, redeemed, repurchased, acquired or retired for
value,
(C) such Indebtedness has a final scheduled maturity date equal to
or later than the final scheduled maturity date of the Subordinated
Indebtedness being so redeemed, repurchased, acquired or retired, and
(D) such Indebtedness has a Weighted Average Life to Maturity equal
to or greater than the remaining Weighted Average Life to Maturity of
the Subordinated Indebtedness being so redeemed, repurchased, acquired
or retired;
(iv) the repurchase, retirement or other acquisition (or dividends to
Holdings to finance any such repurchase, retirement or other acquisition)
for value of Equity Interests of the Issuer or Holdings held by any future,
present or former employee, director or consultant of the Issuer, Holdings
or any Subsidiary of the Issuer pursuant to any management equity plan or
stock option plan or any other management or employee benefit plan or
agreement; provided, however, that the aggregate amounts paid under this
clause (iv) do not exceed $10.0 million in any calendar year (with unused
amounts in any calendar year being permitted to be carried over for the two
succeeding calendar years); provided further, however, that such amount in
any calendar year may be increased by an amount not to exceed:
(I) the cash proceeds received by the Issuer or any of its
Restricted Subsidiaries from the sale of Equity Interests (other than
Disqualified Stock) of the Issuer or Holdings (to the extent contributed
to the Issuer) to members of management, directors or consultants of the
Issuer and its Restricted Subsidiaries or Holdings that occurs after the
Issue Date (provided that the amount of such cash proceeds utilized for
any such repurchase, retirement, other acquisition or dividend will not
increase the amount available for Restricted Payments under clause
(c) of the immediately preceding paragraph) plus
(II) the cash proceeds of key man life insurance policies received
by the Issuer and its Restricted Subsidiaries after the Issue Date
(provided that the Issuer may elect to apply all or any portion of the
aggregate increase contemplated by clauses (I) and (II) above in any
single calendar year);
(v) the declaration and payment of dividends or distributions to
holders of any class or series of Disqualified Stock of the Issuer or any
of its Restricted Subsidiaries issued or incurred in accordance with the
covenant entitled "--Limitation on Incurrence of Indebtedness and Issuance
of Disqualified Stock and Preferred Stock";
(vi) the declaration and payment of dividends or distributions to
holders of any class or series of Designated Preferred Stock (other than
Disqualified Stock) issued after the Issue Date and the declaration and
payment of dividends to Holdings, the proceeds of which will be used to
fund the payment of dividends to holders of any class or series of
Designated Preferred Stock (other than Disqualified Stock) of Holdings
issued after the Issue Date; provided, however, that
(A) for the most recently ended four full fiscal quarters for which
internal financial statements are available immediately preceding the
date of issuance of such Designated Preferred Stock, after giving effect
to such issuance (and the payment of dividends or distributions) on a
pro forma basis, the Issuer would have had a Fixed Charge Coverage Ratio
of at least 2.25 to 1.00 and
(B) the aggregate amount of dividends declared and paid pursuant to
this clause (vi) does not exceed the net cash proceeds actually received
by the Issuer either directly or as a contribution from Holdings from
any such sale of Designated Preferred Stock (other than Disqualified
Stock) issued after the Issue Date;
(vii) Investments in Unrestricted Subsidiaries having an aggregate
Fair Market Value, taken together with all other Investments made pursuant
to this clause (vii) that are at that time outstanding, not to exceed
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$25.0 million at the time of such Investment (with the Fair Market Value of
each Investment being measured at the time made and without giving effect
to subsequent changes in value);
(viii) the payment of dividends on the Issuer's common stock (or the
payment of dividends to Holdings to fund the payment by Holdings of
dividends on Holdings' common stock) of up to 6.0% per annum of the net
proceeds received by the Issuer from any past or future public offering of
common stock or contributed to the Issuer by Holdings from any public
offering of common stock;
(ix) Investments that are made with Excluded Contributions;
(x) other Restricted Payments in an aggregate amount not to exceed
$25.0 million;
(xi) the distribution, as a dividend or otherwise, of shares of
Capital Stock of, or Indebtedness owed to the Issuer or a Restricted
Subsidiary of the Issuer by, Unrestricted Subsidiaries;
(xii) the payment of dividends, other distributions or other amounts
by the Issuer:
(A) to Holdings in amounts equal to the amounts required for
Holdings to pay fees and expenses required to maintain its corporate
existence, customary salary, bonus and other benefits payable to
officers and employees of Holdings and general corporate overhead
expenses of Holdings, in each case to the extent such fees and expenses
are attributable to the ownership or operation of the Issuer and its
Subsidiaries, or
(B) to Holdings in amounts equal to amounts required for Holdings
to pay franchise taxes and Federal, state and local income taxes to the
extent such income taxes are attributable to the income of the Issuer
and its Restricted Subsidiaries (and, to the extent of amounts actually
received from its Unrestricted Subsidiaries, in amounts required to pay
such taxes to the extent attributable to the income of such Unrestricted
Subsidiaries);
(xiii) cash dividends or other distributions on the Issuer's Capital
Stock used to, or the making of loans to Holdings the proceeds of which
will be used to, fund the payment of fees and expenses incurred in
connection with the Offering or owed to Affiliates, in each case to the
extent permitted by the covenant described under "--Transactions with
Affiliates";
(xiv) repurchases of Equity Interests deemed to occur upon exercise of
stock options if such Equity Interests represent a portion of the exercise
price of such options; and
(xv) purchases of receivables pursuant to a Receivables Purchase
Obligation in connection with a Qualified Receivables Financing; provided,
however, that at the time of, and after giving effect to, any Restricted
Payment permitted under clauses (vi), (vii), (x) and (xi), no Default or
Event of Default shall have occurred and be continuing or would occur as a
consequence thereof.
As of the Issue Date, all of the Issuer's Subsidiaries will be Restricted
Subsidiaries. The Issuer will not permit any Unrestricted Subsidiary to become a
Restricted Subsidiary except pursuant to the definition of "Unrestricted
Subsidiary." For purposes of designating any Restricted Subsidiary as an
Unrestricted Subsidiary, all outstanding Investments by the Issuer and its
Restricted Subsidiaries (except to the extent repaid) in the Subsidiary so
designated will be deemed to be Restricted Payments in an amount determined as
set forth in the last sentence of the definition of "Investments." Such
designation will only be permitted if a Restricted Payment in such amount would
be permitted at such time and if such Subsidiary otherwise meets the definition
of an Unrestricted Subsidiary.
Dividend and Other Payment Restrictions Affecting Subsidiaries. The
Indenture provides that the Issuer will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any consensual encumbrance or consensual
restriction on the ability of any Restricted Subsidiary to:
(a) (i) pay dividends or make any other distributions to the Issuer or
any of its Restricted Subsidiaries:
(1) on its Capital Stock; or
(2) with respect to any other interest or participation in, or
measured by, its profits; or
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(ii) pay any Indebtedness owed to the Issuer or any of its
Restricted Subsidiaries;
(b) make loans or advances to the Issuer or any of its Restricted
Subsidiaries; or
(c) sell, lease or transfer any of its properties or assets to the
Issuer or any of its Restricted Subsidiaries except in each case for such
encumbrances or restrictions existing under or by reason of:
(1) contractual encumbrances or restrictions in effect on the Issue
Date, including pursuant to the Credit Agreement and the other Senior
Credit Documents;
(2) the Indenture and the Notes;
(3) applicable law or any applicable rule, regulation or order;
(4) any agreement or other instrument relating to Indebtedness of a
Person acquired by the Issuer or any Restricted Subsidiary which was in
existence at the time of such acquisition (but not created in
contemplation thereof or to provide all or any portion of the funds or
credit support utilized to consummate such acquisition), which
encumbrance or restriction is not applicable to any Person, or the
properties or assets of any Person, other than the Person, or the
property or assets of the Person, so acquired;
(5) any restriction with respect to a Restricted Subsidiary imposed
pursuant to an agreement entered into for the sale or disposition of all
or substantially all the Capital Stock or assets of such Restricted
Subsidiary pending the closing of such sale or disposition;
(6) Secured Indebtedness otherwise permitted to be Incurred
pursuant to the covenants described under "--Limitation on Incurrence of
Indebtedness and Issuance of Disqualified Stock and Preferred Stock" and
"--Liens" that limit the right of the debtor to dispose of the assets
securing such Indebtedness;
(7) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of
business;
(8) customary provisions in joint venture agreements and other
similar agreements entered into in the ordinary course of business;
(9) customary provisions contained in leases and other similar
agreements entered into in the ordinary course of business that impose
restrictions of the type described in clause (c) above;
(10) any encumbrance or restriction of a Receivables Subsidiary
effected in connection with a Qualified Receivables Financing; provided,
however, that such restrictions apply only to such Receivables
Subsidiary;
(11) other Indebtedness of Restricted Subsidiaries
(i) that are Guarantors that is Incurred subsequent to the Issue
Date pursuant to the covenant described under "--Limitation on
Incurrence of Indebtedness and Issuance of Disqualified Stock and
Preferred Stock" or
(ii) that is Incurred subsequent to the Issue Date pursuant to
clauses (d) or (l) of the second paragraph of the covenant described
under "--Limitation on Incurrence of Indebtedness and Issuance of
Disqualified Stock and Preferred Stock"; or
(12) any encumbrances or restrictions of the type referred to in
clauses (a), (b) and (c) above imposed by any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements
or refinancings of the contracts, instruments or obligations referred to
in clauses (1) through (11) above; provided that such amendments,
modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings are, in the good faith judgment
of the Issuer, no more restrictive with respect to such dividend and
other payment restrictions than those contained in the dividend or other
payment restrictions prior to such amendment, modification, restatement,
renewal, increase, supplement, refunding, replacement or refinancing.
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Asset Sales. The Indenture provides that the Issuer will not, and will not
permit any of its Restricted Subsidiaries to, cause or make an Asset Sale,
unless:
(x) the Issuer, or its Restricted Subsidiaries, as the case may be,
receives consideration at the time of such Asset Sale at least equal to the
Fair Market Value (as determined in good faith by the Issuer) of the assets
sold or otherwise disposed of and
(y) at least 75% of the consideration therefor received by the Issuer,
or such Restricted Subsidiary, as the case may be, is in the form of Cash
Equivalents; provided that the amount of:
(a) any liabilities (as shown on the Issuer's or such Restricted
Subsidiary's most recent balance sheet or in the notes thereto) of the
Issuer or any Restricted Subsidiary (other than liabilities that are by
their terms subordinated to the Notes) that are assumed by the
transferee of any such assets,
(b) any notes or other obligations or other securities received by
the Issuer or such Restricted Subsidiary from such transferee that are
converted by the Issuer or such Restricted Subsidiary into cash within
180 days of the receipt thereof (to the extent of the cash received),
and
(c) any Designated Noncash Consideration received by the Issuer or
any of its Restricted Subsidiaries in such Asset Sale having an
aggregate Fair Market Value, taken together with all other Designated
Noncash Consideration received pursuant to this clause (c) that is at
that time outstanding, not to exceed the greater of 5.0% of Total Assets
or $100.0 million at the time of the receipt of such Designated Noncash
Consideration (with the Fair Market Value of each item of Designated
Noncash Consideration being measured at the time received and without
giving effect to subsequent changes in value) shall be deemed to be Cash
Equivalents for the purposes of this provision.
Within 365 days after the Issuer's or any Restricted Subsidiary's receipt
of the Net Proceeds of any Asset Sale, the Issuer or such Restricted Subsidiary
may apply the Net Proceeds from such Asset Sale, at its option:
(i) to permanently reduce Obligations under the Credit Agreement (and,
in the case of revolving Obligations, to correspondingly reduce commitments
with respect thereto) or other Senior Indebtedness or Pari Passu
Indebtedness (provided that if the Issuer shall so reduce Obligations under
Pari Passu Indebtedness, it will equally and ratably reduce Obligations
under the Notes by making an offer (in accordance with the procedures set
forth below for an Asset Sale Offer) to all Holders to purchase at a
purchase price equal to 100% of the principal amount thereof, plus accrued
and unpaid interest and liquidated damages, if any, the pro rata principal
amount of Notes) or Indebtedness of a Restricted Subsidiary, in each case
other than Indebtedness owed to the Issuer or an Affiliate of the Issuer,
(ii) to an investment in any one or more businesses (provided that
such investment in any business may be in the form of the acquisition of
Capital Stock so long as it results in the Issuer or a Restricted
Subsidiary, as the case may be, owning substantially all the Capital Stock
of such business), capital expenditures or acquisitions of other assets in
each case used or useful in a Similar Business, and/or
(iii) to make an investment in any one or more businesses (provided
that such investment in any business may be in the form of the acquisition
of Capital Stock so long as it results in the Issuer or a Restricted
Subsidiary, as the case may be, owning substantially all the Capital Stock
of such business), properties or assets that replace the properties and
assets that are the subject of such Asset Sale.
Pending the final application of any such Net Proceeds, the Issuer or such
Restricted Subsidiary may temporarily reduce Indebtedness under a revolving
credit facility, if any, or otherwise invest such Net Proceeds in Cash
Equivalents or Investment Grade Securities. The Indenture provides that any Net
Proceeds from any Asset Sale that are not applied as provided and within the
time period set forth in the first sentence of this paragraph (it being
understood that any portion of such Net Proceeds used to make an offer to
purchase Notes, as described in clause (i) above, shall be deemed to have been
invested whether or not such offer is accepted) will be deemed to constitute
"Excess Proceeds". When the aggregate amount of Excess Proceeds exceeds $20.0
million, the Issuer shall make an offer to all Holders of Notes (an "Asset Sale
Offer") to purchase the maximum principal amount of Notes, that is an integral
multiple of $1,000, that may be purchased out of the Excess Proceeds at an offer
price in cash in an amount equal to 100% of the principal amount thereof, plus
accrued and unpaid interest and liquidated damages, if any, to the date fixed
for the closing of such offer, in accordance with the procedures set
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forth in the Indenture. The Issuer will commence an Asset Sale Offer with
respect to Excess Proceeds within ten Business Days after the date that Excess
Proceeds exceeds $20.0 million by mailing the notice required pursuant to the
terms of the Indenture, with a copy to the Trustee. To the extent that the
aggregate amount of Notes tendered pursuant to an Asset Sale Offer is less than
the Excess Proceeds, the Issuer may use any remaining Excess Proceeds for
general corporate purposes. If the aggregate principal amount of Notes
surrendered by Holders thereof exceeds the amount of Excess Proceeds, the
Trustee shall select the Notes to be purchased in the manner described below.
Upon completion of any such Asset Sale Offer, the amount of Excess Proceeds
shall be reset at zero.
The Issuer will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations to the extent such
laws or regulations are applicable in connection with the repurchase of the
Notes pursuant to an Asset Sale Offer. To the extent that the provisions of any
securities laws or regulations conflict with the provisions of the Indenture,
the Issuer will comply with the applicable securities laws and regulations and
shall not be deemed to have breached its obligations described in the Indenture
by virtue thereof.
If more Notes are tendered pursuant to an Asset Sale Offer than the Issuer
is required to purchase, selection of such Notes for purchase will be made by
the Trustee in compliance with the requirements of the principal national
securities exchange, if any, on which such Notes are listed, or if such Notes
are not so listed, on a pro rata basis, by lot or by such other method as the
Trustee shall deem fair and appropriate (and in such manner as complies with
applicable legal requirements); provided that no Notes of $1,000 or less shall
be purchased in part.
Notices of an Asset Sale Offer shall be mailed by first class mail, postage
prepaid, at least 30 but not more than 60 days before the purchase date to each
Holder of Notes at such Holder's registered address. If any Note is to be
purchased in part only, any notice of purchase that relates to such Note shall
state the portion of the principal amount thereof that has been or is to be
purchased.
A new Note in principal amount equal to the unpurchased portion of any Note
purchased in part will be issued in the name of the Holder thereof upon
cancellation of the original Note. On and after the purchase date unless the
Issuer defaults in payment of the purchase price, interest shall cease to accrue
on Notes or portions thereof purchased.
Transactions with Affiliates. The Indenture provides that the Issuer will
not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, make any payment to, or sell, lease, transfer or otherwise dispose
of any of its properties or assets to, or purchase any property or assets from,
or enter into or make or amend any transaction or series of transactions,
contract, agreement, understanding, loan, advance or guarantee with, or for the
benefit of, any Affiliate of the Issuer (each of the foregoing, an "Affiliate
Transaction") involving aggregate consideration in excess of $5.0 million,
unless:
(a) such Affiliate Transaction is on terms that are not materially
less favorable to the Issuer or the relevant Restricted Subsidiary than
those that could have been obtained in a comparable transaction by the
Issuer or such Restricted Subsidiary with an unrelated Person; and
(b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$10.0 million, the Issuer delivers to the Trustee a resolution adopted by
the majority of the Board of Directors of the Issuer, approving such
Affiliate Transaction and set forth in an Officers' Certificate certifying
that such Affiliate Transaction complies with clause (a) above.
The foregoing provisions will not apply to the following:
(i) Subsidiaries;
(ii) Permitted Investments and Restricted Payments permitted by the
provisions of the Indenture described above under the covenant
"--Limitation on Restricted Payments";
(iii) the payment of annual management, consulting, monitoring and
advisory fees to Blackstone in an amount in any fiscal year not to exceed
the greater of:
(A) $3.0 million and
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(B) an amount equal to 1.0% of EBITDA (without giving effect to
clause (vii) of the definition thereof) for the prior fiscal year;
(iv) the payment of reasonable and customary fees paid to, and
indemnity provided on behalf of, officers, directors, employees or
consultants of the Issuer, Holdings or any Restricted Subsidiary;
(v) payments by the Issuer or any of its Restricted Subsidiaries to
Blackstone made for any financial advisory, financing, underwriting or
placement services or in respect of other investment banking activities,
including, without limitation, in connection with acquisitions or
divestitures, which payments are approved by a majority of the Board of
Directors of the Issuer in good faith;
(vi) transactions in which the Issuer or any of its Restricted
Subsidiaries, as the case may be, delivers to the Trustee a letter from an
Independent Financial Advisor stating that such transaction is fair to the
Issuer or such Restricted Subsidiary from a financial point of view or
meets the requirements of clause (a) of the preceding paragraph;
(vii) payments or loans to employees or consultants in the ordinary
course of business which are approved by a majority of the Board of
Directors of the Issuer in good faith;
(viii) any agreement as in effect as of the Issue Date or any
amendment thereto (so long as any such amendment is not disadvantageous to
the holders of the Notes in any material respect) or any transaction
contemplated thereby;
(ix) the existence of, or the performance by the Issuer or any of its
Restricted Subsidiaries of its obligations under the terms of, any
stockholders agreement (including any registration rights agreement or
purchase agreement related thereto) to which it is a party as of the Issue
Date and any similar agreements which it may enter into thereafter;
provided, however, that the existence of, or the performance by the Issuer
or any of its Restricted Subsidiaries of its obligations under any future
amendment to any such existing agreement or under any similar agreement
entered into after the Issue Date shall only be permitted by this clause
(ix) to the extent that the terms of any such amendment or new agreement
are not otherwise disadvantageous to the Holders of the Notes in any
material respect;
(x) the payment of all fees and expenses related to the Offering,
including fees to Blackstone, which are described in this prospectus;
(xi) transactions with customers, clients, suppliers or purchasers or
sellers of goods or services, in each case in the ordinary course of
business and otherwise in compliance with the terms of the Indenture, which
are fair to the Issuer and its Restricted Subsidiaries in the reasonable
determination of the Board of Directors or the senior management of the
Issuer, and are on terms at least as favorable as might reasonably have
been obtained at such time from an unaffiliated party;
(xii) any transaction effected as part of a Qualified Receivables
Financing; and
(xiii) the issuance of Equity Interests (other than Disqualified
Stock) of the Issuer or Holdings to any Permitted Holder.
Liens. The Indenture provides that the Issuer will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, create,
Incur or suffer to exist any Lien on any asset or property of the Issuer or such
Restricted Subsidiary, or any income or profits therefrom, or assign or convey
any right to receive income therefrom, that secures any obligations of the
Issuer or any of its Subsidiaries (other than Senior Indebtedness) unless the
Notes are equally and ratably secured with (or on a senior basis to, in the case
of obligations subordinated in right of payment to the Notes) the obligations so
secured or until such time as such obligations are no longer secured by a Lien.
The preceding sentence will not require the Issuer or any Restricted Subsidiary
to secure the Notes if the Lien consists of a Permitted Lien.
The Indenture provides that no Restricted Subsidiary that is a Guarantor
will directly or indirectly create, Incur or suffer to exist any Lien on any
asset or property of such Guarantor or any income or profits therefrom, or
assign or convey any right to receive income therefrom, that secures any
obligation of such Guarantor (other than Senior Indebtedness of such Guarantor)
unless the Guarantee of such Guarantor is equally and ratably secured with (or
on a senior basis to, in the case of obligations subordinated on right of
payment to such Guarantor's Guarantee) the obligations so secured or until such
time as such obligations are no longer secured by a Lien. The
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preceding sentence will not require any Restricted Subsidiary that is a
Guarantor to secure its Guarantee if the Lien consists of a Permitted Lien.
Limitation on Other Pari Passu Indebtedness. The Indenture provides that
the Issuer will not, and will not permit any Restricted Subsidiary that is a
Guarantor to, directly or indirectly, Incur any Indebtedness (including Acquired
Indebtedness) that is subordinate in right of payment to any Indebtedness of the
Issuer or any Indebtedness of any such Guarantor, as the case may be, unless
such Indebtedness is either:
(i) pari passu in right of payment with the Notes or such Guarantor's
Guarantee, as the case may be, or
(ii) subordinate in right of payment to the Notes or such Guarantor's
Guarantee, as the case may be.
Reports and Other Information. The Indenture provides that notwithstanding
that the Issuer may not be subject to the reporting requirements of Section 13
or 15(d) of the Exchange Act or otherwise report on an annual and quarterly
basis on forms provided for such annual and quarterly reporting pursuant to
rules and regulations promulgated by the SEC, the Issuer will file with the SEC
(and provide the Trustee and Holders with copies thereof, without cost to each
Holder, within 15 days after it files them with the SEC),
(i) within 90 days after the end of each fiscal year, annual reports
on Form 10-K (or any successor or comparable form) containing the
information required to be contained therein (or required in such successor
or comparable form),
(ii) within 45 days after the end of each of the first three fiscal
quarters of each fiscal year, reports on Form 10-Q (or any successor or
comparable form),
(iii) promptly from time to time after the occurrence of an event
required to be therein reported, such other reports on Form 8-K (or any
successor or comparable form), and
(iv) any other information, documents and other reports which the
Issuer would be required to file with the SEC if it were subject to
Section 13 or 15(d) of the Exchange Act;
provided, however, the Issuer shall not be so obligated to file such reports
with the SEC if the SEC does not permit such filing, in which event the Issuer
will make available such information to prospective purchasers of Notes, in
addition to providing such information to the Trustee and the Holders, in each
case within 15 days after the time the Issuer would be required to file such
information with the SEC if it were subject to Section 13 or 15(d) of the
Exchange Act. Notwithstanding the foregoing, such requirements shall be deemed
satisfied prior to the commencement of the Exchange Offer (as defined) or the
effectiveness of the Shelf Registration Statement (as defined) by the filing
with the SEC of the Exchange Offer Registration Statement (as defined) and/or
Shelf Registration Statement, and any amendments thereto, with such financial
information that satisfies Regulation S-X of the Securities Act. In the event
that:
(i) the rules and regulations of the SEC permit the Issuer and
Holdings to report at the Holdings' level on a consolidated basis and
(ii) Holdings is not engaged in any business in any material respect
other than incidental to its ownership of the capital stock of the Issuer,
such consolidated reporting at the Holdings' level in a manner consistent with
that described in this covenant for the Issuer will satisfy this covenant.
Future Guarantors. The Indenture provides that the Issuer will cause each
Restricted Subsidiary (unless such Subsidiary is a Receivables Subsidiary)
organized under the laws of the United States of America or any state or
territory thereof that:
(a) guarantees any Indebtedness of Holdings, the Issuer or any of its
Restricted Subsidiaries (other than any Senior Indebtedness) or
(b) Incurs any Indebtedness (other than Senior Indebtedness) or issues
any shares of Disqualified Stock or Preferred Stock permitted to be
Incurred or issued pursuant to the first paragraph of the covenant
described under "--Limitation on Incurrence of Indebtedness and Issuance of
Disqualified Stock and Preferred Stock" or clauses (l) or (s) of the second
paragraph thereof or not permitted to be Incurred by such covenant,
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to execute and deliver to the Trustee a supplemental indenture pursuant to which
such Subsidiary will Guarantee payment of the Notes. Each Guarantee will be
limited to an amount not to exceed the maximum amount that can be guaranteed by
that Restricted Subsidiary without rendering the Guarantee, as it relates to
such Restricted Subsidiary, voidable under applicable law relating to fraudulent
conveyance or fraudulent transfer or similar laws affecting the rights of
creditors generally.
MERGER, CONSOLIDATION, OR SALE OF ALL OR SUBSTANTIALLY ALL ASSETS
The Indenture provides that the Issuer may not consolidate or merge with or
into or wind up into (whether or not the Issuer is the surviving corporation),
or sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
transactions, to any Person unless:
(i) the Issuer is the surviving corporation or the Person formed by or
surviving any such consolidation or merger (if other than the Issuer) or to
which such sale, assignment, transfer, lease, conveyance or other
disposition will have been made is a corporation, partnership or limited
liability company organized or existing under the laws of the United
States, any state thereof, the District of Columbia, or any territory
thereof (the Issuer or such Person, as the case may be, being herein called
the "Successor Issuer");
(ii) the Successor Issuer (if other than the Issuer) expressly assumes
all the obligations of the Issuer under the Indenture and the Notes
pursuant to a supplemental indenture or other documents or instruments in
form reasonably satisfactory to the Trustee;
(iii) immediately after giving effect to such transaction (and
treating any Indebtedness which becomes an obligation of the Successor
Issuer or any of its Restricted Subsidiaries as a result of such
transaction as having been Incurred by the Successor Issuer or such
Restricted Subsidiary at the time of such transaction) no Default or Event
of Default shall have occurred and be continuing;
(iv) immediately after giving pro forma effect to such transaction, as
if such transaction had occurred at the beginning of the applicable
four-quarter period, either
(A) the Successor Issuer would be permitted to Incur at least $1.00
of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio
test set forth in the first sentence of the covenant described under
"--Limitation on Incurrence of Indebtedness and Issuance of Disqualified
Stock and Preferred Stock" or
(B) the Fixed Charge Coverage Ratio for the Successor Issuer and
its Restricted Subsidiaries would be greater than such ratio for the
Issuer and its Restricted Subsidiaries immediately prior to such
transaction;
(v) each Guarantor, unless it is the other party to the transactions
described above, shall have by supplemental indenture confirmed that its
Guarantee shall apply to such Person's obligations under the Indenture and
the Notes; and
(vi) the Issuer shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture (if any)
comply with the Indenture.
The Successor Issuer will succeed to, and be substituted for, the Issuer under
the Indenture and the Notes. Notwithstanding the foregoing clauses (iii) and
(iv),
(a) any Restricted Subsidiary may consolidate with, merge into or
transfer all or part of its properties and assets to the Issuer or to
another Restricted Subsidiary, and
(b) the Issuer may merge with an Affiliate incorporated solely for the
purpose of reincorporating the Issuer in another state of the United States
so long as the amount of Indebtedness of the Issuer and its Restricted
Subsidiaries is not increased thereby.
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The Indenture further provides that subject to certain limitations in the
Indenture governing release of a Guarantee upon the sale or disposition of a
Restricted Subsidiary that is a Guarantor, each such Guarantor will not, and the
Issuer will not permit such a Guarantor to, consolidate or merge with or into or
wind up into (whether or not such Guarantor is the surviving corporation), or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
transactions to, any Person unless:
(i) such Guarantor is the surviving corporation or the Person formed
by or surviving any such consolidation or merger (if other than such
Guarantor) or to which such sale, assignment, transfer, lease, conveyance
or other disposition will have been made is a corporation, partnership or
limited liability company organized or existing under the laws of the
United States, any state thereof, the District of Columbia, or any
territory thereof (such Guarantor or such Person, as the case may be, being
herein called the "Successor Guarantor");
(ii) the Successor Guarantor (if other than such Guarantor) expressly
assumes all the obligations of such Guarantor under the Indenture and such
Guarantors's Guarantee pursuant to a supplemental indenture or other
documents or instruments in form reasonably satisfactory to the Trustee;
(iii) immediately after giving effect to such transaction (and
treating any Indebtedness which becomes an obligation of the Successor
Guarantor or any of its Subsidiaries as a result of such transaction as
having been Incurred by the Successor Guarantor or such Subsidiary at the
time of such transaction) no Default or Event of Default shall have
occurred and be continuing; and
(iv) such Guarantor shall have delivered or caused to be delivered to
the Trustee an Officers' Certificate and an Opinion of Counsel, each
stating that such consolidation, merger or transfer and such supplemental
indenture (if any) comply with the Indenture.
Subject to certain limitations described in the Indenture, the Successor
Guarantor will succeed to, and be substituted for, such Guarantor under the
Indenture and such Guarantor's Guarantee. Notwithstanding the foregoing clause
(iii), a Guarantor may merge with an Affiliate incorporated solely for the
purpose of reincorporating such Guarantor in another state of the United States
so long as the amount of Indebtedness of the Guarantor is not increased thereby.
DEFAULTS
An Event of Default is defined in the Indenture as:
(i) a default in any payment of interest on any Note when due, whether
or not prohibited by the provisions described under "--Ranking" above,
continued for 30 days,
(ii) a default in the payment of principal or premium, if any, of any
Note when due at its Stated Maturity, upon optional redemption, upon
required repurchase, upon declaration or otherwise, whether or not such
payment is prohibited by the provisions described under "--Ranking" above,
(iii) the failure by the Issuer to comply with its obligations under
the covenant described under "--Merger, Consolidation or Sale of All or
Substantially All Assets" above,
(iv) the failure by the Issuer to comply for 30 days after notice with
any of its obligations under the covenants described under "--Change of
Control" or "--Certain Covenants" above (in each case, other than a failure
to purchase Notes),
(v) the failure by the Issuer to comply for 60 days after notice with
its other agreements contained in the Notes or the Indenture,
(vi) the failure by the Issuer or any Significant Subsidiary to pay
any Indebtedness (other than Indebtedness owing to the Issuer or a
Restricted Subsidiary) within any applicable grace period after final
maturity or the acceleration of any such Indebtedness by the holders
thereof because of a default if the total amount of such Indebtedness
unpaid or accelerated exceeds $25.0 million or its foreign currency
equivalent (the "cross acceleration provision"),
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(vii) certain events of bankruptcy, insolvency or reorganization of
the Issuer or a Significant Subsidiary (the "bankruptcy provisions"),
(viii) the rendering of any judgment or decree for the payment of
money (other than judgments which are covered by enforceable insurance
policies issued by solvent carriers) in excess of $25.0 million or its
foreign currency equivalent against the Issuer or a Significant Subsidiary
if:
(A) an enforcement proceeding thereon is commenced, or
(B) such judgment or decree remains outstanding for a period of
60 days following such judgment and is not discharged, waived or stayed
(the "judgment default provision"), or
(ix) any Guarantee ceases to be in full force and effect (except as
contemplated by the terms thereof) or any Guarantor denies or disaffirms
its obligations under the Indenture or any Guarantee and such Default
continues for 10 days.
The foregoing will constitute Events of Default whatever the reason for any
such Event of Default and whether it is voluntary or involuntary or is effected
by operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body.
However, a default under clause (iv) or (v) will not constitute an Event of
Default until the Trustee or the Holders of 25% in principal amount of the
outstanding Notes notify the Issuer of the default and the Issuer does not cure
such default within the time specified in clauses (iv) and (v) hereof after
receipt of such notice.
If an Event of Default (other than a Default relating to certain events of
bankruptcy, insolvency or reorganization of the Issuer) occurs and is
continuing, the Trustee or the Holders of at least 25% in principal amount of
the outstanding Notes by notice to the Issuer may declare the principal of,
premium, if any, and accrued but unpaid interest on all the Notes to be due and
payable. Upon such a declaration, such principal and interest will be due and
payable immediately. If an Event of Default relating to certain events of
bankruptcy, insolvency or reorganization of the Issuer occurs, the principal of,
premium, if any, and interest on all the Notes will become immediately due and
payable without any declaration or other act on the part of the Trustee or any
Holders. Under certain circumstances, the Holders of a majority in principal
amount of the outstanding Notes may rescind any such acceleration with respect
to the Notes and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the Holders unless such Holders
have offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium (if any) or interest when due, no Holder may pursue any
remedy with respect to the Indenture or the Notes unless:
(i) such Holder has previously given the Trustee notice that an Event
of Default is continuing,
(ii) Holders of at least 25% in principal amount of the outstanding
Notes have requested the Trustee to pursue the remedy,
(iii) such Holders have offered the Trustee reasonable security or
indemnity against any loss, liability or expense,
(iv) the Trustee has not complied with such request within 60 days
after the receipt of the request and the offer of security or indemnity,
and
(v) the Holders of a majority in principal amount of the outstanding
Notes have not given the Trustee a direction inconsistent with such request
within such 60-day period.
Subject to certain restrictions, the Holders of a majority in principal amount
of the outstanding Notes are given the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Trustee or of
exercising any trust or power conferred on the Trustee. The Trustee, however,
may refuse to follow any direction that conflicts with law or the Indenture or
that the Trustee determines is unduly prejudicial to the rights of any other
Holder or that would involve the Trustee in personal liability. Prior to taking
any action under
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the Indenture, the Trustee will be entitled to indemnification satisfactory to
it in its sole discretion against all losses and expenses caused by taking or
not taking such action.
The Indenture provides that if a Default occurs and is continuing and is
actually known to the Trustee, the Trustee must mail to each Holder notice of
the Default within the earlier of 90 days after it occurs or 30 days after it is
actually known to a Trust Officer or written notice of it is received by the
Trustee. Except in the case of a Default in the payment of principal of, premium
(if any) or interest on any Note, the Trustee may withhold notice if and so long
as a committee of its Trust Officers in good faith determines that withholding
notice is in the interests of the Noteholders. In addition, the Issuer is
required to deliver to the Trustee, within 120 days after the end of each fiscal
year, a certificate indicating whether the signers thereof know of any Default
that occurred during the previous year. The Issuer also is required to deliver
to the Trustee, within 30 days after the occurrence thereof, written notice of
any event which would constitute certain Defaults, their status and what action
the Issuer is taking or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the
consent of the Holders of a majority in principal amount of the Notes then
outstanding and any past default or compliance with any provisions may be waived
with the consent of the Holders of a majority in principal amount of the Notes
then outstanding. However, without the consent of each Holder of an outstanding
Note affected, no amendment may, among other things:
(i) reduce the amount of Notes whose Holders must consent to an
amendment,
(ii) reduce the rate of or extend the time for payment of interest on
any Note,
(iii) reduce the principal of or extend the Stated Maturity of any
Note,
(iv) reduce the premium payable upon the redemption of any Note or
change the time at which any Note may be redeemed as described under
"Optional Redemption" above,
(v) make any Note payable in money other than that stated in the Note,
(vi) make any change to the subordination provisions of the Indenture
that adversely affects the rights of any Holder,
(vii) impair the right of any Holder to receive payment of principal
of, premium, if any, and interest on such Holder's Notes on or after the
due dates therefor or to institute suit for the enforcement of any payment
on or with respect to such Holder's Notes,
(viii) make any change in the amendment provisions which require each
Holder's consent or in the waiver provisions, or
(ix) modify the Guarantees in any manner adverse to the Holders.
Without the consent of any Holder, the Issuer and Trustee may amend the
Indenture to cure any ambiguity, omission, defect or inconsistency, to provide
for the assumption by a successor corporation, partnership or limited liability
company of the obligations of the Issuer under the Indenture, to provide for
uncertificated Notes in addition to or in place of certificated Notes (provided
that the uncertificated Notes are issued in registered form for purposes of
Section 163(f) of the Code, or in a manner such that the uncertificated Notes
are described in Section 163(f)(2)(B) of the Code), to add Guarantees with
respect to the Notes, to secure the Notes, to add to the covenants of the Issuer
for the benefit of the Holders or to surrender any right or power conferred upon
the Issuer, to make any change that does not adversely affect the rights of any
Holder, to comply with any requirement of the SEC in connection with the
qualification of the Indenture under the TIA or to make certain changes to the
Indenture to provide for the issuance of Additional Notes. However, no amendment
may be made to the subordination provisions of the Indenture that adversely
affects the rights of any holder of Senior Indebtedness then outstanding unless
the holders of such Senior Indebtedness (or any group or representative thereof
authorized to give a consent) consent to such change.
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The consent of the Noteholders is not necessary under the Indenture to
approve the particular form of any proposed amendment. It is sufficient if such
consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Issuer is
required to mail to Noteholders a notice briefly describing such amendment.
However, the failure to give such notice to all Noteholders, or any defect
therein, will not impair or affect the validity of the amendment.
TRANSFER AND EXCHANGE
A Noteholder may transfer or exchange Notes in accordance with the
Indenture. Upon any transfer or exchange, the registrar and the Trustee may
require a Noteholder, among other things, to furnish appropriate endorsements
and transfer documents and the Issuer may require a Noteholder to pay any taxes
required by law or permitted by the Indenture. The Issuer is not required to
transfer or exchange any Note selected for redemption or to transfer or exchange
any Note for a period of 15 days prior to a selection of Notes to be redeemed.
The Notes will be issued in registered form and the registered Holder of a Note
will be treated as the owner of such Note for all purposes.
DEFEASANCE
The Issuer at any time may terminate all its obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. The Issuer at any time may terminate its obligations under the covenants
described under "Certain Covenants," the operation of the cross acceleration
provision, the bankruptcy provisions with respect to Subsidiaries and the
judgment default provision described under "--Defaults" above and the
limitations contained under "Merger, Consolidation or Sale of All or
Substantially All Assets" above ("covenant defeasance"). If the Issuer exercises
its legal defeasance option or its covenant defeasance option, each Guarantor
will be released from all of its obligations with respect to its Guarantee.
The Issuer may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Issuer exercises its
legal defeasance option, payment of the Notes may not be accelerated because of
an Event of Default with respect thereto. If the Issuer exercises its covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default specified in clause (iii), (iv), (vi), (vii) with respect only
to Significant Subsidiaries, (viii) with respect only to Significant
Subsidiaries or (ix) under "--Defaults" above or because of the failure of the
Issuer to comply with "--Merger, Consolidation or Sale of All or Substantially
All Assets" above.
In order to exercise either defeasance option, the Issuer must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal, premium (if any) and
interest on the Notes to redemption or maturity, as the case may be, and must
comply with certain other conditions, including delivery to the Trustee of an
Opinion of Counsel to the effect that holders of the Notes will not recognize
income, gain or loss for Federal income tax purposes as a result of such deposit
and defeasance and will be subject to Federal income tax on the same amount and
in the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred (and, in the case of legal defeasance
only, such Opinion of Counsel must be based on a ruling of the Internal Revenue
Service or change in applicable Federal income tax law).
CONCERNING THE TRUSTEE
IBJ Whitehall Bank & Trust Company is the Trustee under the Indenture and
has been appointed by the Issuer as Registrar and Paying Agent with regard to
the Notes.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York.
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CERTAIN DEFINITIONS
"Acquired Indebtedness" means, with respect to any specified Person:
(i) Indebtedness of any other Person existing at the time such other
Person is merged with or into or became a Restricted Subsidiary of such
specified Person, and
(ii) Indebtedness secured by a Lien encumbering any asset acquired by
such specified Person,
in each case, other than Indebtedness Incurred as consideration in, in
contemplation of, or to provide all or any portion of the funds or credit
support utilized to consummate, the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a Restricted
Subsidiary or was otherwise acquired by such Person, or such asset was acquired
by such person, as applicable.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling", "controlled by"
and "under common control with"), as used with respect to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise.
"Asset Sale" means:
(i) the sale, conveyance, transfer or other disposition (whether in a
single transaction or a series of related transactions) of property or
assets (including by way of a Sale/Leaseback Transaction) of the Issuer or
any Restricted Subsidiary (each referred to in this definition as a
"disposition") or
(ii) the issuance or sale of Equity Interests of any Restricted
Subsidiary (other than to the Issuer or another Restricted Subsidiary)
(whether in a single transaction or a series of related transactions),
in each case other than:
(a) a disposition of Cash Equivalents or Investment Grade
Securities or obsolete or worn out equipment in the ordinary course of
business;
(b) the disposition of all or substantially all of the assets of
the Issuer in a manner permitted pursuant to the provisions described
above under "--Merger, Consolidation or Sale of All or Substantially All
Assets" or any disposition that constitutes a Change of Control;
(c) any Restricted Payment or Permitted Investment that is
permitted to be made, and is made, under the covenant described above
under "--Limitation on Restricted Payments";
(d) any disposition of assets or issuance or sale of Equity
Interests of any Restricted Subsidiary with an aggregate Fair Market
Value of less than $5.0 million;
(e) any disposition of property or assets by a Restricted
Subsidiary to the Issuer or by the Issuer or a Restricted Subsidiary to
a Restricted Subsidiary;
(f) any exchange of like property pursuant to Section 1031 of the
Internal Revenue Code of 1986, as amended, for use in a Similar
Business;
(g) sales of assets received by the Issuer upon the foreclosure on
a Lien;
(h) any sale of Equity Interests in, or Indebtedness or other
securities of, an Unrestricted Subsidiary;
(i) sales of inventory in the ordinary course of business;
(j) the lease, assignment or sub-lease of any real or personal
property in the ordinary course of business;
(k) a sale of accounts receivable and related assets of the type
specified in the definition of "Receivables Financing" to a Receivables
Subsidiary in a Qualified Receivables Financing; and
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(l) a transfer of accounts receivable and related assets of the
type specified in the definition of "Receivables Financing" (or a
fractional undivided interest therein) by a Receivables Subsidiary in a
Qualified Receivables Financing.
"Bank Indebtedness" means any and all amounts payable under or in respect
of the Credit Agreement, the other Senior Credit Documents and any Refinancing
Indebtedness with respect thereto, as amended from time to time, including
principal, premium (if any), interest (including interest accruing on or after
the filing of any petition in bankruptcy or for reorganization relating to the
Issuer whether or not a claim for post-filing interest is allowed in such
proceedings), fees, charges, expenses, reimbursement obligations, guarantees and
all other amounts payable thereunder or in respect thereof.
"Blackstone" means Blackstone Capital Partners II Merchant Banking Fund
L.P. and its Affiliates.
"Board of Directors" means the Board of Directors of the Issuer or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means a day other than a Saturday, Sunday or other day on
which banking institutions in New York State are authorized or required by law
to close.
"Capitalized Lease Obligation" means, at the time any determination thereof
is to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized and reflected as a liability on
a balance sheet (excluding the footnotes thereto) in accordance with GAAP.
"Capital Stock" means:
(i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock,
(iii) in the case of a partnership or limited liability company,
partnership or membership interests (whether general or limited), and
(iv) any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
"Cash Contribution Amount" means the aggregate amount of cash contributions
made to the capital of the Issuer described in the definition of "Contribution
Indebtedness."
"Cash Equivalents" means:
(i) U.S. dollars and foreign currency exchanged into U.S. dollars
within 180 days,
(ii) securities issued or directly and fully guaranteed or insured by
the United States government or any agency or instrumentality thereof,
(iii) certificates of deposit, time deposits and eurodollar time
deposits with maturities of one year or less from the date of acquisition,
bankers' acceptances with maturities not exceeding one year and overnight
bank deposits, in each case with any commercial bank having capital and
surplus in excess of $500.0 million and whose long-term debt is rated "A"
or the equivalent thereof by Moody's or S&P,
(iv) repurchase obligations for underlying securities of the types
described in clauses (ii) and (iii) above entered into with any financial
institution meeting the qualifications specified in clause (iii) above,
(v) commercial paper issued by a corporation (other than an Affiliate
of the Issuer) rated at least "A-2" or the equivalent thereof by Moody's or
S&P and in each case maturing within one year after the date of
acquisition,
(vi) investment funds investing at least 95% of their assets in
securities of the types described in clauses (i) through (v) above,
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(vii) readily marketable direct obligations issued by any state of the
United States of America or any political subdivision thereof having one of
the two highest rating categories obtainable from either Moody's or S&P,
and
(viii) Indebtedness or preferred stock issued by Persons (other than
Blackstone or its Affiliates) with a rating of "A" or higher from S&P or
"A-2" or higher from Moody's.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Depreciation and Amortization Expense" means with respect to
any Person for any period, the total amount of depreciation and amortization
expense of such Person and its Restricted Subsidiaries for such period on a
consolidated basis and otherwise determined in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum, without duplication, of:
(i) consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, to the extent such expense was deducted in
computing Consolidated Net Income (including amortization of original issue
discount, the interest component of Capitalized Lease Obligations, and net
payments and receipts (if any) pursuant to Hedging Obligations and
excluding amortization of deferred financing fees),
(ii) consolidated capitalized interest of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued,
(iii) one-third of the obligations of such Person and its Restricted
Subsidiaries for rental payments under operating leases as part of
Sale/Leaseback Transactions made during such period, and
(iv) commissions, discounts, yield and other fees and charges Incurred
in connection with any Receivables Financing which are payable to Persons
other than the Issuer and its Restricted Subsidiaries.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis; provided, however, that:
(i) any net after-tax extraordinary gains or losses (less all fees and
expenses relating thereto) shall be excluded,
(ii) any increase in amortization or depreciation resulting from
purchase accounting in relation to any acquisition that is consummated
after the Issue Date, net of taxes, shall be excluded,
(iii) the Net Income for such period shall not include the cumulative
effect of a change in accounting principles during such period,
(iv) any net after-tax income or loss from discontinued operations and
any net after-tax gains or losses on disposal of discontinued operations
shall be excluded,
(v) any net after-tax gains or losses (less all fees and expenses
relating thereto) attributable to asset dispositions other than in the
ordinary course of business (as determined in good faith by the Board of
Directors) shall be excluded,
(vi) the Net Income for such period of any Person that is not a
Subsidiary of such Person, or is an Unrestricted Subsidiary, or that is
accounted for by the equity method of accounting, shall be included only to
the extent of the amount of dividends or distributions or other payments
paid in cash (or to the extent converted into cash) to the referent Person
or a Restricted Subsidiary thereof in respect of such period,
(vii) the Net Income of any Person acquired in a pooling of interests
transaction shall not be included for any period prior to the date of such
acquisition, and
(viii) the Net Income for such period of any Restricted Subsidiary
shall be excluded to the extent that the declaration or payment of
dividends or similar distributions by such Restricted Subsidiary of its Net
Income is not at the date of determination permitted without any prior
governmental approval (which has not been obtained) or, directly or
indirectly, by the operation of the terms of its charter or any agreement,
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instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Restricted Subsidiary or its stockholders,
unless such restrictions with respect to the payment of dividends or
similar distributions have been legally waived; provided that the net loss
of any such Restricted Subsidiary shall be included.
Notwithstanding the foregoing, for the purpose of the covenant described under
"--Limitation on Restricted Payments" only, there shall be excluded from
Consolidated Net Income any dividends, repayments of loans or advances or other
transfers of assets from Unrestricted Subsidiaries to the Issuer or a Restricted
Subsidiary to the extent such dividends, repayments or transfers increase the
amount of Restricted Payments permitted under such covenant pursuant to clauses
(c)(iv) and (v) of the first paragraph thereof.
"Contingent Obligations" means, with respect to any Person, any obligation
of such Person guaranteeing any leases, dividends or other obligations that do
not constitute Indebtedness ("primary obligations") of any other Person (the
"primary obligor") in any manner, whether directly or indirectly, including,
without limitation, any obligation of such Person, whether or not contingent:
(i) to purchase any such primary obligation or any property
constituting direct or indirect security therefor,
(ii) to advance or supply funds:
(A) for the purchase or payment of any such primary obligation or
(B) to maintain working capital or equity capital of the primary
obligor or otherwise to maintain the net worth or solvency of the
primary obligor, or
(iii) to purchase property, securities or services primarily for the
purpose of assuring the owner of any such primary obligation of the ability
of the primary obligor to make payment of such primary obligation against
loss in respect thereof.
"Contribution Indebtedness" means Indebtedness of the Issuer in an
aggregate principal amount not greater than twice the aggregate amount of cash
contributions (other than Excluded Contributions) made to the capital of the
Issuer, provided that:
(i) if the aggregate principal amount of such Contribution
Indebtedness is greater than one times such cash contributions to the
capital of the Issuer, the amount in excess shall be Pari Passu
Indebtedness or Subordinated Indebtedness with a Stated Maturity later than
the Stated Maturity of the Notes, and
(ii) such Contribution Indebtedness:
(I) is Incurred within 180 days after the making of such cash
contributions and
(II) is so designated as Contribution Indebtedness pursuant to an
Officers' Certificate on the Incurrence date thereof.
"Credit Agreement" means the credit agreement dated as of October 27, 1997,
as amended, restated, supplemented, waived, replaced, restructured, repaid,
refunded, refinanced or otherwise modified from time to time, including any
agreement extending the maturity thereof or otherwise restructuring all or any
portion of the Indebtedness under such agreement or increasing the amount loaned
thereunder or altering the maturity thereof (except to the extent that any such
amendment, restatement, supplement, waiver, replacement, refunding, refinancing
or other modification thereto would be prohibited by the terms of the Indenture,
unless otherwise agreed to by the Holders of at least a majority in aggregate
principal amount of Notes at the time outstanding), among the Issuer, Holdings,
the financial institutions named therein, The Chase Manhattan Bank, as
Administrative Agent and Collateral Agent and Chase Manhattan Bank Delaware, as
Issuing Bank.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Noncash Consideration" means the Fair Market Value of noncash
consideration received by the Issuer or one of its Restricted Subsidiaries in
connection with an Asset Sale that is so designated as Designated Noncash
Consideration pursuant to an Officers' Certificate, setting forth the basis of
such valuation,
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less the amount of Cash Equivalents received in connection with a subsequent
sale of such Designated Noncash Consideration.
"Designated Preferred Stock" means Preferred Stock of the Issuer or
Holdings (other than Disqualified Stock) that is issued for cash (other than to
the Issuer, a Subsidiary of the Issuer or an employee stock ownership plan or
trust established by the Issuer or any of its Subsidiaries) and is so designated
as Designated Preferred Stock, pursuant to an Officers' Certificate, on the
issuance date thereof, the cash proceeds of which are excluded from the
calculation set forth in clause (c) of the covenant described under
"--Limitation on Restricted Payments."
"Designated Senior Indebtedness" means, with respect to the Issuer or a
Guarantor:
(i) the Bank Indebtedness and
(ii) any other Senior Indebtedness of the Issuer or such Guarantor
which, at the date of determination, has an aggregate principal amount
outstanding of, or under which, at the date of determination, the holders
thereof, are committed to lend up to, at least $15.0 million and is
specifically designated by the Issuer or such Guarantor in the instrument
evidencing or governing such Senior Indebtedness as "Designated Senior
Indebtedness" for purposes of the Indenture.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
of such Person which, by its terms (or by the terms of any security into which
it is convertible or for which it is redeemable or exchangeable), or upon the
happening of any event:
(i) matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise (other than as a result of a change of control or
asset sale),
(ii) is convertible or exchangeable for Indebtedness or Disqualified
Stock, or
(iii) is redeemable at the option of the holder thereof, in whole or
in part, in each case prior to 91 days after the maturity date of the
Notes;
provided, however, that only the portion of Capital Stock which so matures or is
mandatorily redeemable, is so convertible or exchangeable or is so redeemable at
the option of the holder thereof prior to such date shall be deemed to be
Disqualified Stock; provided further, however, that if such Capital Stock is
issued to any employee or to any plan for the benefit of employees of the Issuer
or its Subsidiaries or by any such plan to such employees, such Capital Stock
shall not constitute Disqualified Stock solely because it may be required to be
repurchased by the Issuer in order to satisfy applicable statutory or regulatory
obligations or as a result of such employee's termination, death or disability.
"EBITDA" means, with respect to any Person for any period, the Consolidated
Net Income of such Person for such period plus, without duplication:
(i) provision for taxes based on income or profits of such Person for
such period deducted in computing Consolidated Net Income, plus
(ii) Consolidated Interest Expense of such Person for such period to
the extent the same was deducted in computing Consolidated Net Income, plus
(iii) Consolidated Depreciation and Amortization Expense of such
Person for such period to the extent such Consolidated Depreciation and
Amortization Expense was deducted in computing Consolidated Net Income,
plus
(iv) any non-recurring fees, expenses or charges related to any Equity
Offering, Permitted Investment, acquisition or Indebtedness permitted to be
Incurred by the Indenture (in each case, whether or not successful),
including any such fees, expenses or charges related to the Offering and
Holdings' initial public offering of common stock, deducted in such period
in computing Consolidated Net Income, plus
(v) any non-recurring charges related to one-time severance costs
incurred in connection with acquisitions consummated after the Issue Date
deducted in such period in computing Consolidated Net Income, plus
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(vi) any other noncash charges reducing Consolidated Net Income for
such period (excluding any such charge which consists of or requires an
accrual of, or cash reserve for, anticipated cash charges for any future
period), plus
(vii) the amount of management, monitoring, consulting and advisory
fees and related expenses paid to Blackstone during such period, provided
that such amount shall not exceed the greater of:
(a) $3.0 million, and
(b) an amount equal to 1.0% of EBITDA for the most recently
completed four-fiscal-quarter period (excluding from the computation
thereof any amounts that would otherwise be included under this clause
(vii)), less, without duplication,
(viii) noncash items increasing Consolidated Net Income of such Person
for such period (excluding any items which represent the reversal of any
accrual of, or cash reserve for, anticipated cash charges in any prior
period).
In addition, with respect to the Issuer for the second and/or the third quarters
of fiscal year 1998, there shall be added to EBITDA the Issuer's good faith
estimate of the amount of EBITDA that the Issuer would have generated during
such quarter in excess of that actually generated if the General Motors
Corporation work stoppage that occurred in June and July of 1998 (and the
related start-up inefficiencies in the Issuer's operations in August 1998) had
not occurred. Notwithstanding the foregoing, the provision for taxes based on
the income or profits of, and the depreciation and amortization of, a Subsidiary
of the Issuer shall be added to Consolidated Net Income to compute EBITDA only
to the extent (and in the same proportion) that the Net Income of such
Subsidiary was included in calculating Consolidated Net Income and only if a
corresponding amount would be permitted at the date of determination to be
dividended to the Issuer by such Subsidiary without prior approval (that has not
been obtained), pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to such Subsidiary or its stockholders.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Equity Offering" means any public or private sale of common stock or
Preferred Stock of the Issuer or Holdings (other than Disqualified Stock), other
than:
(i) public offerings with respect to the Issuer's common stock
registered on Form S-8; and
(ii) any such public or private sale that constitutes an Excluded
Contribution.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations of the SEC promulgated thereunder.
"Excluded Contributions" means the net cash proceeds received by the Issuer
after the Issue Date from:
(i) contributions to its common equity capital, and
(ii) the sale (other than to a Subsidiary of the Issuer or to any
Issuer or Subsidiary management equity plan or stock option plan or any
other management or employee benefit plan or agreement) of Capital Stock
(other than Disqualified Stock and Designated Preferred Stock) of the
Issuer,
in each case designated as Excluded Contributions pursuant to an Officers'
Certificate executed by an Officer of the Issuer, the cash proceeds of which are
excluded from the calculation set forth in clause (c) of the first paragraph of
the "--Limitation on Restricted Payments" covenant.
"Fair Market Value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction.
"Fixed Charge Coverage Ratio" means, with respect to any Person for any
period, the ratio of EBITDA of such Person for such period to the Fixed Charges
of such Person for such period. In the event that the Issuer or any of its
Restricted Subsidiaries Incurs or redeems any Indebtedness (other than in the
case of revolving credit borrowings, in which case interest expense shall be
computed based upon the average daily balance of such
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Indebtedness during the applicable period) or issues or redeems Preferred Stock
subsequent to the commencement of the period for which the Fixed Charge Coverage
Ratio is being calculated but prior to the event for which the calculation of
the Fixed Charge Coverage Ratio is made (the "Calculation Date"), then the Fixed
Charge Coverage Ratio shall be calculated giving pro forma effect to such
Incurrence or redemption of Indebtedness, or such issuance or redemption of
Preferred Stock, as if the same had occurred at the beginning of the applicable
four-quarter period.
For purposes of making the computation referred to above, Investments,
acquisitions, dispositions, mergers, consolidations and discontinued operations
(as determined in accordance with GAAP), in each case with respect to an
operating unit of a business, that have been made by the Issuer or any of its
Restricted Subsidiaries during the four-quarter reference period or subsequent
to such reference period and on or prior to or simultaneously with the
Calculation Date shall be calculated on a pro forma basis assuming that all such
Investments, acquisitions, dispositions, discontinued operations, mergers and
consolidations (and the reduction of any associated fixed charge obligations and
the change in EBITDA resulting therefrom) had occurred on the first day of the
four-quarter reference period. If since the beginning of such period any Person
(that subsequently became a Restricted Subsidiary or was merged with or into the
Issuer or any Restricted Subsidiary since the beginning of such period) shall
have made any Investment, acquisition, disposition, discontinued operation,
merger or consolidation, in each case with respect to an operating unit of a
business, that would have required adjustment pursuant to this definition, then
the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect
thereto for such period as if such Investment, acquisition, disposition,
discontinued operation, merger or consolidation had occurred at the beginning of
the applicable four-quarter period.
For purposes of this definition, whenever pro forma effect is to be given
to any transaction, the pro forma calculations shall be made in good faith by a
responsible financial or accounting officer of the Issuer. If any Indebtedness
bears a floating rate of interest and is being given pro forma effect, the
interest on such Indebtedness shall be calculated as if the rate in effect on
the Calculation Date had been the applicable rate for the entire period (taking
into account any Hedging Obligations applicable to such Indebtedness if such
Hedging Obligation has a remaining term in excess of 12 months). Interest on a
Capitalized Lease Obligation shall be deemed to accrue at an interest rate
reasonably determined by a responsible financial or accounting officer of the
Issuer to be the rate of interest implicit in such Capitalized Lease Obligation
in accordance with GAAP. For purposes of making the computation referred to
above, interest on any Indebtedness under a revolving credit facility computed
on a pro forma basis shall be computed based upon the average daily balance of
such Indebtedness during the applicable period. Interest on Indebtedness that
may optionally be determined at an interest rate based upon a factor of a prime
or similar rate, a eurocurrency interbank offered rate, or other rate, shall be
deemed to have been based upon the rate actually chosen, or, if none, then based
upon such optional rate chosen as the Issuer may designate.
Any such pro forma calculation may include adjustments appropriate, in the
reasonable determination of the Issuer as set forth in an Officers' Certificate,
to reflect operating expense reductions reasonably expected to result from any
acquisition or merger. Notwithstanding the foregoing, for the purposes of the
first paragraph of the covenant described under "--Limitation on Incurrence of
Indebtedness and Issuance of Disqualified Stock and Preferred Stock" and clause
(ix) of the definition of "Permitted Investments", in the event that a General
Motors Corporation work stoppage has occurred during the applicable four-quarter
period but is no longer continuing as of the Calculation Date, in calculating
the Fixed Charge Coverage Ratio for the applicable four-quarter period the
Issuer may exclude from the calculation the results of the Issuer and its
Restricted Subsidiaries for up to two quarters of such four-quarter period
during which such work stoppage occurred or was continuing and substitute in
place thereof the results of the Issuer and its Restricted Subsidiaries for the
one or two quarters, as applicable, immediately preceding the applicable
four-quarter period; provided that the Issuer may only make such exclusion and
substitution on one occasion in calculating the Fixed Charge Coverage Ratio;
provided further, however, that, for the purposes of the first paragraph of the
covenant described under "--Limitation on Incurrence of Indebtedness and
Issuance of Disqualified Stock and Preferred Stock," such exclusion and
substitution may not be made unless the proceeds of the Indebtedness which is
being Incurred are used either to make an Investment in a Person permitted by
clause (ix) of the definition of "Permitted Investment" or to finance an
acquisition of an operating unit of a business or of a Person that becomes a
Restricted Subsidiary.
"Fixed Charges" means, with respect to any Person for any period, the sum
of:
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(i) Consolidated Interest Expense of such Person for such period, and
(ii) all cash dividend payments (excluding items eliminated in
consolidation) on any series of Preferred Stock or Disqualified Stock of
such Person and its Subsidiaries.
"Foreign Subsidiary" means a Restricted Subsidiary not organized or
existing under the laws of the United States of America or any state or
territory thereof.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Issue Date. For the purposes of the
Indenture, the term "consolidated" with respect to any Person shall mean such
Person consolidated with its Restricted Subsidiaries, and shall not include any
Unrestricted Subsidiary, but the interest of such Person in an Unrestricted
Subsidiary will be accounted for as an Investment.
"Government Securities" means securities that are:
(i) direct obligations of the United States of America for the timely
payment of which its full faith and credit is pledged, or
(ii) obligations of a Person controlled or supervised by and acting as
an agency or instrumentality of the United States of America the timely
payment of which is unconditionally guaranteed as a full faith and credit
obligation by the United States of America,
which, in each case, are not callable or redeemable at the option of the issuer
thereof, and shall also include a depository receipt issued by a bank (as
defined in Section 3(a)(2) of the Securities Act), as custodian with respect to
any such Government Securities or a specific payment of principal of or interest
on any such Government Securities held by such custodian for the account of the
holder of such depository receipt; provided that (except as required by law)
such custodian is not authorized to make any deduction from the amount payable
to the holder of such depository receipt from any amount received by the
custodian in respect of the Government Securities or the specific payment of
principal of or interest on the Government Securities evidenced by such
depository receipt.
"guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness or other obligations.
"Guarantee" means any guarantee of the obligations of the Issuer under the
Indenture and the Notes by any Person in accordance with the provisions of the
Indenture.
"Guarantor" means any Person that Incurs a Guarantee; provided that upon
the release or discharge of such Person from its Guarantee in accordance with
the Indenture, such Person ceases to be a Guarantor.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under:
(i) currency exchange, interest rate or commodity swap agreements,
currency exchange, interest rate or commodity cap agreements and currency
exchange, interest rate or commodity collar agreements; and
(ii) other agreements or arrangements designed to protect such Person
against fluctuations in currency exchange, interest rates or commodity
prices.
"Holder" or "Noteholder" means the Person in whose name a Note is
registered on the Registrar's books.
"Incur" means issue, assume, guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
person at the time it becomes a Subsidiary.
"Indebtedness" means, with respect to any Person:
(i) the principal and premium (if any) of any indebtedness of such
Person, whether or not contingent,
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(a) in respect of borrowed money,
(b) evidenced by bonds, notes, debentures or similar instruments or
letters of credit or bankers' acceptances (or, without duplication,
reimbursement agreements in respect thereof),
(c) representing the deferred and unpaid purchase price of any
property, except any such balance that constitutes a trade payable or
similar obligation to a trade creditor due within six months from the
date on which it is Incurred, in each case Incurred in the ordinary
course of business, which purchase price is due more than six months
after the date of placing the property in service or taking delivery and
title thereto,
(d) in respect of Capitalized Lease Obligations, or
(e) representing any Hedging Obligations, if and to the extent that
any of the foregoing Indebtedness (other than letters of credit and
Hedging Obligations) would appear as a liability on a balance sheet
(excluding the footnotes thereto) of such Person prepared in accordance
with GAAP,
(ii) to the extent not otherwise included, any obligation of such
Person to be liable for, or to pay, as obligor, guarantor or otherwise, on
the Indebtedness of another Person (other than by endorsement of negotiable
instruments for collection in the ordinary course of business),
(iii) to the extent not otherwise included, Indebtedness of another
Person secured by a Lien on any asset owned by such Person (whether or not
such Indebtedness is assumed by such Person); provided, however, that the
amount of such Indebtedness will be the lesser of:
(a) the Fair Market Value of such asset at such date of
determination, and
(b) the amount of such Indebtedness of such other Person; provided,
further, that Contingent Obligations incurred in the ordinary course of
business shall be deemed not to constitute Indebtedness, and
(iv) to the extent not otherwise included, with respect to the Issuer
and its Restricted Subsidiaries, the amount then outstanding (i.e.,
advanced, and received by, and available for use by, the Issuer or any of
its Restricted Subsidiaries) under any Receivables Financing (as set forth
in the books and records of the Issuer or any Restricted Subsidiary and
confirmed by the agent, trustee or other representative of the institution
or group providing such Receivables Financing).
"Independent Financial Advisor" means an accounting, appraisal or
investment banking firm or consultant to Persons engaged in a Similar Business,
in each case of nationally recognized standing that is, in the good faith
determination of the Issuer, qualified to perform the task for which it has been
engaged.
"Initial Purchasers" means Chase Securities Inc., Donaldson, Lufkin &
Jenrette Securities Corporation and Morgan Stanley & Co. Incorporated.
"Investment Grade Securities" means:
(i) securities issued or directly and fully guaranteed or insured by
the United States government or any agency or instrumentality thereof
(other than Cash Equivalents),
(ii) debt securities or debt instruments (other than those issued by
Blackstone or its Affiliates) with a rating of BBB- or higher by S&P or
Baa3 or higher by Moody's or the equivalent of such rating by such rating
organization, or if no rating of S&P or Moody's then exists, the equivalent
of such rating by any other nationally recognized securities rating agency,
but excluding any debt securities or instruments constituting loans or
advances among the Issuer and its Subsidiaries, and
(iii) investments in any fund that invests exclusively in investments
of the type described in clauses (i) and (ii) which fund may also hold
immaterial amounts of cash pending investment and/or distribution.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the form of loans (including
guarantees), advances or capital contributions (excluding accounts receivable,
trade credit and advances to customers and commission, travel and similar
advances to officers, employees and consultants made in the ordinary course of
business), purchases or other acquisitions for consideration of Indebtedness,
Equity Interests or other securities issued by any other Person and investments
that are required by GAAP to be classified on the balance sheet of the Issuer in
the same manner as the other
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investments included in this definition to the extent such transactions involve
the transfer of cash or other property. For purposes of the definition of
"Unrestricted Subsidiary" and the covenant described under "--Limitation on
Restricted Payments,":
(i) "Investments" shall include the portion (proportionate to the
Issuer's equity interest in such Subsidiary) of the Fair Market Value of
the net assets of a Subsidiary of the Issuer at the time that such
Subsidiary is designated an Unrestricted Subsidiary; provided, however,
that upon a redesignation of such Subsidiary as a Restricted Subsidiary,
the Issuer shall be deemed to continue to have a permanent "Investment" in
an Unrestricted Subsidiary equal to an amount (if positive) equal to:
(x) the Issuer's "Investment" in such Subsidiary at the time of
such redesignation less
(y) the portion (proportionate to the Issuer's equity interest in
such Subsidiary) of the Fair Market Value of the net assets of such
Subsidiary at the time of such redesignation; and
(ii) any property transferred to or from an Unrestricted Subsidiary
shall be valued at its Fair Market Value at the time of such transfer, in
each case as determined in good faith by the Board of Directors.
"Issue Date" means the date on which the outstanding Notes were originally
issued.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction);
provided that in no event shall an operating lease be deemed to constitute a
Lien.
"Management Group" means the group consisting of the directors, executive
officers and other management personnel of the Issuer and Holdings on the Issue
Date.
"Moody's" means Moody's Investors Service, Inc.
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of Preferred Stock dividends.
"Net Proceeds" means the aggregate cash proceeds received by the Issuer or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received in respect of or upon the sale or other
disposition of any Designated Noncash Consideration received in any Asset Sale
and any cash payments received by way of deferred payment of principal pursuant
to a note or installment receivable or otherwise, but only as and when received,
but excluding the assumption by the acquiring person of Indebtedness relating to
the disposed assets or other considerations received in any other noncash form),
net of the direct costs relating to such Asset Sale and the sale or disposition
of such Designated Noncash Consideration (including, without limitation, legal,
accounting and investment banking fees, and brokerage and sales commissions),
and any relocation expenses Incurred as a result thereof, taxes paid or payable
as a result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements related thereto), amounts required
to be applied to the repayment of principal, premium (if any) and interest on
Indebtedness required (other than pursuant to the second paragraph of the
covenant described under "--Asset Sales") to be paid as a result of such
transaction, and any deduction of appropriate amounts to be provided by the
Issuer as a reserve in accordance with GAAP against any liabilities associated
with the asset disposed of in such transaction and retained by the Issuer after
such sale or other disposition thereof, including, without limitation, pension
and other post-employment benefit liabilities and liabilities related to
environmental matters or against any indemnification obligations associated with
such transaction.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements (including, without limitation, reimbursement
obligations with respect to letters of credit and bankers' acceptances), damages
and other liabilities payable under the documentation governing any
Indebtedness; provided that Obligations with respect to the Notes shall not
include fees or indemnifications in favor of the Trustee and other third parties
other than the Holders of the Notes.
"Officer" means the Chairman of the Board, Chief Executive Officer,
President, any Executive Vice President, Senior Vice President or Vice
President, the Treasurer or the Secretary of the Issuer.
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"Officers' Certificate" means a certificate signed on behalf of the Issuer
by two Officers of the Issuer, one of whom must be the principal executive
officer, the principal financial officer, the treasurer or the principal
accounting officer of the Issuer that meets the requirements set forth in the
Indenture.
"Opinion of Counsel" means a written opinion from legal counsel who is
acceptable to the Trustee. The counsel may be an employee of or counsel to the
Issuer or the Trustee.
"Pari Passu Indebtedness" means:
(i) with respect to the Issuer, the Notes and any Indebtedness which
ranks pari passu in right of payment to the Notes and
(ii) with respect to any Guarantor that is a Subsidiary of the Issuer,
its Guarantee and any Indebtedness which ranks pari passu in right of
payment to such Guarantor's Guarantee.
"Permitted Holders" means Blackstone and the Management Group. Any person
or group whose acquisition of beneficial ownership constitutes a Change of
Control in respect of which a Change of Control Offer is made in accordance with
the requirements of the Indenture will thereafter, together with its Affiliates,
constitute an additional Permitted Holder.
"Permitted Investments" means:
(i) any Investment in the Issuer or any Restricted Subsidiary;
(ii) any Investment in Cash Equivalents or Investment Grade
Securities;
(iii) any Investment by the Issuer or any Restricted Subsidiary of the
Issuer in a Person that is primarily engaged in a Similar Business if as a
result of such Investment:
(a) such Person becomes a Restricted Subsidiary, or
(b) such Person, in one transaction or a series of related
transactions, is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is
liquidated into, the Issuer or a Restricted Subsidiary;
(iv) any Investment in securities or other assets not constituting
Cash Equivalents and received in connection with an Asset Sale made
pursuant to the provisions of "--Asset Sales" or any other disposition of
assets not constituting an Asset Sale;
(v) any Investment existing on the Issue Date;
(vi) advances to employees not in excess of $25.0 million outstanding
at any one time in the aggregate;
(vii) any Investment acquired by the Issuer or any of its Restricted
Subsidiaries:
(a) in exchange for any other Investment or accounts receivable
held by the Issuer or any such Restricted Subsidiary in connection with
or as a result of a bankruptcy, workout, reorganization or
recapitalization of the issuer of such other Investment or accounts
receivable, or
(b) as a result of a foreclosure by the Issuer or any of its
Restricted Subsidiaries with respect to any secured Investment or other
transfer of title with respect to any secured Investment in default;
(viii) Hedging Obligations permitted under clause (j) of the
"--Limitation of Incurrence of Indebtedness and Issuance of Disqualified
Stock and Preferred Stock" covenant;
(ix) any Investment in a Similar Business (other than an Investment in
an Unrestricted Subsidiary) having an aggregate Fair Market Value, taken
together with all other Investments made pursuant to this clause (ix), not
to exceed $175.0 million at the time of such Investment (with the Fair
Market Value of each Investment being measured at the time made and without
giving effect to subsequent changes in value); provided, however, that,
after giving pro forma effect to any such Investment (including the
Incurrence or assumption of any Indebtedness in connection therewith) as if
such Investment (and the Incurrence or assumption of any such Indebtedness)
had occurred on the first day of the most recently completed four fiscal
quarter period (subject to the last sentence of the definition of "Fixed
Charge Coverage Ratio") for which internal financial statements are
available, the Fixed Charge Coverage Ratio of the Issuer for such period
(subject to the last sentence of the definition of "Fixed Charge Coverage
Ratio") would have been at least 2.75 to 1.00; provided further, however,
that if any Investment pursuant to this clause (ix) is made in
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any Person that is not a Restricted Subsidiary of the Company at the date
of the making of such Investment and such Person becomes a Restricted
Subsidiary after such date, such Investment shall thereafter be deemed to
have been made pursuant to clause (i) above and shall cease to have been
made pursuant to this clause (ix) for so long as such Person continues to
be a Restricted Subsidiary;
(x) additional Investments having an aggregate Fair Market Value,
taken together with all other Investments made pursuant to this clause (x),
not to exceed 10.0% of Total Assets at the time of such Investment (with
the Fair Market Value of each Investment being measured at the time made
and without giving effect to subsequent changes in value);
(xi) loans and advances to officers, directors and employees for
business-related travel expenses, moving expenses and other similar
expenses, in each case Incurred in the ordinary course of business;
(xii) Investments the payment for which consists of Equity Interests
of the Issuer (other than Disqualified Stock) or of Holdings; provided,
however, that such Equity Interests will not increase the amount available
for Restricted Payments under clause (c) of the first paragraph of the
"--Limitation on Restricted Payments" covenant;
(xiii) any transaction to the extent it constitutes an Investment that
is permitted by and made in accordance with the provisions of the second
paragraph of the covenant described under "--Transactions with Affiliates"
(except transactions described in clauses (ii), (vi) and (vii) of such
paragraph);
(xiv) Investments consisting of the licensing or contribution of
intellectual property pursuant to joint marketing arrangements with other
Persons;
(xv) Guarantees issued in accordance with "Limitation of Incurrence of
Indebtedness and Issuance of Disqualified Stock and Preferred Stock" and
"--Future Guarantors";
(xvi) any Investment by Restricted Subsidiaries in other Restricted
Subsidiaries and Investments by Subsidiaries that are not Restricted
Subsidiaries in other Subsidiaries that are not Restricted Subsidiaries;
(xvii) Investments consisting of purchases and acquisitions of
inventory, supplies, materials and equipment or purchases of contract
rights or licenses or leases of intellectual property, in each case in the
ordinary course of business; and
(xviii) any Investment in a Receivables Subsidiary or any Investment
by a Receivables Subsidiary in any other Person in connection with a
Qualified Receivables Financing, including Investments of funds held in
accounts permitted or required by the arrangements governing such Qualified
Receivables Financing or any related Indebtedness; provided, however, that
any Investment in a Receivables Subsidiary is in the form of a Purchase
Money Note, contribution of additional receivables or an equity interest.
"Permitted Junior Securities" shall mean debt or equity securities of the
Issuer or any successor corporation issued pursuant to a plan of reorganization
or readjustment of the Issuer that are subordinated to the payment of all
then-outstanding Senior Indebtedness of the Issuer at least to the same extent
that the Notes are subordinated to the payment of all Senior Indebtedness of the
Issuer on the Issue Date, so long as to the extent that any Senior Indebtedness
of the Issuer outstanding on the date of consummation of any such plan of
reorganization or readjustment is not paid in full in cash or Cash Equivalents
on such date, the holders of any such Senior Indebtedness not so paid in full in
cash have consented to the terms of such plan of reorganization or readjustment.
"Permitted Liens" means, with respect to any Person:
(a) pledges or deposits by such Person under workmen's compensation
laws, unemployment insurance laws or similar legislation, or good faith
deposits in connection with bids, tenders, contracts (other than for the
payment of Indebtedness) or leases to which such Person is a party, or
deposits to secure public or statutory obligations of such Person or
deposits of cash or United States government bonds to secure surety or
appeal bonds to which such Person is a party, or deposits as security for
contested taxes or import duties or for the payment of rent, in each case
Incurred in the ordinary course of business;
(b) Liens imposed by law, such as carriers', warehousemen's and
mechanics' Liens, in each case for sums not yet due or being contested in
good faith by appropriate proceedings or other Liens arising out of
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judgments or awards against such Person with respect to which such Person
shall then be proceeding with an appeal or other proceedings for review;
(c) Liens for taxes, assessments or other governmental charges not yet
due or payable or subject to penalties for nonpayment or which are being
contested in good faith by appropriate proceedings;
(d) Liens in favor of issuers of performance and surety bonds or bid
bonds or with respect to other regulatory requirements or letters of credit
issued pursuant to the request of and for the account of such Person in the
ordinary course of its business;
(e) minor survey exceptions, minor encumbrances, easements or
reservations of, or rights of others for, licenses, rights-of-way, sewers,
electric lines, telegraph and telephone lines and other similar purposes,
or zoning or other restrictions as to the use of real properties or Liens
incidental to the conduct of the business of such Person or to the
ownership of its properties which were not Incurred in connection with
Indebtedness and which do not in the aggregate materially adversely affect
the value of said properties or materially impair their use in the
operation of the business of such Person;
(f) Liens securing Indebtedness permitted to be incurred pursuant to
clause (d) of the second paragraph of the covenant described under
"--Limitation on Incurrence of Indebtedness and Issuance of Disqualified
Stock and Preferred Stock";
(g) Liens existing on the Issue Date;
(h) Liens on property or shares of stock of a Person at the time such
Person becomes a Subsidiary; provided, however, such Liens are not created
or Incurred in connection with, or in contemplation of, such other Person
becoming such a Subsidiary; provided further, however, that such Liens may
not extend to any other property owned by the Issuer or any Restricted
Subsidiary;
(i) Liens on property at the time the Issuer or a Restricted
Subsidiary acquired the property, including any acquisition by means of a
merger or consolidation with or into the Issuer or any Restricted
Subsidiary; provided, however, that such Liens are not created or Incurred
in connection with, or in contemplation of, such acquisition; provided
further, however, that the Liens may not extend to any other property owned
by the Issuer or any Restricted Subsidiary;
(j) Liens securing Indebtedness or other obligations of a Restricted
Subsidiary owing to the Issuer or another Restricted Subsidiary permitted
to be Incurred in accordance with the covenant described under
"--Limitation on Incurrence of Indebtedness and Issuance of Disqualified
Stock and Preferred Stock";
(k) Liens securing Hedging Obligations so long as the related
Indebtedness is, and is permitted to be under the Indenture, secured by a
Lien on the same property securing such Hedging Obligations;
(l) Liens on specific items of inventory or other goods and proceeds
of any Person securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to facilitate
the purchase, shipment or storage of such inventory or other goods;
(m) leases and subleases of real property which do not materially
interfere with the ordinary conduct of the business of the Issuer or any of
its Restricted Subsidiaries;
(n) Liens arising from Uniform Commercial Code financing statement
filings regarding operating leases entered into by the Issuer and its
Restricted Subsidiaries in the ordinary course of business;
(o) Liens in favor the Issuer;
(p) Liens on equipment of the Issuer granted in the ordinary course of
business to the Issuer's client at which such equipment is located;
(q) Liens on accounts receivable and related assets of the type
specified in the definition of "Receivables Financing" Incurred in
connection with a Qualified Receivables Financing; and
(r) Liens to secure any refinancing, refunding, extension, renewal or
replacement (or successive refinancings, refundings, extensions, renewals
or replacements) as a whole, or in part, of any Indebtedness secured by any
Lien referred to in the foregoing clauses (f), (g), (h), (i), (j), (k) and
(o); provided, however, that:
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(x) such new Lien shall be limited to all or part of the same
property that secured the original Lien (plus improvements on such
property), and
(y) the Indebtedness secured by such Lien at such time is not
increased to any amount greater than the sum of:
(A) the outstanding principal amount or, if greater, committed
amount of the Indebtedness described under clauses (f), (g), (h),
(i), (j), (k) or (o) at the time the original Lien became a Permitted
Lien under the Indenture, and
(B) an amount necessary to pay any fees and expenses, including
premiums, related to such refinancing, refunding, extension, renewal
or replacement.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Preferred Stock" means any Equity Interest with preferential right of
payment of dividends or upon liquidation, dissolution, or winding up.
"Purchase Money Note" means a promissory note of a Receivables Subsidiary
evidencing a line of credit, which may be irrevocable, from the Issuer or any
Subsidiary of the Issuer to a Receivables Subsidiary in connection with a
Qualified Receivables Financing, which note:
(a) shall be repaid from cash available to the Receivables Subsidiary,
other than:
(i) amounts required to be established as reserves,
(ii) amounts paid to investors in respect of interest,
(iii) principal and other amounts owing to such investors and
(iv) amounts paid in connection with the purchase of newly
generated receivables and (b) may be subordinated to the payments
described in clause (a).
"Qualified Receivables Financing" means any Receivables Financing of a
Receivables Subsidiary that meets the following conditions:
(i) the Board of Directors shall have determined in good faith that
such Qualified Receivables Financing (including financing terms, covenants,
termination events and other provisions) is in the aggregate economically
fair and reasonable to the Issuer and the Receivables Subsidiary,
(ii) all sales of accounts receivable and related assets to the
Receivables Subsidiary are made at Fair Market Value (as determined in good
faith by the Issuer), and
(iii) the financing terms, covenants, termination events and other
provisions thereof shall be market terms (as determined in good faith by
the Issuer) and may include Standard Securitization Undertakings.
The grant of a security interest in any accounts receivable of the Issuer or any
of its Restricted Subsidiaries (other than a Receivables Subsidiary) to secure
Bank Indebtedness shall not be deemed a Qualified Receivables Financing. For
purposes of the Indenture, the receivables facility in existence on the Issue
Date (and the initial replacement thereof with substantially similar terms in
the aggregate) shall be deemed to be a Qualified Receivables Financing that is
not recourse to the Issuer (except for Standard Securitization Undertakings).
"Receivables Financing" means any transaction or series of transactions
that may be entered into by the Issuer or any of its Subsidiaries pursuant to
which the Issuer or any of its Subsidiaries may sell, convey or otherwise
transfer to:
(a) a Receivables Subsidiary (in the case of a transfer by the Issuer
or any of its Subsidiaries), and
(b) any other Person (in the case of a transfer by a Receivables
Subsidiary),
or may grant a security interest in, any accounts receivable (whether now
existing or arising in the future) of the Issuer or any of its Subsidiaries, and
any assets related thereto including, without limitation, all collateral
securing such accounts receivable, all contracts and all Guarantees or other
obligations in respect of such accounts receivable, proceeds of such accounts
receivable and other assets which are customarily transferred or in
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respect of which security interests are customarily granted in connection with
asset securitization transactions involving accounts receivable.
"Receivables Repurchase Obligation" means any obligation of a seller of
receivables in a Qualified Receivables Financing to repurchase receivables
arising as a result of a breach of a representation, warranty or covenant or
otherwise, including as a result of a receivable or portion thereof becoming
subject to any asserted defense, dispute, off-set or counterclaim of any kind as
a result of any action taken by, any failure to take action by or any other
event relating to the seller.
"Receivables Subsidiary" means a Wholly Owned Restricted Subsidiary of the
Issuer (or another Person formed for the purposes of engaging in a Qualified
Receivables Financing with the Issuer in which the Issuer or any Subsidiary of
the Issuer makes an Investment and to which the Issuer or any Subsidiary of the
Issuer transfers accounts receivable and related assets) which engages in no
activities other than in connection with the financing of accounts receivable of
the Issuer and its Subsidiaries, all proceeds thereof and all rights
(contractual or other), collateral and other assets relating thereto, and any
business or activities incidental or related to such business, and which is
designated by the Board of Directors (as provided below) as a Receivables
Subsidiary and:
(a) no portion of the Indebtedness or any other obligations
(contingent or otherwise) of which:
(i) is guaranteed by the Issuer or any other Subsidiary of the
Issuer (excluding guarantees of obligations (other than the principal
of, and interest on, Indebtedness) pursuant to Standard Securitization
Undertakings),
(ii) is recourse to or obligates the Issuer or any other Subsidiary
of the Issuer in any way other than pursuant to Standard Securitization
Undertakings, or
(iii) subjects any property or asset of the Issuer or any other
Subsidiary of the Issuer, directly or indirectly, contingently or
otherwise, to the satisfaction thereof, other than pursuant to Standard
Securitization Undertakings,
(b) with which neither the Issuer nor any other Subsidiary of the
Issuer has any material contract, agreement, arrangement or understanding
other than on terms which the Issuer reasonably believes to be no less
favorable to the Issuer or such Subsidiary than those that might be
obtained at the time from Persons that are not Affiliates of the Issuer,
and
(c) to which neither the Issuer nor any other Subsidiary of the Issuer
has any obligation to maintain or preserve such entity's financial
condition or cause such entity to achieve certain levels of operating
results. Any such designation by the Board of Directors shall be evidenced
to the Trustee by filing with the Trustee a certified copy of the
resolution of the Board of Directors giving effect to such designation and
an Officers' Certificate certifying that such designation complied with the
foregoing conditions.
"Representative" means the trustee, agent or representative (if any) for an
issue of Senior Indebtedness.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" means any Subsidiary of the Issuer other than an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired by the Issuer or a Restricted Subsidiary whereby the
Issuer or a Restricted Subsidiary transfers such property to a Person and the
Issuer or such Restricted Subsidiary leases it from such Person, other than
leases between the Issuer and a Restricted Subsidiary or between Restricted
Subsidiaries.
"S&P" means Standard and Poor's Ratings Group.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Issuer secured by a
Lien.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the SEC promulgated thereunder.
"Senior Credit Documents" means the collective reference to the Credit
Agreement, the notes issued pursuant thereto and the guarantees thereof, and the
collateral documents relating thereto.
"Senior Credit Facilities" means the term loan facilities and revolving
credit facility created and in effect pursuant to the Credit Agreement.
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"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Issuer within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Similar Business" means a business, the majority of whose revenues are
derived from the design and/or manufacture of driveline systems and/or component
parts for such systems, or the activities of the Issuer and its Subsidiaries as
of the Issue Date or any business or activity that is reasonably similar thereto
or a reasonable extension, development or expansion thereof or ancillary
thereto.
"Standard Securitization Undertakings" means representations, warranties,
covenants and indemnities entered into by the Issuer or any Subsidiary of the
Issuer which the Issuer has determined in good faith to be customary in a
Receivables Financing including, without limitation, those relating to the
servicing of the assets of a Receivables Subsidiary, it being understood that
any Receivables Repurchase Obligation shall be deemed to be a Standard
Securitization Undertaking.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency beyond the control of the issuer unless such contingency has
occurred).
"Subordinated Indebtedness" means:
(a) with respect to the Issuer, any Indebtedness of the Issuer which
is by its terms subordinated in right of payment to the Notes, and
(b) with respect to any Guarantor, any Indebtedness of such Guarantor
which is by its terms subordinated in right of payment to its Guarantee.
"Subsidiary" means, with respect to any Person:
(i) any corporation, association or other business entity (other than
a partnership, joint venture or limited liability company) of which more
than 50% of the total voting power of shares of Capital Stock entitled
(without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time of
determination owned or controlled, directly or indirectly, by such Person
or one or more of the other Subsidiaries of that Person or a combination
thereof, and
(ii) any partnership, joint venture or limited liability company of
which:
(x) more than 50% of the capital accounts, distribution rights,
total equity and voting interests or general and limited partnership
interests, as applicable, are owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of
that Person or a combination thereof, whether in the form of membership,
general, special or limited partnership interests or otherwise, and
(y) such Person or any Restricted Subsidiary of such Person is a
controlling general partner or otherwise controls such entity.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C.
Section 77aaa-77bbbb) as in effect on the date of the Indenture.
"Total Assets" means the total consolidated assets of the Issuer and its
Restricted Subsidiaries, as shown on the most recent balance sheet of the
Issuer.
"Trustee" means the party named as such in the Indenture until a successor
replaces it and, thereafter, means the successor.
"Trust Officer" means:
(i) any officer within the corporate trust department of the Trustee,
including any vice president, assistant vice president, assistant
secretary, assistant treasurer, trust officer or any other officer of the
Trustee who customarily performs functions similar to those performed by
the Persons who at the time shall be such officers, respectively, or to
whom any corporate trust matter is referred because of such person's
knowledge of and familiarity with the particular subject, and
(ii) who shall have direct responsibility for the administration of
the Indenture.
"Unrestricted Subsidiary" means:
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(i) any Subsidiary of the Issuer that at the time of determination
shall be designated an Unrestricted Subsidiary by the Board of Directors in
the manner provided below and
(ii) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors may designate any Subsidiary of the Issuer (including any
newly acquired or newly formed Subsidiary of the Issuer) to be an Unrestricted
Subsidiary unless such Subsidiary or any of its Subsidiaries owns any Equity
Interests or Indebtedness of, or owns or holds any Lien on any property of, the
Issuer or any other Subsidiary of the Issuer that is not a Subsidiary of the
Subsidiary to be so designated; provided, however, that the Subsidiary to be so
designated and its Subsidiaries do not at the time of designation have and do
not thereafter Incur any Indebtedness pursuant to which the lender has recourse
to any of the assets of the Issuer or any of its Restricted Subsidiaries;
provided further, however, that either:
(a) the Subsidiary to be so designated has total consolidated
assets of $1,000 or less or
(b) if such Subsidiary has consolidated assets greater than $1,000,
then such designation would be permitted under the covenant entitled
"--Limitation on Restricted Payments."
The Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided, however, that immediately after giving effect
to such designation:
(x) (1) the Issuer could Incur $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test
described under "--Limitation on Incurrence of Indebtedness and
Issuance of Disqualified Stock and Preferred Stock," or
(2) the Fixed Charge Coverage Ratio for the Issuer and
its Restricted Subsidiaries would be greater than such ratio for
the Issuer and its Restricted Subsidiaries immediately prior to
such designation, in each case on a pro forma basis taking into
account such designation, and
(y) no Event of Default shall have occurred and be
continuing.
Any such designation by the Board of Directors shall be evidenced to the Trustee
by promptly filing with the Trustee a copy of the resolution of the Board of
Directors giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
or Disqualified Stock, as the case may be, at any date, the quotient obtained by
dividing (i) the sum of the products of the number of years from the date of
determination to the date of each successive scheduled principal payment of such
Indebtedness or redemption or similar payment with respect to such Disqualified
Stock multiplied by the amount of such payment, by (ii) the sum of all such
payments.
"Wholly Owned Restricted Subsidiary" is any Wholly Owned Subsidiary that is
a Restricted Subsidiary.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
100% of the outstanding Capital Stock or other ownership interests of which
(other than directors' qualifying shares) shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person and one or
more Wholly Owned Subsidiaries of such Person.
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REGISTRATION RIGHTS AGREEMENT
Holdings, the Issuer and the initial purchasers entered into the exchange
and registration rights agreement on March 5, 1999. Pursuant to the exchange and
registration rights agreement, the Issuer and Holdings agreed to:
(i) file with the Commission on or prior to 90 days after the date of
issuance of the outstanding Notes a registration statement on Form S-1 or
Form S-4, if the use of such form is then available relating to a
registered exchange offer for the outstanding Notes under the Securities
Act; and
(ii) use their reasonable best efforts to cause the exchange offer
registration statement to be declared effective under the Securities Act
within 180 days after the issuance of the outstanding Notes.
As soon as practicable after the effectiveness of the exchange offer
registration statement, the Issuer will offer to the holders of Transfer
Restricted Securities (as defined below) who are not prohibited by any law or
policy of the Commission from participating in the exchange offer the
opportunity to exchange their Transfer Restricted Securities for an issue of a
second series of Notes that are identical in all material respects to the
outstanding Notes (except that the exchange Notes will not contain terms with
respect to transfer restrictions) and that would be registered under the
Securities Act. The Issuer and Holdings will keep the exchange offer open for
not less than 20 business days (or longer, if required by applicable law) after
the date on which notice of the exchange offer is mailed to the holders of the
outstanding Notes.
If: (i) because of any change in law or applicable interpretations
thereof by the staff of the Commission, the Issuer and Holdings are not
permitted to effect the exchange offer as contemplated hereby,
(ii) any outstanding Notes validly tendered pursuant to the exchange
offer are not exchanged for exchange Notes within 210 days after the
issuance of the outstanding Notes,
(iii) any initial purchaser so requests with respect to outstanding
Notes not eligible to be exchanged for exchange notes in the exchange
offer,
(iv) any applicable law or interpretations do not permit any holder of
outstanding Notes to participate in the exchange offer,
(v) any holder of outstanding Notes that participates in the exchange
offer does not receive freely transferable exchange notes in exchange for
tendered outstanding Notes, or
(vi) the Issuer so elects,
then the Issuer and Holdings will file with the Commission a shelf registration
statement to cover resales of Transfer Restricted Securities by such holders who
satisfy certain conditions relating to the provision of information in
connection with the shelf registration statement. For purposes of the foregoing,
"Transfer Restricted Securities" means each outstanding Note until:
(i) the date on which such outstanding Note has been exchanged for a
freely transferable exchange note in the exchange offer;
(ii) the date on which such outstanding Note has been effectively
registered under the Securities Act and disposed of in accordance with the
shelf registration statement; or
(iii) the date on which such outstanding Note is distributed to the
public pursuant to Rule 144 under the Securities Act or is salable pursuant
to Rule 144(k) under the Securities Act.
The Issuer and Holdings will use their reasonable best efforts to have the
exchange offer registration statement or, if applicable, the shelf registration
statement declared effective by the Commission as promptly as practicable after
the filing thereof. Unless the exchange offer would not be permitted by a policy
of the Commission, the Issuer will commence the exchange offer and will use its
reasonable best efforts to consummate the exchange offer as promptly as
practicable, but in any event prior to 210 days after the Issue Date. If
applicable, the Issuer and Holdings will use their reasonable best efforts to
keep the shelf registration statement effective for a period of until two years
after the Issue Date or such shorter period when all outstanding Notes covered
by the shelf registration statement have been sold in the manner set forth above
and as contemplated in
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the shelf registration statement or when the outstanding Notes become eligible
for resale pursuant to Rule 144 under the Securities Act without volume
restrictions, if any.
If: (i) the applicable registration statement is not filed with the
Commission on or prior to 90 days after the issuance of the outstanding
Notes (or, in the case of a shelf registration statement required to be
filed in response to a change in law or applicable interpretations of the
Staff of the Commission, if later, within 45 days after publication of such
change in law or interpretation, but in no event before 90 days after the
issuance of the outstanding Notes);
(ii) the exchange offer registration statement or the shelf
registration statement, as the case may be, is not declared effective
within 180 days after the issuance of the outstanding Notes (or, in the
case of a shelf registration statement required to be filed in response to
a change in law or applicable interpretations of the Staff of the
Commission, if later, within 60 days after publication of such change in
law or interpretation, but in no event before 180 days after the issuance
of the outstanding Notes);
(iii) the exchange offer is not consummated on or prior to 210 days
after the issuance of the outstanding Notes (other than in the event we
file a shelf registration statement); or
(iv) the shelf registration statement is filed and declared effective
within the time periods specified in clause (ii) above but shall thereafter
cease to be effective (at any time that the Issuer and Holdings are
obligated to maintain the effectiveness thereof) without being succeeded
within 30 days by an additional registration statement filed and declared
effective;
(each such event referred to in clauses (i) through (iv), a "Registration
Default"), the Issuer and Holdings will be obligated to pay liquidated damages
to each holder of Transfer Restricted Securities, during the period of one or
more such Registration Defaults, with respect to the first 90-day period
immediately following the occurrence of the first Registration Default in an
amount equal to one-quarter of one percent per annum (which rate will be
increased by an additional one-quarter of one percent per annum for each
subsequent 90-day period that any liquidated damages continue to accrue,
provided that the rate at which liquidated damages accrue may in no event exceed
1.0% per annum) in respect of the outstanding Notes constituting Transfer
Restricted Securities held by such holder until the applicable registration
statement is filed, the exchange offer registration statement is declared
effective and the exchange offer is consummated or the shelf registration
statement is declared effective or again becomes effective, as the case may be.
All accrued liquidated damages shall be paid to holders in the same manner as
interest payments on the Notes on semi-annual payment dates which correspond to
interest payment dates for the Notes. Following the cure of all Registration
Defaults, the accrual of liquidated damages will cease.
Notwithstanding the foregoing, we may issue a notice that the shelf
registration statement is unusable pending the announcement of a material
corporate transaction and may issue any notice suspending use of the shelf
registration statement required under applicable securities laws to be issued
and, in the event that the aggregate number of days in any consecutive
twelve-month period for which all such notices are issued and effective exceeds
60 days in the aggregate, then we will be obligated to pay liquidated damages to
each holder of Transfer Restricted Securities in an amount equal to one-quarter
of one percent per annum (which rate will be increased by an additional
one-quarter of one percent per annum for each subsequent 90-day period that
liquidated damages continue to accrue, provided that the rate at which
liquidated damages accrue may in no event exceed 1.0% per annum) in respect of
the Notes constituting Transfer Restricted Securities. Upon our declaring that
the shelf registration statement is usable after the period of time described in
the preceding sentence, the accrual of liquidated damages will cease.
The exchange and registration rights agreement also will provide that the
Issuer and Holdings:
(i) shall make available for a period of 90 days after the
consummation of the exchange offer a prospectus meeting the requirements of
the Securities Act to any broker-dealer for use in connection with any
resale of any such Exchange Notes; and
(ii) shall pay all expenses incident to the exchange offer and will
indemnify certain holders of the Notes (including any broker-dealer)
against certain liabilities, including liabilities under the Securities
Act. A broker-dealer which delivers such a prospectus to purchasers in
connection with such resales will be subject
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to certain of the civil liability provisions under the Securities Act and
will be bound by the provisions of the exchange and registration rights
agreement (including certain indemnification rights and obligations).
Each holder of outstanding Notes who wishes to exchange such outstanding
Notes for exchange Notes in the exchange offer will be required to make certain
representations, including representations that:
(i) any exchange Notes to be received by it will be acquired in the
ordinary course of its business;
(ii) it has no arrangement or understanding with any person to
participate in the distribution of the exchange Notes; and
(iii) it is not an "affiliate" (as defined in Rule 405 under the
Securities Act) of the Issuer, or if it is an affiliate, that it will
comply with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable.
If the holder is not a broker-dealer, it will be required to represent that
it is not engaged in, and does not intend to engage in, the distribution of the
exchange Notes. If the holder is a broker-dealer that will receive exchange
Notes for its own account in exchange for Notes that were acquired as a result
of market-making activities or other trading activities, it will be required to
acknowledge that it will deliver a prospectus in connection with any resale of
such exchange Notes.
Holders of the Notes will be required to make certain representations to
the Issuer (as described above) in order to participate in the exchange offer
and will be required to deliver information to be used in connection with the
shelf registration statement in order to have their Notes included in the shelf
registration statement and benefit from the provisions regarding liquidated
damages set forth in the preceding paragraphs. A holder who sells Notes pursuant
to the shelf registration statement generally will be required to be named as a
selling securityholder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the exchange and registration rights agreement which are
applicable to such a holder (including certain indemnification obligations).
For so long as the Notes are outstanding, the Issuer will continue to
provide to holders of the Notes and to prospective purchasers of the Notes the
information required by Rule 144A(d)(4) under the Securities Act.
The foregoing description of the exchange and registration rights agreement
is a summary only, does not purport to be complete and is qualified in its
entirety by reference to all provisions of the exchange and registration rights
agreement. The exchange and registration rights agreement has been filed as an
exhibit to the registration statement of which this prospectus is a part.
BOOK-ENTRY; DELIVERY AND FORM
The exchange Notes will initially be represented by one or more permanent
global notes in definitive, fully registered book-entry form, without interest
coupons (the "Global Notes") that will be deposited with, or on behalf of, DTC
and registered in the name of Cede & Co., as nominee of DTC, on behalf of the
acquirors of exchange Notes represented thereby for credit to the respective
accounts of the acquirors (or to such other accounts as they may direct) at DTC,
or Morgan Guaranty Trust Company of New York, Brussels Office, as operator of
the Euroclear System, or Cedel Bank, societe anonyme. See "The Exchange
Offer--Book Entry Transfer."
The Global Notes may be transferred, in whole and not in part, solely to
another nominee of DTC or to a successor of DTC or its nominee. Beneficial
interests in the Global Notes may not be exchanged for Notes in physical,
certificated form ("Certificated Notes") except in the limited circumstances
described below.
All interests in the Global Notes, including those held through Euroclear
or Cedel, may be subject to the procedures and requirements of DTC. Those
interests held through Euroclear or Cedel may also be subject to the procedures
and requirements of such systems.
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CERTAIN BOOK-ENTRY PROCEDURES FOR THE GLOBAL NOTES
The descriptions of the operations and procedures of DTC, Euroclear and
Cedel set forth below are provided solely as a matter of convenience. These
operations and procedures are solely within the control of the respective
settlement systems and are subject to change by them from time to time. We take
no responsibility for these operations or procedures, and investors are urged to
contact the relevant system or its participants directly to discuss these
matters.
DTC has advised us that it is:
(i) a limited purpose trust company organized under the laws of the
State of New York,
(ii) a "banking organization" within the meaning of the New York
Banking Law,
(iii) a member of the Federal Reserve System,
(iv) a "clearing corporation" within the meaning of the Uniform
Commercial Code, as amended, and
(v) a "clearing agency" registered pursuant to Section 17A of the
Exchange Act.
DTC was created to hold securities for its participants (collectively, the
"Participants") and facilitates the clearance and settlement of securities
transactions between Participants through electronic book-entry changes to the
accounts of its Participants, thereby eliminating the need for physical transfer
and delivery of certificates. DTC's Participants include securities brokers and
dealers (including the Initial Purchasers), banks and trust companies, clearing
corporations and certain other organizations. Indirect access to DTC's system is
also available to other entities such as banks, brokers, dealers and trust
companies (collectively, the "Indirect Participants") that clear through or
maintain a custodial relationship with a Participant, either directly or
indirectly. Investors who are not Participants may beneficially own securities
held by or on behalf of DTC only through Participants or Indirect Participants.
We expect that pursuant to procedures established by DTC ownership of the
Notes will be shown on, and the transfer of ownership thereof will be effected
only through, records maintained by DTC (with respect to the interests of
Participants) and the records of Participants and the Indirect Participants
(with respect to the interests of persons other than Participants).
The laws of some jurisdictions may require that certain purchasers of
securities take physical delivery of such securities in definitive form.
Accordingly, the ability to transfer interests in the Notes represented by a
Global Note to such persons may be limited. In addition, because DTC can act
only on behalf of its Participants, who in turn act on behalf of persons who
hold interests through Participants, the ability of a person having an interest
in Notes represented by a Global Note to pledge or transfer such interest to
persons or entities that do not participate in DTC's system, or to otherwise
take actions in respect of such interest, may be affected by the lack of a
physical definitive security in respect of such interest.
So long as DTC or its nominee is the registered owner of a Global Note, DTC
or such nominee, as the case may be, will be considered the sole owner or holder
of the Notes represented by the Global Note for all purposes under the
Indenture. Except as provided below, owners of beneficial interests in a Global
Note will not be entitled to have Notes represented by such Global Note
registered in their names, will not receive or be entitled to receive physical
delivery of Certificated Notes, and will not be considered the owners or holders
thereof under the Indenture for any purpose, including with respect to the
giving of any direction, instruction or approval to the Trustee thereunder.
Accordingly, each holder owning a beneficial interest in a Global Note must rely
on the procedures of DTC and, if such holder is not a Participant or an Indirect
Participant, on the procedures of the Participant through which such holder owns
its interest, to exercise any rights of a holder of Notes under the Indenture or
such Global Note. The Issuer understands that under existing industry practice,
in the event that the Issuer requests any action of holders of Notes, or a
holder that is an owner of a beneficial interest in a Global Note desires to
take any action that DTC, as the holder of such Global Note, is entitled to
take, DTC would authorize the Participants to take such action and the
Participants would authorize holders owning through such Participants to take
such action or would otherwise act upon the instruction of such holders. Neither
the Issuer nor the Trustee will have any responsibility or liability for any
aspect of the records relating to or payments made
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on account of Notes by DTC, or for maintaining, supervising or reviewing any
records of DTC relating to such Notes.
Payments with respect to the principal of, and premium, if any, Liquidated
Damages, if any, and interest on, any Notes represented by a Global Note
registered in the name of DTC or its nominee on the applicable record date will
be payable by the Trustee to or at the direction of DTC or its nominee in its
capacity as the registered holder of the Global Note representing such Notes
under the Indenture. Under the terms of the Indenture, the Issuer and the
Trustee may treat the persons in whose names the Notes, including the Global
Notes, are registered as the owners thereof for the purpose of receiving payment
thereon and for any and all other purposes whatsoever. Accordingly, neither the
Issuer nor the Trustee has or will have any responsibility or liability for the
payment of such amounts to owners of beneficial interests in a Global Note
(including principal, premium, if any, Liquidated Damages, if any, and
interest). Payments by the Participants and the Indirect Participants to the
owners of beneficial interests in a Global Note will be governed by standing
instructions and customary industry practice and will be the responsibility of
the Participants or the Indirect Participants and DTC.
DTC management is aware that some computer applications, systems, and the
like for processing data ("Systems") that are dependent upon calendar dates,
including dates before, on, and after January 1, 2000, may encounter "Year 2000
problems". DTC has informed its Participants and other members of the financial
community that it has developed and is implementing a program so that its
Systems, as the same relate to the timely payment of distributions (including
principal and income payments) to securityholders, book-entry deliveries, and
settlement of trades within DTC ("DTC Services"), continue to function
appropriately. This program includes a technical assessment and a remediation
plan, each of which is complete. Additionally, DTC's plan includes a testing
phase, which is expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on whom DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed the industry that it is contacting (and will
continue to contact) third party vendors from whom DTC acquires services to:
(i) impress upon them the importance of such services being Year 2000
compliant; and
(ii) determine the extent of their efforts for Year 2000 remediation
(and, as appropriate, testing) of their services.
In addition, DTC is in the process of developing such contingency plans as
it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to the industry for informational purposes only and is not intended to
serve as a representation, warranty, or contract modification of any kind.
Transfers between Participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same-day funds. Transfers between
participants in Euroclear or Cedel will be effected in the ordinary way in
accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the
Notes, cross-market transfers between the Participants in DTC, on the one hand,
and Euroclear or Cedel participants, on the other hand, will be effected through
DTC in accordance with DTC's rules on behalf of Euroclear or Cedel, as the case
may be, by its respective depositary; however, such cross-market transactions
will require delivery of instructions to Euroclear or Cedel, as the case may be,
by the counterparty in such system in accordance with the rules and procedures
and within the established deadlines (Brussels time) of such system. Euroclear
or Cedel, as the case may be, will, if the transaction meets its settlement
requirements, deliver instructions to its respective depositary to take action
to effect final settlement on its behalf by delivering or receiving interests in
the relevant Global Notes in DTC, and making or receiving payment in accordance
with normal procedures for same-day funds settlement applicable to DTC.
Euroclear participants and Cedel participants may not deliver instructions
directly to the depositaries for Euroclear or Cedel.
Because of time zone differences, the securities account of a Euroclear or
Cedel participant purchasing an interest in a Global Note from a Participant in
DTC will be credited, and any such crediting will be reported to
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the relevant Euroclear or Cedel participant, during the securities settlement
processing day (which must be a business day for Euroclear and Cedel)
immediately following the settlement date of DTC. Cash received in Euroclear or
Cedel as a result of sales of interest in a Global Security by or through a
Euroclear or Cedel participant to a Participant in DTC will be received with
value on the settlement date of DTC but will be available in the relevant
Euroclear or Cedel cash account only as of the business day for Euroclear or
Cedel following DTC's settlement date.
Although DTC, Euroclear and Cedel have agreed to the foregoing procedures
to facilitate transfers of interests in the Global Notes among participants in
DTC, Euroclear and Cedel, they are under no obligation to perform or to continue
to perform such procedures, and such procedures may be discontinued at any time.
Neither the Issuer nor the Trustee will have any responsibility for the
performance by DTC, Euroclear or Cedel or their respective participants or
indirect participants of their respective obligations under the rules and
procedures governing their operations.
CERTIFICATED NOTES
If:
(i) the Issuer notifies the Trustee in writing that DTC is no longer
willing or able to act as a depositary or DTC ceases to be registered as a
clearing agency under the Exchange Act and a successor depositary is not
appointed within 90 days of such notice or cessation,
(ii) the Issuer, at its option, notifies the Trustee in writing that
it elects to cause the issuance of Notes in definitive form under the
Indenture, or
(iii) upon the occurrence of certain other events as provided in the
Indenture,
then, upon surrender by DTC of the Global Notes, Certificated Notes will be
issued to each person that DTC identifies as the beneficial owner of the Notes
represented by the Global Notes. Upon any such issuance, the Trustee is required
to register such Certificated Notes in the name of such person or persons (or
the nominee of any thereof) and cause the same to be delivered thereto.
Neither the Issuer nor the Trustee shall be liable for any delay by DTC or
any Participant or Indirect Participant in identifying the beneficial owners of
the related Notes and each such person may conclusively rely on, and shall be
protected in relying on, instructions from DTC for all purposes (including with
respect to the registration and delivery, and the respective principal amounts,
of the Notes to be issued).
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CERTAIN UNITED STATES FEDERAL
INCOME TAX CONSEQUENCES OF THE EXCHANGE OFFER
EXCHANGE OF NOTES
The following summary describes the material United States federal income
tax consequences of the exchange offer. The exchange of outstanding Notes for
exchange Notes in the exchange offer will not constitute a taxable event to
holders. Consequently, no gain or loss will be recognized by a holder upon
receipt of an exchange Note, the holding period of the exchange Note will
include the holding period the outstanding Note and the basis of the exchange
Note will be the same as the basis of the outstanding Note immediately before
the exchange.
IN ANY EVENT, PERSONS CONSIDERING THE EXCHANGE OF OUTSTANDING NOTES FOR
EXCHANGE NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS CONCERNING THE UNITED
STATES FEDERAL INCOME TAX CONSEQUENCES IN LIGHT OF THEIR PARTICULAR SITUATIONS
AS WELL AS ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING
JURISDICTION.
OTHER TAX CONSIDERATIONS
The following summary describes the material United States federal income
tax consequences of the ownership of Notes as of the date hereof by a Non-U.S.
Holder (as defined below). Except where noted, this summary deals only with
Notes held as capital assets by Non-U.S. Holders. As used herein the term
"Non-U.S. Holder" means any person or entity that is not a United States Holder
("U.S. Holder"). A U.S. Holder is any beneficial owner of a Note that is:
(i) a citizen or resident of the United States;
(ii) a corporation or partnership created or organized in or under the
laws of the United States or any political subdivision thereof;
(iii) an estate the income of which is subject to U.S. federal income
taxation regardless of its source; or
(iv) a trust which is:
(x) subject to the supervision of a court within the United States
and the control of a United States person as described in
section 7701(a)(30) of the Code, or
(y) that has a valid election in effect under applicable U.S.
Treasury regulations to be treated as a United States person.
The discussion below is based upon the provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), and regulations, rulings and judicial
decisions thereunder as of the date hereof, and such authorities may be
repealed, revoked or modified so as to result in United States federal income
tax consequences different from those discussed below. PERSONS CONSIDERING THE
PURCHASE, OWNERSHIP OR DISPOSITION OF NOTES SHOULD CONSULT THEIR OWN TAX
ADVISORS CONCERNING THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES IN LIGHT
OF THEIR PARTICULAR SITUATIONS AS WELL AS ANY CONSEQUENCES ARISING UNDER THE
LAWS OF ANY OTHER TAXING JURISDICTION.
Under present United States federal income and estate tax law, and subject
to the discussion below concerning backup withholding:
(a) no withholding of United States federal income tax will be
required with respect to the payment by the Issuer or any paying agent of
principal or interest of a Note owned by a Non-U.S. Holder, provided:
(i) that the beneficial owner does not actually or constructively
own 10% or more of the total combined voting power of all classes of
stock of the Issuer entitled to vote within the meaning of
section 871(h)(3) of the Code and the regulations thereunder,
(ii) the beneficial owner is not a controlled foreign corporation
that is related to the Issuer through stock ownership,
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(iii) the beneficial owner is not a bank whose receipt of interest
on a Note is described in section 881(c)(3)(A) of the Code and
(iv) the beneficial owner satisfies the statement requirement
(described generally below) set forth in section 871(h) and
section 881(c) of the Code and the regulations thereunder;
(b) no withholding of United States federal income tax will be
required with respect to any gain or income realized by a Non-U.S. Holder
upon the sale, exchange, retirement or other disposition of a Note; and
(c) a Note beneficially owned by an individual who at the time of
death is a Non-U.S. Holder will not be subject to United States federal
estate tax as a result of such individual's death, provided that such
individual does not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of the Issuer entitled to
vote within the meaning of section 871(h)(3) of the Code and provided that
the interest payments with respect to such Note would not have been, if
received at the time of such individual's death, effectively connected with
the conduct of a United States trade or business by such individual.
It is unclear whether the payment of liquidated damages would be subject to
withholding of U.S. federal income tax.
To satisfy the requirement referred to in (a)(iv) above, the beneficial
owner of such Note, or a financial institution holding the Note on behalf of
such owner, must provide, in accordance with specified procedures, a paying
agent of the Issuer with a statement to the effect that the beneficial owner is
not a U.S. Holder. Currently, these requirements will be met if:
(1) the beneficial owner provides his name and address, and certifies,
under penalties of perjury, that he is not a U.S. Holder (which
certification may be made on an Internal Revenue Service Form ("IRS") W-8
(or successor form)); or
(2) a financial institution holding the Note on behalf of the
beneficial owner certifies, under penalties of perjury, that such statement
has been received by it and furnishes a paying agent with a copy thereof.
Under final Treasury regulations (the "Final Regulations"), the statement
requirement referred to in (a)(iv) above may also be satisfied with other
documentary evidence for interest paid after December 31, 1999 with respect to
an offshore account or through certain foreign intermediaries.
If a Non-U.S. Holder cannot satisfy the requirements of the "portfolio
interest" exception described in (a) above, payments of interest made to such
Non-U.S. Holder will be subject to a 30% withholding tax unless the beneficial
owner of the Note provides the Issuer or its paying agent, as the case may be,
with a properly executed:
(1) IRS Form 1001 (or successor form) claiming an exemption from or
reduction of withholding under the benefit of a tax treaty, or
(2) IRS Form 4224 (or successor form) stating that interest paid on
the Note is not subject to withholding tax because it is effectively
connected with the beneficial owner's conduct of a trade or business in the
United States.
Under the Final Regulations, Non-U.S. Holders will generally be required to
provide IRS Form W-8 in lieu of the IRS Form 1001 and IRS Form 4224, although
alternative documentation may be applicable in certain situations.
If a Non-U.S. Holder is engaged in a trade or business in the United States
and interest on the Note is effectively connected with the conduct of such trade
or business, the Non-U.S. Holder, although exempt from the withholding tax
discussed above, will be subject to United States federal income tax on such
interest on a net income basis in the same manner as if it were a U.S. Holder.
In addition, if such holder is a foreign corporation, it may be subject to a
branch profits tax equal to 30% (or lower applicable treaty rate) of its
effectively connected earnings and profits for the taxable year, subject to
adjustments. For this purpose, interest on a Note will be included in such
foreign corporation's earnings and profits.
Any gain or income realized upon the sale, exchange, retirement or other
disposition of a Note generally will not be subject to United States federal
income tax unless (i) such gain or income is effectively connected with the
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conduct of a trade or business in the United States by the Non-U.S. Holder or
(ii) in the case of a Non-U.S. Holder who is an individual, such individual is
present in the United States for 183 days or more in the taxable year of such
sale, exchange, retirement or other disposition, and certain other conditions
are met.
Special rules may apply to certain Non-U.S. Holders, such as "controlled
foreign corporations", "passive foreign investment companies" and "foreign
personal holding companies", that are subject to special treatment under the
Code. Such entities should consult their own tax advisors to determine the U.S.
federal, state, local and other tax consequences that may be relevant to them.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, no information reporting or backup withholding will be required
with respect to payments made by the Issuer or any paying agent to Non-U.S.
Holders if a statement described in (a)(iv) above has been received (and the
payor does not have actual knowledge that the beneficial owner is a U.S.
Holder).
In addition, backup withholding and information reporting will not apply if
payments of the principal and interest on a Note are paid or collected by a
foreign office of a custodian, nominee or other foreign agent on behalf of the
beneficial owner of such Note, or if a foreign office of a broker (as defined in
applicable Treasury regulations) pays the proceeds of the sale of a Note to the
owner thereof. If, however, such nominee, custodian, agent or broker is, for
United States federal income tax purposes, a U.S. Holder, a controlled foreign
corporation or a foreign person that derives 50% or more of its gross income for
certain periods from the conduct of a trade or business in the United States,
or, for taxable years beginning after December 31, 1999, a foreign partnership
in which one or more U.S. Holders, in the aggregate, own more than 50% of the
income or capital interests in the partnership or a foreign partnership which is
engaged in a trade or business in the United States, such payments will not be
subject to backup withholding but will be subject to information reporting,
unless (1) such custodian, nominee, agent or broker has documentary evidence in
its records that the beneficial owner is not a U.S. Holder and certain other
conditions are met or (2) the beneficial owner otherwise establishes an
exemption.
Payments of principal and interest on a Note paid to the beneficial owner
of a Note by a United States office of a custodian, nominee or agent, or the
payment by the United States office of a broker of the proceeds of sale of a
Note, will be subject to both backup withholding and information reporting
unless the beneficial owner provides the statement referred to in (a)(iv) above
and the payor does not have actual knowledge that the beneficial owner is a U.S.
Holder or otherwise establishes an exemption.
Any amounts withheld under the backup withholding rules will be allowed as
a refund or a credit against such holder's United States federal income tax
liability provided the required information is furnished to the IRS.
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange Notes for its own account
pursuant to the exchange offer must acknowledge that it will deliver a
prospectus in connection with any resale of such exchange Notes. This
prospectus, as it may be amended or supplemented, may be used by a broker-dealer
in connection with resales of exchange Notes received in exchange for
outstanding Notes only where such outstanding Notes were acquired as a result of
market-making activities or other trading activities. We have agreed that we
will make this prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any such resale for a period of
90 days from the date on which the exchange offer is consummated, or such
shorter period as will terminate when all outstanding Notes acquired by
broker-dealers for their own accounts as a result of market-making activities or
other trading activities have been exchanged for exchange Notes and such
exchange Notes have been resold by such broker-dealers.
We will not receive any proceeds from any sale of exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the exchange Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any exchange Notes. Any broker-dealer that
resells exchange Notes that were received by it for its own account pursuant to
the exchange offer and any broker or dealer that participates in a distribution
of such exchange Notes may be deemed to be an "underwriter" within the meaning
of the Securities Act and any profit on any such resale of exchange Notes and
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any commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The letter of transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
We have agreed to pay all expenses incident to the exchange offer other
than commissions or concessions of any brokers or dealers and the fees of any
counsel or other advisors or experts retained by the holders of outstanding
Notes, except as expressly set forth in the registration rights agreement, and
will indemnify the holders of outstanding Notes (including any broker-dealers)
against certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the exchange Notes offered hereby will be passed upon for
us by Simpson Thacher & Bartlett, New York, New York.
EXPERTS
The financial statements included in this prospectus and the related
financial statement schedule (as of and for the year ended December 31, 1998)
included elsewhere in the registration statement have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing herein and
elsewhere in the registration statement, and are included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
Our consolidated financial statements at December 31, 1997 and for each of
the two years in the period ended December 31, 1997 appearing in this prospectus
and registration statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein and
are included in reliance upon such report given upon the authority of the firm
as experts in accounting and auditing.
AVAILABLE INFORMATION
We have filed with the Commission a registration statement on Form S-4
under the Securities Act with respect to the exchange Notes being offered
hereby. This prospectus, which forms a part of the registration statement, does
not contain all of the information set forth in the registration statement. You
should refer to the registration statement for further information. Statements
contained in this prospectus as to the contents of any contract or other
document are not necessarily complete, and, where such contract or other
document is an exhibit to the registration statement, each such statement is
qualified by the provision in such exhibit to which reference is hereby made.
The Company has recently become subject to the informational reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and, in accordance therewith, will file annual, quarterly and special
reports, proxy statements and other information with the Securities and Exchange
Commission (the "Commission"). The Company's first Quarterly Report on Form 10-Q
will be filed for the quarter ended March 31, 1999. This registration statement,
such other reports, proxy statements and other information may be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's Regional Offices in New York (Seven World Trade Center, 13th
Floor, New York, New York 10048), and Chicago (Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661). Copies of such materials,
including copies of all or any portion of the registration statement, may be
obtained from the Public Reference Section of the Commission 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. In addition, the Commission
maintains a web site at "http://www.sec.gov." Furthermore, we agree that, even
if we are not required to file periodic reports and information with the
Commission, for so long as any exchange Note remains outstanding we will furnish
to you the information that would be required to be furnished by us under
Section 13 of the Securities Exchange Act of 1934. Any such request and requests
for agreements summarized herein should be directed to: American Axle &
Manufacturing, Inc., 1840 Holbrook Avenue, Detroit, Michigan 48212, telephone
number (313) 974-2000, Attention: Investor Relations.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Consolidated Financial Statements:
Independent Auditors' Report............................................................................. F-2
Consolidated Balance Sheets at December 31, 1998 and 1997................................................ F-4
Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996............... F-6
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997
and 1996.............................................................................................. F-7
Notes to Consolidated Financial Statements............................................................... F-8
</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 statements of income,
stockholders' equity, and cash flows for the year then ended. Our audit also
included the financial statement schedule (as of and for the year ended
December 31, 1998) listed in the index at Item 21. These financial statements
and the financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and the financial statement schedule based on our audit.
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. Also, in our
opinion, such financial statement schedule (as of and for the year ended
December 31, 1998) when considered in relation to the basic financial statements
taken as a whole presents fairly in all material respects the information set
forth therein.
/s/ Deloitte & Touche LLP
Detroit, Michigan
February 5, 1999
F-2
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
American Axle & Manufacturing of Michigan, Inc.
We have audited the accompanying consolidated balance sheet of American Axle &
Manufacturing of Michigan, Inc. and subsidiaries as of December 31, 1997, and
the related consolidated statements of income, stockholders' equity, and cash
flows for each of the two years in the period ended December 31, 1997. Our audit
also included the financial statement schedule (as of and for the years ended
December 31, 1997 and 1996) listed in Item 21. These financial statements and
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
American Axle & Manufacturing of Michigan, Inc. and subsidiaries at
December 31, 1997, and the consolidated results of their operations and their
cash flows for each of the two years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule (as of and for the years ended December
31, 1997 and 1996), when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects, the
information set forth therein.
/s/ Ernst & Young LLP
Detroit, Michigan
May 15, 1998, except as to the Note 16 thereto, as to which the date is
January 22, 1999.
F-3
<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-4
<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-5
<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............................................... 2,556 (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............................................ (1,518) (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-6
<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-7
<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-8
<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:
Land improvements 15 years
Buildings and building improvements 40 years
Machinery and equipment 3 to 15 years
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-9
<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-10
<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-11
<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-12
<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 $153 million through November
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-13
<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-14
<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-15
<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-U.S. 1998-ALBION 1997 1996 1998 1997 1996
--------- ----------- ---- ---- ---- ---- ----
<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%
<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-16
<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-17
<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-18
<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-19
<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-20
<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-21
<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-22
<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 EVENTS (UNAUDITED)
On March 5, 1999, American Axle & Manufacturing, Inc., the Company's
wholly-owned subsidiary, issued $300,000,000 of 9 3/4% Senior Subordinated Notes
Due 2009 in a private placement pursuant to Rule 144A and Regulation S of the
Securities Act of 1933. The net proceeds from the sale of the notes was
approximately $289 million after deduction of discounts to the initial
purchasers and other fees and expenses.
Also in March 1999, the Company resyndicated its revolving receivables
facility through its subsidary, AAM Receivables Corp. In addition, this facility
has been expanded from $125 million to $153 million.
On April 1, 1999, the Company purchased two forging companies, Colfor
Manufacturing, Inc. ("Colfor") and MSP Industries Corporation ("MSP"), for an
aggregate cash purchase price of approximately $223 million. 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 1998 sales would have been
approximately $126 million. MSP manufactures precision forged powertrain,
driveline, chasis and other components using cold and warm forging processes at
three manufacturing facilities in Michigan. MSP's 1998 sales were $56 million.
F-23
<PAGE>
$300,000,000
AMERICAN AXLE & MANUFACTURING, INC. [LOGO]
OFFER TO EXCHANGE ALL OUTSTANDING 9 3/4% SENIOR SUBORDINATED NOTES DUE 2009 FOR
9 3/4% SENIOR SUBORDINATED NOTES DUE 2009 WHICH HAVE BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933
