-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FGLnrW3WuEahUxaMwAXwVc5K+H5P4PlQE6HmJ+Wr10FvsEY5BCqQodCtvpYTzYWl Mr91NHqLQ9RT9+9WP5ezrA== 0000950137-00-001197.txt : 20000324 0000950137-00-001197.hdr.sgml : 20000324 ACCESSION NUMBER: 0000950137-00-001197 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000323 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TENNECO AUTOMOTIVE INC CENTRAL INDEX KEY: 0001024725 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLE PARTS & ACCESSORIES [3714] IRS NUMBER: 760515284 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-12387 FILM NUMBER: 576647 BUSINESS ADDRESS: STREET 1: 500 NORTH FIELD DRIVE CITY: LAKE FOREST STATE: IL ZIP: 60045 BUSINESS PHONE: 847-482-50 MAIL ADDRESS: STREET 1: 500 N FIELD DR STREET 2: ROOM T 2560B CITY: LAKE FOREST STATE: IL ZIP: 60045 FORMER COMPANY: FORMER CONFORMED NAME: NEW TENNECO INC DATE OF NAME CHANGE: 19961011 10-K405 1 FORM 10-K405 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-12387 TENNECO AUTOMOTIVE INC. (Exact name of registrant as specified in its charter) DELAWARE 76-0515284 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 500 NORTH FIELD DRIVE 60045 LAKE FOREST, IL (Zip Code) (Address of principal executive offices)
Registrant's telephone number, including area code: (847) 482-5000 Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- 6.70% Notes due 2005; 7.45% Debentures due 2025; New York Stock Exchange 8.075% Notes due 2002; 9.20% Debentures due 2012; 10.75% Notes due 2001; 10.20% Debentures due 2008 Common Stock, par value $.01 per share New York, Chicago, Pacific and London Stock Exchanges Preferred Share Purchase Rights New York, Chicago, Pacific and London Stock Exchanges
Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ______ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10K or any amendment to this Form 10-K. [X] State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of a specified date within 60 days prior to the date of filing.
CLASS OF COMMON EQUITY AND NUMBER OF SHARES HELD BY NON-AFFILIATES AT MARCH 1, 2000 MARKET VALUE HELD BY NON-AFFILIATES - ------------------------------------------- ----------------------------------- Common Stock, 33,654,463 shares $250,305,609*
- ------------------------- * Based upon the closing sale price on the Composite Tape for the Common Stock on March 1, 2000. INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE REGISTRANT'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. Common Stock, par value $.01 per share, 33,978,773 shares outstanding as of March 1, 2000. DOCUMENTS INCORPORATED BY REFERENCE:
PART OF THE FORM 10-K DOCUMENT INTO WHICH INCORPORATED -------- ----------------------- Tenneco Automotive Inc.'s Definitive Proxy Statement for the Annual Meeting of Stockholders to be Held May 9, 2000 Part III
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 CAUTIONARY STATEMENT FOR PURPOSES OF "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 This Annual Report contains forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 concerning, among other things, the prospects and developments of the Company (as defined) and business strategies for its operations, all of which are subject to risks and uncertainties. These forward looking statements are identified as "forward looking statements" or by their use of terms (and variations thereof) and phrases such as "will," "may," "anticipates," "intend," "goal," "continued," "estimate," "expects," "project," "potential," "forecast," "plans," "should," "designed to," "foreseeable future," "outlook," "believe," and "scheduled" and similar terms (and variations thereof) and phrases. When a forward looking statement includes a statement of the assumptions or bases underlying the forward looking statement, we caution that, while we believe such assumptions or bases to be reasonable and make them in good faith, assumed facts or bases almost always vary from actual results, and the differences between assumed facts or bases and actual results can be material, depending upon the circumstances. Where, in any forward looking statement, we or our management expresses an expectation or belief as to future results, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the statement of expectation or belief will result or be achieved or accomplished. Our actual results may differ significantly from the results discussed in the forward looking statements. Factors that might cause such a difference include the following: Changes in Consumer Demand and Prices. Demand for our original equipment products is subject to the level of consumer demand for new vehicles that are equipped with our parts. The level of new car purchases is cyclical, affected by such factors as interest rates, consumer confidence, patterns of consumer spending and the automobile replacement cycle. Demand for our aftermarket products varies based upon such factors as the level of new vehicle purchases, which initially displaces demand for aftermarket products, the severity of winter weather, which increases the demand for certain aftermarket products, and other factors, including the average useful life of parts and number of miles driven. Demand for and pricing of our products are subject to economic conditions and other factors present in the various domestic and international markets where the products are sold. Consolidation among automotive parts customers and suppliers could make it more difficult for us to compete favorably. Our financial condition and results of operations could be adversely affected because the customer base for automotive parts is consolidating in both the original equipment market and aftermarket. As a result, we are competing for business from fewer customers. Due to the cost focus of these major customers, we have been, and expect to continue to be, required to reduce prices. We cannot be certain that we will be able to generate cost savings and operational improvements in the future that are sufficient to offset price reductions required by existing customers and necessary to win additional business. Furthermore, the trend towards consolidation among automotive parts suppliers is resulting in fewer, larger suppliers who benefit from purchasing and distribution economies of scale. If we cannot achieve cost savings and operational improvements sufficient to allow us to compete favorably in the future with these larger companies, our financial condition and results of operations could be adversely affected due to a reduction of, or inability to increase, sales. We are dependent on large customers for future revenues. We depend on major vehicle manufacturers for a substantial portion of our net sales. For example, during 1999 Ford, DaimlerChrysler and General Motors accounted for 13.8%, 13.6% and 10.3% of our net sales from continuing operations, respectively. The loss of all or a substantial portion of our sales to any of our large-volume customers could have a material adverse effect on our financial condition and results of operations by reducing cash flows and our ability to spread costs over a larger revenue base. We may make fewer sales to these customers for a i 3 variety of reasons, including: (1) loss of awarded business; (2) reduced or delayed customer requirements; or (3) strikes or other work stoppages affecting production by the customers. We may not be able to successfully respond to the changing distribution channels for aftermarket products. Major automotive aftermarket retailers, such as AutoZone and Advance Auto Parts, are attempting to increase their commercial sales by selling directly to automotive parts installers in addition to individual consumers. These installers have historically purchased from their local warehouse distributors and jobbers, who are our more traditional customers. We cannot assure you that we will be able to maintain or increase aftermarket sales through increasing our sales to retailers. Furthermore, because of the cost focus of major retailers, we have been, and expect to continue to be, required to offer price concessions. Our failure to maintain or increase aftermarket sales, or to offset the impact of any reduced sales or pricing through cost improvements, could have an adverse impact on our business and operating results. We may be unable to compete favorably in the highly competitive automotive parts industry. The automotive parts industry is highly competitive. Although the overall number of competitors has decreased due to ongoing industry consolidation, we face significant competition within each of our major product areas. The principal competitive factors are price, quality, service, product performance, design and engineering capabilities, new product innovation and timely delivery. We cannot assure you that we will be able to continue to compete favorably in this competitive market or that increased competition will not have a material adverse effect on our business by reducing our ability to increase or maintain sales or profit margins. We may be unable to realize our business strategy of improving operating performance. We have either implemented or plan to implement several important strategic initiatives designed to improve our operating performance. The failure to achieve the goals of these initiatives could have a material adverse effect on our business, particularly since we rely on these initiatives to offset pricing pressures from our customers, as described above. We cannot assure you that we will be able to successfully implement or realize the expected benefits of any of these initiatives or that we will be able to sustain improvements made to date. We are subject to risks related to our international operations. We have manufacturing and distribution facilities in many countries, principally in North America, Europe and Latin America, and sell our products worldwide. For 1999, about 46% of our net sales from continuing operations were derived from operations outside North America. International operations are subject to various risks which could have a material adverse effect on those operations or our business as a whole, including: - exposure to local economic conditions; - exposure to local political conditions, including the risk of seizure of assets by foreign government; - currency exchange rate fluctuations; - hyperinflation in certain foreign countries; - controls on the repatriation of cash, including imposition or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries; and - export and import restrictions. We may be unable to realize sales represented by our awarded business. The realization of future sales from awarded business is inherently subject to a number of important risks and uncertainties, including as to the number of vehicles that our OE customers will actually produce, the timing of that production and the mix of options that our OE customers and consumers may choose. In addition, our customers generally have the right to replace us with another supplier at any time for a variety of reasons. Accordingly, we cannot assure you that we will in fact realize any or all of the future sales represented by our awarded business. ii 4 Exchange rate fluctuations could cause a decline in our financial condition and results of operations. As a result of our international operations, we generate a significant portion of our net sales and incur a significant portion of our expenses in currencies other than the U.S. dollar. To the extent we are unable to match revenues received in foreign currencies with costs paid in the same currency, exchange rate fluctuations in that currency could have a material adverse effect on our business. For example, where we have significantly more costs than revenues generated in a foreign currency, we are subject to risk if that foreign currency appreciates against the U.S. dollar because the appreciation effectively increases our cost in that country. We generally seek to mitigate the effect of exchange rate fluctuations from time to time through the use of derivative financial instruments, but cannot assure you that we will continue this practice or be successful in these efforts. The financial condition and results of operations of some of our operating entities are reported in foreign currencies and then translated into U.S. dollars at the applicable exchange rate for inclusion in our consolidated financial statements. As a result, appreciation of the U.S. dollar against these foreign currencies will have a negative impact on our reported revenues and operating profit while depreciation of the U.S. dollar against these foreign currencies will have a positive effect on reported revenues and operating profit. We do not generally seek to mitigate this translation effect through the use of derivative financial instruments. The cyclicality of automotive production and sales could cause a decline in our financial condition and results. A decline in automotive sales and production would likely cause a decline in our sales to vehicle manufacturers, and could result in a decline in our results of operations and financial condition. The automotive industry has been characterized historically by periodic fluctuations in overall demand for vehicles due to, among other things, changes in general economic conditions and consumer preferences. These fluctuations generally result in corresponding fluctuations in demand for our products. The highly cyclical nature of the automotive industry presents a risk that is outside our control and that cannot be accurately predicted. Longer product lives of automotive parts are adversely affecting aftermarket demand for some of our products. The average useful life of automotive parts has been steadily increasing in recent years due to innovations in products and technologies. The longer product lives allow vehicle owners to replace parts of their vehicles less often. As a result, a portion of sales in the aftermarket has been displaced. Additional increases in the average useful lives of automotive parts are likely to adversely affect the demand for our aftermarket products. Aftermarket sales represented approximately 35% of our net sales from continuing operations for 1999. The hourly workforce in the automotive industry is highly unionized and our business could be adversely affected by labor disruptions. Substantially all of the hourly employees of North American vehicle manufacturers are represented by the United Automobile, Aerospace and Agricultural Implement Workers of America under collective bargaining agreements. In addition, vehicle manufacturers and their employees in other countries are also subject to labor agreements. A work stoppage or strike at the production facilities of a significant customer, at our facilities or at a significant supplier could have an adverse impact on us by disrupting demand for our products and/or our ability to manufacture our products. For example, the General Motors strike in 1998 reduced second and third quarter revenue and income growth of our original equipment business in that year. We may incur material product warranty costs. From time to time, we receive product warranty claims from our customers. Vehicle manufacturers are increasingly requiring their outside suppliers to guarantee or warrant their products and to bear the costs of repair and replacement of these products under new vehicle warranties. We cannot assure you that costs associated with providing product warranties will not be material. We cannot assure you that we will be able to successfully transition to an independent public company. Prior to November 4, 1999, we never operated as a stand-alone company and had historically been able to rely, to some degree, on the earnings, assets and cash flow of our former packaging businesses for capital requirements and some administrative services. Accordingly, our consolidated financial iii 5 statements included in this document may not necessarily reflect the results of operations and financial condition that would have been achieved if we had operated independently of our packaging businesses during the periods presented. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." Changes in Prices of Raw Materials. Significant increases in the cost of certain raw materials used in our products, to the extent they are not timely reflected in the price we charge our customers or mitigated through long-term supply contracts, could adversely impact our results. Other Factors. In addition to the factors described above, we may be impacted by a number of other matters and uncertainties, including: (i) potential legislation, regulatory changes and other governmental actions, including the ability to receive regulatory approvals and the timing of such approvals; (ii) material substitution; (iii) new technologies that reduce the demand for certain of our products or otherwise render them obsolete; (iv) our ability to integrate operations of acquired businesses quickly and in a cost effective manner; (v) changes in distribution channels or competitive conditions in the markets and countries where we operate; (vi) capital availability or costs, including changes in interest rates, market perceptions of the industries in which we operate or ratings of securities; (vii) increases in the cost of compliance with regulations, including environmental regulations, and environmental liabilities in excess of the amount reserved; (viii) changes by the Financial Accounting Standards Board or the Securities and Exchange Commission of authoritative generally accepted accounting principles or policies; and (ix) the timing and occurrence (or nonoccurrence) of transactions and events which may be subject to circumstances beyond our control. iv 6 TABLE OF CONTENTS PART I Item 1. Business.................................................... 1 Tenneco Automotive Inc. .................................. 1 Contributions of Major Businesses......................... 2 Description of Our Business............................... 4 Environmental Matters..................................... 16 Certain Reorganization Agreements......................... 17 Item 2. Properties.................................................. 17 Item 3. Legal Proceedings........................................... 18 Item 4. Submission of Matters to a Vote of Security Holders......... 18 Item 4.1. Executive Officers of the Registrant........................ 19 PART II Item 5. Market for Registrant's Common Equity and Related 21 Stockholder Matters......................................... Item 6. Selected Financial Data..................................... 22 Item 7. Management's Discussion and Analysis of Financial Condition 25 and Results of Operations................................... Item 7A. Quantitative and Qualitative Disclosures About Market 41 Risk........................................................ Item 8. Financial Statements and Supplementary Data................. 42 Item 9. Changes in and Disagreements with Accountants on Accounting 85 and Financial Disclosure.................................... PART III Item 10. Directors and Executive Officers of the Registrant.......... 86 Item 11. Executive Compensation...................................... 86 Item 12. Security Ownership of Certain Beneficial Owners and 86 Management.................................................. Item 13. Certain Relationships and Related Transactions.............. 86 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 87 8-K.........................................................
v 7 PART I ITEM 1. BUSINESS. TENNECO AUTOMOTIVE INC. Our company, Tenneco Automotive Inc., is one of the world's leading manufacturers of automotive emissions control and ride control products and systems for both the original equipment market and the replacement market, or aftermarket. As used herein, the term "Tenneco" , "we", "us", "our", or the "Company" refers to Tenneco Automotive Inc. and its consolidated subsidiaries. Tenneco was incorporated in Delaware in 1996 under the name "New Tenneco Inc." ("New Tenneco") as a wholly owned subsidiary of the company then known as Tenneco Inc. ("Old Tenneco") At that time, Old Tenneco's major businesses were shipbuilding, energy, automotive and packaging. On December 11, 1996, Old Tenneco completed the transfer of its automotive and packaging businesses to us, and spun off our company to its public stockholders (the "1996 Spin-off"). In connection with the 1996 Spin-off, Old Tenneco also spun off its shipbuilding division to its public stockholders, the remaining energy company was acquired by El Paso Natural Gas Company and we changed our name from New Tenneco to Tenneco Inc. Unless the context otherwise requires, for periods prior to December 11, 1996, references to "Tenneco", "we", "us", "our" or the "Company" also refer to Old Tenneco. In July 1998, the Board of Directors authorized management to develop a broad range of strategic alternatives to separate the automotive, paperboard packaging and specialty packaging businesses. Subsequently, we completed the following actions: - In January 1999, we announced an agreement to contribute the containerboard business to a new joint venture with an affiliate of Madison Dearborn Partners. The proceeds from the transaction, including debt assumed by the new joint venture, were approximately $2 billion. The transaction closed in April 1999. We retained a 43 percent interest in the joint venture. - In April 1999, we announced an agreement to sell our folding carton operations to Caraustar Industries. This transaction closed in June 1999. The folding carton operations and the containerboard business together represented our paperboard packaging operating segment. - On November 4, 1999, we completed the spin-off of the common stock of Tenneco Packaging Inc., now known as Pactiv Corporation, to our shareholders (the "1999 Spin-off"). Pactiv included all of the businesses that made up our specialty packaging segment as well as our remaining interest in the containerboard joint venture and our administrative services operations. As a result of this series of transactions, our former specialty and paperboard packaging operating segments are presented as discontinued operations in the accompanying financial statements. You should read Note 2 to the financial statements for more information about our discontinued operations. The morning following the 1999 Spin-off, we completed a reverse stock split that had been approved by our shareholders at a special meeting held in October 1999. As a result, every five shares of our common stock were converted into one share of our new common stock. Before the 1999 Spin-off, we realigned substantially all of our existing debt through a combination of tender offers, exchange offers and other refinancings. To finance the debt realignment, we borrowed under a new credit facility and issued subordinated debt. Pactiv also borrowed under new credit facilities and issued new publicly traded Pactiv debt in exchange for certain series of our publicly traded debt that were outstanding before the debt realignment. Note 4 to the financial statements included in Item 8 and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7 have more information about our debt and the debt realignment. In March 2000, our Board of Directors amended our stockholders rights plan. The amendments were considered in light of the 1999 Spin-off of Pactiv. The amendments were not made in response to any 1 8 specific proposal to acquire the company, and the Board believes that the amendments will help ensure that the rights plan remains effective in preserving long-term value for our stockholders. The amendments decrease the exercise price under the rights plan from $130.00, which was the price established when the plan was adopted in 1998 and each share of our common stock carried one right, to an aggregate exercise price of $44.00 for the five rights that attach to each share of our common stock after giving effect to the one-for-five reverse stock split. As amended, each right will entitle our stockholders to purchase one one-thousandth share of Series B Junior Participating Preferred Stock at a price of $8.80, subject to further adjustment from time to time in accordance with the rights plan. Each share of our common stock carries five rights, for an aggregate exercise price of $44.00. The amendments also decrease the stock ownership level at which the rights become exercisable from 20% or more of our outstanding common stock to 15% or more of our outstanding common stock. The qualified offer exception has been eliminated and certain other technical changes were also made. An independent Board committee will continue to review the plan at least every three years and report to the full Board regarding whether it continues to be in the stockholders' best interests. Under the amended rights plan, the rights will become exercisable if a person or group acquires beneficial ownership of 15% or more of our outstanding common stock or commences a tender offer for 15% or more of our outstanding common stock. Rights held by the 15% or greater beneficial owner will become void and not be exercisable. CONTRIBUTIONS OF MAJOR BUSINESSES For information concerning our operating segments, geographic areas and major products or groups of products, see Note 11 to the Financial Statements of Tenneco Automotive Inc. and Consolidated Subsidiaries included in Item 8. The following tables summarize for each of our operating segments for the periods indicated: (i) net sales and operating revenues from continuing operations; (ii) earnings before interest expense, income taxes and minority interest ("EBIT") from continuing operations; and (iii) capital expenditures for continuing operations. As a result of the 1999 Spin-off, our reportable segments have changed. Information from prior periods has been restated to reflect this change. You should also read "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7 for information about costs and charges included in our results. Those costs and charges relate to the 1999 Spin-off, restructuring actions, and other items. NET SALES AND OPERATING REVENUES FROM CONTINUING OPERATIONS:
1999 1998 1997 --------------- ------------- ------------- (DOLLAR AMOUNTS IN MILLIONS) North America.................................. $1,768 54% $1,688 52% $1,726 54% Europe......................................... 1,273 39 1,278 40 1,204 37 Other.......................................... 297 9 316 9 351 11 Intergroup sales............................... (59) (2) (45) (1) (55) (2) ------ --- ------ --- ------ --- Total..................................... $3,279 100% $3,237 100% $3,226 100% ====== === ====== === ====== ===
EBIT FROM CONTINUING OPERATIONS
1999 1998 1997 --------------- -------------- ------------- (DOLLAR AMOUNTS IN MILLIONS) North America................................. $ 166 112% $ 58 26% $ 216 55% Europe........................................ 44 30 155 68 153 39 Other......................................... (62) (42) 14 6 26 6 ------ --- ------ ---- ------ --- Total.................................... $ 148 100% $ 227 100% $ 395 100% ====== === ====== ==== ====== ===
2 9 CAPITAL EXPENDITURES FOR CONTINUING OPERATIONS:
1999 1998 1997 --------------- ------------- ------------- (DOLLAR AMOUNTS IN MILLIONS) North America.................................. $ 71 46% $ 96 49% $ 95 43% Europe......................................... 65 42 67 34 84 38 Other.......................................... 18 12 32 17 42 19 ------ --- ------ --- ------ --- Total..................................... $ 154 100% $ 195 100% $ 221 100% ====== === ====== === ====== ===
Interest expense, income taxes, and minority interest related to continuing operations that were not allocated to our automotive operations are:
1999 1998 1997 ---- ---- ---- (MILLIONS) Interest expense (net of interest capitalized).............. $106 $69 $ 58 Income tax expense.......................................... 82 13 80 Minority interest........................................... 23 29 23
3 10 DESCRIPTION OF OUR BUSINESS With 1999 revenues from continuing operations of over $3.2 billion, we are one of the world's largest producers of automotive emissions control and ride control systems and products. We serve both original equipment manufacturers and replacement markets worldwide through leading brands, including Monroe(R) brand ride control and Walker(R) brand emissions control products. As an automotive parts supplier, we design, market and sell individual component parts for vehicles as well as groups of components that are combined as modules or systems within vehicles. These parts, modules and systems are sold globally to the vast majority of vehicle manufacturers and throughout all aftermarket distribution channels. OVERVIEW OF AUTOMOTIVE PARTS INDUSTRY The automotive parts industry is generally separated into two categories: (1) "original equipment" or "OE" sales, in which parts are sold in large quantities directly to original equipment vehicle manufacturers; and (2) "aftermarket" sales, in which parts are sold as replacement parts in varying quantities to a wide range of wholesalers, retailers and installers. In the OE market, parts suppliers are generally divided into tiers -- "Tier 1" suppliers, who provide their products directly to original equipment manufacturers, and "Tier 2" or "Tier 3" suppliers, who sell their products principally to other suppliers for combinations into the other suppliers' own product offerings. Demand for automotive parts in the OE market is driven by the number of new vehicle sales, which in turn is largely determined by prevailing economic conditions. Although OE demand is tied to planned vehicle production, parts suppliers also have the opportunity to grow through increasing product content and customer and market penetration. Companies with global presence in advanced technology, engineering, manufacturing and support capabilities, such as our company, are, we believe, in the best position to take advantage of these opportunities. Demand for aftermarket products is fundamentally driven by the quality of OE parts, the number of vehicles in operation, the average age of the vehicle fleet, vehicle usage and the average useful life of vehicle parts. Innovative aftermarket products that upgrade the performance or safety of an automobile's original parts, as several of our products do, can also drive aftermarket demand. INDUSTRY TRENDS Currently, several significant existing and emerging trends are dramatically reshaping the automotive industry. As the dynamics of the automotive industry change, so do the roles, responsibilities and relationships of its participants. Key trends that we believe are affecting automotive parts suppliers include: CUSTOMER AND SUPPLIER CONSOLIDATION The customer base for automotive parts is consolidating in both the OE market and aftermarket. Because of recent business combinations among vehicle manufacturers -- such as the DaimlerChrysler merger and Ford's acquisition of Volvo -- and in the aftermarket -- such as AutoZone's acquisition of Chief Auto Parts and CSK Auto's acquisition of Big Wheel/Rossi -- suppliers are competing for the business of fewer customers. The cost focus of these major customers is causing suppliers to reduce prices. Consolidation is also occurring among automotive parts suppliers, particularly those who supply vehicle makers. The number of Tier 1 suppliers is projected to decrease from approximately 1,500 to approximately 600 between 1998 and 2005. The primary reasons for this consolidation include: (1) an increasing desire by OE manufacturers to work with fewer, larger suppliers that can provide fully integrated systems; and (2) the inability of smaller suppliers to compete on price with the larger companies who benefit from purchasing and distribution economies of scale. A supplier's viability in this consolidating market depends, in part, on its continuing ability to maintain and increase operating efficiencies by reducing costs and improving productivity. Also important is a supplier's ability to provide value-added services such as materials management, specialized engineering capabilities and integration of 4 11 individual components into modules and systems. With our strong market positions in emissions control and ride control products and our demonstrated ability to integrate and deliver modules and systems, we believe we are well positioned to respond to increasing customer consolidation. INCREASED OE OUTSOURCING AND DEMAND FOR FULL SYSTEM INTEGRATION BY SUPPLIERS OE manufacturers are moving towards outsourcing automotive parts and systems to simplify the vehicle assembly process, lower costs and reduce vehicle development time. Outsourcing allows OE manufacturers to take advantage of the lower cost structure of the automotive parts suppliers and to benefit from multiple suppliers engaging in simultaneous development efforts. Development of advanced electronics has enabled formerly independent vehicle components to become "interactive," leading to a shift in demand from individual parts to fully integrated systems. As a result, automotive parts suppliers offer OE manufacturers component products individually, as well as in a variety of integrated forms such as modules and systems: - "Modules" are groups of component parts arranged in close physical proximity to each other within a vehicle. Modules are often assembled by the supplier and shipped to the original equipment manufacturer for installation in a vehicle as a unit. Seats, instrument panels, axles and door panels are examples. - "Systems" are groups of component parts located throughout a vehicle which operate together to provide a specific vehicle function. Anti-lock braking systems, safety restraint systems, roll control systems, emissions control and powertrain systems are examples. This shift in demand towards fully integrated systems has created the role of the Tier 1 systems integrator. These systems integrators will increasingly have the responsibility to execute a number of activities, such as design, product development, engineering, testing of component systems and purchasing from Tier 2 suppliers. We are an established Tier 1 supplier with ten years of product integration experience. We have modules or systems for 25 vehicle platforms in production worldwide and modules or systems for three additional platforms under development. For example, we supply ride control modules for the Chrysler JA Cirrus/Stratus/Breeze and the emissions control system for the Porsche Boxster. GLOBALIZATION OF THE AUTOMOTIVE INDUSTRY OE manufacturers are increasingly requiring suppliers to provide parts on a global basis. As the customer base of OE manufacturers changes, and emerging markets become more important to achieving growth, suppliers must be prepared to provide products any place in the world. This requires a worldwide approach to supply chain management, engineering, sales and distribution: - Growing Importance of Emerging Markets. Because the North American and Western European automotive markets are relatively mature, OE manufacturers are increasingly focusing on emerging markets for growth opportunities, particularly China, Eastern Europe, India and Latin America. This increased OE focus has, in turn, increased the growth opportunities in the aftermarkets in these regions. - Governmental Tariffs and Local Parts Requirements. Many governments around the world require that vehicles sold within their country contain specified percentages of locally produced parts. Additionally, some governments place high tariffs on imported parts. - Location of Production Closer to End Markets. OE manufacturers and parts suppliers have relocated production globally on an "onsite" basis that is closer to end markets. This international expansion allows suppliers to pursue sales in developing markets and take advantage of relatively lower labor costs. With facilities around the world, including the key regions of North America, South America, Europe and Asia, we can supply our customers on a global basis. 5 12 GLOBAL RATIONALIZATION OF OE VEHICLE PLATFORMS OE manufacturers are increasingly designing "global" platforms. A "global" platform is a basic mechanical structure of a vehicle that can accommodate different features and is in production and/or development in more than one region. Thus, OE manufacturers can design one platform for a number of similar vehicle models. This allows manufacturers to realize significant economies of scale through limiting variations across items such as steering columns, brake systems, transmissions, axles, exhaust systems, support structures and power window and door lock mechanisms. We believe that this shift towards standardization will have a large impact on automotive parts suppliers, who should experience a reduction in production costs as OE manufacturers reduce variations in components. We also expect parts suppliers to experience higher production volumes per unit and greater economies of scale, as well as reduced total investment costs for molds, dies and prototype development. As of the end of 1999, we were working with OE manufacturers on more than 30 "global" platforms. INCREASING ELECTRONIC COMPONENTS AND TECHNOLOGICAL INNOVATION As consumers continue to demand competitively priced vehicles with increased performance and functionality, the number of electronic components utilized in vehicles is increasing. By replacing mechanical functions with electronics and by integrating mechanical and electronic functions within a vehicle, OE manufacturers are achieving improved emissions control, improved safety and more sophisticated features at lower costs. In addition, automotive parts customers are increasingly demanding technological innovation from suppliers to address more stringent emissions and other regulatory standards and to improve vehicle performance. To continue developing innovative products, systems and modules, we maintain 16 research and development facilities and have entered into several strategic alliances focused on advanced technology designs. For example, we have developed several adaptive damping systems which reduce undesirable vehicle motion. Also, we have developed the self-lubricating elastomer, which has the additional ability to reduce friction between moving components in a suspension system, thereby reducing noise and vibration. INCREASING ENVIRONMENTAL STANDARDS Automotive parts suppliers and OE manufacturers are designing products and developing materials to comply with increasingly stringent environmental requirements. Government regulations adopted over the past decade require substantial reductions in automobile tailpipe emissions, longer warranties on parts of an automobile's pollution control equipment and additional equipment to control fuel vapor emissions. Some of these regulations also mandate more frequent emissions and safety inspections for the existing fleet of vehicles. Manufacturers have responded by focusing their efforts towards technological development to minimize pollution. As a leading supplier of emissions control systems with strong technical capabilities, we are well positioned to benefit from more rigorous environmental standards. EXTENDED PRODUCT LIFE OF AUTOMOTIVE PARTS The average useful life of automotive parts -- both OE and replacement -- has been steadily increasing in recent years due to innovations in products and technologies. The longer product lives allow vehicle owners to replace parts of their vehicles less often. As a result, a portion of sales in the aftermarket has been displaced. Accordingly, a supplier's future viability in the aftermarket will depend, in part, on its ability to reduce costs and leverage its advanced technology and recognized brand names to maintain or achieve additional sales. As a Tier 1 OE supplier, we believe we are well positioned to leverage our products and technology into the aftermarket. Furthermore, we believe an opportunity exists for replacement of certain parts to increase as the average age of vehicles on the road increases. For example, from 1990 to 1997 the average age of cars in the U.S. increased from 7.8 to 8.7 years. 6 13 GROWING RETAIL AFTERMARKET DISTRIBUTION During the last decade, the number of retail automotive parts chains, such as AutoZone and Advance Auto Parts, has been growing while the number of traditional automotive parts stores ("jobbers") that sell to installers has been declining. Since 1990, the number of retail automotive parts stores has increased from approximately 10,000 to approximately 14,000, while the number of jobbers has decreased from approximately 25,000 to approximately 21,000. In addition, since retailers are attempting to grow their commercial sales to automotive parts installers, they are increasingly adding premium brands to their product portfolios. This enables them to offer the option of a premium brand, which is often preferred by their commercial customers, or a standard product, which is often preferred by their retail customers. We believe we are well positioned to respond to this changing aftermarket situation because of our focus on cost reduction and high quality, premium brands. ANALYSIS OF REVENUES The following table provides, for each of the years 1997 through 1999, information relating to our net sales, by primary product lines and markets:
NET SALES (MILLIONS) -------------------------- YEAR ENDED DECEMBER 31, -------------------------- 1999 1998 1997 ---- ---- ---- EMISSIONS CONTROL SYSTEMS & PRODUCTS Aftermarket............................................... $ 514 $ 590 $ 686 OE market................................................. 1,401 1,224 1,067 ------ ------ ------ 1,915 1,814 1,753 ------ ------ ------ RIDE CONTROL SYSTEMS & PRODUCTS Aftermarket............................................... 634 685 782 OE market................................................. 730 738 691 ------ ------ ------ 1,364 1,423 1,473 ------ ------ ------ Total Automotive....................................... $3,279 $3,237 $3,226 ====== ====== ======
Brands In each of our operating segments, we manufacture and market leading brand names. Monroe(R) ride control products and systems and Walker(R) exhaust products and systems are two of the most recognized brand names in the automotive parts industry. As we acquire related product lines, we would anticipate that they would be incorporated within these existing Monroe(R) and Walker(R) brand name families. Customers We have developed long-standing business relationships with our customers around the world. In each of our operating segments, we work together with our customers in all stages of production, including design, development, component sourcing, quality assurance, manufacturing and delivery. With a balanced mix of OE and aftermarket products and facilities in major markets worldwide, we believe we are well positioned to meet customer needs. We believe we have a strong, established reputation with customers for providing high-quality products at competitive prices, as well as for timely delivery and customer service. 7 14 We serve more than 25 different original equipment manufacturers on a global basis, and our products or systems are included on six of the top 10 passenger car models and eight of the top 10 light truck models produced globally for 1998. During 1999, our OE customers included: NORTH AMERICA EUROPE ASIA CAMI BMW/Rover Bajaj DaimlerChrysler DaimlerChrysler DaimlerChrysler Ford DAF Ford Freightliner Fiat General Motors General Motors Ford/Volvo/Jaguar Isuzu Honda Leyland Maruti Suzuki Mazda Mitsubishi Mazda Mitsubishi Nissan PSA-Citroen Navistar General Motors/Opel/Saab Suzuki Nissan PSA-Peugeot/Citroen TELCO NUMMI Porsche Toyota Toyota Renault/Matra Volkswagen Volkswagen Toyota Volkswagen/Audi/SEAT/Skoda SOUTH AMERICA DaimlerChrysler AUSTRALIA Fiat Ford Ford General Motors/Holden General Motors Mitsubishi Honda Toyota Renault Toyota Volkswagen
During 1999, our aftermarket customers were comprised of full line and specialty warehouse distributors, retailers, jobbers, installer chains and car dealers. These customers included such wholesalers and retailers as National Auto Parts Association (NAPA), Monro Muffler Brake and Advance Auto Parts in North America and Temot, Auto Distribution International and KwikFit in Europe. We believe we have a balanced mix of aftermarket customers, with our top 10 aftermarket customers accounting for less than 11% of our total net sales from continuing operations for 1999. For each of the last three years, fewer than five customers individually accounted for 5% or more of the Company's net sales from continuing operations. For example, Ford accounted for approximately 13.2%, 12.8% and 13.8% of our net sales from continuing operations in 1997, 1998 and 1999, respectively, General Motors accounted for approximately 8.6%, 8.4%, and 10.3% of our net sales from continuing operations in 1997, 1998, and 1999, respectively, and DaimlerChrysler accounted for approximately 8.9%, 13.7% and 13.6% of the our net sales from continuing operations in 1997, 1998 and 1999, respectively. No other customer accounted for more than 10% of our net sales from continuing operations for those years. Competition In North America, Europe and the rest of the world, we operate in highly competitive markets. Customer loyalty is a key element of competition in these markets and is developed through long standing relationships, customer service, value added products and timely delivery. Product pricing and services provided are other important competitive factors. In both the OE market and aftermarket, we compete with the vehicle manufacturers, some of which are also customers of ours, and numerous independent suppliers. In the OE market, we believe that we are among the top four suppliers in the world for both emissions control and ride control products and 8 15 systems. In the aftermarket, we believe that we are the market share leader in the supply of both emissions control and ride control products in the world. EMISSIONS CONTROL SYSTEMS Vehicle emissions control products and systems play a critical role in safely conveying noxious exhaust gases away from the passenger compartment, reducing the level of pollutants and engine exhaust noise to an acceptable level. Precise engineering of the exhaust system -- from the manifold that connects an engine's exhaust ports to an exhaust pipe, to the catalytic converter that eliminates pollutants from the exhaust, to the muffler -- leads to a pleasant, tuned engine sound, reduced pollutants and optimized engine performance. We design, manufacture and distribute a variety of automotive emissions control systems, which include components such as: - mufflers; - resonators -- help the muffler eliminate noise; - catalytic converters -- devices used to convert harmful gaseous emissions, such as carbon monoxide, from a vehicle's exhaust system into harmless components such as water vapor and carbon dioxide; - fabricated exhaust manifolds -- made of sheet metal or tubes and collect gases from individual cylinders of a vehicle's engine and direct them into a single exhaust pipe; - pipes -- connect various parts of an exhaust system; - hydroformed tubing -- forms into various geometric shapes, such as Y-pipes or T-pipes, and provide flexibility in design; and - electronic noise cancellation products. We entered this product line in 1967 with the acquisition of Walker Manufacturing Company, which was founded in 1888. When the term "Walker" is used in this document, it refers to our affiliates that produce emissions control products and systems. Walker supplies emissions control products used in six of the 10 top passenger car models and five of the 10 top light truck models produced globally for 1998. With the acquisition of Heinrich Gillet GmbH & Co. in 1994, Walker also became one of Europe's leading OE emissions control systems suppliers. 9 16 The following table provides, for each of the years 1997 through 1999, information relating to our sales of emissions control systems for certain geographic areas:
PERCENTAGE OF NET SALES ------------------------ YEAR ENDED DECEMBER 31, ------------------------ 1999 1998 1997 ---- ---- ---- UNITED STATES MARKET Aftermarket............................................... 30% 37% 43% OE market................................................. 70 63 57 --- --- --- 100% 100% 100% === === === FOREIGN SALES Aftermarket............................................... 25% 30% 36% OE market................................................. 75 70 64 --- --- --- 100% 100% 100% === === === TOTAL SALES BY GEOGRAPHIC AREA (a) United States............................................. 40% 41% 44% European Union............................................ 42 44 41 Canada.................................................... 8 7 7 Other areas............................................... 10 8 8 --- --- --- 100% 100% 100% === === ===
- ------------------------- (a) See Note 11 to our consolidated financial statements included under Item 8 for information about our foreign and domestic operations. RIDE CONTROL SYSTEMS Superior ride control is governed by a vehicle's suspension system, including its shock absorbers and struts. Shock absorbers and struts help maintain vertical loads placed on a vehicle's tires to help keep the tires in contact with the road. A vehicle's ability to steer, brake and accelerate depends on the contact between the vehicle's tires and the road. Worn shocks and struts can allow excess weight transfer from side to side, which is called "roll," from front to rear, which is called "pitch," and up and down, which is called "bounce." Variations in tire to road contact can affect a vehicle's handling and braking performance and the safe operation of a vehicle. Shock absorbers are designed to control vertical loads placed on tires by providing resistance to vehicle roll, pitch and bounce. Thus, by maintaining the tire to road contact, ride control products are designed to function as safety components of a vehicle, in addition to providing a comfortable ride. We design, manufacture and distribute a variety of ride control products and systems. Our ride control offerings include: - shock absorbers; - struts; - electronically adjustable suspension systems that change performance based on inputs like steering and braking; - vibration control components, including rubber-like bushings and mountings that reduce vibration between metal parts of a vehicle; - springs; and - modular assemblies, which are combinations of parts that are provided to customers as a unit. We manufacture and market replacement shock absorbers for virtually all North American, European and Asian makes of automobiles. In addition, we manufacture and market shock absorbers and struts for use on passenger cars and trucks, as well as for other uses such as exercise and recreational equipment. 10 17 Monroe supplies ride control products used in three of the top 10 passenger car models and seven of the 10 top light truck models produced globally for 1998. We entered the ride control product line in 1977 with the acquisition of Monroe Auto Equipment, which was founded in 1916 and introduced the world's first automotive shock absorber in 1926. When the term "Monroe" is used in this document it refers to our affiliates that produce ride control products and systems. The following table provides, for each of the years 1997 through 1999, information relating to our sales of ride control equipment for certain geographic areas:
PERCENTAGE OF NET SALES ------------------------ YEAR ENDED DECEMBER 31, ------------------------ 1999 1998 1997 ---- ---- ---- UNITED STATES MARKET Aftermarket............................................... 41% 43% 50% OE market................................................. 59 57 50 --- --- --- 100% 100% 100% === === === FOREIGN SALES Aftermarket............................................... 52% 53% 56% OE market................................................. 48 47 44 --- --- --- 100% 100% 100% === === === TOTAL SALES BY GEOGRAPHIC AREA(A) United States............................................. 50% 47% 48% European Union............................................ 27 32 27 Canada.................................................... 4 3 3 Other areas............................................... 19 18 22 --- --- --- 100% 100% 100% === === ===
- ------------------------- (a) See Note 11 to our consolidated financial statements included under Item 8 for information about our foreign and domestic operations. SALES AND MARKETING We sell directly to OE manufacturers. To maintain its customer focus, our OE sales force is organized into customer dedicated teams. These sales teams service the OE manufacturers at a regional facility level, with global coordination and support from our headquarters. For the aftermarket, we use a dedicated sales force and consumer brand marketing professionals to sell and market our products. This group provides extensive marketing support to aftermarket customers, including trade and consumer marketing, promotions and general advertising. We maintain an aftermarket customer order fill rate of 95%, which reflects the percentage of the average customer order we are able to fill from inventory. We sell our aftermarket products through five primary channels of distribution: (1) the traditional three-step distribution system: full line warehouse distributors, jobbers and installers; (2) the specialty two-step distribution system: specialty warehouse distributors that carry only specified automotive product groups and installers; (3) direct sales to retailers; (4) direct sales to installer chains; and (5) direct sales to car dealers. MANUFACTURING AND ENGINEERING We use state-of-the-art manufacturing and focus on achieving superior product quality at the lowest operating costs possible. Our manufacturing strategy centers on a lean production system designed to reduce overall costs -- especially indirect costs -- while maintaining quality standards and reducing manufacturing cycle time. We deploy new technology where it makes sense to differentiate our processes from our competitors' or to achieve balance in one piece flowthrough production lines. 11 18 Emissions Control Walker operates 11 manufacturing facilities in the U.S. and 32 manufacturing facilities outside of the U.S. Two of these facilities, located at Aberdeen MS and Culver, IN, are scheduled to close by March 31, 2000. Walker operates three of these facilities through three joint ventures in which it owns a controlling interest and operates three others through three joint ventures in which it owns a non-controlling interest. Walker operates six engineering and technical facilities worldwide and shares two other such facilities with Monroe. Walker attempts to locate original equipment manufacturing facilities close to its OE customers to provide products on demand, or "just-in-time (JIT)." Eleven of Walker's plants are JIT facilities. During the 1990's, Walker expanded its converter and emission system design, development, test and manufacturing capabilities. Walker's engineering capabilities now include advanced predictive design tools, advanced prototyping processes and state-of-the-art testing equipment. This expanded technological capability makes Walker a "full system" integrator, supplying complete emissions control systems from the manifold to the tailpipe, to provide full emission and noise control. It also allows Walker to provide JIT delivery and, when feasible, sequence delivery of emissions control systems to meet customer production requirements. Ride Control Monroe operates nine manufacturing facilities in the U.S. and 18 manufacturing facilities outside the U.S. Monroe operates six of these facilities through three joint ventures in which it owns a controlling interest. Monroe operates eight engineering and technical facilities worldwide and shares two other such facilities with Walker. Monroe attempts to locate original equipment manufacturing facilities close to customers to provide products on demand, or "just-in-time (JIT)." Four of Monroe's plants are JIT facilities. In designing its shock absorbers and struts, Monroe uses advanced engineering and test capabilities to provide product reliability, endurance and performance. Monroe's engineering capabilities feature advanced computer aided design equipment and testing facilities. Monroe's dedication to innovative solutions has led to such technological advances as: - adaptive damping systems -- adapts to the vehicle's motion to better control undesirable vehicle motions; - electronically adjustable suspensions -- changes suspension performance based on a variety of inputs such as steering, braking, vehicle height, and velocity; and - air leveling systems -- manually or automatically adjust the height of the vehicle. Conventional shock absorbers and struts generally compromise either ride comfort or vehicle control. Monroe's innovative grooved tube, gas charged shock absorbers and struts provide both ride comfort and vehicle control, resulting in improved handling, less roll, reduced vibration and a wider range of vehicle control. This technology can be found in Monroe's premium quality Sensa-Trac(R) shock absorbers. In late 1997, Monroe further enhanced this technology by adding the SafeTech(R) fluon banded piston, which improves shock absorber performance and durability. In 1999, Monroe introduced the Monroe Reflex(TM) truck shock absorber which incorporates its Impact Sensor(TM) device. This new technology permits the shock absorber to automatically switch in milliseconds between firm and soft compression damping when the vehicle encounters rough road conditions, thus maintaining better tire-to-road contact and improving handling and safety. INTERNATIONAL OPERATIONS We operate facilities and sell products in countries throughout the world. As a result, we are subject to risks associated with selling and operating in foreign countries, including devaluations and fluctuations in currency exchange rates, imposition of limitations on conversion of foreign currencies into U.S. dollars or 12 19 remittance of dividends and other payments by foreign subsidiaries, imposition or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries, hyperinflation in foreign countries where we do business, and imposition or increase of investment and other restrictions by foreign governments. BUSINESS STRATEGY Our objective is to enhance profitability by leveraging our global position in the manufacture of emissions control and ride control products and systems. We intend to apply our competitive strengths and balanced mix of products, markets, customers and distribution channels to capitalize on many of the significant existing and emerging trends in the automotive industry. The key components of our business strategy are described below. "Own" the Product Life Cycle Using our global engineering capabilities and our advanced technology position, we are pursuing opportunities to design unique, value added products for vehicle manufacturers that yield higher margins in the OE market. We expect to take advantage of our OE technology investments by moving these differentiated products into the aftermarket, where they should continue to generate future revenue streams through the entire life of the vehicle. Innovative products such as Sensa-Trac(R) shocks and Quiet-Flow(TM) mufflers are examples of where we believe our market balance between OE and aftermarket sales allows us to leverage our cost structure over the entire product life cycle. Develop and Commercialize Innovative, Value Added Products We intend to continue to focus on the development of highly engineered systems and complex assemblies and modules which are designed to provide value added solutions to customers and generally carry higher profit margins than individualized components. Furthermore, we intend to expand our product lines by continuing to identify and fill new fast growing niche markets, by developing new products for existing markets, by acquiring companies with product portfolios that complement the products currently supplied by us and by establishing strategic alliances with other suppliers. One example of our focus on innovation is our acquisition in early 1999 of Kinetic Ltd., an Australian suspension engineering company with advanced roll control technology. This technology also provides enhanced on-road handling while improving off road performance. In addition, in an effort to further enhance our electronic competencies we entered into an agreement with Siemens Automotive S.A. in late 1998 to cooperate in the development and commercialization of advanced electronically controlled ride control and suspension technologies. Also in late 1998, we reached an agreement with Ohlins Racing A.B. to jointly develop advanced, electronically controlled suspension damping systems which decrease spring movement. Leverage Aftermarket Brand Names We manufacture and market leading brand name products. Monroe(R) ride control products and Walker(R) emissions control products, which have been offered to consumers for over 50 years, are two of the most recognized brand name products in the automotive parts industry. We continue to emphasize product value differentiation with these brands and its other primary brands, including: - the Monroe Reflex(TM) truck shock absorber which features an Impact Sensor(TM) device to maintain better tire-to-road contact and improve handling and safety under rough road conditions; - the Monroe Sensa-Trac(R) line of shock absorbers, that has been enhanced by the SafeTech(TM) system technology which incorporates a fluon banded piston to improve performance and durability; - Walker's Quiet-Flow(TM) muffler, which features an open flow design that increases exhaust flow, improves sound quality and significantly reduces exhaust back pressure when compared to other replacement mufflers; 13 20 - Rancho(R) ride control products for the high performance light truck market; - DynoMax(R) high-performance emissions control systems; - Walker Perfection(TM) catalytic converters; - Clevite(TM) elastomeric vibration control components, which are primarily rubber products used to reduce vibration through "cushioning" a connection or contact point; and - in European markets, Walker(R) and Aluminox(TM) mufflers. We are capitalizing on our brand strength by incorporating newly acquired product lines within existing product families. We believe brand equity is a key asset in a time of customer consolidation and merging channels of distribution. Diversify End Markets One of our goals is to apply our existing design, marketing and manufacturing capabilities to produce products for a variety of adjacent markets. We believe that these capabilities could be used for heavy duty vehicle and industrial applications, various recreational vehicles, scooters and bicycles. We expect that expanding into markets other than automotive parts will allow us to capitalize on our advanced technical and manufacturing infrastructure to achieve growth in higher margin businesses. Expand Full System Capabilities The automotive parts industry is encountering a consolidation of parts suppliers, as OE manufacturers require suppliers to provide design assistance and innovation and full system capabilities rather than just specific parts. In response to this trend, we have developed integrated, electronically linked global engineering and manufacturing facilities to maintain our presence on top selling vehicles. We have over 10 years of experience as an integrator of systems and modules. We currently supply modules or systems for 25 vehicle platforms worldwide and have modules or systems for three additional platforms under development. We also plan to continue to dedicate more resources towards strengthening technical capability and design expertise and to pursue appropriate strategic acquisitions, joint ventures, strategic alliances and cooperative development agreements to increase our ability to deliver full system capabilities. Maintain Operating Cost Leadership We intend to continue to reduce costs by: - standardizing products and processes throughout our operations; - further developing our global supply chain management capabilities; - improving our information technology; - increasing efficiency through employee training; - investing in more efficient machinery; and - enhancing the global coordination of costing and quoting procedures. In the fourth quarter of 1998, we began a restructuring designed to reduce administrative and operational overhead costs. The largest part of the $53 million pre-tax restructuring charge we recorded in income from continuing operations related to the restructuring of our North American aftermarket operations. The operational restructuring, designed to better match our capacity to market demand, involves closing two plant locations and five distribution centers, with the elimination of 302 positions at those locations. We expect to complete this by mid 2000. The administrative restructuring involves the reduction of approximately 450 administrative staff positions. We completed this in 1999. We are also implementing a supplemental restructuring plan which we began in the fourth quarter of 1999. See 14 21 "Management's Discussion and Analysis of Financial Condition and Results of Operations" included as Item 7. We have also adopted Business Operating System (BOS) as a disciplined system to promote and manage continuous improvement. BOS focuses on the assembly and analysis of data for quick and effective problem resolution to create more efficient and profitable operations. In late 1999, we engaged Stern Stewart & Co. to assist us in implementing Economic Value Added, a financial tool that more effectively measures how well we employ our capital resources. We are planning to link the successful application of this management discipline to our incentive compensation program. Execute Focused Acquisitions and Alliances In the past, we have been successful in identifying and capitalizing on strategic acquisitions and alliances to achieve growth. Through these acquisitions and alliances, we have: (1) expanded our product portfolio; (2) realized incremental business with existing customers; (3) gained access to new customers; and (4) achieved leadership positions within new geographic markets. Where appropriate, we intend to continue to pursue strategic acquisitions that complement our existing technology and systems development efforts. This focused strategy should assist us in identifying and, if appropriate, acquiring smaller scale companies with proven proprietary technology and recognized research capabilities necessary to help develop further leadership in systems integration. Any potential acquisition will be expected to meet strict financial criteria to ensure it increases economic value. We also plan to continue to pursue joint venture and alliance opportunities to achieve our objectives and enhance profitability. STRATEGIC ACQUISITIONS AND ALLIANCES Strategic acquisitions, joint ventures and alliances have been an important part of our growth. Through this strategy, we have expanded to meet customers' global requirements. This strategy has also allowed us to acquire or align with companies that possess proven technology and research capabilities, furthering, we believe, our leadership in systems integration. Emissions Control - In 1996, we established a joint venture in Dalian, China to supply emissions control systems to the Northern Chinese automotive market, expanded our North American heavy duty truck aftermarket business through the acquisition of Stemco Inc. and acquired Minuzzi, the second largest manufacturer of exhaust products in Argentina. - In 1997, we acquired Autocan, a Mexican catalytic converter and exhaust pipe assembly manufacturer. We also acquired the manufacturing operations of MICHEL, a privately owned, Polish-based manufacturer of replacement market emissions control systems for passenger cars in Eastern Europe. - In 1998, we established a joint venture in Shanghai, China to supply emissions control systems to the Central and Southern Chinese automotive markets. We also established a joint venture in Pune, India to supply emissions control systems to OE customers and the aftermarket. - In 1999, we began manufacturing emissions control systems at a new facility in Curitiba, Brazil to supply original equipment customers in this growing regional market. Ride Control - In 1995, we acquired a 51% interest in a joint venture that has three ride control manufacturing facilities in India and acquired a 51% interest in a joint venture that has one ride control manufacturing facility in China. 15 22 - In July 1996, we acquired The Pullman Company and its Clevite products division. Clevite is a leading OE manufacturer of elastomeric vibration control components, including bushings, engine mounts and control arms, for the auto, light truck and heavy truck markets. These products connect major metal parts and help isolate noise, vibration and shock. With this acquisition, we expanded our capability to deliver ride control systems to original equipment manufacturers. The Clevite acquisition also complemented our interest in global growth opportunities, since both Clevite and Monroe have manufacturing operations in Mexico and Brazil. - In September 1996, we acquired full ownership of Monroe Amortisor Imalat ve Ticaret, a Turkish shock absorber manufacturer, in which we previously held a 16.7% ownership interest. - In December 1996, we acquired 94% of the voting stock of FricRot S.A.I.C., the leading producer and marketer of ride control products in Argentina. In 1997, we increased our interest in FricRot to more than 99% through the purchase of additional shares. - In 1996, we also expanded our presence in Australia's ride control product market with the acquisition of National Springs. - In 1997, we entered into a joint venture which resulted in our acquisition of majority ownership of Armstrong, a leading South African manufacturer of ride control products. - In early 1999, we completed the acquisition of Kinetic Ltd., an Australian suspension engineering company with advanced roll control technology. - In 1999, we licensed elastomer technology and equipment from Draftex, a French company. We intend to apply this technology to manufacturing engine mounts and ride control products for sale in Mexico, Central America and South America. In addition, in 1999 we also entered into a strategic cooperation agreement with Draftex to jointly develop elastomer-based products for sale primarily in Europe. OTHER As of March 1, 2000, we had approximately 23,200 employees, approximately 56% of which were covered by collective bargaining agreements and approximately 32% of which are governed by European works councils. Forty-seven of our existing labor agreements, covering a total of 6,712 employees, are scheduled for renegotiation in 2000. We regard our employee relations as generally satisfactory. The principal raw material utilized by us is steel. We believe that an adequate supply of steel can presently be obtained from a number of different domestic and foreign suppliers. We hold a number of domestic and foreign patents and trademarks relating to our products and businesses. We manufacture and distribute our products primarily under the Walker(R) and Monroe(R) brand names, which are well recognized in the marketplace and are registered trademarks. The patents, trademarks and other intellectual property owned by or licensed to us are important in the manufacturing, marketing and distribution of our products. ENVIRONMENTAL MATTERS We estimate that we and our subsidiaries will make capital expenditures for environmental matters of approximately $3 million in 2000 and approximately $4 million in 2001. For additional information regarding environmental matters, see Item 3, "Legal Proceedings," Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Note 12 to the Financial Statements of Tenneco Automotive Inc. and Consolidated Subsidiaries included under Item 8. 16 23 CERTAIN REORGANIZATION AGREEMENTS In connection with the 1999 Spin-off, described above, we entered into various agreements with Pactiv governing our relationship following the 1999 Spin-off and providing for the allocation of tax and certain other liabilities and obligations arising from periods prior to the 1999 Spin-off. These agreements are described below. We entered into a Distribution Agreement with Pactiv, dated November 3, 1999 (the "Distribution Agreement"), pursuant to which the 1999 Spin-off and certain corporate transactions required to effect the 1999 Spin-off were accomplished. The Distribution Agreement provides for, among other things, the assumption of liabilities and cross indemnities designed to allocate generally, effective as of the date of the 1999 Spin-off, financial responsibility for the liabilities arising out of or in connection with the operation of the packaging and administrative services businesses prior to the 1999 Spin-off. In addition, as contemplated by the Distribution Agreement, we entered into certain ancillary agreements (collectively, the "Ancillary Agreements") with Pactiv prior to the consummation of the 1999 Spin-off which further effectuated the restructuring necessary to accomplish the 1999 Spin-off and govern various aspects of the relationship between the parties after the 1999 Spin-off. The Ancillary Agreements include: (i) the Human Resources Agreement, which provides for allocations of responsibilities between us and Pactiv with respect to employee compensation, benefits and labor matters; (ii) the Tax Sharing Agreement, pursuant to which we and Pactiv will allocate liabilities for taxes arising prior to, as a result of, and subsequent to the 1999 Spin-off; (iii) the Transition Services Agreement, pursuant to which Pactiv will provide specified administrative services to us; (iv) the Insurance Agreement, which provides for our and Pactiv's continuing rights and obligations with respect to various pre-1999 Spin-off insurance programs; and (v) the Trademark Transition License Agreement, allowing Pactiv to use certain of our trademarks and tradenames for certain specified periods of time for certain purposes. ITEM 2. PROPERTIES. We lease our principal offices, which are located at 500 North Field Drive, Lake Forest, Illinois, 60045. Walker operates 11 manufacturing facilities in the U.S. and 32 manufacturing facilities outside of the U.S. Two of these facilities, located at Aberdeen MS and Culver, IN, are scheduled to close by March 31, 2000. Walker operates six engineering and technical facilities worldwide and shares two other such facilities with Monroe. Monroe operates nine manufacturing facilities in the U.S. and 18 manufacturing facilities outside the U.S. Monroe operates seven engineering and technical facilities worldwide and shares two other such facilities with Walker. The above described manufacturing locations outside of the U.S. are located in Canada, Mexico, Belgium, Spain, the United Kingdom, the Czech Republic, Turkey, South Africa, France, Denmark, Sweden, Germany, Poland, Portugal, Argentina, Brazil, Australia, New Zealand, China, and India. We also have sales offices located in Australia, Argentina, Canada, Italy, Japan, Poland, Russia, Singapore, and Sweden. We own approximately one half of the properties described above and lease the other half. We hold nine of the above-described manufacturing facilities through six joint ventures in which we own a controlling interest and hold three others through three joint ventures in which we own a non-controlling interest. We also have distribution facilities at our manufacturing sites and at a few offsite locations, substantially all of which we lease. We believe our commitment to sound management practices and policies is demonstrated by our successful participation in the International Standards Organization/Quality Systems certification process (ISO/QS). ISO/QS certifications are yearly audits that certify that a company's facilities meet stringent 17 24 quality and business systems requirements. Without either ISO or QS certification, we would not be able to supply OE manufacturers locally or globally. Over 90% of our manufacturing facilities have achieved ISO 9000 certification, excluding facilities held in joint ventures. Of those 64 manufacturing facilities where we have determined that QS certification is required to service our customers or would provide us with an advantage in securing additional business, 89% have achieved QS 9000 certification, and we are pursuing certification of the remaining 11%. We believe that substantially all of our plants and equipment are, in general, well maintained and in good operating condition. They are considered adequate for present needs and, as supplemented by planned construction, are expected to remain adequate for the near future. We also believe that we have generally satisfactory title to the properties owned and used in our respective businesses. ITEM 3. LEGAL PROCEEDINGS. At December 31, 1999, we had been designated as a potentially responsible party in four Superfund sites. We estimate our share of the remediation costs for these sites to be approximately $1 million in the aggregate and have established reserves that we believe are adequate for such costs. In addition to the Superfund sites, we may have the obligation to remediate current or former facilities and we estimate our share of remediation costs at these facilities to be approximately $15 million. For both the Superfund sites and our current and former facilities, we have established reserves that we believe are adequate for these costs. Although we believe our estimates of remediation costs are reasonable and are based on the latest available information, the cleanup costs are estimates and are subject to revision as more information becomes available about the extent of remediation required. At some sites, we expect that other parties will contribute to the remediation costs. In addition, at the Superfund sites, the Comprehensive Environmental Response, Compensation and Liability Act provides that our liability could be joint and several, meaning that we could be required to pay in excess of our share of remediation costs. In determining our estimated liability we have considered, where appropriate, our understanding of the financial strength of other potentially responsible parties. We believe that the costs associated with our current status as a potentially responsible party in the Superfund sites referenced above, or as a liable party at our current or former facilities, will not be material to our consolidated financial position or results of operations. For additional information concerning environmental matters, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the caption "Environmental Matters" under Note 12 to the Financial Statements of Tenneco Automotive Inc. and Consolidated Subsidiaries, included as Item 8. In May 1999, we, along with our former wholly-owned subsidiary, Tenneco Packaging Inc. (now known as Pactiv), and a number of containerboard manufacturers were named as defendants in a civil class action antitrust lawsuit pending in the United States District Court for the Eastern District of Pennsylvania. The lawsuit alleges that the defendants conspired to raise linerboard prices for corrugated containers and corrugated sheets, respectively, from October 1, 1993 through November 30, 1995, in violation of Section 1 of the Sherman Act. The lawsuit seeks treble damages in an unspecified amount, plus attorney fees. Under and in accordance with the distribution agreement we entered into with Pactiv before the 1999 Spin-off, as between us and Pactiv, Pactiv will be responsible for defending the claims and for any liability resulting from the action. Accordingly, we believe the outcome of this litigation will not have a material adverse effect on our financial position or results of operations. We are also party to various other legal proceedings arising from our operations. We believe that the outcome of these other proceedings, individually and in the aggregate, will not have a material adverse effect on our financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. We held a special stockholders' meeting on October 25, 1999 to consider and vote on two separate proposals: (i) a proposal to amend our certificate of incorporation to phase-out our existing three-class 18 25 staggered Board of Directors system, and provide instead for the annual election of directors (the "Elimination of Staggered Board Proposal") and (ii) a proposal to amend our certificate of incorporation whereby every five shares of our then-issued common stock would be converted automatically into one share of our new common stock (the "Reverse Stock Split Proposal"). The meeting proceeded and both the Elimination of Staggered Board Proposal and Reverse Stock Split Proposal were approved by holders of a majority of the our outstanding common stock. The following sets forth the number of votes cast for, against and abstain with respect to these proposals at the meeting: ELIMINATION OF STAGGERED BOARD PROPOSAL
VOTES VOTES VOTES FOR AGAINST ABSTAIN - ----------- ------------- ------------- 127,396,690 2,378,548 1,051,113
REVERSE STOCK SPLIT PROPOSAL
VOTES VOTES VOTES FOR AGAINST ABSTAIN - ----------- ------------- ------------- 138,533,392 8,254,821 1,175,919
ITEM 4.1. EXECUTIVE OFFICERS OF THE REGISTRANT. The following provides information concerning the persons who serve as our executive officers as of March 1, 2000. Each of these individuals, other than Richard Sloan and Kenneth Trammell, were named as our company's executive officers effective November 4, 1999, the day of the 1999 Spin-off, at which time our then-existing executive officers resigned. Messrs. Sloan and Trammell were made our executive officers in December 1999. Prior to becoming our executive officers, many of these individuals had served in our automotive operations. Accordingly, for periods prior to November 4, 1999, references to service to "us" or "our company" reflect services to Tenneco's automotive operations.
NAME (AND AGE AT DECEMBER 31, 1999) OFFICES HELD ------------------ ------------------------------------------------- Mark P. Frissora (44)......................... Director Chairman, President and Chief Executive Officer Richard J. Sloan (61)......................... Executive Vice President and Managing Director -- Europe Mark A. McCollum (40)......................... Senior Vice President and Chief Financial Officer Richard P. Schneider (52)..................... Senior Vice President -- Global Administration Timothy R. Donovan (44)....................... Senior Vice President and General Counsel Timothy E. Jackson (43)....................... Senior Vice President and General Manager -- North American Original Equipment and Worldwide Program Management David G. Gabriel (41)......................... Senior Vice President and General Manager -- North American Aftermarket Kenneth R. Trammell (39)...................... Vice President and Controller
MARK P. FRISSORA -- Mr. Frissora became our Chief Executive Officer in connection with the Spin-off and has been serving as President of the automotive operations since April 1999. In March 2000, he was also named our Chairman. From 1996 to April 1999, he held various positions within our automotive operations, including Senior Vice President and General Manager of the worldwide original equipment business. Mr. Frissora joined our company in 1996 from AeroquipVickers Corporation, where he served since 1991 as a Vice President. Previously, he spent 15 years with both General Electric (10 years) and Philips Lighting Company in management roles focusing on product development and marketing. He is a member of both The Business Roundtable and the World Economic Forum's Automotive Board of Governors. 19 26 RICHARD J. SLOAN -- Mr. Sloan was named our Executive Vice President and Managing Director -- Europe in October 1999. Prior to joining us, Mr. Sloan spent 18 years with United Technologies Automotive ("UTA"). He served as President of UTA's Worldwide Interior Division from 1998 to October 1999 and President of UTA Europe from 1993 to 1998. MARK A. MCCOLLUM -- Mr. McCollum joined our automotive operations in April 1998. Prior to that he served as Tenneco Inc.'s Vice President, Corporate Development and was responsible for executing strategic transactions in both the automotive and packaging businesses. From January 1995 to April 1998, he served in various capacities for Tenneco Inc., including Vice President, Financial Analysis and Planning and Corporate Controller. Before that, Mr. McCollum spent 14 years with the international public accounting firm of Arthur Andersen LLP, serving as an audit and business advisory partner of the company's worldwide partnership from 1991 to December 1994. RICHARD P. SCHNEIDER -- As our Senior Vice President -- Global Administration, Mr. Schneider is responsible for the development and implementation of human resources programs and policies and corporate communications activities for our worldwide operations. He joined us in 1994 from International Paper Company where, during his 20 year tenure, he held key positions in labor relations, management development, personnel administration and equal employment opportunity. TIMOTHY R. DONOVAN -- Mr. Donovan was named Senior Vice President and General Counsel of our company in August 1999. Mr. Donovan was a partner in the law firm of Jenner & Block from 1989 until his resignation in September 1999, and most recently served as the Chairman of the firm's Corporate and Securities Department and as a member of its Executive Committee. TIMOTHY E. JACKSON -- Mr. Jackson joined us as Senior Vice President and General Manager -- North American Original Equipment and Worldwide Program Management in June 1999. Mr. Jackson joined us from ITT Industries where he was President of that company's Fluid Handling Systems Division. With over 20 years of management experience, 14 within the automotive industry, he was also Chief Executive Officer for HiSAN, a joint venture between ITT Industries and Sanoh Industrial Company. Mr. Jackson has also served in senior management positions at BF Goodrich Aerospace and General Motors Corporation. DAVID G. GABRIEL -- Mr. Gabriel was named our Senior Vice President and General Manager -- North American Aftermarket in August 1999. From March to August 1999, Mr. Gabriel was the Vice President of Operations for our North American aftermarket business. From March 1997 to March 1999, he served as Vice President of Manufacturing for our North American aftermarket business. From February 1995 to March 1997, he served as Executive Director of Supplier Development for Tenneco Business Services. Before joining Tenneco Business Services in February 1995, Mr. Gabriel spent 15 years in various operating positions of increasing responsibility with the Pepsi Cola Company and Johnson and Johnson. From 1993 to February 1995, Mr. Gabriel was Director of Supplier Development at the Pepsi Cola Company. KENNETH R. TRAMMELL -- Mr. Trammell was named our Vice President and Controller in September 1999. From April 1997 to November 1999 he served as Corporate Controller of Tenneco Inc. He joined Tenneco Inc. in May 1996 as Assistant Controller. Before joining Tenneco Inc., Mr. Trammell spent 12 years with the international public accounting firm of Arthur Andersen LLP, last serving as a senior manager. 20 27 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Our outstanding shares of common stock, par value $.01 per share, are listed on the New York, Chicago, Pacific and London Stock Exchanges. Our common stock began "regular way" trading on the New York Stock Exchange on December 12, 1996 (the business day immediately following the 1996 Spin-off). See "Business -- Tenneco Automotive Inc." included in Item 1. The following table sets forth, for the periods indicated, the high and low sales prices of our common stock on the New York Stock Exchange Composite Transactions Tape, and the dividends paid per share of common stock. On November 4, 1999, we completed the spin-off of Pactiv Corporation and the following morning effected a one-for-five reverse stock split. Accordingly, the high and low sales prices for periods following this date give effect to these transactions.
SALE PRICES ---------------------------------- DIVIDENDS QUARTER HIGH LOW PAID ------- ---- --- --------- 1999 1st....................................................... $37 1/4 $27 1/2 $.30 2nd....................................................... 31 3/8 22 11/16 .30 3rd....................................................... 25 1/8 15 5/16 .30 4th (through 11/4)........................................ 17 9/16 13 13/16 -- 4th (after 11/4).......................................... 9 1/8 7 -- 1998 1st....................................................... $45 $36 $.30 2nd....................................................... 47 1/2 37 .30 3rd....................................................... 38 7/8 30 7/8 .30 4th....................................................... 37 7/16 29 1/2 .30
As of March 1, 2000, there were approximately 45,200 holders of record of our common stock, including brokers and other nominees. The declaration of dividends on our capital stock is at the discretion of our Board of Directors. The Board has not adopted a dividend policy as such; subject to legal and contractual restrictions, its decisions regarding dividends are based on all considerations that in its business judgment are relevant at the time. These considerations may include past and projected earnings, cash flows, economic, business and securities market conditions and anticipated developments concerning our business and operations. For additional information concerning our payment of dividends, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." Now that the 1999 Spin-off is complete, we are highly leveraged and restricted with respect to the payment of dividends under the terms of our financing arrangements. On January 12, 2000, we announced that our board of directors declared a first quarter dividend of five cents per share payable on March 14, 2000, to shareholders of record at the close of business on February 25, 2000. 21 28 ITEM 6. SELECTED FINANCIAL DATA. TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------ 1999(A) 1998(A) 1997(A) 1996 1995 ------- ------- ------- ---- ---- (MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS) STATEMENTS OF INCOME DATA(B): Net sales and operating revenues from continuing operations -- North America.......................... $ 1,768 $ 1,688 $ 1,726 $ 1,550 $ 1,270 Europe................................. 1,273 1,278 1,204 1,201 1,050 Other.................................. 297 316 351 279 214 Intergroup sales....................... (59) (45) (55) (50) (55) ---------- ---------- ---------- ---------- ---------- $ 3,279 $ 3,237 $ 3,226 $ 2,980 $ 2,479 ========== ========== ========== ========== ========== Income from continuing operations before interest expense, income taxes, and minority interest -- North America.......................... $ 166 $ 58 $ 216 $ 128 $ 133 Europe................................. 44 155 153 94 81 Other.................................. (62) 14 26 20 34 ---------- ---------- ---------- ---------- ---------- Total............................. 148 227 395 242 248 Interest expense (net of interest capitalized)(c)........................ 106 69 58 60 44 Income tax expense....................... 82 13 80 79 91 Minority interest........................ 23 29 23 21 23 ---------- ---------- ---------- ---------- ---------- Income (loss) from continuing operations............................. (63) 116 234 82 90 Income (loss) from discontinued operations, net of income tax(d)....... (208) 139 127 564 645 Extraordinary loss, net of income tax(e)................................. (18) -- -- (236) -- Cumulative effect of changes in accounting principles, net of income tax(f)................................. (134) -- (46) -- -- ---------- ---------- ---------- ---------- ---------- Net income (loss)........................ (423) 255 315 410 735 Preferred stock dividends................ -- -- -- 12 12 ---------- ---------- ---------- ---------- ---------- Net income (loss) to common stock........ $ (423) $ 255 $ 315 $ 398 $ 723 ========== ========== ========== ========== ========== Average number of shares of common stock outstanding Basic.................................. 33,480,686 33,701,115 34,052,946 33,921,875 34,552,840 Diluted................................ 33,656,063 33,766,906 34,160,327 34,105,223 34,702,331 Earnings (loss) per average share of common stock -- Basic: Continuing operations................ $ (1.87) 3.45 6.87 2.45 2.60 Discontinued operations(d)........... (6.23) 4.13 3.73 16.27 18.32 Extraordinary loss(e)................ (.55) -- -- (6.96) -- Cumulative effect of changes in accounting principles(f).......... (3.99) -- (1.35) -- -- ---------- ---------- ---------- ---------- ---------- $ (12.64) $ 7.58 $ 9.25 $ 11.76 $ 20.92 ========== ========== ========== ========== ========== Diluted: Continuing operations................ $ (1.87) 3.44 6.85 2.43 2.59 Discontinued operations(d)........... (6.23) 4.12 3.72 16.18 18.24 Extraordinary loss(e)................ (.55) -- -- (6.96) -- Cumulative effect of changes in accounting principles(f).......... (3.99) -- (1.35) -- -- ---------- ---------- ---------- ---------- ---------- $ (12.64) $ 7.56 $ 9.22 $ 11.65 $ 20.83 ========== ========== ========== ========== ========== Cash dividends per common share.......... $ 4.50 $ 6.00 $ 6.00 $ 9.00 $ 8.00
22 29
YEARS ENDED DECEMBER 31, ------------------------------------------------------------------ 1999(A) 1998(A) 1997(A) 1996 1995 ------- ------- ------- ---- ---- (MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS) BALANCE SHEET DATA(B): Net assets of discontinued operations(d).......................... $ -- $ 1,739 $ 1,771 $ 1,883 $ 1,469 Total assets............................. 2,943 4,759 4,682 4,653 3,635 Short-term debt(c)....................... 56 304 75 74 109 Long-term debt(c)........................ 1,578 671 713 639 469 Debt allocated to discontinued operations(c).......................... -- 2,456 2,123 1,590 1,454 Minority interest........................ 16 407 408 304 301 Shareholders' equity..................... 422 2,504 2,528 2,646 3,148 STATEMENT OF CASH FLOWS DATA(B): Net cash provided (used) by operating activities............................. $ (254) $ 532 $ 519 $ 253 $ 1,443 Net cash (used) by investing activities............................. (1,188) (754) (887) (685) (1,162) Net cash provided (used) by financing activities............................. 1,495 216 354 147 (356) Capital expenditures for continuing operations............................. 154 195 221 188 208 OTHER DATA: EBITDA(g)................................ $ 292 $ 377 $ 505 $ 336 $ 331 Ratio of earnings to fixed charges(h).... 1.0 2.2 4.8 2.3 2.6
- ------------------------- NOTE: Our financial statements which are discussed in the following notes are included in this Form 10-K. They cover the three years ended December 31, 1999. (a) For a discussion of the significant items affecting comparability of the financial information for the years ended 1999, 1998 and 1997, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." (b) During the periods presented, we completed numerous acquisitions. The most significant acquisition was our acquisition of Clevite for $328 million in July 1996. You should also read "Item 1. Business" included elsewhere in this Annual Report on Form 10-K. (c) Debt amounts for 1998, 1997 and 1996, and for 1999 through November 4, 1999, are net of allocations of corporate debt to the net assets of our discontinued specialty packaging and paperboard packaging segments. Debt amounts for 1995 are net of allocations of corporate debt to the net assets of our discontinued specialty packaging, paperboard packaging, energy, and shipbuilding segments. Interest expense for periods presented is net of interest expense allocated to income from discontinued operations. These allocations of debt and related interest expense are based on the ratio of our investment in the specialty packaging, paperboard packaging, energy, and shipbuilding segments' respective net assets to our consolidated net assets plus debt. You should also read Notes to the Financial Statements of Tenneco Automotive Inc. and Consolidated Subsidiaries for more information. (d) Discontinued operations reflected in the above periods consist of our (1) specialty packaging segment, which was discontinued in August 1999, (2) paperboard packaging segment, which was discontinued in June 1999, (3) energy and shipbuilding segments, which were discontinued in December 1996, and (4) farm and construction equipment segment, which was discontinued in March 1996. You should also read Notes to the Financial Statements of Tenneco Automotive Inc. and Consolidated Subsidiaries for more information. (e) Represents our costs related to prepayment of debt, including the 1996 loss recognized in the realignment of our debt preceding the 1996 corporate reorganization, the 1999 loss recognized in connection with the contribution of the containerboard assets to a new joint venture, and the 1999 loss recognized in the spin-off of Tenneco Packaging Inc. You should also read Notes to the Financial Statements of Tenneco Automotive Inc. and Consolidated Subsidiaries for more information. (f) In 1999, we implemented the American Institute of Certified Public Accountants Statement of Position 98-5, "Reporting on the Costs of Start-up Activities." In addition, effective January 1, 1999, we changed our method of accounting for customer acquisition costs from a deferred method to an expense-as-incurred method. In 1997, we implemented the Financial Accounting Standards Board's Emerging Issues Task Force Issue 97-13, "Accounting for Costs Incurred in Connection with a Consulting Contract that Combines Business Process Reengineering and Information Technology Transformation." In 1994, we adopted Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits." You should also read Notes to the Financial Statements of Tenneco Automotive Inc. and Consolidated Subsidiaries for additional information. (g) EBITDA represents income from continuing operations before interest expense, income taxes, minority interest and depreciation and amortization. EBITDA is not a calculation based upon generally accepted accounting principles. The amounts included in the EBITDA calculation, however, are derived from amounts included in the historical statements of income data. In addition, EBITDA should not be considered as an alternative to net 23 30 income or operating income as an indicator of our operating performance, or as an alternative to operating cash flows as a measure of liquidity. We have reported EBITDA because we believe EBITDA is a measure commonly reported and widely used by investors and other interested parties as an indicator of a company's ability to incur and service debt. We believe EBITDA assists investors in comparing a company's performance on a consistent basis without regard to depreciation and amortization, which can vary significantly depending upon accounting methods, particularly when acquisitions are involved, or nonoperating factors. However, the EBITDA measure presented in this document may not always be comparable to similarly titled measures reported by other companies due to differences in the components of the calculation. (h) For purposes of computing this ratio, earnings generally consist of income from continuing operations before income taxes and fixed charges excluding capitalized interest. Fixed charges consist of interest expense, the portion of rental expense considered representative of the interest factor and capitalized interest. For purposes of computing these ratios, preferred stock dividends have been included in the calculations on a pre-tax basis. 24 31 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. On November 4, 1999, Tenneco Inc. completed the spin-off of its packaging business to shareholders, leaving the automotive business as the sole remaining operating segment. Following the spin-off, Tenneco Inc. changed its name to Tenneco Automotive Inc. In this Management's Discussion and Analysis, when we discuss Tenneco we mean Tenneco Inc. and its consolidated subsidiaries before the spin-off and Tenneco Automotive Inc. and its consolidated subsidiaries after the spin-off. As you read the following review of our financial condition and results of operations, you should also read our financial statements and related notes beginning on page F-1. BACKGROUND OF THE SPIN-OFF TRANSACTION In July 1998, the Board of Directors authorized management to develop a broad range of strategic alternatives to separate the automotive, paperboard packaging, and specialty packaging businesses. Subsequently, we completed the following actions: - In January 1999, we announced an agreement to contribute the containerboard business to a new joint venture with an affiliate of Madison Dearborn Partners. The proceeds from the transaction, including debt assumed by the new joint venture, were approximately $2 billion. The transaction closed in April 1999. We retained a 43 percent interest in the joint venture. - In April 1999, we announced an agreement to sell our folding carton operations to Caraustar Industries. This transaction closed in June 1999. The folding carton operations and the containerboard business together represented our paperboard packaging operating segment. - On November 4, 1999, we completed the spin-off of the common stock of Tenneco Packaging Inc., now known as Pactiv Corporation, to our shareholders. Pactiv included all of the businesses that made up our specialty packaging segment as well as our remaining interest in the containerboard joint venture and our administrative services operations. As a result of this series of transactions, our former specialty and paperboard packaging operating segments are presented as discontinued operations in the accompanying financial statements. You should read Note 2 to the financial statements for more information about our discontinued operations. The morning following the spin-off, we completed a reverse stock split that had been approved by our shareholders in a special meeting held in October 1999. As a result, every five shares of our common stock were converted into one share of our new common stock. Before the spin-off, we realigned substantially all of our existing debt through a combination of tender offers, exchange offers, and other refinancings. To finance the debt realignment, we borrowed under new credit facilities and issued subordinated debt. Pactiv also borrowed under new credit facilities and issued new publicly traded Pactiv debt in exchange for certain series of our publicly traded debt that was outstanding before the debt realignment. Note 4 to the financial statements and the section -- "Liquidity and Capital Resources" have more information about our debt and the debt realignment. 25 32 YEARS 1999 AND 1998 RESULTS FROM CONTINUING OPERATIONS The following tables aggregate and summarize our results from continuing operations:
1999 ------------------------------------------------------------- MINORITY INCOME FROM REVENUE EBIT INTEREST TAXES INTEREST CONTINUING OPS ------- ---- -------- ----- -------- -------------- (MILLIONS) Operating units results................ $3,279 $275 $ (96) $(67) $(23) $ 89 Restructuring charges.................. -- (55) -- 5 -- (50) Spin-off transaction costs and other expenses............................. -- (59) (10) (25) -- (94) "Stand-alone" company expenses......... -- (9) -- 3 -- (6) Previously unallocated Tenneco Inc. expenses............................. -- (4) -- 2 -- (2) ------ ---- ----- ---- ---- ---- Reported results....................... $3,279 $148 $(106) $(82) $(23) $(63) ====== ==== ===== ==== ==== ====
1998 ------------------------------------------------------------- MINORITY INCOME FROM REVENUE EBIT INTEREST TAXES INTEREST CONTINUING OPS ------- ---- -------- ----- -------- -------------- (MILLIONS) Operating units results................ $3,237 $301 $(69) $(40) $(29) $ 163 Restructuring charges.................. -- (53) -- 19 -- (34) Previously unallocated Tenneco Inc. expenses............................. -- (21) -- 8 -- (13) ------ ---- ---- ---- ---- ----- Reported results....................... $3,237 $227 $(69) $(13) $(29) $ 116 ====== ==== ==== ==== ==== =====
Earnings from continuing operations per diluted common share were $3.44 in 1998 compared to a loss of $1.87 in 1999. The following table shows the impact on earnings per diluted common share of the costs and charges reflected in the tables above:
1999 1998 ------ ------ Operating units results..................................... $ 2.65 $ 4.83 Restructuring charges....................................... (1.50) (1.02) Spin-off transaction costs and other expenses............... (2.80) -- "Stand-alone" company expenses.............................. (.17) -- Previously unallocated Tenneco Inc. expenses................ (.05) (.37) ------ ------ Reported earnings per diluted common share from continuing operations................................................ $(1.87) $ 3.44 ====== ======
The reverse stock split we completed on the morning following the spin-off is reflected for all periods in this Management's Discussion and Analysis. You should read Note 7 to the financial statements for more information. OPERATING UNITS RESULTS Net Sales and Operating Revenues
1999 1998 % CHANGE ------ ------ -------- (MILLIONS) North America............................................. $1,760 $1,679 5 Europe.................................................... 1,235 1,252 (1) Rest of World............................................. 284 306 (7) ------ ------ $3,279 $3,237 1 ====== ======
26 33 Revenues from our North American original equipment market increased by 15 percent due primarily to higher volumes. Record-breaking light vehicle production in North America, which increased from about 15.6 million units in 1998 to about 17.0 million units in 1999, or 9 percent, combined with our solid position on many top-selling light truck platforms, were primarily responsible for our North American revenue growth. Revenues from our North American aftermarket business decreased by $70 million in 1999 from 1998. Lower aftermarket exhaust product volumes represented $59 million of the decrease, due primarily to increased price competition and increasing average exhaust system product lives arising from the use of stainless steel by original equipment manufacturers. European revenues were essentially unchanged from 1998. Revenues from our European original equipment exhaust operations increased by $59 million due primarily to higher volumes from new original equipment exhaust program launches. The impact of currency devaluation in Europe on both original equipment and aftermarket operations reduced our revenues in Europe by $56 million. Increased price competition and private branded sales, as well as generally weaker aftermarket industry conditions, also contributed to the year-over-year change in revenues. Revenues from our operations in the rest of the world decreased 7 percent to $284 million compared to $306 million in the prior year. Difficult economic conditions in South America and currency devaluation in Brazil led to a $37 million decrease in revenues. This was partially offset by a 49 percent increase in Asian revenues due primarily to higher volumes. Income Before Interest Expense, Income Taxes, and Minority Interest ("EBIT") We reported EBIT of $148 million in 1999, compared to $227 million in 1998. Each year included costs and charges, shown in the table in the above section - --"Results from Continuing Operations," that have an effect on comparability of the results. These costs and charges are explained in more detail following the discussion of our automotive operating units results. Before considering these costs and charges, our automotive operating units reported EBIT of $275 million in 1999 compared to $301 million in 1998. Those results are shown by segment in the following table:
1999 1998 ---- ---- (MILLIONS) North America............................................... $181 $106 Europe...................................................... 82 159 Rest Of World............................................... 12 36 ---- ---- $275 $301 ==== ====
The increase in our North American EBIT was driven by improvements in both our original equipment market and our aftermarket. The North American aftermarket improved due to significantly reduced marketing and promotional expenses, lower operational costs due to our restructuring initiatives, and lower customer changeover expenses. These improvements were partially offset by the impact of lower sales. Our North American original equipment market improved due to the increase in sales volumes as well as realized operational cost savings initiatives. These improvements in our original equipment business were partially offset by the launch of some lower margin exhaust platforms. While European original equipment volumes were up in 1999, the EBIT impact of this revenue improvement was offset by lower profit margins from the new business and price reductions to original equipment manufacturers on existing exhaust programs. Lower sales of our premium ride control products in the aftermarket, combined with the introduction of private branded ride control products, caused a change in our product mix toward lower margin products. This, combined with higher product sales to original equipment dealer service departments rather than sales through our traditional aftermarket channels, accounted for most of the EBIT decrease in our European aftermarket. Finally, the required change in our accounting for start-up expenses and the impact of European currency devaluation were the other major factors causing the decline in EBIT from our European operations during 1999. 27 34 EBIT from our operations in the rest of the world fell $24 million in 1999, resulting primarily from the currency devaluation and resulting economic instability in South America which reduced EBIT by $28 million. This was partially offset by stronger operating results in Australia from operational cost saving activities and improved original equipment exhaust product mix. EBIT as a Percentage of Revenue The following table shows EBIT as a percentage of revenue by segment before the costs and charges described above:
1999 1998 ---- ---- North America............................................... 10.3% 6.3% Europe...................................................... 6.6 12.7 Rest of World............................................... 4.2 11.8 Total Tenneco Automotive.......................... 8.4% 9.3%
In North America, operating income as a percentage of revenue increased significantly due to proportionately lower aftermarket selling, general, and administrative expenses relative to the change in sales and improved overhead absorption due to higher original equipment volumes. European operating income as a percentage of revenue decreased primarily due to lower aftermarket sales and product mix changes from higher margin to lower margin business in both market channels. The decrease in EBIT margin in the rest of the world was caused primarily by difficult economic conditions and currency devaluation in Brazil, which was partially offset by increased margins in Australia. Restructuring Charges We adopted plans to restructure portions of our operations in both 1998 and 1999. In the fourth quarter of 1998, our Board of Directors approved an extensive restructuring plan designed to reduce administrative and operational overhead costs. We recorded a pre-tax charge to income from continuing operations of $53 million, $34 million after-tax, or $1.02 per diluted common share. Of the pre-tax charge, for operational restructuring plans, $36 million related to the consolidation of the manufacturing and distribution operations of our North American aftermarket business. A staff and related cost reduction plan, which covered employees in both the operating units and corporate operations, cost $17 million. Our aftermarket restructuring involved closing two plant locations and five distribution centers, resulting in eliminating 302 positions. Our staff and related cost reduction plan involved eliminating 454 administrative positions. We wrote down the fixed assets at the locations to be closed to their fair value, less costs to sell, in the fourth quarter of 1998. As a result of the single-purpose nature of the assets, we estimated fair value at scrap value less cost to dispose. We do not expect to receive any significant net cash proceeds from our ultimate disposal of these assets, which should be complete by the fourth quarter of 2000. The effect of suspending depreciation for these impaired assets is a reduction in depreciation and amortization of about $2 million on an annual basis. As of December 31, 1999, we have terminated approximately 670 employees and our North American aftermarket business has closed one plant location and four distribution centers under the 1998 plan. To address customer service and production transfer issues, we have delayed closing one plant location and one distribution center until the first quarter of 2000. We have executed all other restructuring actions, with the exception of the final disposal of certain assets, according to our initial plan, and these actions were completed by year-end 1999. In the fourth quarter of 1999, our Board of Directors approved a second restructuring plan designed to further reduce operational overhead costs. We recorded a pre-tax charge to income from continuing operations of $55 million, $50 million after-tax, or $1.50 per diluted common share. The charge includes $37 million recorded in Europe to close a ride control manufacturing facility and an exhaust just-in-time plant, close or downsize four aftermarket distribution centers, and reduce 28 35 administrative overhead by reducing management employment; $15 million to close a North American exhaust manufacturing facility; and $3 million for employment reductions in South America and Asia. In total, the plan involves eliminating approximately 780 positions. We wrote down the fixed assets at the locations to be closed to their fair value, less costs to sell, in the fourth quarter of 1999. We estimated the fair value for buildings using external real estate valuations or a review of recent sales prices for like buildings in the area surrounding the plant to be closed. As a result of the single-purpose nature of the machinery and equipment to be disposed of, fair value was estimated at scrap value less cost to dispose in most cases. For certain machines that have value in the used equipment market, engineers estimated value based on recent sales of like machines. We expect to receive net cash proceeds of about $11 million when we dispose of these assets. The effect of suspending depreciation for these impaired assets is a reduction in depreciation and amortization expense of about $3 million on an annual basis. We expect to complete all restructuring activities by the middle of 2001. Amounts related to the restructuring plans are shown in the following table:
DECEMBER 31, 1998 1999 1999 CHARGED TO DECEMBER 31, 1999 RESTRUCTURING RESTRUCTURING CASH ASSET RESTRUCTURING RESERVE CHARGE PAYMENTS ACCOUNTS RESERVE ----------------- ------------- -------- ---------- ----------------- Severance................... $15 $21 $10 $-- $26 Asset impairments........... -- 31 -- 31 -- Facility exit costs......... 1 3 2 -- 2 --- --- --- --- --- $16 $55 $12 $31 $28 === === === === ===
We continue to evaluate our cost structure and manufacturing footprint in an effort to identify and evaluate other opportunities to improve our results. These efforts could result in developing further restructuring plans that would involve additional restructuring charges. Spin-off Transaction Costs and Other Expenses In the fourth quarter of 1999, we recorded costs and expenses to complete the series of actions necessary to separate Pactiv from the automotive business. These costs included fees for advisors, costs for accelerated vesting of restricted and performance shares of common stock granted to key employees by Tenneco since 1996, and other fees and expenses directly associated with the spin-off transaction. Also included in the total of $59 million in spin-off transaction costs and other expenses in the table presented earlier in the section "-- Results from Continuing Operations" is a $12 million charge to write down the value of a receivable from a former business that we sold in 1994. Deteriorating performance by that business, as well as a consolidation in its primary industry, has caused us to revise our estimate of the proceeds we will ultimately collect on the receivable. "Stand-Alone" Company Expenses These costs were incurred after the November 4 spin-off transaction date and include the addition of functions necessary for us to operate as a public company as well as administrative costs for information technology and payroll and accounts payable services. We receive these information technology and payroll and accounts payable services from Pactiv under a contractual agreement entered into in connection with the spin-off of Pactiv. We have identified and explained these costs separately to improve comparability since they did not exist in 1998. These costs will, however, continue in future periods. We currently estimate these stand-alone company expenses will be approximately $54 million annually. Of that amount, approximately $40 million relates to the services received under the contract with Pactiv. The contract extends for 24 months from the date of the spin-off. Subsequent to year-end, Pactiv sold the payroll and accounts payable functions to a third party who will continue to provide those services under terms similar to the Pactiv arrangements, except that the term has been extended for an additional year for a total of three years from the date of the spin-off. 29 36 Previously Unallocated Tenneco Inc. Expenses Tenneco Inc. incurred costs at the corporate level that were not allocated to the business units. Some of those historical costs remained in our results due to the manner in which our former corporate operations were split between Pactiv and us. These costs related primarily to a receivables sale program operated by Tenneco Inc. prior to the spin-off. Tenneco Inc.'s receivables sale program was discontinued at the end of the third quarter of 1999. The total amount of expenses previously unallocated by Tenneco Inc. were $21 million in 1998 and $4 million in 1999. All of the 1999 previously unallocated Tenneco Inc. expenses were incurred in the first nine months of 1999. Interest Expense, net of interest capitalized We reported interest expense for our continuing operations of $106 million in 1999, compared to $69 million in 1998. Interest expense allocated to discontinued operations was $118 million in 1999 and $171 million in 1998. The decrease in our total interest expense is due primarily to our lower debt levels as a result of using the proceeds from the containerboard sale to pay down debt. This was partially offset by higher interest expense after the spin-off due to our higher cost of financing. As a result of the realignment of our debt before the spin-off, we borrowed approximately $1.7 billion under our new debt arrangements. The new debt structure is explained in more detail in "-- Liquidity and Capital Resources" later in this Management's Discussion and Analysis and in Note 4 to our financial statements. We allocate interest expense to our discontinued operations based generally on the ratio of net assets of discontinued operations to our total net assets plus debt. We began taking certain debt and balance sheet realignment actions in October of 1999, before the spin-off. As a result of these actions, the ratio for allocating interest changed in October, requiring a reduction in interest allocated to discontinued operations. This adjustment was $10 million, which we have attributed to part of the cost of the spin-off and debt realignment transactions. Income Taxes Our effective tax rate for 1999 was 195 percent. This high effective tax rate relates primarily to the spin-off transaction. In connection with the spin-off, we repatriated earnings from some foreign tax jurisdictions. Since our policy is to reinvest earnings from foreign operations rather than repatriate them to the U.S., this one-time action resulted in a charge to recognize the taxes due on the repatriation. Additionally, some tax benefits previously shared between the automotive and packaging businesses are no longer available to us following the spin-off and this resulted in a tax charge in the fourth quarter. Finally, the 1999 restructuring involves significant activity in Europe where many of the costs of restructuring will not be deductible for tax purposes. Consequently, we recognized no tax benefit for these non-deductible costs. Our effective tax rate for 1998 was 8 percent. This rate was lower than the statutory rate as a result of certain non-recurring foreign and state tax benefits, lower foreign tax rates, and a reduction in our estimated tax liabilities related to certain global tax audits. Minority Interest Minority interest is related primarily to dividends on the preferred stock of a U.S. subsidiary. We repurchased the preferred stock before the spin-off as part of the debt realignment. 30 37 DISCONTINUED OPERATIONS AND EXTRAORDINARY LOSS Revenues and income for the paperboard packaging discontinued operations are shown in the following table:
YEAR ENDED DECEMBER 31 --------------- 1999 1998 ------ ------ Net sales and operating revenues....................... $ 445 $1,570 ====== ====== Income (loss) before income taxes and interest allocation Operations........................................... $ 32 $ 99 Loss on containerboard sale.......................... (343) -- Gain on sale of folding carton....................... 11 -- Gain on sale of joint venture with Caraustar......... -- 15 Gain on sale of non-strategic timberland............. -- 17 ------ ------ (300) 131 Income tax (expense) benefit........................... 120 (48) ------ ------ Income (loss) before interest allocation............... (180) 83 Allocated interest expense, net of income tax.......... (5) (26) ------ ------ Income (loss) from discontinued operations............. $ (185) $ 57 ====== ======
Fourth quarter 1998 results from discontinued operations for the paperboard packaging segment include a pretax charge of $14 million related to a restructuring plan to reduce administrative and operational overhead costs. The paperboard packaging restructuring plan involved closing four box plants and eliminating 78 manufacturing and 198 administrative positions. Revenues and income for the discontinued specialty packaging business and administrative services operations are shown in the following table:
YEAR ENDED DECEMBER 31 --------------- 1999 1998 ------ ------ Net sales and operating revenues....................... $2,419 $2,791 ====== ====== Income before income taxes and interest allocation..... 87 280 Income tax (expense) benefit........................... (29) (113) ------ ------ Income before interest allocation...................... 58 167 Allocated interest expense, net of income tax.......... (81) (85) ------ ------ Income (loss) from discontinued operations............. $ (23) $ 82 ====== ======
Results from discontinued operations for the specialty packaging segment in 1999 include a pre-tax charge of $29 million relating to a plan to realign the headquarters functions. This plan involved severing approximately 40 employees and closing the Greenwich, Connecticut, headquarters facility. Our loss from discontinued operations in 1999 was $208 million, comprised principally of an after-tax loss on sale of the paperboard packaging business of $207 million. This loss on sale includes a $54 million net loss in the fourth quarter, reflecting events that occurred subsequent to the April 1999 sale related to the final settlement of working capital amounts, revisions to actuarially-determined estimates of pension plan effects, and changes in estimates regarding liabilities retained by Pactiv. Earnings per common diluted share from discontinued operations were $4.12 in 1998 compared to a loss per common diluted share of $6.23 in 1999. We recognized extraordinary losses related to the early retirement of debt during 1999. In the first quarter, we recognized an extraordinary loss of $7 million net of income tax, or $ .21 per common diluted 31 38 share, related to debt retired in connection with the containerboard sale. In the fourth quarter, we recognized an extraordinary loss of $11 million net of income tax, or $.34 per common diluted share, for the cost of debt retired in connection with the debt realignment necessary to accomplish the spin-off. This extraordinary loss related to the debt securities that were retired in the cash tender offer. We did not recognize any gain or loss on the debt securities retired in the offer to exchange Pactiv debt securities for our debt securities since the terms of the Pactiv debt securities were not "substantially different" from the terms of our debt securities. CHANGES IN ACCOUNTING PRINCIPLES In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which establishes new accounting and reporting standards for the costs of computer software developed or obtained for internal use. This statement required prospective application for fiscal years beginning after December 15, 1998. We adopted SOP 98-1 on January 1, 1999. The impact of this new standard did not have a significant effect on our financial position or results of operations. In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-up Activities," which requires costs of start-up activities to be expensed as incurred. This statement was effective for fiscal years beginning after December 15, 1998. The statement requires previously capitalized costs related to start-up activities to be expensed as a cumulative effect of a change in accounting principle when the statement is adopted. Prior to January 1, 1999, we capitalized some costs related to start-up activities, primarily pre-production design and development costs for new automobile original equipment platforms. We adopted SOP 98-5 on January 1, 1999, and recorded an after-tax charge for the cumulative effect of this change in accounting principle of $102 million (net of a $50 million tax benefit), or $3.04 per diluted common share. The change in accounting principle decreased income from continuing operations by $19 million (net of a $11 million tax benefit), or $.56 per diluted common share, for the year ended December 31, 1999. If the new accounting method had been applied retroactively, income from continuing operations for the years ended December 31, 1998 and 1997, would have been lower by $19 million (net of a $12 million tax benefit), or $.57 per diluted common share, and $18 million (net of a $12 million tax benefit), or $.54 per diluted common share, respectively. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes new accounting and reporting standards requiring that all derivative instruments, including derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting treatment. This statement cannot be applied retroactively and is effective for all fiscal years beginning after June 15, 2000. We are currently evaluating the new standard and have not yet determined the impact it will have on our financial position or results of operations. Effective January 1, 1999, we changed our method of accounting for customer acquisition costs from a deferral method to an expense-as-incurred method. In connection with the decision to separate the automotive and specialty packaging businesses into independent public companies, we determined that a change to an expense-as-incurred method of accounting for automotive aftermarket customer acquisition costs was preferable in order to permit improved comparability of stand-alone financial results with our aftermarket industry competitors. We recorded an after-tax charge for the cumulative effect of this change in accounting principle of $32 million (net of a $22 million tax benefit), or $.95 per diluted common share. The change in accounting principle increased income from continuing operations by $10 million (net of $6 million in income tax expense), or $.30 per diluted common share, for the year ended December 31, 1999. If the new accounting principle had been applied retroactively, income from 32 39 continuing operations for the years ended December 31, 1998 and 1997, would have been lower by $4 million (net of a $3 million income tax benefit), or $.11 per diluted common share, and $12 million (net of a $8 million income tax benefit), or $.35 per diluted common share, respectively. LIQUIDITY AND CAPITAL RESOURCES Capitalization
DECEMBER 31, DECEMBER 31, 1999 1998 ------------ ------------ Short term debt and current maturities...................... $ 56 $ 304 Long term debt.............................................. 1,578 671 Debt allocated to discontinued operations................... -- 2,456 ------ ------ Total debt.................................................. 1,634 3,431 ------ ------ Minority interest of continuing operations.................. 16 407 Minority interest allocated to discontinued operations...... -- 14 ------ ------ Total minority interest..................................... 16 421 ------ ------ Common shareholders' equity................................. 422 2,504 ------ ------ Total capitalization........................................ $2,072 $6,356 ====== ======
Our debt and equity balances at December 31, 1999, reflect the impact of the debt realignment and spin-off transactions. At December 31, 1999, we had no borrowings under our revolving credit facility. Our short-term debt relates primarily to borrowings by foreign subsidiaries. Our long-term debt balance consists of borrowings made under new credit agreements described below to facilitate the debt realignment, as well as approximately $21 million of public debt that was not retired in the cash tender and exchange offers. Our equity at December 31, 1999, reflects the effect of the spin-off of Pactiv to our shareholders. This transaction resulted in a $1,448 million reduction to common equity. Equity was also reduced during 1999 by cumulative translation adjustments resulting from the strong U.S. dollar, by the loss recognized primarily as a result of the spin-off transaction, and dividends of $151 million issued for the first three quarters of 1999. Prior to the spin-off, we realigned substantially all of our existing debt. To accomplish this, we initiated an offer to exchange Pactiv debt securities for some of our debt securities having a book value of $1,166 million. We also initiated a cash tender offer to purchase debt securities having a book value of $1,374 million and repaid substantially all of our short-term borrowings. Finally, we retired approximately $400 million of subsidiary preferred stock. These transactions were financed by borrowings under our new credit facility, senior subordinated debt that we issued, and borrowings by Pactiv under new credit facilities. The debt of Pactiv was rated investment grade and our debt was rated noninvestment grade by debt rating agencies. As part of the debt realignment, on September 30, 1999, we entered into a $1.55 billion committed senior secured financing arrangement with a syndicate of banks and other financial institutions consisting of: (i) a $500 million, six-year revolving credit facility; (ii) a $450 million six-year term loan; (iii) a $300 million eight-year term loan and; (iv) a $300 million eight-and-one-half-year term loan. This financing is secured by substantially all of our tangible and intangible U.S. assets, the capital stock of our material U.S. subsidiaries and up to 66 percent of the capital stock of our first-tier foreign subsidiaries. It is also guaranteed by our material U.S. subsidiaries. We will pay a portion of each term loan in quarterly installments beginning September 30, 2001. Borrowings under this facility bear interest at an annual rate equal to, at our option, either (i) the London Interbank Offering Rate plus a margin of 275 basis points for the six-year revolving credit facility and the six-year term loan, 325 basis points for the eight-year term loan and 350 basis points for the eight-and-one-half-year term loan; or (ii) a rate consisting of the greater of The Chase Manhattan Bank's prime rate or the Federal Funds rate plus 50 basis points, plus a margin 33 40 of 175 basis points for the six-year revolving credit facility and the six-year term loan, 225 basis points for the eight-year term loan and 250 basis points for the eight-and-one-half-year term loan. Under the provisions of the senior credit facility agreement, the interest margins for borrowings under the revolving credit facility and the six-year term loan may be adjusted based on our consolidated leverage ratio (total debt divided by consolidated earnings before interest, taxes, depreciation, and amortization ("EBITDA") as defined in the senior credit facility agreement) measured at the end of each quarter starting with the fiscal quarter ending December 31, 2000. The senior credit facility agreement requires that we initially maintain: (i) a consolidated leverage ratio (consolidated indebtedness divided by consolidated EBITDA) not greater than 4.75; (ii) a consolidated interest coverage ratio (consolidated EBITDA divided by consolidated interest expense) not less than 2.00; and (iii) a consolidated fixed charge coverage ratio (consolidated EBITDA less consolidated capital expenditures, divided by consolidated interest expense) not less than 1.00. Under the terms of the senior credit facility agreement, the maximum permitted consolidated leverage ratio will decrease beginning in the year 2001, the minimum permitted consolidated interest coverage ratio will increase beginning in the year 2001, and the minimum permitted consolidated fixed charge coverage ratio will increase beginning in the year 2002. The senior credit facility agreement also contains restrictions on our operations that are customary for similar facilities, including limitations on: (a) incurring additional liens; (b) sale and leaseback transactions; (c) liquidations and dissolutions; (d) incurring additional indebtedness or guarantees; (e) capital expenditures; (f) dividends; (g) mergers and consolidations; and (h) prepayments and modifications of subordinated and other debt instruments. Compliance with these requirements and restrictions is a condition for any incremental borrowings under the senior credit facility agreement and failure to meet these requirements enables the lenders to require us to repay any outstanding loans. On October 14, 1999, we issued $500 million of 11 5/8 percent senior subordinated notes due in 2009. The senior subordinated debt indenture requires that we, as a condition to incurring certain types of indebtedness not otherwise permitted, initially maintain an interest coverage ratio of not less than 2.00. Under the terms of the indenture, the minimum interest coverage ratio will increase beginning in 2001. The indenture also contains restrictions on our operations, including limitations on: (1) incurring additional indebtedness or liens; (2) dividends; (3) distributions and stock repurchases; (4) investments; and (5) mergers and consolidations. Capital Commitments We estimate that expenditures of approximately $81 million will be required after December 31, 1999, to complete facilities and projects authorized at that date, and we have made substantial commitments in connection with these facilities and projects. Dividends on Common Stock In October 1999, our shareholders approved an amendment to the Certificate of Incorporation providing for a one-for-five reverse stock split of Tenneco's common stock. As a result, the reverse stock split is reflected in the historical dividends declared on our common shares. We declared dividends on our common shares of $1.50 per share for each quarter in 1998 and the first three quarters of 1999. During the fourth quarter of 1999, no cash dividends were paid. Now that the spin-off of Pactiv is complete, we are highly leveraged and restricted with respect to paying dividends by the terms of our financing arrangements. On January 12, 2000, we announced that our Board of Directors declared a first quarter dividend of 5 cents per share payable on March 14, 2000, to shareholders of record at the close of business on February 25, 2000. 34 41 Cash Flows
1999 1998 ------ ----- (MILLIONS) Cash provided (used) by: Operating activities -- continuing operations............. $ (1) $ 63 Investing activities -- continuing operations............. (227) (278) Financing activities...................................... 1,495 216
Operating Activities Cash provided by continuing operating activities, including cash transaction related and stand-alone expenses, declined by $64 million for 1999 compared to 1998. Income from continuing operations, inclusive of transaction and stand-alone expenses, and restructuring and other charges, was $179 million lower, and investments in working capital were $70 million more in 1999 compared to 1998. The increase in working capital was attributable primarily to the $112 million increase in accounts receivable arising primarily from the termination of the domestic accounts receivable factoring program operated by Tenneco Inc. Net deferred income tax liabilities increased by $97 million in 1999. The majority of this increase is related to the spin-off transaction and reallocation of tax assets between us and our discontinued operations. Cash provided by our discontinued operations declined by $722 million in 1999 compared to 1998. The paperboard operations were responsible for $213 million, which is attributable primarily to the purchase of containerboard business accounts receivable in contemplation of the sale of the containerboard business in April. Transaction expenses related to the spin-off reduced discontinued operations cash flow by an additional $164 million. Additionally, containerboard results are reflected for the first four months in 1999 and for the full year in 1998 due to the sale of this business, and the specialty business results are reflected for the first 10 months in 1999 and for the full year in 1998 due to the spin-off. Investing Activities Cash used by investing activities for continuing operations was $51 million higher in 1999 compared to 1998. Capital expenditures were $41 million lower in 1999 compared to 1998 due to more effective capital management. This was offset by the acquisition of Kinetic Ltd., an Australian suspension engineering company, for $36 million in May 1999. Cash used by other investing activities was $45 million. Discontinued operations and adjustments related to the spin-off accounted for $24 million of this total and investments in other intangible assets accounted for most of the balance in other investing activities. Cash used by investments in discontinued operations increased by $476 million in 1999 compared to 1998. During the second quarter of 1999, Pactiv acquired for approximately $1.1 billion certain assets previously used by the containerboard business under operating leases and timber cutting rights. This was required in order to complete the April containerboard sale. The source of the funds for these capital expenditures was borrowings by Pactiv prior to the containerboard sale. See "Financing Activities" below. We also received approximately $300 million in proceeds related to the containerboard and folding carton sale transactions. Financing Activities Excluding financing activities required to complete the containerboard sale transaction and the spin-off of Pactiv, cash provided by financing activities was $545 million in 1999. This reflected primarily the impact of our debt realignment discussed earlier in the section -- "Liquidity and Capital Resources" You should also read Note 1, "Summary of Accounting Policies -- Allocation of Corporate Debt and Interest Expense," for more information. 35 42 Before the containerboard sale transaction, Pactiv borrowed approximately $1.8 billion. Pactiv used these borrowings to acquire the assets used under operating leases and timber cutting rights described under "Investing Activities" above, and to purchase the containerboard business accounts receivable described under "Operating Activities" above. Pactiv remitted the balance of the borrowings to us to retire short-term debt. Pactiv contributed the containerboard business to the new joint venture, including approximately $1.8 billion in new debt. The debt reduction that resulted from this contribution is shown on the Statements of Cash Flows as a non-cash financing activity. YEAR 2000 We completed all Year 2000 remediation efforts by December 31, 1999. No material Year 2000 issues were identified at significant vendors, at customers or at any of our locations. Our total cost to address the Year 2000 issues was about $16 million. EURO CONVERSION The European Monetary Union resulted in the adoption of a common currency, the "euro," among 11 European nations. The euro is being adopted over a three-year transition period beginning January 1, 1999. In October 1997, we established a cross-functional Euro Committee, comprised of representatives of our operational divisions as well as our corporate offices. That committee had two principal objectives: (1) to determine the impact of the euro on our business operations, and (2) to recommend and facilitate implementation of those steps necessary to ensure that we would be fully prepared for the euro's introduction. As of January 1, 1999, we implemented those euro conversion procedures that we determined were necessary and prudent to adopt by that date, and we are on track to becoming fully "euro ready" on or before the conclusion of the three-year euro transition period. We believe that the costs associated with transitioning to the euro will not be material to our consolidated financial position or results of operations. ENVIRONMENTAL AND OTHER MATTERS We and certain of our subsidiaries and affiliates are parties to environmental proceedings. We expense or capitalize, as appropriate, expenditures for ongoing compliance with environmental regulations that relate to current operations. We expense expenditures that relate to an existing condition caused by past operations and that do not contribute to current or future revenue generation. We record liabilities when environmental assessments indicate that remedial efforts are probable and the costs can be reasonably estimated. Estimates of the liability are based upon currently available facts, existing technology, and presently enacted laws and regulations taking into consideration the likely effects of inflation and other societal and economic factors. We consider all available evidence including prior experience in remediation of contaminated sites, other companies' cleanup experience and data released by the United States Environmental Protection Agency or other organizations. These estimated liabilities are subject to revision in future periods based on actual costs or new information. We report these liabilities in the balance sheet at their undiscounted amounts. We evaluate recoveries separately from the liability and, when they are assured, recoveries are recorded and reported separately from the associated liability in our financial statements. At December 31, 1999, we had been designated as a potentially responsible party in four Superfund sites. We have estimated our share of the remediation costs for these sites to be approximately $1 million in the aggregate. In addition to the Superfund sites, we may have the obligation to remediate current or former facilities, and we estimate our share of remediation costs at these facilities to be approximately $15 million. For both the Superfund sites and the current and former facilities, we have established reserves that we believe are adequate for these costs. Although we believe our estimates of remediation costs are reasonable and are based on the latest available information, the cleanup costs are estimates and are subject to revision as more information becomes available about the extent of remediation required. At some sites, we expect that other parties will contribute to the remediation costs. In addition, at the Superfund sites, the Comprehensive Environmental Response, Compensation and Liability Act provides that our liability could be joint and several, meaning that we could be required to pay in excess of our share of remediation costs. Our understanding of the financial strength of other potentially responsible 36 43 parties has been considered, where appropriate, in our determination of our estimated liability. We believe that the costs associated with our current status as a potentially responsible party in the Superfund sites, or as a liable party at our current or former facilities, will not be material to our consolidated financial position or results of operations. We estimate that our capital expenditures for environmental matters will be $3 million and $4 million for 2000 and 2001, respectively. We are a party to various other legal proceedings arising from our operations. We believe that the outcome of these other proceedings, individually and in the aggregate, will not have a material adverse effect on our financial position or results of operations. DERIVATIVE FINANCIAL INSTRUMENTS FOREIGN CURRENCY EXCHANGE RATE RISK We use derivative financial instruments, principally foreign currency forward purchase and sale contracts with terms of less than one year, to hedge our exposure to changes in foreign currency exchange rates. Our primary exposure to changes in foreign currency rates results from intercompany loans made between affiliates to minimize the need for borrowings from third parties. Additionally, we enter into foreign currency forward purchase and sale contracts to mitigate our exposure to changes in exchange rates on certain intercompany and third-party trade receivables and payables. We have from time to time also entered into forward contracts to hedge our net investment in foreign subsidiaries. We do not currently enter into derivative financial instruments for speculative purposes. In managing our foreign currency exposures, we identify and aggregate existing offsetting positions and then hedge residual exposures through third-party derivative contracts. The following table summarizes by major currency the notional amounts, weighted average settlement rates, and fair value for foreign currency forward purchase and sale contracts as of December 31, 1999. All contracts in the following table mature in 2000.
DECEMBER 31, 1999 ----------------- NOTIONAL AMOUNT WEIGHTED AVERAGE FAIR VALUE IN FOREIGN CURRENCY SETTLEMENT RATES IN U.S. DOLLARS ------------------- ----------------- --------------- (MILLIONS EXCEPT SETTLEMENT RATES) Australian dollars................. -Purchase 8 0.656 $ 5 -Sell (61) 0.656 (40) British pounds..................... -Purchase 108 1.615 175 -Sell (92) 1.615 (149) Canadian dollars................... -Purchase 18 0.692 12 -Sell (97) 0.692 (67) Czech Republic koruna.............. -Purchase 32 0.028 1 -Sell (551) 0.028 (15) Danish kroner...................... -Purchase -- 0.135 -- -Sell (340) 0.135 (46) European euro...................... -Purchase 38 1.007 38 -Sell (26) 1.007 (26) U.S. dollars....................... -Purchase 153 1.000 153 -Sell (35) 1.000 (35) Other.............................. -Purchase 43 0.143 6 -Sell (150) 0.079 (12) ----- $ -- =====
INTEREST RATE RISK Following the realignment of our debt in connection with the spin-off of Pactiv, our financial instruments that are sensitive to market risk for changes in interest rates are our debt securities. We 37 44 primarily use a revolving credit facility to finance our short-term capital requirements. We pay a current market rate of interest on these borrowings. We financed our long-term capital requirements with long-term debt with original maturity dates ranging from six to 10 years. We have $500 million of long-term debt obligations that have fixed interest rates and $1.05 billion of long-term debt obligations that have variable interest rates based on a current market rate of interest. If we were to redeem our fixed rate, long-term debt securities prior to their stated maturity, we would generally incur costs based on the fair value of the debt at that time plus any applicable early payment premiums. Under the terms of our senior credit facility agreement, we are required to hedge our exposure to floating interest rates within 180 days following the spin-off so that at least 50 percent of our long-term debt is fixed for a period of at least three years. In February 2000, we hedged $250 million of our floating rate long-term debt with three-year, floating to fixed interest rate swaps. We must hedge about $50 million more of our long-term, floating rate debt to satisfy the interest rate hedging requirement of the senior credit facility agreement. We estimate that the fair value of our long-term debt at December 31, 1999, was about the same as its book value. The fair value of the floating rate portion of our long-term debt does not change as interest rates change. A one percent increase or decrease in interest rates would increase or decrease the interest expense we recognize in the income statement and the cash we pay for interest expense by about $6 million after tax. The interest rate swaps we entered into after the end of the year would have reduced the effect of a one percent change in interest rates by about $1 million after tax. The statements and other information (including the tables) in this "Derivative Financial Instruments" section constitute "forward-looking statements." YEARS 1998 AND 1997 RESULTS OF CONTINUING OPERATIONS We reported income from continuing operations of $116 million for the year ended December 31, 1998, compared to $234 million for the same period in 1997. The 1998 figure includes a $34 million after tax charge to restructure the automotive aftermarket business and to reduce overhead and manufacturing costs throughout every part of the business. Excluding the restructuring charge, our income from continuing operations for the 1998 period was $150 million compared to $234 million for the year ended December 31, 1997. While our operating income declined, we also experienced higher interest expense and minority interest. Net Sales and Operating Revenues
1998 1997 % CHANGE ------ ------ -------- (MILLIONS) North America............................................. $1,679 $1,719 (2) Europe.................................................... 1,252 1,173 7 Rest of World............................................. 306 334 (8) ------ ------ $3,237 $3,226 -- ====== ======
Our revenue for 1998 was essentially flat with 1997 as increases in original equipment revenue in North America and Europe of $215 million were offset by a $165 million decline in aftermarket revenues throughout the world and a $54 million reduction due to the adverse impact of a strong U.S. dollar, with the remaining change due to the mix of products sold. Original equipment revenue increased as we continued to place our ride control and exhaust products on many of the world's bestselling vehicles. Lower aftermarket demand was driven by customer consolidations that temporarily increased field inventory levels in North America and Europe; milder than normal winter weather; and continuing soft Asian and South American replacement markets. Additionally, we began reducing our quarterly promotional programs in an effort to better balance supply and demand going into 1999. 38 45 Income Before Interest Expense, Income Taxes, and Minority Interest ("EBIT") The following table presents EBIT for the years 1998 and 1997:
1998 1997 % CHANGE ---- ---- -------- (MILLIONS) North America............................................... $ 58 $216 (73) Europe...................................................... 155 153 1 Rest of World............................................... 35 38 (8) ---- ---- Automotive.................................................. 248 407 (39) Previously unallocated Tenneco Inc. expenses................ (21) (12) NM ---- ---- $227 $395 (43) ==== ====
Excluding restructuring charges, a comparison of our 1998 and 1997 EBIT is as follows:
1998 1997 % CHANGE ---- ---- -------- (MILLIONS) North America............................................... $106 $216 (51) Europe...................................................... 159 153 4 Rest of World............................................... 36 38 (5) ---- ---- Automotive.................................................. 301 407 (26) Previously unallocated Tenneco Inc. expenses................ (21) (12) NM ---- ---- $280 $395 (29) ==== ====
Our EBIT in 1998 reflected strong volume growth in the original equipment business that was more than offset by lower volumes in the aftermarket. The net impact of volume was a decline in EBIT of $43 million. Adverse currency movements caused a further deterioration of $14 million. The 1997 EBIT included $10 million related to the favorable resolution of a legal action and a net reduction of $4 million in certain reserves, related primarily to ongoing reorganization initiatives that had proceeded more rapidly and efficiently than planned, allowing us to adjust our cost estimate for completing the initiatives. Charges in 1998 for bad debts, a higher level of costs related to customer acquisition activity and marketing, and pricing adjustments in the original equipment business produced the balance of the earnings decline. The previously unallocated Tenneco Inc. expenses in both 1998 and 1997 related primarily to the loss from the sale of accounts receivable. EBIT as a Percentage of Revenue Excluding the fourth quarter 1998 restructuring charge described previously, EBIT as a percentage of revenue for 1998 and 1997 was as follows:
1998 1997 ----- ----- North America............................................... 6.3% 12.6% Europe...................................................... 12.7% 13.0% Rest of World............................................... 11.8% 11.4% Automotive.................................................. 9.3% 12.6% Total....................................................... 8.7% 12.2%
Interest Expense, net of interest capitalized We incurred interest expense of $69 million, a $11 million increase over 1997. For the year 1998, we allocated $171 million of interest expense to discontinued operations compared with $158 million during 1997. Adjusting for the allocation, interest expense increased by $24 million. This increase was attributable to higher average debt levels in 1998 resulting from our acquisition of the protective and flexible packaging 39 46 business of KNP BT in late April 1997 for the specialty packaging segment, a higher level of working capital to support higher revenue levels, and common share repurchase activity. Income Taxes Our effective tax rate for 1998 was 8 percent, compared to 24 percent for 1997. The 1998 effective tax rate was lower than the statutory rate as a result of certain nonrecurring foreign and state tax benefits, lower foreign tax rates, and a reduction in our estimated tax liabilities related to certain global tax audits. The 1997 effective tax rate benefitted from the nonrecurring impact of certain foreign tax benefits and the benefit of previously unrecognized deferred tax assets. Minority Interest Minority interest was $29 million in 1998, compared to $23 million in 1997. This represents primarily dividends on the preferred stock of a U.S. subsidiary. In December 1997, this subsidiary issued additional preferred stock. You should read Note 9 to the financial statements for additional information. DISCONTINUED OPERATIONS Read Note 2 to the financial statements for information regarding the results of our discontinued operations. CHANGE IN ACCOUNTING PRINCIPLE As required by the FASB's Emerging Issues Task Force Issue 97-13, "Accounting for Costs Incurred in Connection with a Consulting Contract that Combines Business Process Reengineering and Information Technology Transformation," we recorded an aftertax charge of $46 million, or $1.35 per diluted common share, in the fourth quarter of 1997, which was reported as a cumulative effect of a change in accounting principle. EARNINGS PER SHARE Income from continuing operations was $3.44 per diluted common share for 1998, compared to $6.85 per diluted common share in 1997. Discontinued operations contributed $4.12 per diluted common share for 1998 compared to $3.72 per diluted common share for 1997. For 1997, we also recorded a charge for the cumulative effect of a change in accounting principle noted above of $1.35 per diluted common share, resulting in net income of $9.22 per diluted common share compared to $7.56 per diluted common share for 1998. CASH FLOWS
1998 1997 ----- ----- (MILLIONS) Cash provided (used) by: Operating activities -- continuing operations............. $ 63 $ 211 Investing activities -- continuing operations............. (278) (289) Financing activities...................................... 216 354
Operating Activities Cash flow provided by operating activities was $148 million lower in 1998 than in 1997. Income from continuing operations was $118 million lower than in 1997, largely as a result of higher interest expense and the restructuring charge taken during the fourth quarter of 1998, for which the bulk of the cash outflows occurred during 1999. Noncash charges for deferred income taxes were higher in 1997 than in 1998, primarily as a result of tax benefits derived from the 1996 reorganization and debt realignment and a 1996 tax net operating loss that was carried back to earlier years. 40 47 Investing Activities Investing activities used $11 million less cash in 1998 than in 1997. Capital expenditures for continuing operations declined by $26 million in 1998. Cash used for acquisitions decreased by $26 million in 1998 compared to 1997. In 1998, we acquired the minority interest of a Brazilian subsidiary for $3 million. Capital expenditures and acquisitions for discontinued operations decreased in 1998 by $124 million, as lower acquisitions in 1998 were partially offset by higher capital spending. During 1998, the most significant acquisitions were Richter Manufacturing, a North American protective packaging business, and the Belvidere, Illinois dual ovenable paperboard tray manufacturing facility of Champion International. Acquisition activity in 1997 related primarily to the purchase of KNP BT's protective and flexible packaging business. The higher capital expenditures were primarily a result of $84 million spent to acquire certain leased timberlands in contemplation of the separation of the containerboard assets from our other businesses. Financing Activities Financing activities in 1998 generated $138 million less cash than in 1997. During 1997, a subsidiary issued preferred stock for net proceeds of $99 million. During 1998, we repurchased $22 million more of our common stock than in 1997. During 1997, we refinanced a portion of our short-term debt by issuing $600 million of long-term debt. The net proceeds of these debt offerings was $593 million. During 1998, our short-term debt (excluding current maturities on long-term debt) increased by $540 million. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The section entitled "Derivative Financial Instruments" in Item 7, "Management's Discussion and Analysis of Financial Conditions and Results of Operations" is incorporated herein by reference. 41 48 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO FINANCIAL STATEMENTS OF TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES
PAGE ---- Report of independent public accountants.................... 43 Statements of income (loss) for each of the three years in the period ended December 31, 1999........................ 44 Balance sheets -- December 31, 1999 and 1998................ 45 Statements of cash flows for each of the three years in the period ended December 31, 1999............................ 46 Statements of changes in shareholders' equity for each of the three years in the period ended December 31, 1999..... 47 Statements of comprehensive income (loss) for each of the three years in the period ended December 31, 1999......... 48 Notes to financial statements............................... 49
42 49 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Tenneco Automotive Inc.: We have audited the accompanying balance sheets of Tenneco Automotive Inc. (a Delaware corporation) and consolidated subsidiaries (see Note 1) as of December 31, 1999 and 1998, and the related statements of income, cash flows, changes in shareholders' equity and comprehensive income for each of the three years in the period ended December 31, 1999. These financial statements and the schedule referred to below are the responsibility of Tenneco Automotive Inc.'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 financial statements referred to above present fairly, in all material respects, the financial position of Tenneco Automotive Inc. and consolidated subsidiaries as of December 31, 1999 and 1998, and the results of their operations and cash flows for each of the three years in the period ended December 31, 1999, in conformity with generally accepted accounting principles. As discussed in Note 1 to the financial statements, in 1999 Tenneco Automotive Inc. changed its methods of accounting for the costs of start-up activities and for customer acquisition costs, and in 1997 changed its method of accounting for certain costs incurred in connection with information technology transformation projects. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedule of Tenneco Automotive Inc. and consolidated subsidiaries is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. The supplemental schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements of Tenneco Automotive Inc. and consolidated subsidiaries taken as a whole. ARTHUR ANDERSEN LLP Chicago, Illinois January 24, 2000 43 50 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES STATEMENTS OF INCOME (LOSS)
YEARS ENDED DECEMBER 31, ----------------------------------------------- 1999 1998 1997 ------------- ------------- ------------- (MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS) REVENUES Net sales and operating revenues........................ $ 3,279 $ 3,237 $ 3,226 Other income, net....................................... 13 (25) 37 ----------- ----------- ----------- 3,292 3,212 3,263 ----------- ----------- ----------- COSTS AND EXPENSES Cost of sales (exclusive of depreciation shown below)... 2,427 2,332 2,303 Engineering, research, and development.................. 52 31 34 Selling, general, and administrative.................... 521 472 421 Depreciation and amortization........................... 144 150 110 ----------- ----------- ----------- 3,144 2,985 2,868 ----------- ----------- ----------- INCOME BEFORE INTEREST EXPENSE, INCOME TAXES, AND MINORITY INTEREST................................................ 148 227 395 Interest expense (net of interest capitalized)........ 106 69 58 Income tax expense.................................... 82 13 80 Minority interest..................................... 23 29 23 ----------- ----------- ----------- INCOME (LOSS) FROM CONTINUING OPERATIONS.................. (63) 116 234 Income (loss) from discontinued operations, net of income tax..................................................... (208) 139 127 ----------- ----------- ----------- Income (loss) before extraordinary loss................... (271) 255 361 Extraordinary loss, net of income tax..................... (18) -- -- ----------- ----------- ----------- Income (loss) before cumulative effect of changes in accounting principles................................... (289) 255 361 Cumulative effect of changes in accounting principles, net of income tax........................................... (134) -- (46) ----------- ----------- ----------- NET INCOME (LOSS)......................................... $ (423) $ 255 $ 315 =========== =========== =========== EARNINGS (LOSS) PER SHARE Average shares of common stock outstanding -- Basic................................................. 33,480,686 33,701,115 34,052,946 Diluted............................................... 33,656,063 33,766,906 34,160,327 Basic earnings (loss) per share of common stock -- Continuing operations................................. $ (1.87) $ 3.45 $ 6.87 Discontinued operations............................... (6.23) 4.13 3.73 Extraordinary loss.................................... (.55) -- -- Cumulative effect of changes in accounting principles......................................... (3.99) -- (1.35) ----------- ----------- ----------- $ (12.64) $ 7.58 $ 9.25 =========== =========== =========== Diluted earnings (loss) per share of common stock -- Continuing operations................................. $ (1.87) $ 3.44 $ 6.85 Discontinued operations............................... (6.23) 4.12 3.72 Extraordinary loss.................................... (.55) -- -- Cumulative effect of changes in accounting principles......................................... (3.99) -- (1.35) ----------- ----------- ----------- $ (12.64) $ 7.56 $ 9.22 =========== =========== =========== Cash dividends per share of common stock.................. $ 4.50 $ 6.00 $ 6.00 =========== =========== ===========
The accompanying notes to financial statements are an integral part of these statements of income (loss). 44 51 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES BALANCE SHEETS
DECEMBER 31, ---------------- 1999 1998 ------ ------ (MILLIONS) ASSETS Current assets: Cash and temporary cash investments....................... $ 84 $ 29 Receivables -- Customer notes and accounts, net....................... 557 430 Other.................................................. 14 13 Inventories............................................... 412 414 Deferred income taxes..................................... 59 39 Prepayments and other..................................... 75 139 ------ ------ 1,201 1,064 ------ ------ Other assets: Long-term notes receivable, net........................... 20 23 Goodwill and intangibles, net............................. 495 499 Deferred income taxes..................................... 13 39 Pension assets............................................ 31 101 Other..................................................... 146 201 ------ ------ 705 863 ------ ------ Plant, property, and equipment, at cost..................... 1,923 1,944 Less -- Reserves for depreciation and amortization........ 886 851 ------ ------ 1,037 1,093 ------ ------ Net assets of discontinued operations....................... -- 1,739 ------ ------ $2,943 $4,759 ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt (including current maturities on long-term debt).................................................. $ 56 $ 304 Trade payables............................................ 348 337 Accrued taxes............................................. 20 31 Accrued interest.......................................... 29 37 Accrued liabilities....................................... 149 124 Other..................................................... 61 76 ------ ------ 663 909 ------ ------ Long-term debt.............................................. 1,578 671 ------ ------ Deferred income taxes....................................... 108 98 ------ ------ Postretirement benefits..................................... 125 139 ------ ------ Deferred credits and other liabilities...................... 31 31 ------ ------ Commitments and contingencies Minority interest........................................... 16 407 ------ ------ Shareholders' equity: Common stock.............................................. -- -- Premium on common stock and other capital surplus......... 2,721 2,712 Accumulated other comprehensive income (loss)............. (179) (91) Retained earnings (accumulated deficit)................... (1,880) 142 ------ ------ 662 2,763 Less -- Shares held as treasury stock, at cost............ 240 259 ------ ------ 422 2,504 ------ ------ $2,943 $4,759 ====== ======
The accompanying notes to financial statements are an integral part of these balance sheets. 45 52 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, --------------------------- 1999 1998 1997 ------- ----- ------- (MILLIONS) OPERATING ACTIVITIES Income (loss) from continuing operations.................... $ (63) $ 116 $ 234 Adjustments to reconcile income (loss) from continuing operations to cash provided (used) by continuing operations-- Depreciation and amortization........................... 144 150 110 Deferred income taxes................................... 97 (76) 31 (Gain) loss on sale of businesses and assets, net....... 6 20 20 Changes in components of working capital-- (Increase) decrease in receivables.................... (151) (88) (25) (Increase) decrease in inventories.................... (23) (32) (12) (Increase) decrease in prepayments and other current assets............................................... 14 26 (79) Increase (decrease) in payables....................... 46 (12) 107 Increase (decrease) in accrued taxes.................. (43) (9) (8) Increase (decrease) in accrued interest............... (7) -- 30 Increase (decrease) in other current liabilities...... (11) 10 (108) Other................................................... (10) (42) (89) ------- ----- ------- Cash provided (used) by continuing operations............... (1) 63 211 Cash provided (used) by discontinued operations............. (253) 469 308 ------- ----- ------- Net cash provided (used) by operating activities............ (254) 532 519 ------- ----- ------- INVESTING ACTIVITIES Net proceeds related to the sale of discontinued operations................................................ 303 22 24 Net proceeds from sale of businesses and assets............. 8 10 5 Expenditures for plant, property, and equipment............. (154) (195) (221) Acquisitions of businesses.................................. (36) (3) (29) Expenditures for plant, property, and equipment and business acquisitions--discontinued operations..................... (1,264) (498) (622) Investments and other....................................... (45) (90) (44) ------- ----- ------- Net cash provided (used) by investing activities............ (1,188) (754) (887) ------- ----- ------- FINANCING ACTIVITIES Issuance of common and treasury shares...................... 41 50 48 Purchase of common stock.................................... (4) (154) (132) Issuance of equity securities by a subsidiary............... -- -- 99 Redemption of equity securities by a subsidiary............. (408) -- -- Issuance of long-term debt.................................. 3,721 4 597 Retirement of long-term debt................................ (1,410) (21) (23) Net increase (decrease) in short-term debt excluding current maturities on long-term debt.............................. (294) 540 (31) Dividends (common).......................................... (151) (203) (204) ------- ----- ------- Net cash provided (used) by financing activities............ 1,495 216 354 ------- ----- ------- Effect of foreign exchange rate changes on cash and temporary cash investments................................ 2 6 3 ------- ----- ------- Increase (decrease) in cash and temporary cash investments............................................... 55 -- (11) Cash and temporary cash investments, January 1.............. 29 29 40 ------- ----- ------- Cash and temporary cash investments, December 31 (Note)..... $ 84 $ 29 $ 29 ======= ===== ======= Cash paid during the year for interest...................... $ 260 $ 259 $ 206 Cash paid during the year for income taxes (net of refunds).................................................. $ 137 $ 80 $ (145) NON-CASH INVESTING AND FINANCING ACTIVITIES Common equity interest received related to the sale of containerboard operations................................. 194 -- -- Principal amount of long-term debt assumed by buyers of containerboard operations................................. (1,760) -- -- Principal amount of long-term and short-term debt assumed by Specialty Packaging....................................... (2,118) -- -- Distribution of Specialty Packaging Business................ (1,448) -- --
- ------------------------- Note: Cash and temporary cash investments include highly liquid investments with a maturity of three months or less at the date of purchase. The accompanying notes to financial statements are an integral part of these statements of cash flows. 46 53 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, --------------------------------------------------------------------- 1999 1998 1997 --------------------- -------------------- -------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ----------- ------ ---------- ------ ---------- ------ (MILLIONS EXCEPT SHARE AMOUNTS) COMMON STOCK Balance January 1.................................. 34,734,039 $ -- 34,513,977 $ -- 34,313,531 $ -- Issued pursuant to benefit plans................. 236,446 -- 220,062 -- 200,446 -- ----------- ------ ---------- ------ ---------- ------ Balance December 31................................ 34,970,485 -- 34,734,039 -- 34,513,977 -- =========== ------ ========== ------ ========== ------ PREMIUM ON COMMON STOCK AND OTHER CAPITAL SURPLUS Balance January 1.................................. 2,712 2,681 2,644 Premium on common stock issued pursuant to benefit plans.................................. 22 31 37 Redemption of equity securities by a subsidiary..................................... (13) -- -- ------ ------ ------ Balance December 31................................ 2,721 2,712 2,681 ------ ------ ------ ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Balance January 1.................................. (91) (122) 23 Other comprehensive income (loss)................ (110) 31 (145) Reclassification adjustment for disposition of investments.................................... 22 -- -- ------ ------ ------ Balance December 31................................ (179) (91) (122) ------ ------ ------ RETAINED EARNINGS (ACCUMULATED DEFICIT) Balance January 1.................................. 142 89 (21) Net income (loss)................................ (423) 255 315 Dividends-- Common stock................................... (151) (202) (205) Distribution of Specialty Packaging Business... (1,448) -- -- ------ ------ ------ Balance December 31................................ (1,880) 142 89 ------ ------ ------ LESS -- COMMON STOCK HELD AS TREASURY STOCK, AT COST Balance January 1.................................. 1,351,535 259 585,637 120 -- -- Shares acquired.................................. 93,553 9 876,076 161 656,151 134 Shares issued pursuant to benefit and dividend reinvestment plans............................. (146,715) (28) (110,178) (22) (70,514) (14) ----------- ------ ---------- ------ ---------- ------ Balance December 31................................ 1,298,373 240 1,351,535 259 585,637 120 =========== ------ ========== ------ ========== ------ Total.......................................... $ 422 $2,504 $2,528 ====== ====== ======
The accompanying notes to financial statements are an integral part of these statements of changes in shareholders' equity. 47 54 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEARS ENDED DECEMBER 31, --------------------------------------------------------------------------------------------- 1999 1998 1997 ----------------------------- ----------------------------- ----------------------------- ACCUMULATED ACCUMULATED ACCUMULATED OTHER OTHER OTHER COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE COMPREHENSIVE INCOME INCOME INCOME INCOME INCOME INCOME ------------- ------------- ------------- ------------- ------------- ------------- (MILLIONS) NET INCOME (LOSS)................. $ (423) $ 255 $ 315 ----------- ----------- ----------- ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) CUMULATIVE TRANSLATION ADJUSTMENT Balance January 1............... $ (82) $ (122) $ 23 Translation of foreign currency statements......... (114) (114) 40 40 (160) (160) Hedges of net investment in foreign subsidiaries........ -- -- -- -- 23 23 Income tax benefit (expense)................... -- -- -- -- (8) (8) Reclassification adjustment for disposition of investments in foreign subsidiaries................ 20 -- -- -- -- -- ----------- ----------- ----------- Balance December 31............. (176) (82) (122) ----------- ----------- ----------- ADDITIONAL MINIMUM PENSION LIABILITY ADJUSTMENT Balance January 1............... (9) -- -- Additional minimum pension liability adjustment........ 6 6 (15) (15) -- -- Income tax benefit (expense)................... (2) (2) 6 6 -- -- Reclassification adjustment for disposition of investments in subsidiaries................ 2 -- -- -- -- -- ----------- ----------- ----------- Balance December 31............. (3) (9) -- ----------- ----------- ----------- Balance December 31............... $ (179) $ (91) $ (122) ============= ============= ============= ----------- ----------- ----------- Other comprehensive income (loss).......................... (110) 31 (145) ----------- ----------- ----------- COMPREHENSIVE INCOME (LOSS)....... $ (533) $ 286 $ 170 ============= ============= =============
The accompanying notes to financial statements are an integral part of these statements of comprehensive income (loss). 48 55 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF ACCOUNTING POLICIES Consolidation and Presentation Tenneco Automotive Inc. was known as Tenneco Inc. before the spin-off on November 4, 1999, of our packaging business to our shareholders, as described in Note 2. In these notes, when we discuss Tenneco we mean Tenneco Inc. and its subsidiaries before the spin-off and Tenneco Automotive Inc. and its subsidiaries after the spin-off. Our financial statements include all majority-owned subsidiaries. We carry investments in 20% to 50% owned companies at cost plus equity in undistributed earnings since the date of acquisition and cumulative translation adjustments. We have eliminated all significant intercompany transactions. Inventories At December 31, 1999 and 1998, inventory by major classification was as follows:
1999 1998 ---- ---- (MILLIONS) Finished goods.............................................. $215 $221 Work in process............................................. 86 79 Raw materials............................................... 73 73 Materials and supplies...................................... 38 41 ---- ---- $412 $414 ==== ====
Our inventories are stated at the lower of cost or market. A portion of total inventories (30% and 28% at December 31, 1999 and 1998, respectively) is valued using the last-in, first-out method. If we had used the first-in, first-out ("FIFO") method of accounting for these inventories, they would have been $21 million and $15 million higher at December 31, 1999 and 1998, respectively. We value all other inventories using the FIFO or average cost methods at the lower of cost or market value. Goodwill and Intangibles, net At December 31, 1999 and 1998, goodwill and intangibles, net of amortization, by major category were as follows:
1999 1998 ---- ---- (MILLIONS) Goodwill.................................................... $485 $487 Other intangible assets..................................... 10 12 ---- ---- $495 $499 ==== ====
Goodwill is being amortized on a straight-line basis over periods ranging from 15 to 40 years. Goodwill amortization amounted to $17 million, $16 million, and $14 million for 1999, 1998, and 1997, respectively, and is included in the statements of income caption "Depreciation and amortization." We have capitalized certain intangible assets, primarily trademarks and patents, based on their estimated fair value at the date we acquired them. We amortize these intangible assets on a straight-line basis over periods ranging from five to 30 years. Amortization of intangibles amounted to $3 million, $2 million, and $6 million in 1999, 1998, and 1997, respectively, and is included in the statements of income caption "Depreciation and amortization." 49 56 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Plant, Property, and Equipment, at Cost At December 31, 1999 and 1998, plant, property, and equipment, at cost, by major category were as follows:
1999 1998 ------ ------ (MILLIONS) Land, buildings, and improvements........................... $ 365 $ 341 Machinery and equipment..................................... 1,339 1,395 Other, including construction in progress................... 219 208 ------ ------ $1,923 $1,944 ====== ======
We depreciate these properties on a straight-line basis over the estimated useful lives of the assets. Useful lives range from 10 to 40 years for buildings and improvements and from three to 25 years for machinery and equipment. Notes Receivable and Allowance for Doubtful Accounts Short and long-term notes receivable outstanding were $26 million and $36 million at December 31, 1999 and 1998, respectively. At December 31, 1999 and 1998, the allowance for doubtful accounts on short and long-term accounts and notes receivable was $29 million and $39 million, respectively. Other Long-Term Assets Prior to January 1, 1999, we capitalized certain costs we incurred in connection with the acquisition of new customer contracts to sell our aftermarket products. These new customer acquisition costs were incurred in exchange for contracts in which the aftermarket customer agreed to purchase our aftermarket products exclusively for periods of time ranging up to three years. We amortized these costs over the initial contract period. At December 31, 1998, the net capitalized costs related to these activities were $54 million. You should also read "Changes in Accounting Principles" later in this note for more information. Before January 1, 1999, we capitalized certain costs related to start-up activities, primarily pre-production design and development costs for new automobile original equipment platforms, which are included in the 1998 balance sheet caption "Other assets -- Other." We amortized the pre-production design and development costs over the life of the underlying supply agreements and other start-up costs over the periods benefited, generally two years. Start-up costs capitalized, net of amortization, at December 31, 1998, were $111 million for continuing operations and $41 million for discontinued operations. You should also read "Changes in Accounting Principles" later in this note for more information. Beginning on January 1, 1999, we began expensing pre-production design and development costs as incurred unless we have a contractual guarantee for reimbursement from the original equipment customer. At December 31, 1999 we had long-term receivables of $10 million on the balance sheet for guaranteed pre-production design and development reimbursement arrangements with our customers. In addition, property, plant and equipment includes $56 million and $63 million at December 31, 1999 and 1998, respectively, for original equipment tools and dies that we own, and prepayments and other includes $25 million and $24 million at December 31, 1999 and 1998, respectively, for in-process tools and dies that we are building for our original equipment customers. We capitalize certain costs related to the purchase and development of software that we use in our business operations. We amortize the costs attributable to these software systems over their estimated 50 57 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) useful lives, ranging from three to 12 years, based on various factors such as the effects of obsolescence, technology and other economic factors. Capitalized software development costs, net of amortization, were $73 million at December 31, 1999 and were $67 million for continuing operations and $140 million for discontinued operations at December 31, 1998. You should also read "Changes in Accounting Principles" later in this note for more information. Income Taxes We utilize the liability method of accounting for income taxes whereby we recognize deferred tax assets and liabilities for the future tax consequences of temporary differences between the tax basis of assets and liabilities and their reported amounts in our financial statements. We reduce deferred tax assets by a valuation allowance when, based upon our estimates, it is more likely than not that we will not realize a portion of the deferred tax assets in a future period. The estimates utilized in the recognition of deferred tax assets are subject to revision in future periods based on new facts or circumstances. We do not provide for U.S. income taxes on unremitted earnings of foreign subsidiaries as our present intention is to reinvest the unremitted earnings in our foreign operations. Unremitted earnings of foreign subsidiaries are approximately $410 million at December 31, 1999. It is not practicable to determine the amount of U.S. income taxes that would be payable upon remittance of the assets that represent those earnings. Earnings Per Share We compute basic earnings per share by dividing income available to common shareholders by the weighted-average number of common shares outstanding. The computation of diluted earnings per share is similar to the computation of basic earnings per share, except that the weighted-average number of shares outstanding is adjusted to include estimates of additional shares that would be issued if potentially dilutive common shares had been issued. In addition, income available to common shareholders is adjusted to include any changes in income or loss that would result from the assumed issuance of the dilutive common shares. Allocation of Corporate Debt and Interest Expense Our practice is to incur indebtedness for our consolidated group at the parent company level or at a limited number of subsidiaries, rather than at the operating company level, and to centrally manage various cash functions. Consequently, our corporate debt has been allocated to discontinued operations based upon the ratio of the discontinued operations' net assets to our consolidated net assets plus debt. We have allocated interest expense, net of tax, to our discontinued operations based on the same allocation methodology. You should also read Note 2, "Discontinued Operations and Extraordinary Loss," for more information. Research and Development We expense research and development costs as they are incurred. Research and development expenses were $32 million, $30 million, and $19 million for 1999, 1998, and 1997, respectively, and are included in the income statement caption "Engineering, research, and development expenses." Foreign Currency Translation Financial statements of international operations are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and the weighted average exchange rate for each 51 58 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) applicable period for revenues, expenses, and gains and losses. Translation adjustments are reflected in the balance sheet caption "Accumulated other comprehensive income (loss)." Risk Management Activities We use derivative financial instruments, principally foreign currency forward purchase and sale contracts with terms of less than one year, to hedge our exposure to changes in foreign currency exchange rates, and interest rate swaps to hedge our exposure to changes in interest rates. Our primary exposure to changes in foreign currency rates results from intercompany loans made between affiliates to minimize the need for borrowings from third parties. Net gains or losses on these foreign currency exchange contracts that are designated as hedges are recognized in the income statement to offset the foreign currency gain or loss on the underlying transaction. Additionally, we enter into foreign currency forward purchase and sale contracts to mitigate our exposure to changes in exchange rates on some intercompany and third party trade receivables and payables. Since these anticipated transactions are not firm commitments, we mark these forward contracts to market each period and record any gain or loss in the income statement. From time to time we have also entered into forward contracts to hedge our net investment in foreign subsidiaries. We recognize the after-tax net gains or losses on these contracts on the accrual basis in the balance sheet caption "Accumulated other comprehensive income (loss)." In the statement of cash flows, cash receipts or payments related to these exchange contracts are classified consistent with the cash flows from the transaction being hedged. We do not currently enter into derivative financial instruments for speculative purposes. Changes in Accounting Principles In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," which establishes new accounting and reporting standards for the costs of computer software developed or obtained for internal use. This statement required prospective application for fiscal years beginning after December 15, 1998. We adopted SOP 98-1 on January 1, 1999. The impact of this new standard did not have a significant effect on our financial position or results of operations. In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-up Activities," which requires costs of start-up activities to be expensed as incurred. This statement was effective for fiscal years beginning after December 15, 1998. The statement requires previously capitalized costs related to start-up activities to be expensed as a cumulative effect of a change in accounting principle when the statement is adopted. Prior to January 1, 1999, we capitalized certain costs related to start-up activities, primarily pre-production design and development costs for new automobile original equipment platforms. We adopted SOP 98-5 on January 1, 1999, and recorded an after-tax charge for the cumulative effect of this change in accounting principle of $102 million (net of a $50 million tax benefit), or $3.04 per diluted common share. The change in accounting principle decreased income from continuing operations by $19 million (net of an $11 million tax benefit), or $.56 per diluted common share, for the year ended December 31, 1999. If the new accounting method had been applied retroactively, income from continuing operations for the years ended December 31, 1998 and 1997, would have been lower by $19 million (net of a $12 million tax benefit), or $.57 per diluted common share, and $18 million (net of a $12 million tax benefit), or $.54 per diluted common share, respectively. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes new accounting and reporting standards requiring that all derivative instruments, including derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the 52 59 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting treatment. This statement cannot be applied retroactively and is effective for all fiscal years beginning after June 15, 2000. We are currently evaluating the new standard and have not yet determined the impact it will have on our financial position or results of operations. Effective January 1, 1999, we changed our method of accounting for customer acquisition costs from a deferral method to an expense-as-incurred method. In connection with the decision to separate the automotive and specialty packaging businesses into independent public companies, we determined that a change to an expense-as-incurred method of accounting for automotive aftermarket customer acquisition costs was preferable in order to permit improved comparability of stand-alone financial results with our aftermarket industry competitors. We recorded an after-tax charge for the cumulative effect of this change in accounting principle of $32 million (net of a $22 million tax benefit), or $.95 per diluted common share. The change in accounting principle increased income from continuing operations by $10 million (net of $6 million in income tax expense), or $.30 per diluted common share, for the year ended December 31, 1999. If the new accounting principle had been applied retroactively, income from continuing operations for the years ended December 31, 1998 and 1997, would have been lower by $4 million (net of a $3 million income tax benefit), or $.11 per diluted common share, and $12 million (net of a $8 million income tax benefit), or $.35 per diluted common share, respectively. As required by the FASB's Emerging Issues Task Force ("EITF") Issue 97-13, "Accounting for Costs Incurred in Connection with a Consulting Contract that Combines Business Process Reengineering and Information Technology Transformation," we recorded an after-tax charge of $46 million ($1.35 per diluted common share), net of a tax benefit of $28 million, in the fourth quarter of 1997. EITF 97-13 establishes the accounting treatment and an allocation methodology for certain consulting and other costs incurred in connection with information technology transformation efforts. This charge was reported as a cumulative effect of a change in accounting principle. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Prior years' financial statements have been reclassified where appropriate to conform to 1999 presentations. 2. DISCONTINUED OPERATIONS AND EXTRAORDINARY LOSS Background of the Spin-off Transaction In July 1998, the Board of Directors authorized management to develop a broad range of strategic alternatives to separate the automotive, paperboard packaging, and specialty packaging businesses. Subsequently, we completed the following actions: - In January 1999, we announced an agreement to contribute the containerboard business to a new joint venture with an affiliate of Madison Dearborn Partners. The proceeds from the transaction, 53 60 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) including debt assumed by the new joint venture, were approximately $2 billion. The transaction closed in April 1999. We retained a 43 percent interest in the joint venture. - In April 1999, we announced an agreement to sell our folding carton operations to Caraustar Industries. This transaction closed in June 1999. The folding carton operations and the containerboard business together represented our paperboard packaging operating segment. - On November 4, 1999, we completed the spin-off of the common stock of Tenneco Packaging Inc., now known as Pactiv Corporation, to our shareholders. Pactiv included all of the businesses that made up our specialty packaging segment, as well as our remaining interest in the containerboard joint venture and our administrative services operations. As a result of this series of transactions, our former specialty and paperboard packaging operating segments are presented as discontinued operations in the accompanying financial statements. The morning following the spin-off, we completed a reverse stock split that had been approved by our shareholders in a special meeting held in October 1999. As a result, every five shares of our common stock were converted into one share of our new common stock. Before the spin-off, we realigned substantially all of our existing debt through a combination of tender offers, exchange offers, and other refinancings. You should also read Note 4, "Long-Term Debt, Short-Term Debt, and Financing Arrangements" for more information. Discontinued Operations Our loss from discontinued operations in 1999 was $208 million, comprised principally of an after-tax loss on sale of the paperboard packaging business of $207 million. This loss on sale includes a $54 million net loss in the fourth quarter, reflecting events that occurred subsequent to the April 1999 sale related to the final settlement of working capital amounts, revisions to actuarially-determined estimates of pension plan effects, and changes in estimates regarding liabilities retained by Pactiv. The Specialty Packaging Business Net assets as of December 31, 1998 and 1997, and results of operations for the years ended December 31, 1999, 1998, and 1997, for the specialty packaging business were as follows:
1999 1998 1997 ------ ------ ------ (MILLIONS) Net assets at December 31................................... $ -- $1,373 $1,348 ====== ====== ====== Net sales and operating revenues............................ $2,419 $2,791 $2,563 ====== ====== ====== Income before income taxes and interest allocation.......... $ 87 $ 280 $ 302 Income tax (expense) benefit................................ (29) (113) (118) ------ ------ ------ Income before interest allocation........................... 58 167 184 Allocated interest expense, net of income tax (Note)........ (81) (85) (78) ------ ------ ------ Income (loss) from discontinued operations.................. $ (23) $ 82 $ 106 ====== ====== ======
- --------------- Note: Reference is made to Note 1, "Summary of Accounting Policies -- Allocation of Corporate Debt and Interest Expense," for a discussion of the allocation of corporate debt and interest expense to discontinued operations. 54 61 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The Paperboard Packaging Business Net assets as of December 31, 1998 and 1997, and results of operations for the years ended 1999, 1998, and 1997, for the paperboard packaging business were as follows:
1999 1998 1997 ---- ---- ---- (MILLIONS) Net assets at December 31................................... $ -- $ 366 $ 423 ===== ====== ====== Net sales and operating revenues............................ $ 445 $1,570 $1,431 ===== ====== ====== Income (loss) before income taxes and interest allocation Operations................................................ $ 32 $ 99 $ 63 Loss on containerboard sale............................... (343) -- -- Gain on sale of folding carton............................ 11 -- -- Gain on sale of joint venture with Caraustar.............. -- 15 -- Gain on sale of non-strategic timberland.................. -- 17 -- ----- ------ ------ (300) 131 63 Income tax (expense) benefit................................ 120 (48) (19) ----- ------ ------ Income (loss) before interest allocation.................... (180) 83 44 Allocated interest expense, net of income tax (Note)........ (5) (26) (23) ----- ------ ------ Income (loss) from discontinued operations.................. $(185) $ 57 $ 21 ===== ====== ======
- ------------------------- Note: Reference is made to Note 1, "Summary of Accounting Policies -- Allocation of Corporate Debt and Interest Expense," for a discussion of the allocation of corporate debt and interest expense to discontinued operations. Extraordinary Loss In connection with the sale of the containerboard assets, an extraordinary loss of approximately $7 million, net of an income tax benefit of $3 million, was recognized due to the early retirement of debt. As a result of the debt realignment prior to the spin-off, we recognized an extraordinary loss of approximately $11 million, net of an income tax benefit of $7 million. This extraordinary loss consists principally of the fair value paid in the cash tender offers in excess of the historical carrying value for the debt tendered. 3. RESTRUCTURING CHARGES We adopted plans to restructure portions of our operations in both 1998 and 1999. In the fourth quarter of 1998, our Board of Directors approved an extensive restructuring plan designed to reduce administrative and operational overhead costs. We recorded a pre-tax charge to income from continuing operations of $53 million, $34 million after-tax, or $1.02 per diluted common share. Of the pre-tax charge, for operational restructuring plans, $36 million related to the consolidation of the manufacturing and distribution operations of our North American aftermarket business. A staff and related cost reduction plan, which covered employees in both the operating units and corporate operations, cost $17 million. Our aftermarket restructuring involved closing two plant locations and five distribution centers, resulting in eliminating 302 positions. Our staff and related cost reduction plan involved eliminating 454 administrative positions. We wrote down the fixed assets at the locations to be closed to their fair value, less costs to sell, in the fourth quarter of 1998. As a result of the single-purpose nature of the assets, we estimated fair value at scrap value less cost to dispose. We do not expect to receive any significant net cash proceeds from the ultimate disposal of these assets, which should be complete by the fourth quarter 55 62 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) of 2000. The effect of suspending depreciation for these impaired assets is a reduction in depreciation and amortization of approximately $2 million on an annual basis. As of December 31, 1999, we have terminated approximately 670 employees and our North American aftermarket business has closed one plant location and four distribution centers under the 1998 plan. To address customer service and production transfer issues, we have delayed closing one plant location and one distribution center until the first quarter of 2000. We have executed all other restructuring actions, with the exception of the final disposal of certain assets, according to our initial plan, and those actions were completed by year-end 1999. In the fourth quarter of 1999, our Board of Directors approved a second restructuring plan designed to further reduce operational overhead costs. We recorded a pre-tax charge to income from continuing operations of $55 million, $50 million after-tax, or $1.50 per diluted common share. The charge includes $37 million recorded in Europe to close a ride control manufacturing facility and an exhaust just-in-time plant, close or downsize four aftermarket distribution centers, and reduce administrative overhead by reducing management employment; $15 million to close a North American exhaust manufacturing facility; and $3 million for employment reductions in South America and Asia. In total, the plan involves eliminating approximately 780 positions. We wrote down the fixed assets at the locations to be closed to their fair value, less costs to sell, in the fourth quarter of 1999. We estimated the fair value for buildings using external real estate valuations or a review of recent sales prices for like buildings in the area surrounding the plant to be closed. As a result of the single-purpose nature of the machinery and equipment to be disposed of, fair value was estimated at scrap value less cost to dispose in most cases. For certain machines that have value in the used equipment market, engineers estimated value based on recent sales of like machines. We expect to receive net cash proceeds of approximately $11 million when we dispose of these assets. The effect of suspending depreciation for these impaired assets is a reduction in depreciation and amortization expense of approximately $3 million on an annual basis. We expect to complete all restructuring activities by the middle of 2001. Amounts related to the restructuring plans are shown in the following table:
DECEMBER 31, 1998 1999 1999 CHARGED TO DECEMBER 31, 1999 RESTRUCTURING RESTRUCTURING CASH ASSET RESTRUCTURING RESERVE CHARGE PAYMENTS ACCOUNTS RESERVE ----------------- ------------- -------- ---------- ----------------- Severance..................... $15 $21 $10 $-- $26 Asset impairments............. -- 31 -- 31 -- Facility exit costs........... 1 3 2 -- 2 --- --- --- --- --- $16 $55 $12 $31 $28 === === === === ===
56 63 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 4. LONG-TERM DEBT, SHORT-TERM DEBT, AND FINANCING ARRANGEMENTS Long-Term Debt A summary of our long-term debt obligations at December 31, 1999 and 1998, is set forth in the following table:
1999 1998 ------ ------ (MILLIONS) Tenneco Automotive Inc. -- Senior Term Loans due 2001 through 2008, average effective interest rate 9.3% in 1999............................. $1,050 -- 11 5/8% Senior Subordinated Notes due 2009................ 500 -- Debentures due 2008 through 2025, average effective interest rate 9.3% in 1999 and 7.5% in 1998 (net of none in 1999 and $64 million in 1998 of unamortized premium)............................................... 3 1,213 Notes due 2001 through 2007, average effective interest rate 8.9% in 1999 and 6.7% in 1998 (net of none in 1999 and $33 million in 1998 of unamortized premium)........ 17 1,344 Other subsidiaries -- Notes due 2000 through 2005, average effective interest rate 10.8% in 1999 and 10.7% in 1998 (net of none in 1999 and $22 million in 1998 of unamortized discount).............................................. 9 53 ------ ------ 1,579 2,610 Less -- current maturities.................................. 1 250 ------ ------ Total long-term debt........................................ 1,578 2,360 Less -- long-term corporate debt allocated to net assets of discontinued operations................................... -- 1,689 ------ ------ Total long-term debt, net of allocation to net assets of discontinued operations................................... $1,578 $ 671 ====== ======
The aggregate maturities and sinking fund requirements applicable to the issues outstanding at December 31, 1999, are $1 million, $61 million, $118 million, $108 million, and $106 million for 2000, 2001, 2002, 2003, and 2004, respectively. Short-Term Debt We principally use a revolving credit facility to finance our short-term capital requirements. Information regarding our short-term debt as of and for the years ended December 31, 1999 and 1998, is as follows:
1999 1998 ---------------------- ---------------------- COMMERCIAL NOTES COMMERCIAL NOTES PAPER PAYABLE* PAPER PAYABLE* ---------- -------- ---------- -------- (DOLLARS IN MILLIONS) Outstanding borrowings at end of year................ $ -- $ 55 $576 $245 Weighted average interest rate on outstanding borrowings at end of year.......................... --% 17.7% 5.8% 6.3% Approximate maximum month-end outstanding borrowings during year........................................ $822 $287 $576 $245 Approximate average month-end outstanding borrowings during year........................................ $280 $143 $447 $157 Weighted average interest rate on approximate average month-end outstanding borrowings during year....... 5.3% 9.1% 5.8% 6.9%
- ------------------------- * Includes borrowings under both committed credit facilities and uncommitted lines of credit and similar arrangements. 57 64 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Short-Term Corporate Debt Allocation
1999 1998 ------ ------ (MILLIONS) Current maturities on long-term debt........................ $ 1 $ 250 Commercial paper............................................ -- 576 Notes payable............................................... 55 245 ------ ------ Total short-term debt....................................... 56 1,071 Less -- short-term corporate debt allocated to net assets of discontinued operations................................... -- 767 ------ ------ Total short-term debt, net of allocation to discontinued operations................................................ $ 56 $ 304 ====== ======
Financing Arrangements
COMMITTED CREDIT FACILITIES(A) ------------------------------------------------- TERM COMMITMENTS UTILIZED AVAILABLE ------- ----------- -------- --------- (MILLIONS) Tenneco Automotive Inc. revolving credit agreement... 2005 $ 500 $ -- $500 Subsidiaries' credit agreements...................... Various 12 12 -- ------ ------ ---- $ 512 $ 12 $500 ====== ====== ====
- ------------------------- (a) We generally are required to pay commitment fees on the unused portion of the total commitment and facility fees on the total commitment. Prior to the spin-off, we realigned substantially all of our existing debt. To accomplish this, we initiated an offer to exchange Pactiv debt securities for some of our debt securities having a book value of $1,166 million. We also initiated a cash tender offer to purchase debt securities having a book value of $1,374 million and repaid substantially all of our short-term borrowings. Finally, we retired approximately $400 million of subsidiary preferred stock. These transactions were financed by borrowings under our new credit facility, senior subordinated debt that we issued, and borrowings by Pactiv under new credit facilities. The debt of Pactiv was rated investment grade and our debt was rated non-investment grade by debt rating agencies. As part of the debt realignment, on September 30, 1999, we entered into a $1.55 billion committed senior secured financing arrangement with a syndicate of banks and other financial institutions consisting of: (i) a $500 million, six-year revolving credit facility; (ii) a $450 million six-year term loan; (iii) a $300 million eight-year term loan and; (iv) a $300 million eight-and-one-half-year term loan. We will pay a portion of each term loan in quarterly installments beginning September 30, 2001. Borrowings under this facility bear interest at an annual rate equal to, at our option, either (i) the London Interbank Offering Rate plus a margin of 275 basis points for the six-year revolving credit facility and the six-year term loan, 325 basis points for the eight-year term loan and 350 basis points for the eight-and-one-half-year term loan; or (ii) a rate consisting of the greater of The Chase Manhattan Bank's prime rate or the Federal Funds rate plus 50 basis points, plus a margin of 175 basis points for the six-year revolving credit facility and the six-year term loan, 225 basis points for the eight-year term loan and 250 basis points for the eight-and-one-half-year term loan. Under the provisions of the senior credit facility agreement, the interest margins for borrowings under the revolving credit facility and the six-year term loan may be adjusted based on the consolidated leverage ratio (total debt divided by consolidated earnings before interest, taxes, depreciation, and amortization ("EBITDA") as defined in the senior credit facility agreement) measured at the end of each quarter starting with the fiscal quarter ending December 31, 2000. 58 65 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The senior credit facility agreement requires that we initially maintain: (i) a consolidated leverage ratio (consolidated indebtedness divided by consolidated EBITDA) not greater than 4.75; (ii) a consolidated interest coverage ratio (consolidated EBITDA divided by consolidated interest expense) not less than 2.00; and (iii) a consolidated fixed charge coverage ratio (consolidated EBITDA less consolidated capital expenditures, divided by consolidated interest expense) not less than 1.00. Under the terms of the senior credit facility agreement, the maximum permitted consolidated leverage ratio will decrease beginning in the year 2001, the minimum permitted consolidated interest coverage ratio will increase beginning in the year 2001, and the minimum permitted consolidated fixed charge coverage ratio will increase beginning in the year 2002. The senior credit facility agreement also contains restrictions on our operations that are customary for similar facilities, including limitations on: (a) incurring additional liens; (b) sale and leaseback transactions; (c) liquidations and dissolutions; (d) incurring additional indebtedness or guarantees; (e) capital expenditures; (f) dividends; (g) mergers and consolidations; and (h) prepayments and modifications of subordinated and other debt instruments. Compliance with these requirements and restrictions is a condition for any incremental borrowings under the senior credit facility agreement and failure to meet these requirements enables the lenders to require us to repay any outstanding loans. On October 14, 1999, we issued $500 million of 11 5/8 percent senior subordinated notes due in 2009. The senior subordinated debt indenture requires that we, as a condition to incurring certain types of indebtedness not otherwise permitted, initially maintain an interest coverage ratio of not less than 2.00. Under the terms of the indenture, the minimum interest coverage ratio will increase beginning in 2001. The indenture also contains restrictions on our operations, including limitations on: (1) incurring additional indebtedness or liens; (2) dividends; (3) distributions and stock repurchases; (4) investments; and (5) mergers and consolidations. 5. FINANCIAL INSTRUMENTS The carrying and estimated fair values of our financial instruments by class at December 31, 1999 and 1998, were as follows:
1999 1998 ------------------- ------------------- CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE -------- ------- -------- ------- (MILLIONS) ASSETS (LIABILITIES) Long-term debt (including current maturities) (Note).... $(1,579) $(1,588) $(2,610) $(2,606) Instruments with off-balance-sheet risk Foreign currency contracts............................ -- -- 1 1 Financial guarantees.................................. -- (38) -- (13)
- ------------------------- Note: The carrying amounts and estimated fair value of long-term debt are before allocation of corporate debt to discontinued operations. Reference is made to Note 1 for information concerning corporate debt allocated to discontinued operations. Under the terms of our senior credit facility agreement, we are required to hedge our exposure to floating interest rates within 180 days following the date of the spin-off so that at least 50 percent of our long-term debt is fixed for a period of at least three years. In February 2000, we hedged $250 million of our long-term, floating rate debt with three-year, floating to fixed interest rate swaps. We must hedge approximately $50 million more of our long-term, floating rate debt to satisfy the interest rate hedging requirement of the senior credit facility agreement. 59 66 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Asset and Liability Instruments The fair value of cash and temporary cash investments, short and long-term receivables, accounts payable, and short-term debt was considered to be the same as or was not determined to be materially different from the carrying amount. Long-term debt -- The fair value of fixed rate long-term debt was based on the market value of debt with similar maturities and interest rates. Instruments With Off-Balance-Sheet Risk Foreign Currency Contracts -- Note 1, "Summary of Accounting Policies -- Risk Management Activities" describes our use of and accounting for foreign currency exchange contracts. The following table summarizes by major currency the contractual amounts of foreign currency contracts we utilize:
NOTIONAL AMOUNT ------------------------------------ DECEMBER 31, DECEMBER 31, 1999 1998 ---------------- ---------------- PURCHASE SELL PURCHASE SELL -------- ---- -------- ---- (MILLIONS) Foreign currency contracts (in U.S.$): Australian dollars........................................ $ 5 $ 40 $ 3 $ 2 Belgian francs............................................ -- -- 17 19 British pounds............................................ 175 149 163 252 Canadian dollars.......................................... 12 67 73 115 Czech Republic koruna..................................... 1 15 -- 19 Danish kroner............................................. -- 46 12 -- European euro............................................. 38 26 -- -- French francs............................................. -- -- 89 17 German marks.............................................. -- -- 2 33 Spanish pesetas........................................... -- -- 32 2 U.S. dollars.............................................. 153 35 105 33 Other..................................................... 6 12 25 28 ---- ---- ---- ---- $390 $390 $521 $520 ==== ==== ==== ====
Based on exchange rates at December 31, 1999 and 1998, the cost of replacing these contracts in the event of non-performance by the counterparties would not have been material. Guarantees -- We had guaranteed payment and performance of approximately $38 million and $13 million at December 31, 1999 and 1998, respectively, primarily with respect to letters of credit and other guarantees supporting various financing and operating activities. As of the spin-off, all of our then existing and future material domestic wholly owned subsidiaries fully and unconditionally guaranteed the senior secured credit facility and the senior subordinated notes on a joint and several basis. You should also read Note 13 where we present the Supplemental Guarantor Condensed Consolidating Financial Statements. 60 67 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 6. INCOME TAXES The domestic and foreign components of our income from continuing operations before income taxes are as follows:
YEARS ENDED DECEMBER 31, ----------------------- 1999 1998 1997 ----- ----- ----- (MILLIONS) U.S. income (loss) before income taxes...................... $ (42) $ (65) $ 91 Foreign income before income taxes.......................... 84 223 246 ----- ----- ----- Income before income taxes.................................. $ 42 $ 158 $ 337 ===== ===== =====
Following is a comparative analysis of the components of income tax expense applicable to continuing operations:
YEARS ENDED DECEMBER 31, ----------------------- 1999 1998 1997 ----- ----- ----- (MILLIONS) Current -- U.S. ..................................................... $ (44) $ 72 $ (5) State and local........................................... (4) (21) -- Foreign................................................... 33 38 54 ----- ----- ----- (15) 89 49 ----- ----- ----- Deferred -- U.S. ..................................................... 62 (109) 13 Foreign, state, and other................................. 35 33 18 ----- ----- ----- 97 (76) 31 ----- ----- ----- Income tax expense.......................................... $ 82 $ 13 $ 80 ===== ===== =====
Following is a reconciliation of income taxes computed at the statutory U.S. federal income tax rate (35% for all years presented) to the income tax expense reflected in the statements of income:
YEARS ENDED DECEMBER 31, ----------------------- 1999 1998 1997 ----- ----- ----- (MILLIONS) Tax expense computed at the statutory U.S. federal income tax rate.................................................. $ 15 $ 55 $ 118 Increases (reductions) in income tax expense resulting from: Foreign income taxed at different rates and foreign losses with no tax benefit.................................... (2) (12) (25) Taxes on repatriation dividends........................... 33 -- -- State and local taxes on income, net of U.S. federal income tax benefit..................................... (2) (8) 4 Recognition of previously unbenefited loss carryforwards.......................................... (4) (5) (11) Amortization of nondeductible goodwill.................... 3 3 2 Tax effect of intercompany allocation..................... 18 -- -- Nondeductible restructuring expenses...................... 15 -- -- Other..................................................... 6 (20) (8) ----- ----- ----- Income tax expense.......................................... $ 82 $ 13 $ 80 ===== ===== =====
61 68 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The components of our net deferred tax liability were as follows:
DECEMBER 31, ------------ 1999 1998 ---- ---- (MILLIONS) Deferred tax assets -- Tax loss carryforwards: U.S. .................................................. $ 78 $104 State.................................................. 2 7 Foreign................................................ 49 58 Postretirement benefits other than pensions............... 31 32 Other..................................................... 28 26 Valuation allowance....................................... (25) (30) ---- ---- Net deferred tax asset............................... 163 197 ---- ---- Deferred tax liabilities -- Tax over book depreciation................................ 132 113 Pensions.................................................. 13 27 Other..................................................... 54 77 ---- ---- Total deferred tax liability......................... 199 217 ---- ---- Net deferred tax liability.................................. $ 36 $ 20 ==== ====
As shown by the valuation allowance in the table above, we had potential tax benefits of $25 million and $30 million at December 31, 1999 and 1998, respectively, that we did not recognize in the statements of income when they were generated. These unrecognized tax benefits resulted primarily from foreign tax loss carryforwards that are available to reduce future foreign tax liabilities. The $223 million of U.S. tax loss carryforwards that exist at December 31, 1999, expire in 2018. The $29 million of state tax loss carryforwards that exist at December 31, 1999, will expire in varying amounts over the period from 2000 to 2012. Of the $165 million of foreign tax loss carryforwards that exist at December 31, 1999, $145 million do not expire and the remainder expires in varying amounts over the period from 2000 to 2009. We have tax sharing agreements with our former affiliates that allocate tax liabilities for prior periods. 7. COMMON STOCK On October 25, 1999, our shareholders approved a reverse stock split whereby every five shares of our common stock were converted into one share of our new common stock on the day following the spin-off of Pactiv. In addition, the stock options outstanding on the date of the spin-off were adjusted such that employees received options only in the company for which they worked. The number of shares subject to these options, as well as their exercise prices, were adjusted so that the options immediately after the spin-off had equivalent economic terms to the options immediately before the spin-off. Also, on the date of the spin-off, all restricted stock and units and all performance shares then outstanding were fully vested. All share prices and amounts, prior to November 5, 1999, in this note, with the exception of the earnings per share table, are presented before the effect of the spin-off and reverse stock split. We have authorized 350 million shares ($.01 par value) of common stock, of which 34,970,485 shares and 173,670,197 shares were issued at December 31, 1999 and 1998, respectively. We held 1,298,373 shares and 6,757,678 shares of treasury stock at December 31, 1999 and 1998, respectively. 62 69 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Stock Repurchase Plans During 1997, we initiated a common stock repurchase program to acquire up to 8.5 million shares. Approximately 7.5 million shares have been acquired under this program at a total cost of approximately $289 million. All purchases that we executed through this program were in the open market or negotiated purchases. Reserved The total number of shares of our common stock reserved at December 31, 1999 and 1998, were as follows:
DECEMBER 31, ---------------------- ORIGINAL ISSUE SHARES 1999 1998 --------------------- --------- ---------- Thrift Plan............................................. 380,000 74,576 Stock Ownership Plan.................................... 8,603,344 16,199,114 Employee Stock Purchase Plan............................ 232,052 1,642,037 --------- ---------- 9,215,396 17,915,727 ========= ========== TREASURY STOCK ------------------ Employee Stock Award Plan............................... 1,119,500 -- Thrift Plan............................................. -- 201,541 --------- ---------- 1,119,500 201,541 ========= ==========
Stock Plans Tenneco Automotive Inc. Stock Ownership Plan -- In December 1996, we adopted the 1996 Stock Ownership Plan, which permits the granting of a variety of awards, including common stock, restricted stock, performance units, stock appreciation rights ("SARs"), and stock options to our directors, officers, and employees. The plan, which will terminate December 31, 2001, was renamed the "Tenneco Automotive Inc. Stock Ownership Plan" in connection with the spin-off. We can issue up to 9.4 million shares of common stock under the Stock Ownership Plan after adjusting for the spin-off and reverse stock split. Restricted Stock/Units, Performance Units, and Stock Equivalent Units -- We have granted restricted stock and restricted units under the Stock Ownership Plan to certain key employees. These awards generally require, among other things, that the employee remains our employee during the restriction period. We have also granted performance units to certain key employees that will vest over three years from the date of grant based on the attainment of specified performance goals in each of the three years. During 1999, 1998, and 1997, we granted 2,705,107, 640,810, and 494,350 shares and units, respectively, with a weighted average fair value based on the price of our stock on the grant date of $8.56, $38.03, and $43.08 per share, respectively. At December 31, 1999, 263,770 restricted shares at an average price of $8.40 per share, 465,000 performance units at an average price of $8.56 per share, 39,076 restricted units at an average price of $8.56 per unit, and 1,935,261 stock equivalent units at an average price of $8.56 per unit were outstanding under this plan. In December 1996, we adopted a restricted stock and unit plan and performance unit plan for each member of the Board of Directors who is not also an officer. During 1999, 6,000 performance units were issued under this plan at the weighted average fair value of our stock on the grant date of $8.56 per share. During 1998 and 1997, 1,700 and 5,040 restricted shares and units, respectively, were issued under this plan at the weighted average fair value of our stock on the grant date of $37.31, and $45.19 per share, 63 70 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) respectively. At December 31, 1999, no restricted shares or restricted units and 6,000 performance units at an average price of $8.56 per unit were outstanding under the plan. Employee Stock Purchase Plan -- Effective April 1, 1997, we adopted an Employee Stock Purchase Plan ("ESPP") that allows U.S. and Canadian employees to purchase our common stock at a 15% discount. Each year employees participating in the ESPP may purchase shares with a discounted value not to exceed $21,250. Under the ESPP, we sold 281,056, 613,195, and 244,768 shares to employees in 1999, 1998, and 1997, respectively. The weighted average fair value of the employee purchase right, which was estimated using the Black-Scholes option pricing model and the assumptions described below except that the average life of each purchase right was assumed to be 90 days, was $4.29, $6.31, and $11.16 in 1999, 1998, and 1997, respectively. The ESPP was suspended in June 1999, in connection with the reorganization transactions. Stock Options -- The following table reflects the status and activity for all stock options we have issued, including those outside the option plans discussed above, for the periods indicated:
1999 1998 1997 --------------------- ----------------------- ----------------------- WEIGHTED WEIGHTED WEIGHTED SHARES AVG. AVG. AVG. UNDER EXERCISE SHARES UNDER EXERCISE SHARES UNDER EXERCISE STOCK OPTIONS OPTION PRICES OPTION PRICES OPTION PRICES ------------- ---------- -------- ------------ -------- ------------ -------- Outstanding, beginning of year.......................... 12,423,304 $42.58 11,924,072 $43.42 10,877,758 $43.41 Granted before the reverse stock split................ 1,763,700 39.04 1,745,480 37.30 2,928,669 42.91 Cancelled before the reverse stock split................ (9,968,074) 41.86 (1,123,639) 43.53 (1,569,376) 43.19 Adjustment for reverse stock split and spin-off......... 3,702,596 20.04 -- -- -- -- Granted after the reverse stock split................ 2,047,500 8.56 -- -- -- -- Cancelled after the reverse stock split................ (2,879) 20.32 -- -- -- -- Exercised..................... -- -- (122,609) 38.58 (312,979) 39.64 ---------- ----------- ----------- Outstanding, end of year........ 9,966,147 19.83 12,423,304 42.58 11,924,072 43.42 ========== =========== =========== Options exercisable at end of year.......................... 5,574,049 23.15 7,522,654 42.84 2,703,948 40.84 Weighted average fair value of options granted during the year.......................... $ 3.03 $ 10.82 $ 12.62
The fair value of each option granted during 1999, 1998, and 1997 is estimated on the date of grant using the Black-Scholes option pricing model using the following weighted-average assumptions for grants in 1999, 1998, and 1997, respectively: (i) risk-free interest rates of 5.9%, 5.7%, and 6.6%; (ii) expected lives of 5.7, 9.9, and 7.5 years; (iii) expected volatility 26.9%, 25.6%, and 25.6%; and (iv) dividend yield of 2.6%, 3.2%, and 2.8%. 64 71 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The following table reflects summarized information about stock options outstanding at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------- ---------------------- WEIGHTED AVG. WEIGHTED WEIGHTED NUMBER REMAINING AVG. NUMBER AVG. OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE RANGE OF EXERCISE PRICE AT 12/31/99 LIFE PRICE AT 12/31/99 PRICE ----------------------- ----------- ------------- -------- ----------- -------- $ 8.00 - $14.00........................... 2,047,500 9.8 years $ 8.56 -- $ -- $14.00 - $21.00........................... 1,682,212 15.4 years 19.49 664,521 19.64 $21.00 - $27.00........................... 6,236,435 9.8 years 23.62 4,909,528 23.63 ---------- --------- 9,966,147 5,574,049 ========== =========
We apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," to account for our stock-based compensation plans. We recognized after-tax stock-based compensation expense in 1999 of $11 million, in 1998 of $3 million, and in 1997 of $5 million, of which $8 million, $3 million, and $4 million, respectively, related to restricted stock and performance shares awarded to employees of our discontinued operations. Had compensation costs for our stock-based compensation plans been determined in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," based on the fair value at the grant dates for the awards under those plans, our pro forma net income and earnings per diluted share of common stock for the years ended December 31, 1999, 1998, and 1997, would have been lower by $13 million or $.39 per diluted common share, $33 million or $.19 per diluted common share, and $34 million or $.20 per diluted common share, respectively of which $8 million, $20 million, and $22 million related to employees of our discontinued operations, respectively. Grantor Trust In August 1998, we established a grantor trust and issued approximately 1.9 million shares of common stock to the trust. This grantor trust was a so-called "rabbi trust" designed to assure the payment of deferred compensation and supplemental pension benefits. The trust was consolidated in our financial statements and the shares were reflected in our financial statements as treasury stock. Consequently, the shares of common stock issued to the trust were not considered to be outstanding in the computation of earnings per share. The grantor trust was terminated at the time of the spin-off. Rights Plan On September 9, 1998, we adopted a Rights Plan and established an independent Board committee to review it every three years. The Rights Plan was adopted to deter coercive takeover tactics and to prevent a potential acquiror from gaining control of us in a transaction that is not in the best interests of our shareholders. Generally, under the Rights Plan, as it has been amended, if a person becomes the beneficial owner of 15 percent or more of our outstanding common stock, each right will entitle its holder to purchase, at the right's exercise price, a number of shares of our common stock or, under certain circumstances, of the acquiring person's common stock, having a market value of twice the right's exercise price. Rights held by the 15 percent or more holder will become void and will not be exercisable. In March 2000, we amended the Rights Plan to (i) reduce from 20 percent to 15 percent the level of beneficial ownership at which the rights became exercisable, as described above, and (ii) eliminate the "qualified offer" terms of the plan. These terms provided that the rights would not become exercisable in connection with a "qualified offer," which was defined as an all-cash tender offer for all outstanding common stock that was fully financed, remained open for a period of at least 60 business days, resulted in 65 72 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) the offeror owning at least 85% of our common stock after consummation of the offer, assured a prompt second-step acquisition of shares not purchased in the initial offer, at the same price as the initial offer, and met certain other requirements. In connection with the adoption of the Rights Plan, our Board of Directors also adopted a three-year independent director evaluation ("TIDE") mechanism. Under the TIDE mechanism, an independent Board committee will review, on an ongoing basis, the Rights Plan and developments in rights plans generally, and, if it deems appropriate, recommend modification or termination of the Rights Plan. The independent committee will report to our Board at least every three years as to whether the Rights Plan continues to be in the best interests of our shareholders. Dividend Reinvestment and Stock Purchase Plan Under the Tenneco Automotive Inc. Dividend Reinvestment and Stock Purchase Plan, holders of our common stock may apply their cash dividends and optional cash investments to the purchase of additional shares of our common stock. Earnings Per Share Earnings (loss) per share of common stock outstanding were computed as follows:
YEARS ENDED DECEMBER 31, ----------------------------------------------- 1999 1998 1997 ------------- ------------- ------------- (MILLIONS EXCEPT SHARE AND PER SHARE AMOUNTS) Basic earnings (loss) per share -- Income (loss) from continuing operations............ $ (63) $ 116 $ 234 =========== =========== =========== Average shares of common stock outstanding.......... 33,480,686 33,701,115 34,052,946 =========== =========== =========== Earnings (loss) from continuing operations per average share of common stock.................... $ (1.87) $ 3.45 $ 6.87 =========== =========== =========== Diluted earnings (loss) per share -- Income (loss) from continuing operations............ $ (63) $ 116 $ 234 =========== =========== =========== Average shares of common stock outstanding.......... 33,480,686 33,701,115 34,052,946 Effect of dilutive securities: Restricted stock............................... 18,545 10,586 -- Stock options.................................. 8,055 17,647 90,573 Performance shares............................. 148,777 37,558 16,808 ----------- ----------- ----------- Average shares of common stock outstanding including dilutive securities.............................. 33,656,063 33,766,906 34,160,327 =========== =========== =========== Earnings (loss) from continuing operations per average share of common stock.................... $ (1.87) $ 3.44 $ 6.85 =========== =========== ===========
8. PREFERRED STOCK We had 50 million shares of preferred stock ($.01 par value) authorized at December 31, 1999 and 1998. No shares of preferred stock were outstanding at those dates. We have designated and reserved 2 million shares of the preferred stock as junior preferred stock for the Qualified Offer Rights Plan. 9. MINORITY INTEREST At December 31, 1998, we reported minority interest in the balance sheet of $407 million, of which $394 million resulted from the December 1994 and December 1997 sales of preferred stock ($300 million and $100 million, respectively) of Tenneco International Holding Corp. ("TIHC") to a financial investor. 66 73 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Subsequent to each sale, the investor had approximately a 25% interest in TIHC, consisting of 100% of the issued and outstanding variable rate voting preferred stock of TIHC. We and some of our subsidiaries held 100% of the issued and outstanding $8.00 junior preferred stock and common stock of TIHC. For financial reporting purposes, the assets, liabilities, and earnings of TIHC and its subsidiaries are consolidated in our financial statements, and the investor's preferred stock interest was recorded as "Minority interest" in the 1998 balance sheet. In connection with the spin-off, we purchased the preferred stock from the investor and the related minority interest was eliminated from our balance sheet. At December 31, 1998 there is $14 million of minority interest included as part of the net assets of discontinued operations. 10. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS We have various defined benefit pension plans that cover substantially all of our employees. Benefits are based on years of service and, for most salaried employees, on final average compensation. Our funding policy is to contribute to the plans amounts necessary to satisfy the funding requirement of applicable federal or foreign laws and regulations. Plan assets consist principally of listed equity and fixed income securities. Some of our employees participated in the Tenneco Retirement Plan ("TRP"). For information regarding the TRP, see the notes to the table below. We have postretirement health care and life insurance plans that cover a majority of our domestic employees. For salaried employees, the plans cover our employees retiring on or after attaining age 55 who have had at least 10 years of service with us after attaining age 45. For hourly employees, the postretirement benefit plans generally cover employees who retire according to one of our hourly employee retirement plans. All of these benefits may be subject to deductibles, copayment provisions, and other limitations, and we have reserved the right to change these benefits. Our postretirement benefit plans are not funded. 67 74 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) A summary of the change in benefit obligation, the change in plan assets, the development of net amount recognized, and the amounts recognized in the balance sheets for the pension plans and postretirement benefit plans follows:
PENSION POSTRETIREMENT ------------ --------------- 1999 1998 1999 1998 ----- ---- ------ ------ (MILLIONS) Change in benefit obligation: Benefit obligation at September 30 of the previous year... $ 552 $491 $ 115 $ 105 Spin-off of Pactiv........................................ (285) -- -- -- Currency rate conversion.................................. (4) -- -- -- Service cost.............................................. 8 13 4 3 Interest cost............................................. 17 36 8 8 Plan amendments........................................... 5 1 -- -- Actuarial loss (gain)..................................... 4 41 4 7 Benefits paid............................................. (15) (30) (9) (8) ----- ---- ----- ----- Benefit obligation at September 30........................ $ 282 $552 $ 122 $ 115 ===== ==== ===== ===== Change in plan assets: Fair value at September 30 of the previous year........... $ 583 $593 $ -- $ -- Spin-off of Pactiv........................................ (338) -- -- -- Currency rate conversion.................................. -- (1) -- -- Actual return on plan assets.............................. 35 13 -- -- Employer contributions.................................... 8 7 9 8 Participants' contributions............................... 1 1 -- -- Benefits paid............................................. (15) (30) (9) (8) ----- ---- ----- ----- Fair value at September 30................................ $ 274 $583 $ -- $ -- ===== ==== ===== ===== Development of net amount recognized: Funded status at September 30............................. $ (8) $ 31 $(122) $(115) Contributions during the fourth quarter................... 2 1 2 2 Unrecognized cost: Actuarial loss (gain).................................. 5 20 30 27 Prior service cost..................................... 15 12 (1) (1) Transition liability (asset)........................... (3) (7) -- -- ----- ---- ----- ----- Net amount recognized at December 31...................... $ 11 $ 57 $ (91) $ (87) ===== ==== ===== ===== Amounts recognized in the balance sheets: Prepaid benefit cost...................................... $ 37 $ 81 $ -- $ -- Accrued benefit cost...................................... (35) (39) (91) (87) Intangible asset.......................................... 4 4 -- -- Accumulated other comprehensive income.................... 5 11 -- -- ----- ---- ----- ----- Net amount recognized..................................... $ 11 $ 57 $ (91) $ (87) ===== ==== ===== =====
- ------------------------- Notes: Assets of one plan may not be utilized to pay benefits of other plans. Additionally, the prepaid (accrued) benefit cost has been recorded based upon certain actuarial estimates as described below. Those estimates are subject to revision in future periods given new facts or circumstances. Amounts included in the above table for 1998 reflect the participation of our employees in the TRP; however, our employees will not accrue additional benefits under the TRP following the spin-off. The sponsorship and the prepaid pension costs related to the TRP were transferred to Pactiv in connection with the corporate restructuring transactions. We have established a new defined benefit plan for our employees called the Tenneco Automotive Retirement Plan with provisions similar to the TRP. 68 75 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Amounts in the table are for continuing operations only. Amounts recognized in the balance sheets for discontinued operations include the following:
PENSION POSTRETIREMENT ----------- --------------- 1999 1998 1999 1998 ---- ---- ------ ------ Net assets of discontinued operations....................... $ -- $630 $ -- $(61) Accumulated other comprehensive income...................... -- 4 -- -- ---- ---- ---- ---- $ -- $634 $ -- $(61) ==== ==== ==== ====
Net periodic pension costs (income) from continuing operations for the years 1999, 1998, and 1997, consist of the following components:
1999 1998 1997 ---- ---- ---- (MILLIONS) Service cost -- benefits earned during the year............. $ 8 $ 13 $ 12 Interest on prior year's projected benefit obligation....... 17 36 33 Expected return on plan assets.............................. (22) (48) (45) Net amortization: Actuarial loss............................................ -- 1 -- Prior service cost........................................ 1 1 1 Transition asset.......................................... -- (2) (2) ---- ---- ---- Net pension costs (income).................................. $ 4 $ 1 $ (1) ==== ==== ====
The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for all pension plans with accumulated benefit obligations in excess of plan assets were $50 million, $48 million, and $13 million, respectively, as of September 30, 1999, and $114 million, $108 million, and $68 million, respectively, as of September 30, 1998. An additional expense of $1 million was recorded in 1999 related to our December adoption of the Tenneco Automotive Retirement Plan. The weighted average discount rates (which are based on long-term market rates) used in determining the 1999, 1998, and 1997 actuarial present value of the benefit obligations were 6.9%, 6.9%, and 7.6%, respectively. The rate of increase in future compensation was 4.3%, 4.7%, and 5.0%, for 1999, 1998, and 1997, respectively. The weighted average expected long-term rate of return on plan assets for 1999, 1998, and 1997 was 9.4%, 9.8%, and 9.9%, respectively. Net periodic postretirement benefit cost from continuing operations for the years 1999, 1998, and 1997 consist of the following components:
1999 1998 1997 ---- ---- ---- (MILLIONS) Service cost -- benefits earned during the year............. $ 4 $ 2 $ 4 Interest on accumulated postretirement benefit obligation... 8 8 7 Net amortization of actuarial loss.......................... 1 1 -- --- --- --- Net periodic postretirement benefit cost.................... $13 $11 $11 === === ===
The weighted average assumed health care cost trend rate used in determining the accumulated postretirement benefit obligation was 5% for all periods. Increasing the assumed health care cost trend rate by one percentage point in each year would increase the 1999, 1998, and 1997 accumulated postretirement benefit obligations by approximately $13 million, $13 million, and $12 million, respectively, and would increase the aggregate of the service cost 69 76 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) and interest cost components of the net periodic postretirement benefit cost by approximately $2 million each year for 1999, 1998, and 1997. Decreasing the assumed health care cost trend rate by one percentage point in each year would decrease the 1999 accumulated postretirement benefit obligation by approximately $11 million and would decrease the aggregate of service cost and interest cost components of the net periodic postretirement benefit cost by $2 million. The discount rates (which are based on long-term market rates) used in determining the 1999, 1998, and 1997 accumulated postretirement benefit obligations were 7.50%, 7.00%, and 7.75%, respectively. 11. SEGMENT AND GEOGRAPHIC AREA INFORMATION We are a global manufacturer with two geographic reportable segments: North America and Europe. Each segment manufactures and distributes ride control and emission control products primarily for the automotive industry. We have not aggregrated individual operating segments within these reportable segments. The accounting policies of the segments are the same as described in Note 1, "Summary of Accounting Policies." We evaluate segment performance based primarily on income before interest expense, income taxes, and minority interest. Products are transferred between segments and geographic areas on a basis intended to reflect as nearly as possible the "market value" of the products. Segment results for 1999, 1998, and 1997 are as follows:
SEGMENT -------------------------------------------------- RECLASS NORTH & AMERICA EUROPE OTHER ELIMS CONSOLIDATED ------- ------ ------ ------- ------------ (MILLIONS) AT DECEMBER 31, 1999, AND FOR THE YEAR THEN ENDED Revenues from external customers............................ $1,760 $1,235 $ 284 $ -- $3,279 Intersegment revenues....................................... 8 38 13 (59) -- Interest income............................................. -- -- 7 -- 7 Depreciation and amortization............................... 69 44 31 -- 144 Income before interest, income taxes, and minority interest.................................................. 166 44 (62) -- 148 Income (loss) from discontinued operations.................. -- -- (208) -- (208) Extraordinary loss.......................................... -- -- (18) -- (18) Cumulative effect of change in accounting principle......... (65) (32) (37) -- (134) Total assets................................................ 1,193 944 840 (34) 2,943 Investment in affiliated companies.......................... -- 1 -- -- 1 Capital expenditures for continuing operations.............. 71 65 18 -- 154 Noncash items other than depreciation and amortization...... 8 23 (4) -- 27 AT DECEMBER 31, 1998, AND FOR THE YEAR THEN ENDED Revenues from external customers............................ $1,679 $1,252 $ 306 $ -- $3,237 Intersegment revenues....................................... 9 26 10 (45) -- Interest income............................................. -- -- 6 -- 6 Depreciation and amortization............................... 72 51 27 -- 150 Income before interest, income taxes, and minority interest.................................................. 58 155 14 -- 227 Income (loss) from discontinued operations.................. -- -- 139 -- 139 Total assets (Note)......................................... 1,062 1,046 2,703 (52) 4,759 Net assets of discontinued operations....................... -- -- 1,739 -- 1,739 Investment in affiliated companies.......................... -- 1 -- -- 1 Capital expenditures for continuing operations.............. 96 67 32 -- 195 Noncash items other than depreciation and amortization...... 3 5 (1) -- 7
70 77 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
SEGMENT -------------------------------------------------- RECLASS NORTH & AMERICA EUROPE OTHER ELIMS CONSOLIDATED ------- ------ ------ ------- ------------ (MILLIONS) AT DECEMBER 31, 1997, AND FOR THE YEAR THEN ENDED Revenues from external customers............................ $1,719 $1,173 $ 334 $ -- $3,226 Intersegment revenues....................................... 7 31 17 (55) -- Interest income............................................. -- 1 3 -- 4 Depreciation and amortization............................... 59 28 23 -- 110 Income before interest, income taxes, and minority interest.................................................. 216 153 26 -- 395 Income (loss) from discontinued operations.................. -- -- 127 -- 127 Cumulative effect of change in accounting principle......... -- (3) (43) -- (46) Total assets (Note)......................................... 1,096 946 2,718 (78) 4,682 Net assets of discontinued operations....................... -- -- 1,771 -- 1,771 Investment in affiliated companies.......................... -- 2 -- -- 2 Capital expenditures for continuing operations.............. 95 84 42 -- 221 Noncash items other than depreciation and amortization...... (5) (5) 4 -- (6)
- ------------------------- Note: The Other segment's total assets include the net assets of discontinued operations. The following table shows information relating to our external customer revenues for each product or each group of similar products:
NET SALES AND OPERATING REVENUES YEAR ENDED DECEMBER 31, -------------------------- 1999 1998 1997 ------ ------ ------ (MILLIONS) EMISSIONS CONTROL SYSTEMS & PRODUCTS Aftermarket............................................... $ 514 $ 590 $ 686 Original equipment market................................. 1,401 1,224 1,067 ------ ------ ------ 1,915 1,814 1,753 ------ ------ ------ RIDE CONTROL SYSTEMS & PRODUCTS Aftermarket............................................... $ 634 $ 685 $ 782 Original equipment market................................. 730 738 691 ------ ------ ------ 1,364 1,423 1,473 ------ ------ ------ Total............................................. $3,279 $3,237 $3,226 ====== ====== ======
During 1999, sales to three major customers comprised approximately 13.8%, 13.6%, and 10.3% of consolidated net sales and operating revenues. During 1998, sales to two major customers comprised 12.8% and 13.7% of consolidated net sales and operating revenues. During 1997, sales to one major customer comprised approximately 13.2% of consolidated net sales and operating revenues. 71 78 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
GEOGRAPHIC AREA ----------------------------- UNITED OTHER RECLASS & STATES GERMANY FOREIGN(A) ELIMS CONSOLIDATED ------ ------- ---------- --------- ------------ (MILLIONS) AT DECEMBER 31, 1999, AND FOR THE YEAR THEN ENDED Revenues from external customers(b)........... $1,460 $355 $1,464 $ -- $3,279 Long-lived assets(c).......................... 578 88 568 -- 1,234 Total assets.................................. 1,497 205 1,309 (68) 2,943 AT DECEMBER 31, 1998, AND FOR THE YEAR THEN ENDED Revenues from external customers(b)........... $1,432 $321 $1,484 $ -- $3,237 Long-lived assets(c).......................... 648 116 654 -- 1,418 Total assets(d)............................... 2,733 444 1,646 (64) 4,759 AT DECEMBER 31, 1997, AND FOR THE YEAR THEN ENDED Revenues from external customers(b)........... $1,502 $273 $1,451 $ -- $3,226 Long-lived assets(c).......................... 634 99 568 -- 1,301 Total assets(d)............................... 2,982 242 1,512 (54) 4,682
- ------------------------- Notes: (a) Revenues from external customers and long-lived assets for individual foreign countries other than Germany are not material. (b) Revenues are attributed to countries based on location of the seller. (c) Long-lived assets include all long-term assets except net assets from discontinued operations, goodwill, intangibles, and deferred tax assets. (d) Total assets include net assets from discontinued operations. 12. COMMITMENTS AND CONTINGENCIES Capital Commitments We estimate that expenditures aggregating approximately $81 million will be required after December 31, 1999, to complete facilities and projects authorized at such date, and we have made substantial commitments in connection with these facilities and projects. Lease Commitments We have long-term leases for certain facilities, equipment, and other assets. The minimum lease payments under non-cancelable operating leases with lease terms in excess of one year are $16 million, $15 million, $12 million, $11 million, and $11 million for the years 2000, 2001, 2002, 2003, and 2004, respectively, and $25 million for subsequent years. Our commitments under capital leases were not significant to the accompanying financial statements. Total rental expense for continuing operations for the years 1999, 1998, and 1997 was $34 million, $31 million, and $30 million, respectively, including minimum rentals under non-cancelable operating leases of $18 million, $16 million, and $29 million for the corresponding periods. Litigation We are party to various legal proceedings arising from our operations. We believe that the outcome of these proceedings, individually and in the aggregate, will have no material effect on our financial position or results of operations. 72 79 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Environmental Matters We are subject to a variety of environmental and pollution control laws and regulations in all jurisdictions in which we operate. We have provided reserves for compliance with these laws and regulations where it is probable that a liability exists and where we can make a reasonable estimate of the liability. The estimated liabilities recorded are subject to change as more information becomes available regarding the magnitude of possible costs and the timing, varying costs, and effectiveness of alternative technologies. However, we believe that any additional costs that may arise as more information becomes available will not have a material effect on our financial condition or results of operations. 13. SUPPLEMENTAL GUARANTOR CONDENSED CONSOLIDATING FINANCIAL STATEMENTS Basis of Presentation We issued senior subordinated notes due 2009 as a component of a plan to realign our debt prior to the spin-off. You should also read Note 2, "Discontinued Operations and Extraordinary Loss" for further discussion of the spin-off and debt realignment and Note 5, "Financial Instruments" for further discussion of the notes and related guarantee. All of our existing and future material domestic wholly owned subsidiaries (the Guarantor Subsidiaries) fully and unconditionally guarantee the notes on a joint and several basis. We believe separate financial statements and other disclosures concerning each of the Guarantor Subsidiaries would not provide additional information that is material to investors. Therefore, the Guarantor Subsidiaries are combined in the presentation below. Included in the financial information of the Guarantor Subsidiaries for each period presented are the financial position and results of operations of a domestic subsidiary, Tenneco International Holding Corp., which had issued preferred stock to a third party (See Note 9, "Minority Interest"). These condensed consolidating financial statements are presented on the equity method. Under this method, our investments are recorded at cost and adjusted for our ownership share of a subsidiary's cumulative results of operations, capital contributions and distributions, and other equity changes. The balance sheet caption "Investment in affiliated companies" includes investments in continuing and discontinued subsidiaries. You should read the condensed consolidating financial statements of the Guarantor Subsidiaries in connection with our consolidated financial statements and related notes of which this note is an integral part. Distributions There are no significant restrictions on the ability of the Guarantor Subsidiaries to make distributions to us. 73 80 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) STATEMENT OF INCOME (LOSS)
FOR THE YEAR ENDED DECEMBER 31, 1999 -------------------------------------------------------------------------- TENNECO AUTOMOTIVE INC. GUARANTOR NONGUARANTOR (PARENT RECLASS SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED ------------ ------------ --------------- ------- ------------ (MILLIONS) REVENUES Net sales and operating revenues -- External.......................... $1,460 $1,819 $ -- $ -- $3,279 Affiliated companies.............. 77 68 -- (145) -- Other income, net................... 12 (1) 2 -- 13 ------ ------ ----- ----- ------ 1,549 1,886 2 (145) 3,292 ------ ------ ----- ----- ------ COSTS AND EXPENSES Cost of sales (exclusive of depreciation shown below)......... 1,101 1,469 2 (145) 2,427 Engineering, research, and development....................... 28 24 -- -- 52 Selling, general, and administrative.................... 295 225 1 -- 521 Depreciation and amortization....... 75 69 -- -- 144 ------ ------ ----- ----- ------ 1,499 1,787 3 (145) 3,144 ------ ------ ----- ----- ------ INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INTEREST EXPENSE, INCOME TAXES, MINORITY INTEREST, AND EQUITY IN NET INCOME FROM CONTINUING OPERATIONS OF AFFILIATED COMPANIES........................... 50 99 (1) -- 148 Interest expense -- External (net of interest capitalized)................. 2 16 87 1 106 Affiliated companies (net of interest income)............. 74 10 (84) -- -- Income tax expense................ 43 38 1 -- 82 Minority interest................. -- 1 -- 22 23 ------ ------ ----- ----- ------ (69) 34 (5) (23) (63) Equity in net income (loss) from continuing operations of affiliated companies........... 36 -- (58) 22 -- ------ ------ ----- ----- ------ INCOME (LOSS) FROM CONTINUING OPERATIONS.......................... (33) 34 (63) (1) (63) Income (loss) from discontinued operations, net of income tax................... 1 (95) (208) 94 (208) ------ ------ ----- ----- ------ Income (loss) before extraordinary loss................................ (32) (61) (271) 93 (271) Extraordinary loss, net of income tax................................. -- (7) (18) 7 (18) ------ ------ ----- ----- ------ Income (loss) before cumulative effect of change in accounting principle... (32) (68) (289) 100 (289) Cumulative effect of change in accounting principle, net of income tax................................. (64) (70) (134) 134 (134) ------ ------ ----- ----- ------ NET INCOME (LOSS)..................... (96) (138) (423) 234 (423) Preferred stock dividends............. 22 -- -- (22) -- ------ ------ ----- ----- ------ NET INCOME (LOSS) TO COMMON STOCK..... $ (118) $ (138) $(423) $ 256 $ (423) ====== ====== ===== ===== ======
74 81 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998 -------------------------------------------------------------------------- TENNECO AUTOMOTIVE INC. GUARANTOR NONGUARANTOR (PARENT RECLASS SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED ------------ ------------ --------------- ------- ------------ (MILLIONS) REVENUES Net sales and operating revenues -- External....................... $1,429 $1,804 $ 4 $ -- $3,237 Affiliated companies........... 90 74 -- (164) -- Other income, net................. (25) (1) 1 -- (25) ------ ------ ------ ------ ------ 1,494 1,877 5 (164) 3,212 ------ ------ ------ ------ ------ COSTS AND EXPENSES Costs of sales (exclusive of depreciation shown below)...... 1,086 1,408 2 (164) 2,332 Engineering, research, and development................ 19 12 -- -- 31 Selling, general, and administrative................. 276 195 1 -- 472 Depreciation and amortization..... 79 71 -- -- 150 ------ ------ ------ ------ ------ 1,460 1,686 3 (164) 2,985 ------ ------ ------ ------ ------ INCOME FROM CONTINUING OPERATIONS BEFORE INTEREST EXPENSE, INCOME TAXES, MINORITY INTEREST, AND EQUITY IN NET INCOME FROM CONTINUING OPERATIONS OF AFFILIATED COMPANIES.............. 34 191 2 -- 227 Interest expense -- External (net of interest capitalized)................. 2 17 50 -- 69 Affiliated companies (net of interest income).......... 58 4 (62) -- -- Income tax expense (benefit)... (35) 50 (2) -- 13 Minority interest.............. -- 1 -- 28 29 ------ ------ ------ ------ ------ 9 119 16 (28) 116 Equity in net income from continuing operations of affiliated companies......... 97 -- 100 (197) -- ------ ------ ------ ------ ------ INCOME FROM CONTINUING OPERATIONS... 106 119 116 (225) 116 Income from discontinued operations, net of income tax................. 24 269 139 (293) 139 ------ ------ ------ ------ ------ Income before extraordinary loss.... 130 388 255 (518) 255 Extraordinary loss, net of income tax............................... -- -- -- -- -- ------ ------ ------ ------ ------ Income before cumulative effect of change in accounting principle.... 130 388 255 (518) 255 Cumulative effect of change in accounting principle, net of income tax........................ -- -- -- -- -- ------ ------ ------ ------ ------ NET INCOME.......................... 130 388 255 (518) 255 Preferred stock dividends........... 28 -- -- (28) -- ------ ------ ------ ------ ------ NET INCOME TO COMMON STOCK.......... $ 102 $ 388 $ 255 $ (490) $ 255 ====== ====== ====== ====== ======
75 82 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997 -------------------------------------------------------------------------- TENNECO AUTOMOTIVE INC. GUARANTOR NONGUARANTOR (PARENT RECLASS SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED ------------ ------------ --------------- ------- ------------ (MILLIONS) REVENUES Net sales and operating revenues -- External.......................... $1,492 $1,723 $ 11 $ -- $3,226 Affiliated companies.............. 97 97 -- (194) -- Other income, net.................... 7 30 -- -- 37 ------ ------ ----- ----- ------ 1,596 1,850 11 (194) 3,263 ------ ------ ----- ----- ------ COSTS AND EXPENSES Cost of sales (exclusive of depreciation shown below)......... 1,130 1,359 8 (194) 2,303 Engineering, research, and development....................... 19 15 -- -- 34 Selling, general, and administrative.................... 226 194 1 -- 421 Depreciation and amortization........ 64 46 -- -- 110 ------ ------ ----- ----- ------ 1,439 1,614 9 (194) 2,868 ------ ------ ----- ----- ------ INCOME FROM CONTINUING OPERATIONS BEFORE INTEREST EXPENSE, INCOME TAXES, MINORITY INTEREST, AND EQUITY IN NET INCOME FROM CONTINUING OPERATIONS OF AFFILIATED COMPANIES... 157 236 2 -- 395 Interest expense -- External (net of interest capitalized)........ (3) 14 47 -- 58 Affiliated companies (net of interest income)............. (31) (10) 41 -- -- Income tax expense (benefit)...... 65 58 (43) -- 80 Minority interest................. -- 2 -- 21 23 ------ ------ ----- ----- ------ 126 172 (43) (21) 234 Equity in net income from continuing operations of affiliated companies............ 100 -- 277 (377) -- ------ ------ ----- ----- ------ INCOME FROM CONTINUING OPERATIONS...... 226 172 234 (398) 234 Income from discontinued operations, net of income tax.................... 16 229 127 (245) 127 ------ ------ ----- ----- ------ Income before extraordinary loss....... 242 401 361 (643) 361 Extraordinary loss, net of income tax.................................. -- -- -- -- -- ------ ------ ----- ----- ------ Income before cumulative effect of change in accounting principle....... 242 401 361 (643) 361 Cumulative effect of change in accounting principle, net of income tax.................................. (7) (41) (46) 48 (46) ------ ------ ----- ----- ------ NET INCOME............................. 235 360 315 (595) 315 Preferred stock dividends.............. 21 -- -- (21) -- ------ ------ ----- ----- ------ NET INCOME TO COMMON STOCK............. $ 214 $ 360 $ 315 $(574) $ 315 ====== ====== ===== ===== ======
76 83 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) BALANCE SHEET
DECEMBER 31, 1999 -------------------------------------------------------------------------- TENNECO AUTOMOTIVE INC. GUARANTOR NONGUARANTOR (PARENT RECLASS SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED ------------ ------------ --------------- ------- ------------ (MILLIONS) ASSETS Current assets: Cash and temporary cash investments... $ 28 $ 56 $ -- $ -- $ 84 Receivables........................... 665 316 18 (428) 571 Inventories........................... 155 257 -- -- 412 Deferred income taxes................. 68 (9) -- -- 59 Prepayments and other................. 34 41 -- -- 75 ------ ------ ------- ------- ------ 950 661 18 (428) 1,201 ------ ------ ------- ------- ------ Other assets: Investment in affiliated companies.... 266 -- 2,365 (2,631) -- Notes and advances receivable from affiliates..................... 1,809 -- 3,302 (5,111) -- Long-term notes receivable, net....... 3 17 -- -- 20 Goodwill and intangibles, net......... 331 164 -- -- 495 Deferred income taxes................. -- 13 -- -- 13 Pension assets........................ 21 10 -- -- 31 Other................................. 67 52 27 -- 146 ------ ------ ------- ------- ------ 2,497 256 5,694 (7,742) 705 ------ ------ ------- ------- ------ Plant, property, and equipment, at cost.................................. 888 1,035 -- -- 1,923 Less -- Reserves for depreciation and amortization........................ 428 458 -- -- 886 ------ ------ ------- ------- ------ 460 577 -- -- 1,037 ------ ------ ------- ------- ------ $3,907 $1,494 $ 5,712 $(8,170) $2,943 ====== ====== ======= ======= ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt (including current maturities on long-term debt)....... $ 1 $ 176 $ 238 $ (359) $ 56 Trade payables........................ 138 268 6 (64) 348 Taxes accrued......................... 6 15 (1) -- 20 Other................................. 131 81 27 -- 239 ------ ------ ------- ------- ------ 276 540 270 (423) 663 Long-term debt.......................... 1,580 10 5,098 (5,110) 1,578 Deferred income taxes................... 131 55 (78) -- 108 Postretirement benefits and other liabilities........................... 130 26 -- -- 156 Commitments and contingencies Minority interest....................... -- 16 -- -- 16 Shareholders' equity.................... 1,790 847 422 (2,637) 422 ------ ------ ------- ------- ------ $3,907 $1,494 $ 5,712 $(8,170) $2,943 ====== ====== ======= ======= ======
77 84 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) BALANCE SHEET
DECEMBER 31, 1998 ---------------------------------------------------------------------- TENNECO AUTOMOTIVE INC. GUARANTOR NONGUARANTOR (PARENT RECLASS SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED ------------ ------------ --------------- ------- ------------ (MILLIONS) ASSETS Current assets: Cash and temporary cash investments............ $ 1 $ 25 $ 3 $ -- $ 29 Receivables.................................... 277 307 32 (173) 443 Inventories.................................... 149 265 -- -- 414 Deferred income taxes.......................... 48 (9) -- -- 39 Prepayments and other.......................... 94 45 -- -- 139 ------ ------ ------- ------- ------ 569 633 35 (173) 1,064 ------ ------ ------- ------- ------ Other assets: Investment in affiliated companies............. 733 -- 5,387 (6,120) -- Notes and advances receivable from affiliates................................... 635 -- 2,772 (3,407) -- Long-term notes receivable, net................ 12 9 2 -- 23 Goodwill and intangibles, net.................. 348 151 -- -- 499 Deferred income taxes.......................... -- 39 -- -- 39 Pension assets................................. 83 18 -- -- 101 Other.......................................... 89 106 6 -- 201 ------ ------ ------- ------- ------ 1,900 323 8,167 (9,527) 863 ------ ------ ------- ------- ------ Plant, property, and equipment, at cost.......... 875 1,069 -- -- 1,944 Less -- Reserves for depreciation and amortization................................. 419 432 -- -- 851 ------ ------ ------- ------- ------ 456 637 -- -- 1,093 ------ ------ ------- ------- ------ Net assets of discontinued operations............ 1,649 3,119 (3,029) -- 1,739 ------ ------ ------- ------- ------ $4,574 $4,712 $ 5,173 $(9,700) $4,759 ====== ====== ======= ======= ====== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term debt (including current maturities on long-term debt)........................... $ 26 $ 124 $ 229 $ (75) $ 304 Trade payables................................. 148 258 10 (79) 337 Taxes accrued.................................. (3) 34 -- -- 31 Other.......................................... 130 71 36 -- 237 ------ ------ ------- ------- ------ 301 487 275 (154) 909 Long-term debt................................... 1,571 25 2,480 (3,405) 671 Deferred income taxes............................ 137 47 (86) -- 98 Postretirement benefits and other liabilities.... 126 44 -- -- 170 Commitments and contingencies Minority interest................................ -- 13 -- 394 407 Preferred stock with mandatory redemption provisions..................................... 394 -- -- (394) -- Shareholders' equity............................. 2,045 4,096 2,504 (6,141) 2,504 ------ ------ ------- ------- ------ $4,574 $4,712 $ 5,173 $(9,700) $4,759 ====== ====== ======= ======= ======
78 85 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999 ---------------------------------------------------------------------- TENNECO AUTOMOTIVE INC. GUARANTOR NONGUARANTOR (PARENT RECLASS SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED ------------ ------------ --------------- ------- ------------ (MILLIONS) OPERATING ACTIVITIES Net cash provided (used) by operating activities........ $ (92) $ (25) $ (115) $(22) $ (254) ----- ------- ------- ---- ------- INVESTING ACTIVITIES Net proceeds related to the sale of discontinued operations............................................ -- 303 -- -- 303 Net proceeds from sale of businesses and assets......... 6 2 -- -- 8 Expenditures for plant, property, and equipment......... (51) (103) -- -- (154) Acquisitions of businesses.............................. (2) (34) -- -- (36) Expenditures for plant, property, and equipment and business acquisitions -- discontinued operations...... -- (1,264) -- -- (1,264) Investments and other................................... (8) (37) -- -- (45) ----- ------- ------- ---- ------- Net cash provided (used) by investing activities........ (55) (1,133) -- -- (1,188) ----- ------- ------- ---- ------- FINANCING ACTIVITIES Issuance of common and treasury shares.................. -- -- 41 -- 41 Purchase of common stock................................ -- -- (4) -- (4) Redemption of equity securities by a subsidiary......... (408) -- -- -- (408) Issuance of long-term debt.............................. -- 2,200 1,521 -- 3,721 Retirement of long-term debt............................ (1) (35) (1,374) -- (1,410) Net increase (decrease) in short-term debt excluding current maturities on long-term debt.................. (25) 392 (661) -- (294) Intercompany dividends and net increase (decrease) in intercompany obligations.............................. 630 (1,370) 740 -- -- Dividends (common)...................................... (22) -- (151) 22 (151) ----- ------- ------- ---- ------- Net cash provided (used) by financing activities........ 174 1,187 112 22 1,495 ----- ------- ------- ---- ------- Effect of foreign exchange rate changes on cash and temporary cash investments............................ -- 2 -- -- 2 ----- ------- ------- ---- ------- Increase (decrease) in cash and temporary cash investments........................................... 27 31 (3) -- 55 Cash and temporary cash investments, January 1.......... 1 25 3 -- 29 ----- ------- ------- ---- ------- Cash and temporary cash investments, December 31 (Note)................................................ $ 28 $ 56 $ -- $ -- $ 84 ===== ======= ======= ==== =======
- --------------- Note: Cash and temporary cash investments include highly liquid investments with a maturity of three months at the date of purchase. 79 86 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998 ---------------------------------------------------------------------- TENNECO AUTOMOTIVE INC. GUARANTOR NONGUARANTOR (PARENT RECLASS SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED ------------ ------------ --------------- ------- ------------ (MILLIONS) OPERATING ACTIVITIES Net cash provided (used) by operating activities.... $ 238 $ 577 $(255) $ (28) $ 532 ----- ----- ----- ----- ----- INVESTING ACTIVITIES Net proceeds related to the sale of discontinued operations........................................ -- 22 -- -- 22 Net proceeds from sale of businesses and assets..... 7 3 -- -- 10 Expenditures for plant, property, and equipment..... (82) (113) -- -- (195) Acquisitions of businesses.......................... -- (3) -- -- (3) Expenditures for plant, property, and equipment and businesses acquisitions -- discontinued operations........................................ -- (498) -- -- (498) Investments and other............................... (49) (43) 2 -- (90) ----- ----- ----- ----- ----- Net cash provided (used) by investing activities.... (124) (632) 2 -- (754) ----- ----- ----- ----- ----- FINANCING ACTIVITIES Issuance of common and treasury shares.............. -- -- 50 -- 50 Purchase of common stock............................ -- -- (154) -- (154) Issuance of long-term debt.......................... -- 4 -- -- 4 Retirement of long-term debt........................ (1) (20) -- -- (21) Net increase (decrease) in short-term debt excluding current maturities on long-term debt.............. -- 115 425 -- 540 Intercompany dividends and net increase (decrease) in intercompany obligations....................... (87) (51) 138 -- -- Dividends (common).................................. (28) -- (203) 28 (203) ----- ----- ----- ----- ----- Net cash provided (used) by financing activities.... (116) 48 256 28 216 ----- ----- ----- ----- ----- Effect of foreign exchange rate changes on cash and temporary cash investments........................ -- 6 -- -- 6 ----- ----- ----- ----- ----- Increase (decrease) in cash and temporary cash investments....................................... (2) (1) 3 -- -- Cash and temporary cash investments, January 1...... 3 26 -- -- 29 ----- ----- ----- ----- ----- Cash and temporary cash investments, December 31 (Note)............................................ $ 1 $ 25 $ 3 $ -- $ 29 ===== ===== ===== ===== =====
- --------------- Note: Cash and temporary cash investments include highly liquid investments with a maturity of three months or less at the date of purchase. 80 87 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997 ---------------------------------------------------------------------- TENNECO AUTOMOTIVE INC. GUARANTOR NONGUARANTOR (PARENT RECLASS SUBSIDIARIES SUBSIDIARIES COMPANY) & ELIMS CONSOLIDATED ------------ ------------ --------------- ------- ------------ (MILLIONS) OPERATING ACTIVITIES Net cash provided (used) by operating activities... $ 22 $ 552 $ (34) $ (21) $ 519 ----- ----- ----- ----- ----- INVESTING ACTIVITIES Net proceeds related to the sale of discontinued operations....................................... -- 24 -- -- 24 Net proceeds from the sale of businesses and assets........................................... -- 5 -- -- 5 Expenditures for plant, property, and equipment.... (69) (152) -- -- (221) Acquisitions of businesses......................... (7) (22) -- -- (29) Expenditures for plant, property, and equipment and business acquisitions -- discontinued operations....................................... -- (622) -- -- (622) Investments and other.............................. (11) (51) 18 -- (44) ----- ----- ----- ----- ----- Net cash provided (used) by investing activities... (87) (818) 18 -- (887) ----- ----- ----- ----- ----- FINANCING ACTIVITIES Issuance of common and treasury shares............. -- -- 48 -- 48 Purchase of common stock........................... -- -- (132) -- (132) Issuance of equity securities by a subsidiary...... 99 -- -- -- 99 Issuance of long-term debt......................... -- 7 590 -- 597 Retirement of long-term debt....................... (1) (22) -- -- (23) Net increase (decrease) in short-term debt excluding current maturities on long-term debt... 25 (74) 18 -- (31) Intercompany dividends and net increase (decrease) in intercompany obligations...................... (40) 344 (304) -- -- Dividends (common)................................. (21) -- (204) 21 (204) ----- ----- ----- ----- ----- Net cash provided (used) by financing activities... 62 255 16 21 354 ----- ----- ----- ----- ----- Effect of foreign exchange rate changes on cash and temporary cash investments....................... -- 3 -- -- 3 ----- ----- ----- ----- ----- Increase (decrease) in cash and temporary cash investments...................................... (3) (8) -- -- (11) Cash and temporary cash investments, January 1..... 6 34 -- -- 40 ----- ----- ----- ----- ----- Cash and temporary cash investments, December 31 (Note)........................................... $ 3 $ 26 $ -- $ -- $ 29 ===== ===== ===== ===== =====
- --------------- Note: Cash and temporary cash investments include highly liquid investments with a maturity of three months or less at the date of purchase. 81 88 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 14. QUARTERLY FINANCIAL DATA (UNAUDITED)
INCOME (LOSS) BEFORE NET SALES INTEREST EXPENSE, INCOME (LOSS) INCOME (LOSS) INCOME (LOSS) AND INCOME TAXES, FROM FROM BEFORE OPERATING AND MINORITY CONTINUING DISCONTINUED EXTRAORDINARY EXTRAORDINARY QUARTER REVENUES INTEREST OPERATIONS OPERATIONS LOSS LOSS - ------- --------- -------------------- ------------- ------------- ------------- ------------- (MILLIONS) 1999 1st................ $ 789 $ 55 $ 16 $(166) $(150) $ (7) 2nd................ 868 97 37 55 92 -- 3rd................ 816 67 27 12 39 -- 4th................ 806 (71) (143) (109) (252) (11) ------ ---- ---- ----- ----- ---- $3,279 $148 $(63) $(208) $(271) $(18) ====== ==== ==== ===== ===== ==== 1998 1st................ $ 800 $ 83 $ 43 $ 32 $ 75 $ -- 2nd................ 864 124 63 74 137 -- 3rd................ 804 81 63 40 103 -- 4th................ 769 (61) (53) (7) (60) -- ------ ---- ---- ----- ----- ---- $3,237 $227 $116 $ 139 $ 255 $ -- ====== ==== ==== ===== ===== ==== INCOME (LOSS) BEFORE CUMULATIVE CUMULATIVE EFFECT OF EFFECT OF CHANGE CHANGE IN IN ACCOUNTING ACCOUNTING NET INCOME QUARTER PRINCIPLE PRINCIPLE (LOSS) - ------- ---------------- ---------- ---------- (MILLIONS) 1999 1st................ $(157) $(134) $(291) 2nd................ 92 -- 92 3rd................ 39 -- 39 4th................ (263) -- (263) ----- ----- ----- $(289) $(134) $(423) ===== ===== ===== 1998 1st................ $ 75 $ -- $ 75 2nd................ 137 -- 137 3rd................ 103 -- 103 4th................ (60) -- (60) ----- ----- ----- $ 255 $ -- $ 255 ===== ===== =====
BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK ------------------------------------------------------------------------------------------------------ BEFORE CUMULATIVE CUMULATIVE EFFECT OF FROM FROM BEFORE EFFECT OF CHANGE CHANGE IN CONTINUING DISCONTINUED EXTRAORDINARY EXTRAORDINARY IN ACCOUNTING ACCOUNTING NET INCOME QUARTER OPERATIONS OPERATIONS LOSS LOSS PRINCIPLE PRINCIPLE (LOSS) - ------- ---------- ------------ ------------- ------------- ---------------- ---------- ---------- 1999 1st................ $ .47 $(4.99) $(4.52) $(.20) $(4.72) $(4.00) $ (8.72) 2nd................ 1.07 1.67 2.74 -- 2.74 -- 2.74 3rd................ .86 .32 1.18 -- 1.18 -- 1.18 4th................ (4.25) (3.24) (7.49) (.34) (7.83) -- (7.83) ------ ------ ------ ----- ------ ------ ------- $(1.87) $(6.23) $(8.10) $(.55) $(8.65) $(3.99) $(12.64) ====== ====== ====== ===== ====== ====== ======= 1998 1st................ $ 1.26 $ .95 $ 2.21 $ -- $ 2.21 $ -- $ 2.21 2nd................ 1.88 2.16 4.04 -- 4.04 -- 4.04 3rd................ 1.85 1.24 3.09 -- 3.09 -- 3.09 4th................ (1.57) (.23) (1.80) -- (1.80) -- (1.80) ------ ------ ------ ----- ------ ------ ------- $ 3.45 $ 4.13 $ 7.58 $ -- $ 7.58 $ -- $ 7.58 ====== ====== ====== ===== ====== ====== =======
82 89 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK ------------------------------------------------------------ FROM FROM BEFORE CONTINUING DISCONTINUED EXTRAORDINARY EXTRAORDINARY QUARTER OPERATIONS OPERATIONS LOSS LOSS ------- ---------- ------------ ------------- ------------- 1999 1st................ $ .47 $(4.99) $(4.52) $(.20) 2nd................ 1.06 1.67 2.73 -- 3rd................ .86 .32 1.18 -- 4th................ (4.25) (3.24) (7.49) (.34) ------ ------ ------ ----- $(1.87) $(6.23) $(8.10) $(.55) ====== ====== ====== ===== 1998 1st................ $ 1.26 $ .94 $ 2.20 $ -- 2nd................ 1.88 2.15 4.03 -- 3rd................ 1.84 1.24 3.08 -- 4th................ (1.57) (.23) (1.80) -- ------ ------ ------ ----- $ 3.44 $ 4.12 $ 7.56 $ -- ====== ====== ====== ===== DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK ------------------------------------------------- BEFORE CUMULATIVE CUMULATIVE EFFECT EFFECT OF OF CHANGE CHANGE IN IN ACCOUNTING ACCOUNTING NET INCOME QUARTER PRINCIPLE PRINCIPLE (LOSS) ------- ----------------- ---------- ---------- 1999 1st................ $(4.72) $(4.00) $ (8.72) 2nd................ 2.73 -- 2.73 3rd................ 1.18 -- 1.18 4th................ (7.83) -- (7.83) ------ ------ ------- $(8.65) $(3.99) $(12.64) ====== ====== ======= 1998 1st................ $ 2.20 $ -- $ 2.20 2nd................ 4.03 -- 4.03 3rd................ 3.08 -- 3.08 4th................ (1.80) -- (1.80) ------ ------ ------- $ 7.56 $ -- $ 7.56 ====== ====== =======
- ------------------------- Note: You should read Notes 1, 2, 3 and 7 and "Management's Discussion and Analysis of Financial Condition and Results of Operations" for items affecting quarterly results. The sum of the quarters may not equal the total of the respective year's earnings per share on either a basic or diluted basis due to changes in the weighted average shares outstanding throughout the year. (The preceding notes are an integral part of the foregoing financial statements.) 83 90 SCHEDULE II TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS (MILLIONS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- --------- -------------------- ---------- -------- ADDITIONS -------------------- BALANCE CHARGED CHARGED AT TO TO BALANCE BEGINNING COSTS AND OTHER AT END DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR - ----------- --------- --------- -------- ---------- -------- Allowance for Doubtful Accounts and Notes Deducted from Assets to Which it Applies: Year Ended December 31, 1999............ $39 $21 $(2) $29 $29 === === === === === Year Ended December 31, 1998............ $20 $20 $ 5 $ 6 $39 === === === === === Year Ended December 31, 1997............ $10 $ 6 $ 4 $-- $20 === === === === ===
84 91 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 85 92 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The section entitled "Election of Directors" in our definitive Proxy Statement for the Annual Meeting of Stockholders to be held May 9, 2000 is incorporated herein by reference. In addition, Item 4.1 of this Annual Report on Form 10-K, which appears at the end of Part I, is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION. The sections entitled "Executive Compensation" and "Election of Directors--Compensation of Directors" in our definitive Proxy Statement for the Annual Meeting of Stockholders to be held May 9, 2000 are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The section entitled "Ownership of Common Stock" in our definitive Proxy Statement for the Annual Meeting of Stockholders to be held May 9, 2000 is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The section entitled "Election of Directors--Transactions with Management and Others" in our definitive Proxy Statement for the Annual Meeting of Stockholders to be held May 9, 2000 is incorporated herein by reference. 86 93 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. FINANCIAL STATEMENTS INCLUDED IN ITEM 8 See "Index to Financial Statements of Tenneco Automotive Inc. and Consolidated Subsidiaries" set forth in Item 8, "Financial Statements and Supplementary Data" for a list of financial statements filed as part of this report. INDEX TO SCHEDULE INCLUDED IN ITEM 8
PAGE ---- Schedules of Tenneco Automotive Inc. and Consolidated Subsidiaries -- Schedule II -- Valuation and qualifying accounts -- three years ended December 31, 1999........... 84 SCHEDULES OMITTED AS NOT REQUIRED OR INAPPLICABLE Schedule I -- Condensed financial information of registrant Schedule III -- Real estate and accumulated depreciation Schedule IV -- Mortgage loans on real estate Schedule V -- Supplemental information concerning property -- casualty insurance operations
REPORTS ON FORM 8-K We filed the following Current Reports on Form 8-K during the quarter ended December 31, 1999: - Current Report on Form 8-K dated October 4, 1999, as amended, including pursuant to Item 5 certain financial information; - Current Report on Form 8-K dated October 4, 1999, including pursuant to Item 5 certain information regarding Pactiv Corporation; - Current Report on Form 8-K dated October 7, 1999, including pursuant to Item 5 certain financial information and certain information regarding our offering of senior subordinated notes; - Current Report on Form 8-K dated October 12, 1999, including pursuant to Item 5 certain information regarding the spin-off of Pactiv Corporation and certain information regarding our offering of senior subordinated notes; - Current Report on Form 8-K dated October 25, 1999, including pursuant to Item 5 certain information regarding our special stockholders' meeting held on October 25, 1999, certain information regarding Pactiv Corporation and certain financial information; and - Current Report on Form 8-K dated November 4, 1999, including pursuant to Items 2 and 7 financial and other information regarding the spin-off of Pactiv Corporation (including our Unaudited pro Forma Consolidated Balance Sheet at June 30, 1999 and our Unaudited Pro Forma Consolidated Statements of Income for the six months ended June 30, 1999 and the year ended December 31, 1998). 87 94 EXHIBITS The following exhibits are filed with this Annual Report on Form 10-K for the fiscal year ended December 31, 1999, or incorporated herein by reference (exhibits designated by an asterisk are filed with the Report; all other exhibits are incorporated by reference): INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- ----------- 2 -- Distribution Agreement by and between the registrant and Tenneco Packaging Inc. dated November 3, 1999 (incorporated herein by reference to Exhibit 2 to the registrant's Current Report on Form 8-K dated November 4, 1999, File No. 1-12387). 3.1(a) -- Restated Certificate of Incorporation of the registrant dated December 11, 1996 (incorporated herein by reference from Exhibit 3.1(a) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-12387). 3.1(b) -- Certificate of Amendment, dated December 11, 1996 (incorporated herein by reference from Exhibit 3.1(c) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-12387). 3.1(c) -- Certificate of Ownership and Merger, dated July 8, 1997 (incorporated herein by reference from Exhibit 3.1(d) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1997, File No. 1-12387). 3.1(d) -- Certificate of Designation of Series B Junior Participating Preferred Stock dated September 9, 1998 (incorporated herein by reference from Exhibit 3.1(d) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, File No. 1-12387). 3.1(e) -- Certificate of Elimination of the Series A Participating Junior Preferred Stock of the registrant dated September 11, 1998 (incorporated herein by reference from Exhibit 3.1(e) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, File No. 1-12387). 3.1(f) -- Certificate of Amendment to Restated Certificate of Incorporation of the registrant dated November 5, 1999 (incorporated herein by reference from Exhibit 3.1(f) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). 3.1(g) -- Certificate of Amendment to Restated Certificate of Incorporation of the registrant dated November 5, 1999 (incorporated herein by reference from Exhibit 3.1(g) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). 3.1(h) -- Certificate of Ownership and Merger merging Tenneco Automotive Merger Sub Inc. with and into the registrant, dated November 5, 1999 (incorporated herein by reference from Exhibit 3.1(h) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). *3.2(a) -- By-laws of the registrant, as amended March 14, 2000. 3.3 -- Certificate of Incorporation of Tenneco Global Holdings Inc. ("Global"), as amended (incorporated herein by reference to Exhibit 3.3 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.4 -- By-laws of Global (incorporated herein by reference to Exhibit 3.4 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.5 -- Certificate of Incorporation of TMC Texas Inc. ("TMC") (incorporated herein by reference to Exhibit 3.5 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.6 -- By-laws of TMC (incorporated herein by reference to Exhibit 3.6 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757).
88 95
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.7 -- Amended and Restate Certificate of Incorporation of Tenneco International Holding Corp. ("TIHC") (incorporated herein by reference to Exhibit 3.7 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.8 -- Amended and Restated By-laws of TIHC (incorporated herein by reference to Exhibit 3.8 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.9 -- Certificate of Incorporation of Clevite Industries Inc. ("Clevite"), as amended (incorporated herein by reference to Exhibit 3.9 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.10 -- By-laws of Clevite (incorporated herein by reference to Exhibit 3.10 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.11 -- Amended and Restated Certificate of Incorporation of the Pullman Company ("Pullman") (incorporated herein by reference to Exhibit 3.11 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.12 -- By-laws of Pullman (incorporated herein by reference to Exhibit 3.12 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.13 -- Certificate of Incorporation of Tenneco Automotive Operating Company Inc. ("Operating") (incorporated herein by reference to Exhibit 3.13 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 3.14 -- By-laws of Operating (incorporated herein by reference to Exhibit 3.14 to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 4.1(a) -- Rights Agreement dated as of September 8, 1998, by and between the registrant and First Chicago Trust Company of New York, as Rights Agent (incorporated herein by reference from Exhibit 4.1 of the registrant's Current Report on Form 8-K dated September 24, 1998, File No. 1-12387). *4.1(b) -- Amendment No. 1 to Rights Agreement, dated March 14, 2000, by and between the registrant and First Chicago Trust Company of New York, as Rights Agent. 4.2(a) -- Indenture, dated as of November 1, 1996, between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.1 of the registrant's Form S-4 Registration No. 33314003). 4.2(b) -- First Supplemental Indenture dated as of December 11, 1996 to Indenture dated as of November 1, 1996 between registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.3(b) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 4.2(c) -- Second Supplemental Indenture dated as of December 11, 1996 to Indenture dated as of November 1, 1996 between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.3(c) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 4.2(d) -- Third Supplemental Indenture dated as of December 11, 1996 to Indenture dated as of November 1, 1996 between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.3(d) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 4.2(e) -- Fourth Supplemental Indenture dated as of December 11, 1996 to Indenture dated as of November 1, 1996 between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.3(e) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387).
89 96
EXHIBIT NUMBER DESCRIPTION ------- ----------- 4.2(f) -- Fifth Supplemental Indenture dated as of December 11, 1996 to Indenture dated as of November 1, 1996 between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.3(f) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 4.2(g) -- Sixth Supplemental Indenture dated as of December 11, 1996 to Indenture dated as of November 1, 1996 between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.3(g) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 4.2(h) -- Seventh Supplemental Indenture dated as of December 11, 1996 to Indenture dated as of November 1, 1996 between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.3(h) of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 4.2(i) -- Eighth Supplemental Indenture, dated as of April 28, 1997, to Indenture, dated as of November 1, 1996 between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.1 of the registrant's Current Report on Form 8-K dated April 23, 1997, File No. 1-12387). 4.2(j) -- Ninth Supplemental Indenture, dated as of April 28, 1997, to Indenture, dated as of November 1, 1996, between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.2 of the registrant's Current Report on Form 8-K dated April 23, 1997, File No. 1-12387). 4.2(k) -- Tenth Supplemental Indenture, dated as of July 16, 1997, to Indenture, dated as of November 1, 1996, between the registrant and The Chase Manhattan Bank, as Trustee (incorporated herein by reference from Exhibit 4.1 of the registrant's Current Report on Form 8-K dated June 11, 1997, File No. 1-12387). 4.2(l) -- Eleventh Supplemental Indenture, dated October 21, 1999, to Indenture dated November 1, 1996 between The Chase Manhattan Bank, as Trustee, and the registrant (incorporated herein by reference from Exhibit 4.2(l) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). 4.3 -- Specimen stock certificate for Tenneco Automotive Inc. common stock (incorporated herein by reference from Exhibit 4.3 of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). 4.4(a) -- Indenture dated October 14, 1999 by and between the registrant and The Bank of New York, as trustee (incorporated herein by reference from Exhibit 4.4(a) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). 4.4(b) -- Supplemental Indenture dated November 4, 1999 among Tenneco Automotive Operating Subsidiary Inc. (formerly Tenneco Automotive Inc.), Tenneco International Holding Corp., Tenneco Global Holdings Inc., the Pullman Company and Clevite Industries Inc. in favor of The Bank of New York, as trustee (incorporated herein by reference from Exhibit 4.4(b) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). 4.4(c) -- Subsidiary Guarantee dated as of October 14, 1999 from Tenneco Automotive Operating Subsidiary Inc. (formerly Tenneco Automotive Inc.), Tenneco International Holding Corp., Tenneco Global Holdings Inc., the Pullman Company, Clevite Industries Inc. and TMC Texas Inc. in favor of The Bank of New York, as trustee (incorporated herein by reference to Exhibit 4.4(c) to the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 4.5(a) -- Credit Agreement, dated as of September 30, 1999, among the registrant, the Lenders named therein, Commerzbank and Bank of America, N.A., Citicorp USA, Inc. and The Chase Manhattan Bank (incorporated herein by reference from Exhibit 4.5(a) of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387).
90 97
EXHIBIT NUMBER DESCRIPTION ------- ----------- 9 -- None. 10.1 -- Distribution Agreement, dated November 1, 1996, by and among El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), the registrant, and Newport News Shipbuilding Inc. (incorporated herein by reference from Exhibit 2 of the registrant's Form 10, File No. 1-12387). 10.2 -- Amendment No. 1 to Distribution Agreement, dated as of December 11, 1996, by and among El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), the registrant, and Newport News Shipbuilding Inc. (incorporated herein by reference from Exhibit 10.2 of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 10.3 -- Debt and Cash Allocation Agreement, dated December 11, 1996, by and among El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), the registrant, and Newport News Shipbuilding Inc. (incorporated herein by reference from Exhibit 10.3 of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 10.4 -- Benefits Agreement, dated December 11, 1996, by and among El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), the registrant, and Newport News Shipbuilding Inc. (incorporated herein by reference from Exhibit 10.4 of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 10.5 -- Insurance Agreement, dated December 11, 1996, by and among El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), the registrant, and Newport News Shipbuilding Inc. (incorporated herein by reference from Exhibit 10.5 of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 10.6 -- Tax Sharing Agreement, dated December 11, 1996, by and among El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), Newport News Shipbuilding Inc., the registrant, and El Paso Natural Gas Company (incorporated herein by reference from Exhibit 10.6 of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387. 10.7 -- First Amendment to Tax Sharing Agreement, dated as of December 11, 1996, among El Paso Tennessee Pipeline Co. (formerly Tenneco Inc.), the registrant and Newport News Shipbuilding Inc. (incorporated herein by reference from Exhibit 10.7 of the registrant's Annual Report on Form 10-K for the year ended December 31, 1996, File No. 1-12387). 10.8 -- Tenneco Automotive Inc. Executive Incentive Compensation Plan (incorporated herein by reference from Exhibit 10.8 of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387).(1) 10.9 -- Tenneco Automotive Inc. Change of Control Severance Benefits Plan for Key Executives (incorporated herein by reference from Exhibit 10.13 of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387).(1) 10.10 -- Tenneco Automotive Inc. Stock Ownership Plan (incorporated herein by reference from Exhibit 10.10 of the registrant's Registration Statement on Form S-4, Reg. No. 333-93757).(1) 10.11 -- Tenneco Automotive Inc. Key Executive Pension Plan (incorporated herein by reference from Exhibit 10.15 of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387).(1) 10.12 -- Tenneco Automotive Inc. Deferred Compensation Plan (incorporated herein by reference from Exhibit 10.16 of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387).(1) 10.13 -- Tenneco Automotive Inc. Supplemental Executive Retirement Plan (incorporated herein by reference from Exhibit 10.17 of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387).(1)
91 98
EXHIBIT NUMBER DESCRIPTION ------- ----------- 10.14 -- Release Agreement dated as of October 18, 1999 by and between Dana G. Mead and Tenneco Management Company and Modification of Release Agreement dated as of October 18, 1999 among Dana G. Mead, Tenneco Automotive Inc. and Tenneco Management Company (incorporated herein by reference from Exhibit 10.18 of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387).(1) *10.15 -- Release Agreement dated as of September 17, 1999 by and between Robert T. Blakely and Tenneco Management Company and Modification of Release Agreement dated as of September 17, 1999 among Robert T. Blakely, Tenneco Automotive Inc. and Tenneco Management Company.(1) 10.16 -- Agreement, dated as of April 12, 1999, among the registrant, Tenneco Management Company, Tenneco Packaging Inc. and Paul T. Stecko (incorporated herein by reference from Exhibit 10.30 of the registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, File No. 1-12387).(1) 10.17 -- Human Resources Agreement by and between Tenneco Automotive Inc. and Tenneco Packaging Inc. dated November 4, 1999 (incorporated herein by reference to Exhibit 99.1 to the registrant's Current Report on Form 8-K dated November 4, 1999, File No. 1-12387). 10.18 -- Tax Sharing Agreement by and between Tenneco Automotive Inc. and Tenneco Packaging Inc. dated November 3, 1999 (incorporated herein by reference to Exhibit 99.2 to the registrant's Current Report on Form 8-K dated November 4, 1999, File No. 1-12387). 10.19 -- Amended and Restated Transition Services Agreement by and between Tenneco Automotive Inc. and Tenneco Packaging Inc. dated as of November 4, 1999 (incorporated herein by reference from Exhibit 10.21 of the registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 1999, File No. 1-12387). 10.20 -- Purchase Agreement among Salomon Smith Barney Inc., the other Initial Purchasers as named therein and Tenneco Inc. dated October 8, 1999 (incorporated herein by reference from Exhibit 10.18 of the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 10.21 -- Registration Rights Agreement among Tenneco Inc., the Guarantors named therein, Salomon Smith Barney Inc. and the other Initial Purchasers named therein dated October 14, 1999 (incorporated herein by reference from Exhibit 10.19 of the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). 10.22 -- Assumption Agreement among Tenneco Automotive Operating Company Inc., Tenneco International Holding Corp., Tenneco Global Holdings Inc., The Pullman Company, Clevite Industries Inc., TMC Texas Inc., Salomon Smith Barney Inc. and the other Initial Purchasers listed in the Purchase Agreement dated as of November 4, 1999 (incorporated herein by reference from Exhibit 10.20 of the registrant's Registration Statement on Form S-4, Reg. No. 333-93757). *10.23 -- Letter Agreement between Tenneco Automotive Inc. and Richard P. Schneider dated as of December 12, 1996.(1) *10.24 -- Letter Agreement between Tenneco Automotive Inc. and Mark P. Frissora dated as of January 11, 2000.(1)
92 99
EXHIBIT NUMBER DESCRIPTION ------- ----------- 11 -- None. *12 -- Statement of Ratio of Earnings to Fixed Charges -- December 31, 1999, 1998, 1997, 1996 and 1995. 13 -- None. 16 -- None. 18 -- None. *21 -- List of subsidiaries of the registrant. 22 -- None. *23 -- Consent of Arthur Andersen LLP. *24 -- Power of Attorney of Mark P. Frissora, Mark A. McCollum, Kenneth R. Trammell, Dana G. Mead, Sir David Plastow, M. Kathryn Eickhoff, Mark Andrews, Roger B. Porter, Paul T. Stecko and David B. Price, Jr. 26 -- None. *27.1 -- Financial Data Schedule -- Fiscal Year Ended December 31, 1999. *27.2 -- Financial Data Schedule -- Fiscal Year Ended December 31, 1998. *27.3 -- Financial Data Schedule -- Fiscal Year Ended December 31, 1997. 99 -- None.
- ------------------------- (1) Indicates a management contract or compensatory plan or arrangement. * Filed herewith. 93 100 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TENNECO AUTOMOTIVE INC. By /s/ MARK P. FRISSORA* ------------------------------------ Mark P. Frissora Chairman and Chief Executive Officer Date: March 23, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934 this report has been signed by the following persons in the capacities indicated on March 23, 2000.
SIGNATURE TITLE --------- ----- /s/ MARK P. FRISSORA* Chairman and Chief Executive Officer and - -------------------------------------------------------- Director (principal executive officer) Mark P. Frissora /s/ MARK A. MCCOLLUM* Senior Vice President and Chief Financial - -------------------------------------------------------- Officer (principal financial officer) Mark A. McCollum /s/ KENNETH R. TRAMMELL* Vice President and Controller (principal - -------------------------------------------------------- accounting officer) Kenneth R. Trammell /s/ DANA G. MEAD* Director - -------------------------------------------------------- Dana G. Mead /s/ SIR DAVID PLASTOW* Director - -------------------------------------------------------- Sir David Plastow /s/ M. KATHRYN EICKHOFF* Director - -------------------------------------------------------- M. Kathryn Eickhoff /s/ MARK ANDREWS* Director - -------------------------------------------------------- Mark Andrews /s/ ROGER B. PORTER* Director - -------------------------------------------------------- Roger B. Porter /s/ PAUL T. STECKO* Director - -------------------------------------------------------- Paul T. Stecko /s/ DAVID B. PRICE, JR.* Director - -------------------------------------------------------- David B. Price, Jr. *By: /s/ TIMOTHY R. DONOVAN ---------------------------------------------- Timothy R. Donovan Attorney in fact
94 EX-3.2(A) 2 BY-LAWS OF THE REGISTRANT, AS AMENDED 3/14/00 1 EXHIBIT 3.2(a) BY-LAWS OF TENNECO AUTOMOTIVE INC. AS AMENDED MARCH 14, 2000 ARTICLE I PLACE OF STOCKHOLDER MEETINGS Section 1. All meetings of the stockholders of the corporation shall be held at such place or places, within or without the State of Delaware, as may from time to time be fixed by the Board of Directors of the corporation (the "Board"), or as shall be specified or fixed in the respective notices or waivers of notice thereof. ANNUAL MEETING Section 2. The Annual Meeting of Stockholders shall be held on such date and at such time as may be fixed by the Board and stated in the notice thereof, for the purposes of electing directors and for the transaction of only such other business as is properly brought before the meeting in accordance with these By-Laws. SPECIAL MEETING Section 3. Subject to the rights of the holders of any series of preferred stock, par value $.01 per share, of the corporation (the "Preferred Stock") to elect additional directors under specified circumstances, special meetings of the stockholders shall be called by the Board. The business transacted at a special meeting shall be confined to the purposes specified in the notice thereof. Special meetings shall be held at such date and at such time as the Board may designate. NOTICE OF MEETING Section 4. Written notice of each meeting of stockholders, stating the place, date and hour of the meeting, and the purpose or purposes thereof, shall be mailed not less than ten nor more than sixty days before the date of such meeting to each stockholder entitled to vote thereat. QUORUM Section 5. Unless otherwise provided by statute, the holders of shares of stock entitled to cast a majority of votes at a meeting, present either in person or by proxy, shall constitute a quorum at such meeting. The Secretary of the corporation or in his absence an Assistant Secretary or an appointee of the presiding officer of the meeting, shall act as the Secretary of the meeting. VOTING Section 6. Except as otherwise provided by law or the Restated Certificate of Incorporation, each stockholder entitled to vote at any meeting shall be entitled to one vote, in person or by proxy, for each share held of record on the record date fixed as provided in Section 4 of Article V of these By-Laws for determining the stockholder entitled to vote at such meeting. At all meetings of stockholders for the election of directors, a plurality of the votes cast shall be sufficient to elect. All other elections and questions shall, unless otherwise provided by the Restated Certificate of Incorporation, these By-Laws, the rules or regulations of any stock exchange applicable to the corporation, or applicable law or pursuant to any regulation applicable to the corporation or its securities, be decided by the affirmative vote of the holders of a majority in voting power of the shares of stock of the corporation which are present in person or by proxy and entitled to vote thereon. 1 2 Elections of directors need not be by written ballot; provided, however, that by resolution duly adopted, a vote by written ballot may be required. PROXIES Section 7. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. A proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing an instrument revoking the proxy or by delivering a proxy in accordance with applicable law bearing a later date to the Secretary of the corporation. In order to be exercised at a meeting of stockholders, proxies shall be delivered to the Secretary of the corporation or his representative at or before the time of such meeting. INSPECTORS Section 8. At each meeting of the stockholders the polls shall be opened and closed; the proxies and ballots shall be received and be taken in charge, and all questions touching the qualification of voters and the validity of proxies and the acceptance or rejection of votes shall be decided by three Inspectors, two of whom shall have power to make a decision. Such Inspectors shall be appointed by the Board before the meeting, or in default thereof by the presiding officer at the meeting, and shall be sworn to the faithful performance of their duties. If any of the Inspectors previously appointed shall fail to attend or refuse or be unable to serve, substitutes shall be appointed by the presiding officer. CONDUCT OF MEETINGS Section 9. The date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced at the meeting by the chairman of the meeting. The Board may adopt by resolution such rules and regulations for the conduct of the meeting of stockholders as it shall deem appropriate. Except to the extent inconsistent with such rules and regulations as adopted by the Board, the chairman of any meeting of stockholders shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the Board or prescribed by the chairman of the meeting, may include, without limitation, the following: (i) the establishment of an agenda or order of business for the meeting, (ii) rules and procedures for maintaining order at the meeting and the safety of those present, (iii) limitations on attendance at or participation in the meeting to stockholders of record of the corporation, their duly authorized and constituted proxies or such other persons as the chairman of the meeting shall determine; (iv) restrictions on entry to the meeting after the time fixed for the commencement thereof, and (v) limitations on the time allotted to questions or comments by participants. Unless and to the extent determined by the Board or the chairman of the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure. ADVANCE NOTICE Section 10. (A) (1) Nominations of persons for election to the Board and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders only (a) pursuant to the corporation's notice of meeting (or any supplement thereto), (b) by or at the direction of the Board or (c) by any stockholder of the corporation who was a stockholder of record of the corporation at the time the notice provided for in this Section 10 is delivered to the Secretary of the corporation, who is entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 10. (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (c) of paragraph (A)(1) of this Section 10, the stockholder must 2 3 have given timely notice thereof in writing to the Secretary of the corporation and any such proposed business other than the nominations of persons for election to the Board must constitute a proper matter for stockholder action. To be timely, a stockholder's notice shall be delivered to the Secretary at the principal executive offices of the corporation not later than the close of business on the ninetieth day nor earlier than the close of business on the one hundred twentieth day prior to the first anniversary of the preceding year's annual meeting (provided, however, that in the event that the date of the annual meeting is more than thirty days before or more than seventy days after such anniversary date, notice by the stockholder must be so delivered not earlier than the close of business on the one hundred twentieth day prior to such annual meeting and not later than the close of business on the later of the ninetieth day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made by the corporation). In no event shall the public announcement of an adjournment or postponement of an annual meeting commence a new time period (or extend any time period) for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth: (a) as to each person whom the stockholders proposes to nominate for election as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 14a-11 thereunder (and such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the text of the proposal or business (including the text of any resolutions proposed for consideration and in the event that such business includes a proposal to amend the By-Laws of the corporation, the language of the proposed amendment), the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the corporation's books, and of such beneficial owner, (ii) the class and number of shares of capital stock of the corporation which are owned beneficially and of record by such stockholder and such beneficial owner, (iii) a representation that the stockholder is a holder of record of stock of the corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such business or nomination, and (iv) a representation whether the stockholder or the beneficial owner, if any, intends or is part of a group which intends (a) to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the corporation's outstanding capital stock required to approve or adopt the proposal or elect the nominee and/or (b) otherwise to solicit proxies from stockholders in support of such proposal or nomination. The corporation may require any proposed nominee to furnish such other information as it may reasonably require to determine the eligibility of such proposed nominee to serve as a director of the corporation. (3) Notwithstanding anything in the second sentence of paragraph (A)(2) of this Section 10 to the contrary, in the event that the number of directors to be elected to the Board of the corporation at an annual meeting is increased and there is no public announcement by the corporation naming the nominees for the additional directorships at least one hundred days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by this Section 10 shall also be considered timely, but only with respect to nominees for the additional directorships, if it shall be delivered to the Secretary at the principal executive offices of the corporation not later than the close of business on the tenth day following the day on which such public announcement is first made by the corporation. (B) Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the corporation's notice of meeting. Nominations of persons for election to the Board may be made at a special meeting of stockholders at which directors are to be elected pursuant to the corporation's notice of meeting (1) by or at the direction of the Board or (2) provided that the Board has determined that directors shall be elected at such meeting, by any stockholder of the corporation who is a stockholder of record at the time the notice provided for in this Section 10 is delivered to the Secretary of the corporation, who is entitled to vote at the meeting and upon such election and who complies with the notice procedures set forth in this Section 10. In the event the corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board, any such stockholder entitled to vote in such election of directors may nominate a person or persons (as the case may 3 4 be) for election to such position(s) as specified in the corporation's notice of meeting, if the stockholder's notice required by paragraph (A)(2) of this Section 10 shall be delivered to the Secretary at the principal executive offices of the corporation not earlier than the close of business on the one hundred twentieth day prior to such special meeting and not later than the close of business on the later of the ninetieth day prior to such special meeting or the tenth day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board to be elected at such meeting. In no event shall the public announcement of an adjournment or postponement of a special meeting commence a new time period (or extend any time period) for the giving of a stockholder's notice as described above. (C) (1) Only such persons who are nominated in accordance with the procedures set forth in this Section 10 shall be eligible to be elected an annual or special meeting of stockholders of the corporation to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 10. Except as otherwise provided by law, the chairman of the meeting shall have the power and duty (a) to determine whether a nomination or any business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 10 (including whether the stockholder or beneficial owner, if any, on whose behalf the nomination or proposal is made solicited (or is part of a group which solicited) or did not so solicit, as the case may be, proxies in support of such stockholder's nominee or proposal in compliance with such stockholder's representation as required by clause (A)(2)(c)(iv) of this Section 10) and (b) if any proposed nomination or business was not made or proposed in compliance with this Section 10, to declare that such nomination shall be disregarded or that such proposed business shall not be transacted. Notwithstanding the foregoing provisions of this Section 10, if the stockholder (or a qualified representative of the stockholder) does not appear at the annual or special meeting of stockholders of the corporation to present a nomination or business, such nomination shall be disregarded and such proposed business shall not be transacted, notwithstanding that proxies in respect of such vote may have been received by the corporation. (2) For purposes of this Section 10, "public announcement" shall include disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this Section 10, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 10. Nothing in this Section 10 shall be deemed to affect any rights (a) of stockholders to request inclusion of proposals in the corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act or (b) of the holders of any series of Preferred Stock to elect directors pursuant to any applicable provisions of the Restated Certificate of Incorporation. ARTICLE II BOARD OF DIRECTORS NUMBERS; METHOD OF ELECTION; TERMS OF OFFICE AND QUALIFICATION Section 1. The business and affairs of the corporation shall be managed under the direction of the Board. The number of directors which shall constitute the entire Board shall not be less than eight nor more than sixteen and shall be determined from time to time by resolution adopted by a majority of the entire Board. Except as may otherwise be determined in the good faith judgement of the Board with respect to any particular person, after due consideration of all relevant factors (including, but not limited to, the particular individual at issue and the background and experience of the individual), no person who shall have attained the age of 72 shall be eligible for election or reelection, as the case may be, as a director of the corporation. 4 5 MEETINGS Section 2. The Board may hold its meetings and have an office in such place or places within or without the State or Delaware as the Board by resolution from time to time may determine. The Board may in its discretion provide for regular or stated meetings of the Board. Notice of regular or stated meetings need not be given. Special meetings of the Board shall be held whenever called by direction of the Chief Executive Officer, the President or any two of the directors. Notice of any special meeting shall be given by the Secretary to each director either by mail or by telegram, facsimile, telephone or other electronic communication or transmission. If mailed, such notice shall be deemed adequately delivered when deposited in the United States mails so addressed, with postage thereon prepaid, at least three days before such meeting. If by telegram, such notice shall be deemed adequately delivered when the telegram is delivered to the telegraph corporation at least twenty-four hours before such meeting. If by facsimile, telephone, or other electronic communication or transmission, such notice shall be transmitted at least twenty-four hours before such meeting. Unless otherwise indicated in the notice thereof, any and all business may be transacted at a special meeting. Except as otherwise provided by applicable law, at any meeting at which every director shall be present, even though without notice, any business may be transacted. No notice of any adjourned meeting need be given. The Board shall meet immediately after election, following the Annual Meeting of Stockholders, for the purpose of organizing, for the election of corporate officers as hereinafter specified, and for the transaction of any other business which may come before it. No notice of such meeting shall be necessary. QUORUM Section 3. Except as otherwise expressly required by these By-Laws or by statute, a majority of the directors then in office (but not less than one-third of the total number of directors constituting the entire Board) shall be present at any meeting of the Board in order to constitute a quorum for the transaction of business at such meeting, and the vote of a majority of the directors present at any such meeting at which quorum is present shall be necessary for the passage of any resolution or for an act to be the act of the Board. In the absence of a quorum, a majority of the directors present may adjourn such meeting from time to time until a quorum shall be present. Notice of any adjourned meeting need not be given. COMPENSATION OF BOARD OF DIRECTORS Section 4. Each director (other than a director who is a salaried officer of the corporation or of any subsidiary of the corporation), in consideration of his serving as such, shall be entitled to receive from the corporation such amount per annum and such fees for attendance at meetings of the Board or of any committee of the Board (a "Committee"), or both, as the Board shall from time to time determine. The Board may likewise provide that the corporation shall reimburse each director or member of a Committee for any expenses incurred by him on account of his attendance at any such meeting. Nothing contained in this Section shall be construed to preclude any director from serving the corporation in any other capacity and receiving compensation therefor. 5 6 ARTICLE III COMMITTEES OF THE BOARD COMMITTEES Section 1. The Board shall elect from the directors an Audit Committee and any other Committee which the Board may be resolution prescribe. Any such other Committee shall be comprised of such persons and shall possess such authority as shall be set forth in such resolution. PROCEDURE Section 2. (1) Each Committee shall fix its own rules of procedure and shall meet where and as provided by such rules. Unless otherwise stated in these By-Laws, a majority of a Committee shall constitute a quorum. (2) In the absence or disqualification of a member of any Committee, the members of such Committee present at any meeting, and not disqualified from voting, whether or not they constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of any such absent or disqualified member. Fees in connection with such appointments shall be established by the Board. REPORTS TO THE BOARD Section 3. All completed actions by the Audit Committee shall be reported to the Board at the next succeeding Board meeting and shall be subject to revision or alteration by the Board, provided, that no acts or rights of third parties shall be affected by any such revision or alteration. AUDIT COMMITTEE Section 4. The Board shall elect from among its members an Audit Committee consisting of at least three members. The Board shall appoint a chairman of said Committee who shall be one of its members. The Audit Committee shall have such authority and duties as the Board by resolution shall prescribe. In no event shall a director who is also an officer or employee of the corporation of any of its subsidiary companies serve as a member of such Committee. The Chief Executive Officer shall have the right to attend (but not vote at) each meeting of such Committee. ARTICLE IV OFFICERS GENERAL PROVISIONS Section 1. The corporate officers of the corporation shall consist of a Chief Executive Officer, a Secretary and a Treasurer and such other officers as the Board may from time to time designate, including but not limited to the following: a Chairman who shall be chosen from the Board; one or more Vice Chairmen who shall be chosen from the Board; a President; one or more Executive Vice Presidents, Senior Vice Presidents, Vice Presidents and Assistant Vice Presidents; a General Counsel; and one or more Assistant Secretaries, one or more Assistant Treasurers, and/or a Controller. Insofar as permitted by statute, the same person may hold two or more offices. All officers chosen by the Board shall each have such powers and duties as generally pertain to their respective offices, subject to the specific provisions of this Article IV. The Chief Executive Officer, the Secretary, the Treasurer and any other officers of the corporation shall be elected by the Board. Each such officer shall hold office until his successor is elected or appointed and qualified or until his earlier death, resignation or removal. 6 7 Any officer may be removed, with or without cause, at any time by the Board. A vacancy in any office may be filled for the unexpired portion of the term in the same manner as provided in these By-Laws for election or appointment to such office. POWERS AND DUTIES OF THE CHIEF EXECUTIVE OFFICER Section 2. The Chief Executive Officer shall have general charge and management of the affairs, property and business of the corporation, subject to the Board and the provisions of these By-Laws. The Chief Executive Officer or in his absence such other individual as the Board may select, shall preside at all meetings of the stockholders. He shall also preside at meetings of the Board and in his absence the Board shall appoint one of their number to preside. The Chief Executive Officer shall perform all duties assigned to him in these By-Laws and such other duties as may from time to time be assigned to him by the Board. He shall have the power to appoint and remove, with or without cause, such officers, other than those elected by the Board as provided for in these By-Laws, as in his judgment may be necessary or proper for the transaction of the business of the corporation, and shall determine their duties, all subject to ratification by the Board. POWERS AND DUTIES OF OTHER OFFICERS Section 3. The Chairman, if any, shall perform such duties as may from time to time be assigned to him by the Board or the Chief Executive Officer. Section 4. Each Vice Chairman, if any, shall perform such duties as may from time to time be assigned to him by the Board or the Chief Executive Officer. Section 5. The President, if any, shall perform such duties as may from time to time be assigned to him by the Board or the Chief Executive Officer. Section 6. Each Executive Vice President shall perform such duties as may from time to time be assigned to him by the Board or the Chief Executive Officer. Section 7. Each Senior Vice President shall perform such duties as may from time to time be assigned to him by the Board or the Chief Executive Officer. Section 8. Each Vice President and Assistant Vice President shall perform such duties as may from time to time be assigned to him by the Board or the Chief Executive Officer or any Senior Vice President. Section 9. The General Counsel shall have general supervision and control of all of the corporation's legal business. He shall perform such duties as may from time to time be assigned to him by the Board or the Chief Executive Officer. Section 10. The Secretary or an Assistant Secretary shall record the proceedings of all meetings of the Board and the stockholders, in books kept for that purpose. The Secretary shall be the custodian of the corporate seal, and he or an Assistant Secretary shall affix the same to and countersign papers requiring such acts; and he and the Assistant Secretaries shall perform such other duties as may be required by the Board or the Chief Executive Officer. Section 11. The Treasurer and Assistant Treasurers shall have care and custody of all funds of the corporation and disburse and administer the same under the direction of the Board or the Chief Executive Officer and shall perform such other duties as the Board or the Chief Executive Officer shall assign to them. 7 8 Section 12. The Controller shall maintain adequate records of all assets, liabilities and transactions of the corporation and see that audits thereof are currently and regularly made, and he shall perform such other duties as may be required by the Board or the Chief Executive Officer. SALARIES AND APPOINTMENTS Section 13. The salaries of corporate officers shall be fixed by the Board or by any Committee of the Board to which the Board delegates such authority, except that the fixing of salaries below certain levels, determinable from time to time by the Board or any such Committee, may in the discretion of the Board or any such Committee be delegated to the Chief Executive Officer, subject to the approval of the Board or any such Committee. INDEMNIFICATION OF DIRECTORS AND OFFICERS Section 14. (1) The corporation shall indemnify and hold harmless, to the fullest extent permitted by applicable law as it presently exists or may hereafter be amended, any person (an "Indemnittee") who was or is made or is threatened to be made a party or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative, including appeals (a "proceeding"), by reason of the fact that he, or a person for whom he is the legal representative, is or was a director or officer of the corporation or, while a director of officer of the corporation is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust, enterprise or nonprofit entity, including service with respect to employee benefit plans, against all liability and loss suffered and expenses (including attorneys' fees) reasonably incurred by such Indemnitee. Notwithstanding the preceding sentence, except as otherwise provided in paragraph (3) of this Section 14, the corporation shall be required to indemnify an Indemnitee in connection with a proceeding (or part thereof) commenced by such Indemnitee only if the commencement of such proceeding (or part thereof) by the Indemnitee was authorized by the Board. (2) The corporation shall pay the expenses (including attorneys' fees) incurred by an Indemnitee in defending any proceeding in advance of its final disposition, provided, however, that, to the extent required by law, such payment of expenses in advance of the final disposition of the proceeding shall be made only upon receipt of an undertaking by the Indemnitee to repay all amounts advanced if it should be ultimately determined that the Indemnitee is not entitled to be indemnified under this Section 14 or otherwise. (3) If a claim for indemnification or payment of expenses under this Section 14 is not paid in full within thirty days after a written claim therefor by the Indemnittee has been received by the corporation, the Indemnitee may file suit to recover the unpaid amount of such claim and, if successful in whole or in part, shall be entitled to be paid the expense of prosecuting such claim. In any such action the corporation shall have the burden of proving that the Indemnitee is not entitled to the requested indemnification or payment of expenses under applicable law. (4) The rights conferred on any Indemnitee by this Section 14 shall not be exclusive of any other rights which such Indemnitee may have or hereafter acquire under any statute, provision of the Restated Certificate of Incorporation, these By-Laws, agreement, vote of stockholders or disinterested directors or otherwise. (5) The corporation's obligation, if any, to indemnify or to advance expenses to any Indemnitee who was or is serving at its request as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, enterprise or nonprofit entity shall be reduced by an amount such Indemnitee may collect as indemnification or advancement of expenses from such other corporation, partnership, joint venture, trust enterprise or nonprofit enterprise. 8 9 (6) Any repeal or modification of the foregoing provisions of this Section 14 shall not adversely affect any right or protection hereunder of any Indemnitee in respect of any act or omission occurring prior to the time of such repeal or modification. (7) This Section 14 shall not limit the right of the corporation, to the extent and in the manner permitted by law, to indemnify and to advance expenses to persons other than Indemnitees when as authorized by appropriate corporate action. ARTICLE V CAPITAL STOCK CERTIFICATES OF STOCK Section 1. Certificates of stock certifying the number of shares owned shall be issued to each stockholder in such form not inconsistent with the Restated Certificate of Incorporation as shall be approved by the Board. Such certificates of stock shall be numbered and registered in the order in which they are issued and shall be signed by the Chief Executive Officer or any of the Chairman or the President or any Vice President, and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary. Any and all of the signatures on the certificates may be a facsimile. TRANSFER OF SHARES Section 2. Transfers of shares shall be made only upon the books of the corporation by the holder, in person, or by power of attorney duly executed and filed with the Secretary of the corporation, and on the surrender of the certificate or certificates of such shares, properly assigned. The corporation may, if and whenever the Board shall so determine, maintain one or more offices or agencies, each in charge of an agent designated by the Board, where the shares of the capital stock of the corporation shall be transferred and/or registered. The Board may also make such additional rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates for shares of the capital stock of the corporation. LOST, STOLEN OR DESTROYED CERTIFICATES Section 3. The corporation may issue a new certificate of capital stock of the corporation in place of any certificate theretofore issued by the corporation, alleged to have been lost, stolen or destroyed, and the corporation may, but shall not be obligated to, require the owner of the alleged lost, stolen or destroyed certificate, or his legal representatives, to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate, as the officers of the corporation may, in their discretion, require. FIXING OF RECORD DATE Section 4. In order that the corporation may determine the stockholders entitled to notice of or to vote at the meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting or entitled to receive payment of any dividend or other distribution of allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board, and which record date: (1) in the case of determination of stockholders entitled to vote at any meeting of stockholders or adjournment thereof, shall, unless otherwise required by law, not be more than sixty nor less than ten days before the date of such meeting; (2) in the case of determination of stockholders entitled to express consent to corporate action in writing without a meeting, shall not be more then ten days from the date upon which the resolution fixing the record date is adopted by the Board; and (3) in the case of any other action, shall not be more than sixty days prior to such other action. If no record date is fixed by the Board: (1) the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meetings is held; (2) the 9 10 record date for determining stockholders entitled to express consent to corporate action in writing without a meeting shall be determined in accordance with Article VI of these By-Laws; and (3) the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board may fix a new record date for the adjourned meeting. ARTICLE VI CONSENTS TO CORPORATE ACTION RECORD DATE Section 1. The record date for determining stockholders entitled to express consent to corporate action in writing without a meeting shall be as fixed by the Board or as otherwise established under this Section. Any person seeking to have the stockholders authorize or take corporate action by written consent without a meeting shall by written notice addressed to the Secretary and delivered to the corporation, request that a record date be fixed for such purpose. The Board may fix a record date for such purpose which shall be no more than 10 days after the date upon which the resolution is adopted. If the Board fails within 10 days after the corporation receives such notice to fix a record date for such purpose, the record date shall be the day on which the first written consent is delivered to the corporation in the manner described in Section 2 below unless prior action by the Board is required under the General Corporation Law of Delaware, in which event the record date shall be at the close of business on the day on which the Board adopts the resolution taking such prior action. PROCEDURES Section 2. Every written consent purporting to take or authorizing the taking of corporate action and/or related revocations (each such written consent and related revocation is referred to in this Article VI as a "Consent") shall bear the date of signature of each stockholder who signs the Consent, and no Consent shall be effective to take the corporate action referred to therein unless, within 60 days of the earliest dated Consent delivered in the manner required by this Section 2, Consents signed by a sufficient number of stockholders to take such action are delivered to the corporation. A Consent shall be delivered to the corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery to the corporation's registered office shall be made by hand or by certified or registered mail, return receipt requested. In the event of the delivery of the corporation of a Consent, the Secretary of the corporation shall provide for the safe-keeping of such Consent and shall promptly conduct such ministerial review of the sufficiency of the Consents and of the validity of the action to be taken by shareholder consent as he deems necessary or appropriate, including, without limitation, whether the holders of a number of shares having the requisite voting power to authorize or take the action specified in the Consent have given consent; provided, however, that if the corporate action to which the Consent relates is the removal or replacement of one or more members of the Board, the Secretary of the corporation shall promptly designate two persons, who shall not be members of the Board, to serve as Inspectors with respect to such Consent and such Inspectors shall discharge the functions of the Secretary of the corporation under this Section 2. If after such investigation the Secretary or the Inspectors (as the case may be) shall determine that the Consent is valid and that the action therein specified has been validly authorized, that fact shall forthwith be certified on the records of the corporation kept for the purpose of recording the proceedings of meetings or stockholders, and the Consent shall be filed in such records, at which time the Consent shall become effective as stockholder action. In conducting the investigation required by this Section 2, the Secretary or the Inspectors (as the case may be) may, at the expense of the corporation, retain special legal counsel and any other necessary or appropriate professional advisors, and such other personnel as they may deem necessary or appropriate to assist them, and shall be fully protected in relying in good faith upon the opinion of such counsel of advisors. 10 11 ARTICLE VII MISCELLANEOUS DIVIDENDS AND RESERVES Section 1. Dividends upon the capital stock of the corporation may be declared as permitted by law by the Board at any regular or special meeting. Before payment of any dividend or making any distribution of profits, there may be set aside out of the surplus or net profits of the corporation such sum or sums as the Board, from time to time, in their absolute discretion, think proper as a reserve fund to meet contingencies, or for such other purposes as the Board shall think conducive to the interests of the corporation, and any reserve so established may be abolished and restored to the surplus account by like action of the Board. SEAL Section 2. The seal of the corporation shall bear the corporate name of the corporation, the year of its incorporation and the words "Corporate Seal, Delaware". WAIVER Section 3. Whenever any notice whatever is required to be given by statute or under the provisions of the Restated Certificate of Incorporation or these By-Laws, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Neither the business to be transacted at, nor the purpose of, any annual or special meeting of the stockholders or the Board, as the case may be, need be specified in any waiver of notice of such meeting. FISCAL YEAR Section 4. The fiscal year of the corporation shall begin with January first and end with December thirty-first. CONTRACTS Section 5. Except as otherwise required by law, the Restated Certificate of Incorporation or these By-Laws, any contracts or other instruments may be executed and delivered in the name and on the behalf of the corporation by such officer or officers of the corporation as the Board may from time to time direct. Such authority may be general or confined to specific instances as the Board may determine. The Chief Executive Officer or any of the Chairman or the President and any Vice President may execute bonds, contracts, deeds, leases and other instruments to be made or executed for or on behalf of the corporation. Subject to any restrictions imposed by the Board, the Chief Executive Officer or any of the Chairman or the President or any Vice President of the corporation may delegate contractual powers to others under his jurisdiction, it being understood, however, that any such delegation of power shall not relieve such officer of responsibility with respect to the exercise of such delegated power. PROXIES Section 6. Unless otherwise provided by resolution adopted by the Board, the Chief Executive Officer or any of the Chairman or the President and any Vice President may from time to time appoint an attorney or attorneys or agent or agents of the corporation, in the name and on behalf of the corporation, to cast the votes which the corporation may be entitled to cast as the holder of stock or other securities in any other corporation or other entity, any of whose stock or other securities may be held by the corporation, at meetings of the holders of the stock or other securities of such other corporation or other entity, or to consent in writing, in the name of the corporation as such holder, to any action by such other corporation or other entity, and may instruct the person or persons so appointed as to the manner of casting such votes or 11 12 giving such consent, and may execute or cause to be executed in the name and on behalf of the corporation and under its corporate seal or otherwise, all such written proxies or other instruments as he may deem necessary or proper in the premises. AMENDMENTS Section 7. The Board from time to time shall have the power to make, alter, amend or repeal any and all of these By-Laws, but any By-Laws so made altered or repealed by the board may be amended, altered or repealed by the stockholders. 12 EX-4.1(B) 3 AMENDMENT #1 TO RIGHTS AGREEMENT 1 EXHIBIT 4.3 AMENDMENT NO. 1 TO RIGHTS AGREEMENT THIS AMENDMENT NO. 1 TO RIGHTS AGREEMENT (this "Amendment"), dated as of March 14, 2000, is between Tenneco Automotive Inc. (formerly known as Tenneco Inc.), a Delaware corporation (the "Company"), and First Chicago Trust Company of New York (the "Rights Agent"). WHEREAS, the Company and the Rights Agent are parties to a Rights Agreement dated as of September 9, 1998 (the "Rights Agreement"); and WHEREAS, pursuant to Section 27 of the Rights Agreement, the Company and the Rights Agent desire to amend the Rights Agreement as set forth below; NOW, THEREFORE, the Rights Agreement is hereby amended as follows: 1. Amendment of the Title of the Rights Agreement. (a) The title set forth on the cover page of the Rights Agreement is amended in its entirety as follows: ------------------------------------- TENNECO AUTOMOTIVE INC. (formerly known as TENNECO INC.) and FIRST CHICAGO TRUST COMPANY OF NEW YORK, as Rights Agent ------------------------------------- RIGHTS AGREEMENT Dated as of September 9, 1998, as amended on March 14, 2000 (b) The first paragraph on page 1 of the Rights Agreement is amended to read in its entirety as follows: RIGHTS AGREEMENT Rights Agreement, dated as of September 9, 1998, as amended on March 14, 2000 ("Agreement"), between Tenneco Automotive Inc., a Delaware corporation, formerly known as Tenneco Inc. (the "Company"), and First Chicago Trust Company of New York, as Rights Agent (the "Rights Agent"). 2 2. Amendment of Section 1(a). Section 1(a) of the Rights Agreement is amended to read in its entirety as follows: (a) "Acquiring Person" shall mean any Person (as such term is hereinafter defined) who or which shall be the Beneficial Owner (as such term is hereinafter defined) of 15% or more of the shares of Common Stock then outstanding, but shall not include an Exempt Person (as such term is hereinafter defined); provided, however, that (i) if the Board of Directors of the Company determines in good faith that a Person who would otherwise be an "Acquiring Person" became the Beneficial Owner of a number of shares of Common Stock such that the Person would otherwise qualify as an "Acquiring Person" inadvertently (including, without limitation, because (A) such Person was unaware that it beneficially owned a percentage of Common Stock that would otherwise cause such Person to be an "Acquiring Person" or (B) such Person was aware of the extent of its Beneficial Ownership of Common Stock but had no actual knowledge of the consequences of such Beneficial Ownership under this Agreement) and without any intention of changing or influencing control of the Company, then such Person shall not be deemed to be or to have become an "Acquiring Person" for any purposes of this Agreement unless and until such Person shall have failed to divest itself, as soon as practicable (as determined, in good faith, by the Board of Directors of the Company), of Beneficial Ownership of a sufficient number of shares of Common Stock so that such Person would no longer otherwise qualify as an "Acquiring Person"; (ii) if, as of the date hereof or prior to the first public announcement of the adoption of this Agreement, any Person is or becomes the Beneficial Owner of 15% or more of the shares of Common Stock outstanding, such Person shall not be deemed to be or to become an "Acquiring Person" unless and until such time as such Person shall, after the first public announcement of the adoption of this Agreement, become the Beneficial Owner of additional shares of Common Stock (other than pursuant to a dividend or distribution paid or made by the Company on the outstanding Common Stock or pursuant to a split or subdivision of the outstanding Common Stock), unless, upon becoming the Beneficial Owner of such additional shares of Common Stock, such Person is not then the Beneficial Owner of 15% or more of the shares of Common Stock then outstanding; (iii) no Person shall become an "Acquiring Person" as the result of an acquisition of shares of Common Stock by the Company which, by reducing the number of shares outstanding, increases the proportionate number of shares of Common Stock 2 3 beneficially owned by such Person to 15% or more of the shares of Common Stock then outstanding, provided, however, that if a Person shall become the Beneficial Owner of 15% or more of the shares of Common Stock then outstanding by reason of such share acquisitions by the Company and shall thereafter become the Beneficial Owner of any additional shares of Common Stock (other than pursuant to a dividend or distribution paid or made by the Company on the outstanding Common Stock or pursuant to a split or subdivision of the outstanding Common Stock), then such Person shall be deemed to be an "Acquiring Person" unless upon becoming the Beneficial Owner of such additional shares of Common Stock such Person does not beneficially own 15% or more of the shares of Common Stock then outstanding; and (iv) if, as of the date of the adoption of Amendment No. 1 to this Agreement or prior to the first public announcement thereof, any Person is or becomes the Beneficial Owner of 15% or more, but in all events less than 20%, of the shares of Common Stock outstanding, such Person shall not be deemed to be or to become an "Acquiring Person" unless and until such time as such Person shall, after the first public announcement of the adoption of Amendment No. 1 to this Agreement, become the Beneficial Owner of additional shares of Common Stock (other than pursuant to a dividend or distribution paid or made by the Company on the outstanding Common Stock or pursuant to a split or subdivision of the outstanding Common Stock), unless, upon becoming the Beneficial Owner of such additional shares of Common Stock, such Person is not then the Beneficial Owner of 15% or more of the shares of Common Stock then outstanding. For all purposes of this Agreement, any calculation of the number of shares of Common Stock outstanding at any particular time, including for purposes of determining the particular percentage of such outstanding shares of Common Stock of which any Person is the Beneficial Owner, shall be made in accordance with the last sentence of Rule 13d-3(d)(1)(i) of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in effect on the date hereof. 3. Amendment of Section 1(t). Section 1(t) of the Rights Agreement is amended to read in its entirety as follows: (t) Intentionally omitted. 3 4 4. Amendment of Section 3(a). Section 3(a) of the Rights Agreement is amended to read in its entirety as follows: (a) Until the Close of Business on the earlier of (i) the tenth day after the Stock Acquisition Date or (ii) the tenth Business Day (or such later date as may be determined by action of the Board of Directors prior to such time as any Person becomes an Acquiring Person) after the date of the commencement by any Person (other than an Exempt Person) of, or of the first public announcement of the intention of such Person (other than an Exempt Person) to commence, a tender or exchange offer the consummation of which would result in any Person (other than an Exempt Person) becoming the Beneficial Owner of shares of Common Stock aggregating 15% or more of the Common Stock then outstanding (the earlier of such dates being herein referred to as the "Distribution Date", provided, however, that if either of such dates occurs after the date of this Agreement and on or prior to the Record Date, then the Distribution Date shall be the Record Date), (x) the Rights will be evidenced (subject to the provisions of Section 3(b) hereof) by the certificates for Common Stock registered in the names of the holders thereof and not by separate Right Certificates, and (y) the Rights will be transferable only in connection with the transfer of Common Stock. As soon as practicable after the Distribution Date, the Company will prepare and execute, the Rights Agent will countersign and the Company will send or cause to be sent (and the Rights Agent will, if requested, send) by first-class, insured, postage-prepaid mail, to each record holder of Common Stock as of the close of business on the Distribution Date (other than any Acquiring Person or any Associate or Affiliate of an Acquiring Person), at the address of such holder shown on the records of the Company, a Right Certificate, in substantially the form of Exhibit B hereto (a "Right Certificate"), evidencing one Right (subject to adjustment as provided herein) for each share of Common Stock so held. As of the Distribution Date, the Rights will be evidenced solely by such Right Certificates. 5. Amendment of Section 3(c). The legend set forth in Section 3(c) of the Rights Agreement is amended to read in its entirety as follows: 4 5 This certificate also evidences and entitles the holder hereof to certain rights as set forth in a Rights Agreement between Tenneco Automotive Inc., formerly known as Tenneco Inc. (the "Company"), and First Chicago Trust Company of New York, as Rights Agent, dated as of September 9, 1998 and as amended from time to time (the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal executive offices of the Company. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. The Company will mail to the holder of this certificate a copy of the Rights Agreement without charge after receipt of a written request therefor. Under certain circumstances, as set forth in the Rights Agreement, Rights owned by or transferred to any Person who is or becomes an Acquiring Person (as defined in the Rights Agreement) and certain transferees thereof will become null and void and will no longer be transferable. 6. Amendment of Section 7(b). Section 7(b) of the Rights Agreement is amended to read in its entirety as follows: (b) The Purchase Price shall be initially $8.80 for each one one-thousandth of a share of Preferred Stock purchasable upon the exercise of a Right. The Purchase Price and the number of one one-thousandths of a share of Preferred Stock or other securities or property to be acquired upon exercise of a Right shall be subject to adjustment from time to time as provided in Sections 11 and 13 hereof and shall be payable in lawful money of the United States of America in accordance with paragraph (c) of this Section 7. 7. Amendment of Section 13(f). Section 13(f) of the Rights Agreement is amended to read in its entirety as follows: (f) Intentionally omitted. 8. Amendment of Section 26. The notice provision in respect of the Company set forth in Section 26 of the Rights Agreement is amended to read in its entirety as follows: Tenneco Automotive Inc. 500 North Field Drive Lake Forest, IL 60045 Attention: General Counsel 5 6 9. Amendment of Section 30(a). Section 30(a) of the Rights Agreement is amended to read in its entirety as follows: (a) The Board of Directors of the Company shall have the exclusive power and authority to administer this Agreement and to exercise the rights and powers specifically granted to the Board of Directors of the Company or to the Company, or as may be necessary or advisable in the administration of this Agreement, including, without limitation, the right and power to (i) interpret the provisions of this Agreement and (ii) make all determinations deemed necessary or advisable for the administration of this Agreement (including, without limitation, a determination whether: to exchange the outstanding Rights for Common Stock pursuant to Section 24; to redeem or not redeem the Rights; or to amend or not to amend this Agreement). All such actions, calculations, interpretations and determinations (including, for purposes of clause (y) below, all omissions with respect to the foregoing) that are done or made by the Board of Directors of the Company in good faith, shall (x) be final, conclusive and binding on the Company, the Rights Agent, the holders of the Rights, as such, and all other parties, and (y) not subject the Board of Directors to any liability to the holders of the Rights. 10. Amendment of Section 30(b). Section 30(b) of the Rights Agreement is amended to read in its entirety as follows: 6 7 (b) Nothing contained in this Agreement shall be deemed to be in derogation of the obligation of the Board of Directors of the Company to exercise its fiduciary duty. Without limiting the foregoing, nothing contained herein shall be construed to suggest or imply that the Board of Directors shall not be entitled to reject any tender offer or other acquisition proposal, or to recommend that holders of Common Stock reject any tender offer or other acquisition proposal, or to take any other action (including, without limitation, the commencement, prosecution, defense or settlement of any litigation and the submission of additional or alternative offers or other proposals) with respect to any tender offer or other acquisition proposal that the Board of Directors believes is necessary or appropriate in the exercise of such fiduciary duty. 7 8 11. Amendment of Form of Rights Certificate. (a) The first paragraph of the form of rights certificate attached as Exhibit B to the Rights Agreement is amended to read in its entirety as follows: RIGHTS CERTIFICATE TENNECO AUTOMOTIVE INC. This certifies that ____________________________ or registered assigns, is the registered owner of the number of Rights set forth above, each of which entitles the owner thereof, subject to the terms, provisions and conditions of the Rights Agreement, dated as of September 9, 1998, as the same may be amended from time to time (the "Rights Agreement"), between Tenneco Automotive Inc., a Delaware corporation (the "Company"), and First Chicago Trust Company of New York, as Rights Agent (the "Rights Agent"), to purchase from the Company at any time after the Distribution Date (as such term is defined in the Rights Agreement) and prior to 5:00 P.M., New York City time, on September 9, 2008 at the office or agency of the Rights Agent designated for such purpose, or of its successor as Rights Agent, one one-thousandth of a fully paid non-assessable share of Series B Junior Participating Preferred Stock, par value $.01 per share (the "Preferred Stock"), of the Company at a purchase price of $8.80 per one one-thousandth of a share of Preferred Stock (the "Purchase Price"), upon presentation and surrender of this Right Certificate with the Form of Election to Purchase duly executed. The number of Rights evidenced by this Rights Certificate (and the number of one one-thousandths of a share of Preferred Stock which may be purchased upon exercise hereof) set forth above, and the Purchase Price set forth above, are the number and Purchase Price as of March 14, 2000, based on the Preferred Stock as constituted at such date. As provided in the Rights Agreement, the Purchase Price, the number of one one-thousandths of a share of Preferred Stock (or other securities or property) which may be purchased upon the exercise of the Rights and the number of Rights evidenced by this Right Certificate are subject to modification and adjustment upon the happening of certain events. 8 9 (b) The signature block of the Company set forth on the form of rights certificate attached as Exhibit B to the Rights Agreement is amended to read in its entirety as follows: TENNECO AUTOMOTIVE INC. By:_______________________________________ Chairman, President and Chief Executive Officer (c) The addressee on the Form of Election to Purchase set forth as an attachment to the form of rights certificate attached as Exhibit B to the Rights Agreement is amended to read in its entirety as follows: To TENNECO AUTOMOTIVE INC.: 12. Effectiveness. This Amendment shall be deemed effective as of March 14, 2000. Except as amended hereby, the Rights Agreement shall remain in full force and effect and shall be otherwise unaffected hereby. 13. Miscellaneous. This Amendment shall be deemed to be a contract made under the laws of the State of Delaware and for all purposes shall be governed by and construed in accordance with the laws of such state applicable to contracts to be made and performed entirely within such state. This Amendment may be executed in any number of counterparts, each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. If any term, provision, covenant or restriction of this Amendment is held by a court of competent jurisdiction or other authority to be invalid, illegal, or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Amendment shall remain in full force and effect and shall in no way be affected, impaired or invalidated. 9 10 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date set forth above. TENNECO AUTOMOTIVE INC. By: /s/ Timothy R. Donovan --------------------------------- Name: Timothy R. Donovan Title: Senior Vice President and General Counsel FIRST CHICAGO TRUST COMPANY OF NEW YORK By: /s/ Charles Keryc --------------------------------- Name: Charles Keryc Title: Managing Director 10 EX-10.15 4 RELEASE AGREEMENT DATED AS OF 8/17/99 1 EXHIBIT 10.15 September 17, 1999 Robert T. Blakely 89 Valley Drive Greenwich, CT 06831 Re: Release Agreement ----------------- Dear Bob: This Release Agreement ("Agreement") entered into as of the date at the end hereof is by and between Robert T. Blakely ("Employee") and the employer, Tenneco Management Company ("Employer" or "Company"), (collectively, the "Parties"). The Parties named above agree as follows: 1. Your employment with Employer will terminate on or before December 31, 1999 (the "Termination Date"). Effective as of the Termination Date, you will resign all positions which you hold with Tenneco Inc. and its subsidiaries and affiliates, except for your position as a trustee of the Tenneco Rabbi Trust which you will continue to hold after your Termination Date. 2. You will be entitled to the following consideration upon the later of the Termination Date or the end of the seven-day revocation period defined in Paragraph 28, assuming you execute this Agreement, fail to revoke it during the seven-day period referred to in Paragraph 28, remain in compliance with all of the terms and conditions of this Agreement, and further assuming that your spouse executes a separate spousal waiver agreement to be tendered to your spouse ("Effective Date"): - PAYMENT - You will receive a lump sum payment of $1,266,000.48, less applicable tax withholdings and any amounts due the Employer, as soon as administratively feasible after the Effective Date. This payment shall be in lieu of any other payments, wages and benefits including without limitation any severance-type payment, except as expressly provided in this Agreement. If you fail to execute this Agreement by November 5, 1999, or revoke or cancel this Agreement during the seven-day period referred to 2 Robert T. Blakely Page 2 in Paragraph 28, Employer shall not be obligated to make this lump sum payment to you. If you revoke or cancel the Agreement after Employer has made the lump sum payment, you shall be obligated to return to Employer all benefits and payments provided to you under this Agreement, including but not limited to the lump sum payment. - RELOCATION LOAN MODIFICATION - The Employer and you and your spouse are parties to a June 13, 1996 Balloon Note (Fixed Rate) (the "Note"), which has a current outstanding principal balance of $400,000.00. The Employer hereby forgives the full principal balance of the Note, and all accrued interest under the Note. Accordingly, the Note is hereby canceled. The Employer shall deliver to you a release of the mortgage, given by you to the Employer securing the Note. - BUSINESS EXPENSES - You will receive a payment for reimbursement for any business expenses incurred by you on behalf of the Employer that have been submitted for reimbursement in accordance with the Employer's normal expense account procedures. - EXECUTIVE INCENTIVE COMPENSATION PLAN - Should the Company achieve the performance goals for Executive Incentive Compensation Plan ("EICP") payouts, you will receive an adjusted EICP Award prorated through the Termination Date. No future payments will be made under this Plan. - DEFERRED COMPENSATION - The balance of your Deferred Compensation Account will be distributed, as soon as administratively feasible after the Effective Date, in accordance with your election under the terms of the Plan. - RETIREMENT PLAN VESTING - Since you are a participant in the Tenneco Retirement Plan and have completed five years of service on the Termination Date, you are 100% vested in your accrued benefit under the Tenneco Retirement Plan. For information regarding your retirement benefit, call the Benefits Center at 1-800-444-5578. - EXECUTIVE INCENTIVE COMPENSATION PLAN RETIREMENT BENEFIT - Since you are a participant in both the Tenneco Retirement Plan and the Executive Incentive Compensation Plan, you are eligible for retirement benefits under the Tenneco Inc. Supplemental Executive Retirement Plan. For information 3 Robert T. Blakely Page 3 regarding these supplemental retirement benefits, call the Benefits Center at 1-800-444-5578. - ADDITIONAL SERP - Notwithstanding any other provision hereof, Employee shall be entitled to the benefits described in the document entitled "Blakely Special Appendix to the Tenneco Inc. Supplemental Executive Retirement Plan", including without limitation, deemed credit for 25 years of service and participation. - TENNECO INC. STOCK OPTION PLAN - You can exercise all currently exercisable options during the remainder of your employment in accordance with provisions of the Plan. Remaining options will become exercisable as of the Effective Date. Since you are eligible for retirement, your options will remain active for a period of ten (10) years following the termination of your employment (or the remaining term of the option, if less.) You will not be awarded any reload stock options upon the exercise of any such options. Except as modified herein, your stock options will continue to be subject to the rules of the 1996 Tenneco Inc. Stock Ownership Plan as amended from time to time, including without limitation, the provisions regarding adjustment and amendment of outstanding options which may result in the replacement of these options with options on the stock of Tenneco Packaging Inc. - TENNECO INC. PERFORMANCE SHARES - Subject to any generally applicable earlier earn-out, at the Effective Date, all outstanding performance shares awarded under the Stock Ownership Plan shall be deemed to have been earned at target and shall be paid out in Tenneco Inc. common stock. - TENNECO INC. RESTRICTED STOCK - Subject to any generally applicable earlier vesting, your restricted shares awarded under the Stock Ownership Plan will vest on the Effective Date and all applicable restrictions will lapse. A stock certificate for the appropriate number of shares will be delivered to you as soon as administratively feasible. - THRIFT PLAN - You are a participant in the Tenneco Thrift Plan and contributions to the Tenneco Thrift Plan cease upon the termination of your employment. You may then elect to receive a final settlement of your account balance, usually within four to six weeks following the receipt of 4 Robert T. Blakely Page 4 your properly completed election forms. You are 100% vested in the account. You should contact the Benefits Center for information about your Thrift Plan account, including any outstanding Thrift Plan loans, and the tax consequences of the distribution. - MEDICAL COVERAGE CONTINUATION - If enrolled in the Tenneco medical plan at the Termination Date, continued coverage under the Tenneco medical plan as it may be amended from time to time will be offered to you and your eligible dependents on an optional basis with your sharing the cost (after-tax basis) for up to twelve (12) months from the Termination Date. You remain responsible for any employee contribution required by your medical coverage choice. In the event you enroll in a group medical plan of a new employer before the end of your continuation period, your new coverage will be primary and Tenneco medical coverage will be secondary as provided in the medical plan. Under the regular provisions of the Tenneco medical plan, if at the time your Tenneco employment terminates, you have attained age 5 5 and 10 years of service after age 45, you will be entitled to retiree medical coverage. For information regarding your Medical Benefits, call the Benefits Center at 1-800-444-5578. - DENTAL COVERAGE CONTINUATION - If enrolled in the Tenneco dental plan at the Termination Date, coverage under the Tenneco dental plan as it may be amended from time to time (or the DMO option you have elected) will be offered to you and your eligible dependents on an optional basis with your sharing the cost (after-tax basis) for up to twelve (12) months from the Termination Date. You remain responsible for any employee contribution required by your dental coverage choice. In the event you enroll in a group dental plan of a new employer before the end of your continuation period, your new coverage will be primary and Tenneco dental coverage will be secondary as provided in the dental plan. Under the regular provisions of the Tenneco medical plan, if at the time your Tenneco employment terminates, you have attained age 55 and 10 years of service after age 45, you will be entitled to retiree medical coverage. For information regarding your Medical Benefits, call the Benefits Center at 1-800-444-5578. 5 Robert T. Blakely Page 5 - HEALTH CARE FLEXIBLE SPENDING ACCOUNT - If enrolled in the Tenneco health care flexible spending account at the Termination Date, you may, under COBRA, continue your coverage choice as it may be amended from time to time, completely at your own expense (after-tax basis), for eighteen (18) months from the Termination Date. - LIFE INSURANCE CONTINUATION - Under the Tenneco basic group life insurance plan as it may be amended from time to time, your basic life and accidental death and dismemberment (AD&D) coverage will continue at Company expense for twelve (12) months from the Termination Date. An individual life insurance conversion policy may be available following termination of Tenneco life insurance coverage. You may not continue your supplemental or dependent coverage past the Termination Date. Under the regular provisions of the Tenneco basic group life insurance plan, if at the time your Tenneco employment terminates, you are eligible for an immediately payable retirement benefit under the Tenneco Inc. Supplemental Executive Retirement Plan, you may be entitled to retiree insurance coverage. For information regarding retiree life insurance, call the Benefits Center at 1-800-444-5578. - DISABILITY AND ACCIDENT INSURANCE - Your participation in the Tenneco Inc. Long Term Disability and Travel Accident Insurance Plans ceases upon your termination of employment. - BENEFIT PLANS - Except as set out in this Agreement, the provisions of the policies or plan documents will control. - VACATION - If applicable, employer will pay you an amount equal to earned and unused vacation for 1999, subject to withholding of taxes. - COMPUTER/OFFICE EQUIPMENT - Employer will transfer to you, upon your payment of $500.00, ownership of the office equipment as identified on Exhibit C, however, no license or other right to use any computer software is granted to you by virtue of this transfer. Further, no property identified in Exhibit C that is leased by the Employer will transfer to you under this Agreement. 6 Robert T. Blakely Page 6 3. You acknowledge that the aggregate of all benefits set forth in Paragraph 2 of this Agreement is greater than the aggregate to which you are already entitled. IN ADDITION TO THE OTHER RESTRICTIONS AND CONDITIONS SET FORTH IN THIS AGREEMENT AND IN NO WAY IN LIMIT OF THOSE OTHER RESTRICTIONS AND CONDITIONS, YOU SHALL NOT BE ENTITLED TO ANY RETENTION, SEVERANCE, OR OTHER NON-VESTED BENEFITS SET FORTH IN THIS AGREEMENT IN THE EVENT YOU RESIGN YOUR EMPLOYMENT PRIOR TO THE TERMINATION DATE. FURTHERMORE, IN THE EVENT THAT YOU TRANSFER TO ANOTHER TENNECO COMPANY OR ONE OF ITS AFFILIATES OR SUCCESSORS AS DEFINED IN PARAGRAPH 4, YOU SHALL FORFEIT ALL RIGHTS TO ANY RETENTION, SEVERANCE OR OTHER NON-VESTED BENEFITS SET FORTH IN THIS AGREEMENT. 4. You acknowledge that your employment shall terminate with Employer, its direct or indirect subsidiaries, affiliates, parents, and related companies or entities, regardless of its or their form of business organization, including without limitation the plans described in Paragraph 7 (all collectively the "Employer Entities"), on or before the Termination Date. 5. In exchange for the compensation and benefits described in Paragraph 2, you release and discharge any and all Employer Entities as defined in Paragraph 4 and any and all of their past and present subsidiaries, affiliates, parents, related companies, persons and entities, directors, employees, officers, agents, partners, insurers, attorneys, trustees, administrators and fiduciaries (all collectively the "Released Parties") from any and all claims, demands, and causes- of action, whether arising in contract, tort or any other theory of action, whether arising in law or equity, whether known or unknown, accrued or unaccrued, asserted or unasserted, from the effective date of this Agreement, except for those obligations created by or arising out of this Agreement. You expressly waive the benefit of any statute or rule of law which, if applied to this Agreement, would otherwise exclude from its binding effect any claim against any Released Party not now known by you to exist. Except as necessary for you to enforce this Agreement, this Agreement is intended to be a general release that extinguishes all claims by you against any Employer Entity. Without limiting the generality of this Paragraph, if you commence or continue any claim in violation of this Agreement, the Released Party shall be entitled to assert this Agreement as a bar to such action or proceeding. 7 Robert T. Blakely Page 7 6. Without in any way limiting the generality of the foregoing, this Agreement constitutes a full release and disclaimer of any and all claims arising or accruing up to the effective date of this Agreement, including but not limited to any claims arising out of or in any way connected with or relating to the termination of your employment and any claims arising out of or in any way connected with or related to your employment with Employer or any other Employer Entity up to the effective date of this Agreement. The scope of this waiver includes but is not limited to claims arising under 29 U.S.C. (s) 1981, the Age Discrimination in Employment Act of 1967 as amended (29 U.S.C. (s) 621), Title VII of the Civil Rights Act of 1964 as amended, (42 U.S.C.ss.2000e), the Americans With Disabilities Act (42 U.S.C. ss.1210 1), the Worker Adjustment Retraining and Notification Act (29 U.S.C.ss. 2101), the Family and Medical Leave Act of 1993 (29 U.S.C.ss.2601), the Connecticut Human Rights and Opportunities Act, the Connecticut Family and Medical Leave laws (Conn. Gen. Stat. 31-5 1 cc to 31-51 gg and Ct. Legis. 96-140, effective January 1, 1997), the Texas Human Rights Act, (Tex. Rev. Civ. Stat. Art. 5221k), the Illinois Human Rights Act, the Wisconsin Fair Employment Act, the New York Human Rights Law, the New York Equal Pay Law, the New York Rights of Persons with a Disability Law, the New York Equal Rights Law, the National Labor Relations Act, any claims for breach of contract, wrongful or retaliatory discharge, tortious action, inaction or interference of any sort, and any claim under any other state, local or federal statute, regulation or ordinance, or common law cause of action. 7. It is expressly agreed that the payments described in Paragraph 2 of this Agreement are in full and complete satisfaction of any and all liabilities or obligations which any Employer Entity, including any plan, fund or program sponsored, maintained or contributed to by any Employer Entity, has or may have to you under or with respect to any employee benefit plan described in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), any payment or other item excluded from the definition of "employee welfare benefit plan", "employee pension benefit plan" or "employee benefit plan" under the rules of 29 C.F.R. Section 2510.3-1, 2510.3-2 or 2510.3-3, as the case may be, and any employee benefit plan described in Section 4 of ERISA. It is further agreed that the payments described in this Agreement exceed in value anything to which you may be already entitled. 8 Robert T. Blakely Page 8 8. You represent that you have not assigned or transferred, or purported to assign or transfer, to any person or entity, any claim or any portion thereof or interest therein against a Released Party. 9. You represent that as of the Termination Date, you will have turned over to Employer all originals and copies of expense reports, notes, memoranda, records, documents, Employer manuals, credit cards, pass keys, computers, computer diskettes, office equipment, sales records and data, and all other information or property, no matter how produced, reproduced or maintained, which you have in your possession and pertain to the business of any Employer Entity, including but not limited to lists of customers, prices, marketing plans, strategies, documents relating to the legal rights and obligations of any Employer Entity, the work product of any attorney employed or retained by any Employer Entity, and other confidential materials or information obtained by you in the course of your employment. 10. You acknowledge that the business and services of all Employer Entities are highly specialized and that the following information is not generally known, is highly confidential and constitutes trade secrets: proprietary technical and business information relating to any Employer Entity's plans, analysis or strategies concerning international or domestic acquisitions, possible acquisitions or new ventures; development plans or introduction plans for products or services; unannounced products or services; operation costs; pricing of products or services; research and development; personnel information; manufacturing processes; installation, service and distribution procedures and processes; customer lists; any know-how relating to the design, manufacture, and marketing of any Employer Entity's services and products, including components and parts thereof, non-public information acquired by you concerning the requirements and specifications of any Employer Entity's agents, vendors, contractors, customers and potential customers; non-public financial information, business and marketing plans, pricing and price lists; non-public matters relating to employee benefit plans; quotations or proposals given to agents or customers or received from suppliers; documents relating to any Employer Entity's legal rights and obligations; the work product of any attorney employed by or retained by any Employer Entity; and any other information which is sufficiently secret to derive economic value from not being generally known. 11. You shall maintain in the strictest confidence and will not, directly or indirectly, use, intentionally or inadvertently, publish or otherwise disclose to any person or entity whatever, any trade secrets, or any confidential, proprietary or other non-public 9 Robert T. Blakely Page 9 information of or belonging to any Employer Entity -or any agent, joint venturer, contractor, customer, vendor or supplier of any Employer Entity (collectively, the "Confidential Information"), regardless of its form without the prior written explicit consent of Employer. You shall take reasonable precautions to protect the inadvertent disclosure of Confidential Information. Your obligations under this Agreement with respect to Confidential Information shall extend for the period that such information is not generally known outside of the relevant Employer Entity for reasons other than disclosure or disclosures made by you or on your behalf. All duties and obligations set forth in this Agreement shall be in addition to those which exist under statute and at common law and shall not negate but shall be in addition to or coextensive with those obligations arising under any agreements or documents executed by you during your employment with Employer. Should you be served with legal process seeking to compel disclosure of any such information, you shall notify the General Counsel of Employer immediately. 12. Paragraphs 10 - 11 hereof shall be deemed to consist of a series of separate covenants. Should a determination be made by a court of competent jurisdiction that the character, duration, or geographical scope of those provisions are unreasonable in light of the circumstances as they then exist, then it is the intention and the agreement of the Parties that these shall be construed by the court in such a manner as to impose only those restrictions on your conduct which are reasonable in light of the circumstances as they then exist and as are necessary to assure the relevant Employer Entity of their intended benefit. If, in any judicial proceeding, a court shall refuse to enforce all of the separate covenants because, taken together, they are more extensive than necessary to assure the relevant Employer Entity of the intended benefit, then it is expressly understood and agreed that those of such covenants which, if modified or eliminated, would permit the remaining separate covenants to be enforced in such proceeding, shall, for the purpose of such proceeding, be deemed modified or eliminated in order to enforce the remaining provisions. 13. In expansion and not in limitation of Paragraphs 9, 10, and 11, hereof, it is specifically provided that among the communications, publications and disclosures forbidden or restricted by such Paragraphs, are any such communications, publications or disclosures by means of electronic, computer, print or other media, including without limitation, any use of the Internet, chat rooms, bulletin boards web sites, etc. 10 Robert T. Blakely Page 10 You hereby agree that Employer would suffer significant damages, which would be difficult to completely quantify in the event you or any Affiliate breached the provisions of Paragraphs 9, 10, or 11 of this Agreement. You acknowledge that any violation of any such Paragraphs by you or by an Affiliate shall be treated as a material breach and that you shall pay to Employer either $50,000 in total liquidated damages, or, alternatively, the actual damages suffered by Employer as a result of the breach if Employer is able to adequately establish that actual total damages exceeded $50,000. You hereby acknowledge and agree that as of the September 17, 1999, $50,000 represents a reasonable estimate of the minimum damages that Employer can be expected to incur as a result of any such breach. 14. Nothing in this Agreement shall be construed as an admission of any wrongdoing by any person or entity. 15. The Parties agree to cooperate fully and to execute any and all supplementary documents and to take all additional actions that may be necessary or appropriate to give full force to the terms and intent of this Agreement that are not inconsistent with its terms. 16. You shall provide thorough and accurate information and testimony voluntarily to or on behalf of any Employer Entity, regarding any investigation or court case initiated by or against any Employer Entity or by any government agency, but you agree not to disclose or to discuss with anyone who is not directing or assisting in any Employer Entity investigation or case, other than your attorney, the fact of or the subject matter of any investigation, except as required by law. You will cooperate with the Employer Entity and promptly provide such information. If the Employer Entity requests information, it will attempt to work with you to arrange times that reasonably accommodate you, and will reimburse you for commuting, parking or other similar expenses and, to the extent permitted by law, will reasonably compensate you for any significant imposition on your time by the request. 17. You acknowledge that any employment or contractual relationship between you and any and all Employer Entities, including but not limited to the Employer, will terminate by virtue of this Agreement on or before the Termination Date. In consideration of this Agreement, you waive any and all employment rights that you now have with any Employer Entity, except as otherwise expressly provided in this Agreement. You agree not to seek reinstatement, reemployment, or future employment as a new employee, and no Employer Entity has an obligation, 11 Robert T. Blakely Page 11 contractual or otherwise, to employ or reemploy, hire or rehire, or recall or reinstate you in the future. 18. You agree to keep confidential the terms, conditions, and amounts set forth in this Agreement and not to disclose any information relating to this Agreement to any employee or former employee of any Employer Entity except as required by law, or a court of competent jurisdiction. 19. It is further agreed that if any provision of this Agreement contravenes the law of any state or jurisdiction where this Agreement is to be performed or enforced, such provision shall be deemed not to be a part of this Agreement, and the other provisions of this Agreement, shall remain in full force and effect. 20. The failure of the Employer to exercise any rights under this Agreement upon any breach or threatened breach by you shall not constitute a waiver of any rights arising by reason of other or similar breaches. 21. You shall have no right of assignment or transfer of any rights herein or any sums that may accrue to you hereunder, nor shall any creditor or other claimant have any right to assert any interest in or right to receive such sums either by voluntary or involuntary act on their part, by any writ or garnishment or attachment or otherwise. 22. The rights and obligations of the Parties shall be construed and enforced in accordance with, and governed by, the laws of the State of Connecticut without regard to that or any other state's rules regarding conflict of laws. The language of all parts of this Agreement shall in all cases be construed as a whole, according to its fair meaning and not strictly for or against any of the Parties. 23. This Agreement shall be binding upon and inure to the benefit of the respective successors, heirs, assigns, administrators, executors and legal representatives of the Parties and other entities described in this Agreement. 24. You warrant that no promise or inducement to enter into this Agreement has been offered or made except as set forth in this Agreement, that you are entering into this Agreement without any threat or coercion and without reliance on any statement or representation made on behalf of any Employer Entity or by any person employed by or representing any Employer Entity, except for the written provisions and promises contained in this Agreement. 12 Robert T. Blakely Page 12 25. This Agreement constitutes the entire agreement and understanding between the Parties with regard to all matters, including but not limited to your employment, the cessation of your employment from Employer, payments owed to you, and the other subject matters addressed in this Agreement. This Agreement supersedes and replaces all prior commitments, negotiations and all agreements proposed or otherwise, whether written or oral, concerning the subject matters contained in this Agreement. This Agreement is an integrated document and the consideration stated herein is the sole consideration for this Agreement. 26. This Agreement is being delivered to you on September 17, 1999. You shall have fifty days, or until November 5, 1999, to decide whether to sign the Agreement and be bound by its terms. 27. Employer informs you of the following: a) In order to be eligible for the benefits. contained in this Release Agreement, you must: (i) have worked in the Finance Department on January 1, 1999 and, (ii) terminate your employment on or before your Termination Date, and (iii) agree on or before November 5, 1999 to terminate your employment under the terms of a valid separation agreement, by executing this Agreement. b) This severance program covers the following class, unit or group of individuals: employees in Tenneco Management Company terminated pursuant to a reduction-in-force. c) Attached at Exhibit A, this Agreement contains the job titles and ages of all individuals in the Company eligible or selected for the program. d) Attached at Exhibit B, this Agreement contains the job titles and ages of all individuals in the Company who are not eligible or selected for the program. 28. In addition, the Parties agree that even after signing the Agreement, you shall have the right to revoke or cancel it only within seven days after signing it. This cancellation or revocation can be accomplished by delivery of a written notification if you wish to revoke the Agreement to the Vice President of Human Resources. In the event that this Agreement is canceled or revoked by you, Employer shall have no obligation to meet any of the commitments described in this Agreement. 13 Robert T. Blakely Page 13 29. You acknowledge that you have been advised and encouraged by Employer to consult your own attorney prior to signing this Agreement, and that you execute this Agreement voluntarily. 30. You acknowledge that you have read this Agreement and that you understand that the Agreement will have the effect of waiving any action or recovery you might pursue, including breach of contract, personal injury, discrimination on the basis of race, age, sex, national origin, citizenship, religion, veteran status, handicap, or disability and any other claims arising prior to the date of the Agreement. Please return the executed original of this letter to Stephen J. Smith, Vice President Human Resources, 1275 King Street, Greenwich, Connecticut 06831. Sincerely, /s/ Stephen J. Smith Stephen J. Smith Vice President Human Resources Tenneco Inc. /s/ Dana G. Mead ------------------------------------- Dana G. Mead Chairman and Chief Executive Officer AGREED AND ACCEPTED: /s/ Robert T. Blakely Date: November 3, 1999 ------------------------------------- ---------------------- Robert T. Blakely 14 MODIFICATION OF RELEASE AGREEMENT The parties hereto have entered into the Release Agreement, dated September 17, 1999 (the "Release Agreement"). This Modification supersedes and amends the Release Agreement as and to the extent set forth herein. Notwithstanding any provision of the Release agreement to the contrary, Robert T. Blakely ("Officer") shall not be deemed to have waived any rights to indemnification, contribution or reimbursement to which Officer is or would otherwise be entitled by contract, operation of law or otherwise, including without limitation, under and pursuant to the Delaware General Corporation Law, the certificate of incorporation of Tenneco Inc., the By-Laws of Tenneco Inc., any contract, the Tenneco Rabbi Trust or any insurance policy or other similar arrangement at any time maintained by Tenneco Inc. or any of its subsidiaries or any right in respect or resulting from any legal, accounting, financial or other advice provided to Tenneco Inc. or any of its subsidiaries or Officer by any legal counsel, accountant, financial advisor, engineer, consultant or other similar person, firm or corporation in the discharge of such Officer's employment as an officer, director or employee of Tenneco Inc. or any of it subsidiaries or as a representative of Tenneco Inc. or any of its subsidiaries. Neither Tenneco Inc. nor any of its subsidiaries will, for a period of ten years from the date of the spin-off described below, amend or modify or terminate any such certificate of incorporation, by-law, contract, insurance policy or other arrangement if the effect thereof could be to eliminate or diminish the protection afforded the Officer thereby in any material respect. Officer shall also retain, without cost to Officer, the benefit of all the liability insurance coverage maintained by Tenneco Inc., Tenneco Packaging Inc., Tenneco Automotive Inc. or otherwise, including, without limitation, the Tenneco Inc. Director and Officer and Fiduciary "run-off" insurance policies to be purchased in connection with the Tenneco Packaging Inc. spin-off. Tenneco Inc. and Tenneco Management Company each further agrees jointly and severally to purchase and keep in force, at their sole expense, such coverage for its full term and to deliver proof of such coverage to Officer. 15 Nothing contained herein or in the Release Agreement shall be deemed to be a waiver or discharge of any right which the Officer has or may have if the effect of any such waiver or discharge would be to abrogate or diminish any right the Officer or Tenneco Inc. or any of its subsidiaries has or may have under any insurance policy or other similar arrangement. Dated: November 3, 1999 -------------------------- /s/ Robert T. Blakely - -------------------------------- Robert T. Blakely TENNECO INC. By: /s/ Dana G. Mead ------------------------------------- Dana G. Mead Chairman and Chief Executive Officer TENNECO MANAGEMENT COMPANY By: /s/ Stephen J. Smith ------------------------------------- Stephen J. Smith Vice President Human Resources -2- EX-10.23 5 LETTER AGREEMENT DATED AS OF 12/12/96 1 EXHIBIT 10.23 December 12, 1996 PERSONAL AND CONFIDENTIAL Mr. Richard P. Schneider 210 Margate Court Lake Bluff, IL 60044 Dear Mike: On behalf of Tenneco Inc. (the "Company" or "Tenneco"), I am pleased to set forth the terms and conditions of your employment: 1. You are employed as Vice President, Human Resources, Tenneco Automotive and shall in the future hold such positions as the Company may determine from time to time. While employed, you will abide by all policies of the Company. 2. You will be paid a base salary of $200,000 a year, which shall be subject to such adjustments as may from time to time be approved by the Compensation and Benefits Committee of the Board of Directors of Tenneco, payable according to the regular pay schedule for salaried employees. 3. You will be a participant in the Tenneco Executive Incentive Compensation Plan ("EICP"). The amount distributed to you under the EICP for 1996 will be $130,000, which includes a special award amount of $40,000 reflecting your special contribution to Tenneco during this transition year. In the future, you will be eligible for EICP distributions based on your performance at the discretion of the Compensation and Benefits Committee of the Board of Directors. 4. You will be awarded 40,000 non-qualified stock options under the Tenneco stock ownership plan. The number of shares you will receive represents a front-loaded grant of three years' worth of stock options. Two-thirds of this award will be granted to you on December 12, 1996 with the option price based on the fair market value of Tenneco stock on that date. The remaining one-third will be granted and priced in 1997 at a date to be determined by the Compensation and Benefits Committee. In January, 1997 you will be awarded 4,000 performance shares under Tenneco Stock Ownership Plan. In the future, you will be eligible to receive awards under that plan at the discretion of the Compensation and Benefits Committee of the Board of Directors. You will also receive a one-time grant of 3,000 shares of restricted stock, which will vest only upon retirement or other mutually satisfactory separation from service. 2 5. You will receive annual perquisite compensation of $20,000, according to the new plan we are putting in place. 6. You will receive non-cash compensation and personal benefits comparable to those currently provided to Tenneco executives under Tenneco's policy in effect at the time hereof, including Health Care, Thrift Plan, Long-Term Disability, and Life Insurance (the plan provides for coverage for one and one-half times your salary paid for by the Company, with the option to purchase at your expense up to five times your salary.) 7. The aggregate monthly pension benefits to which you and your surviving spouse shall be entitled hereunder, shall be equal to the additional benefits you and your surviving spouse would be entitled to under the Tenneco qualified and non-qualified defined benefit pension plans EXCEPT that the compensation used to compute your monthly pension shall include your EICP bonus for the year earned (regardless of when paid) and EXCEPT that final average compensation for the purpose of this supplement will be determined over a three year rather than a five year period. You will qualify for the additional benefits provided under this Section only if you render five years of service with the Company in the period commencing January 1, 1997. 8. If your employment is terminated other than for death, disability or non-performance of your duties, subject to your execution of a general release and such other documents as the Company may specify: (a) you will be paid a severance benefit in an amount equal to one and one-half times the total of your then-current base salary plus your bonus for the immediately preceding year; (b) subject to Board approval, all outstanding awards under the Tenneco Stock Ownership Plan may vest and/or become exercisable on the date of your termination; and (e) vested stock options you hold will remain exercisable for a period of not less than 90 days from your termination. 9. If you resign voluntarily at any time you will not be entitled to any benefits described in section 8 hereof. Sincerely, /s/ Barry R. Schuman Barry R. Schuman Senior Vice President, Human Resources ACKNOWLEDGED AND ACCEPTED: /s/ Richard P. Schneider - ----------------------------------- On this 16th day of December, 1996. EX-10.24 6 LETTER AGREEMENT DATED AS OF 1/11/00 1 EXHIBIT 10.24 January 11, 2000 PERSONAL AND CONFIDENTIAL Mr. Mark P. Frissora 1170 Elm Tree Road Lake Forest, IL 60045 Dear Mr. Frissora: On behalf of Tenneco Automotive Inc. (the "Company"), I am pleased to set forth and confirm the terms and conditions of your service as Chief Executive Officer of the Company: 1. Commencement. Except as specifically provided herein, the terms and conditions hereof will be effective immediately upon the signing hereof. You will report to and serve at the pleasure of the Board of Directors of the Company (the "Board"). 2. Base Salary. Effective on January 1, 2000, you will be paid a base salary of $640,000.00 per year, which will be subject to such increases as may from time to time be approved by the Board or such committee of the Board to which such power has been delegated (the "Committee"), payable according to the regular pay schedule for salaried employees. 3. Annual Bonus. You will be eligible for an annual performance bonus. Commencing with calendar year 2000, your annual target bonus will be, at least, $590,000.00, subject to fulfillment of performance goals as determined by the Board or Committee. 2 Page 2 4. Performance Shares, Stock Options, Restricted Stock and Stock Equivalent Units. At the time of Spin-off, you will be granted 75,000 performance shares under the Company's Stock Ownership Plan (the "Plan"), subject to fulfillment of performance goals as determined by the Committee. At the time of the Spin-off, you will be granted under the Plan an option to purchase 375,000 shares of Company stock, subject to terms and conditions set by the Committee under the Plan. You have received a restricted stock grant of 68,385 shares and one-third of such restricted stock will vest on each of the first three anniversaries of the Spin-off if you continue to become employed by the Company on such anniversary. The grants described herein are without prejudice to your receipt of additional grants as determined by the Board or the Committee under the Plan. The number of shares set forth above with respect to the performance share and stock option awards is after giving effect to the proposed one-for-five reverse stock split. You are granted 150,000 stock equivalent units for the year 2000. This grant is payable in January 2001. 5. Executive Benefit Plans. You will be a participant in all employee benefit plans applicable to salaried employees generally and all executive compensation structures applicable to senior executives. 6. Perquisite Allowance. You will receive an annual perquisites allowance of $40,000 which you may receive in either cash, perquisites, or a combination at your election. 7. Vacation. You will receive four weeks vacation per year. 8. Key Employee Pension Plan. You will retain your special benefit under the Company's Supplemental Executive Retirement Plan (the "SERP"). You will be a participant in the Company's Key Employee Pension Plan. 9. Change in Control. You will participate in the Company's Change in Control Severance Benefit Plan for Key Executives (the "Change in Control Plan"); provided, that your cash severance benefit under the Change in Control Plan will be 3) times the total of your then base salary plus your highest target bonus over the last 3 years of your employment and provided further that all of your outstanding awards under the Plan, referred to in Section 4 above, will be treated as exercisable, earned at target and vested, as the case may be, immediately upon the Change in Control as that term is defined in the Change in Control Plan. 3 Page 3 10. Severance. If your employment is terminated other than for death, disability, or non-performance of your duties, subject to your execution of a general release and such other documents as the Company may reasonably request; (a) you will be paid a severance benefit in an amount equal to two times the total of your then current base salary plus your bonus for the immediately preceding year; (b) subject to Board approval, all your outstanding awards under the Company's Stock Ownership Plan may vest and/or become exercisable on the date of your termination; (c) vested stock options you hold will remain exercisable for a period of not less than 90 days from your termination; and (d) the Company will continue to provide to you, for one year following the date of the termination of your employment, health and welfare benefits amounting to no less than the amount of health and welfare benefits you receive at the time your employment commences. COBRA continuation coverage will begin following this one year period. Tax Gross-Up Payment. If any portion of the payments described herein, and/or any other payments, shall be subject to the tax imposed by Section 4999 of the Internal Revenue Code (the portion of such payments which are subject to the Excise Tax being referred to herein as the "Payments"), the Company shall pay you, not later than the 30th day following the date you become subject to the Excise Tax, an additional amount (the "Gross-Up Payment") such that the net amount retained by you after deduction of the Excise Tax on such Payments and all federal, state, and local income tax; interest and penalties; and Excise Tax on the Gross-Up Payment, shall be equal to the amount which would have been retained by you had the payments not been subject to the Excise Tax. Please acknowledge your agreement of these terms by executing a copy of this letter in the space provided below and returning it to me. Sincerely, TENNECO AUTOMOTIVE INC. By: /s/ Roger B. Porter ------------------------------------ Its: Chairman - Compensation Committee ----------------------------------- ACKNOWLEDGED AND ACCEPTED /s/ Mark P. Frissora Date: 3/13/00 - ----------------------------- ----------------------------------- EX-12 7 STATEMENT OF RATIO OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12 TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES COMBINED WITH 50% OWNED UNCONSOLIDATED SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES YEARS ENDED DECEMBER 31, -------------------------------- 1999 1998 1997 1996 1995 ---- ---- ---- ---- ---- Income (loss) from continuing operations.................. $(63) $116 $234 $ 82 $ 90 Add: Interest................................................ 106 69 58 60 44 Portion of rentals representative of interest factor.... 11 10 10 12 11 Preferred stock dividend requirements of majority-owned subsidiaries......................................... 22 27 21 21 23 Income tax expense and other taxes on income............ 82 13 80 79 91 Amortization of interest capitalized.................... -- -- -- -- -- Undistributed (earnings) losses of affiliated companies in which less than a 50% voting interest is owned.... -- -- -- -- -- ---- ---- ---- ---- ---- Earnings as defined............................. $158 $235 $403 $254 $259 ==== ==== ==== ==== ==== Interest.................................................. $106 $ 69 $ 58 $ 60 $ 44 Interest capitalized...................................... -- -- -- -- -- Portion of rentals representative of interest factor...... 11 10 10 12 11 Preferred stock dividend requirements of majority-owned subsidiaries on a pre-tax basis......................... 35 30 16 37 44 ---- ---- ---- ---- ---- Fixed charges as defined........................ $152 $109 $ 84 $109 $ 99 ==== ==== ==== ==== ==== Ratio of earnings to fixed charges........................ 1.04 2.16 4.80 2.33 2.62 ==== ==== ==== ==== ====
EX-21 8 LIST OF SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 TENNECO AUTOMOTIVE INC. SUBSIDIARIES AND AFFILIATES TENNECO AUTOMOTIVE INC. (DELAWARE) Tenneco Automotive Operating Company Inc. ................................... 100% Beijing Monroe Automobile Shock Absorber Company Ltd. (Peoples Republic of China) ..................................................... 51 (Tenneco Automotive Operating Company Inc. owns 51%; and Beijing Automotive Industry Corporation, an unaffiliated company, owns 49%) Dalian Walker-Gillet Muffler Co. Ltd. (Peoples Republic of China) ........ 55 (Tenneco Automotive Operating Company Inc. owns 55%; and non-affiliates own 45%) McPherson Strut Company Inc. (Delaware) .................................. 100 Precision Modular Assembly Corp. (Delaware) .............................. 100 Shanghai Walker Exhaust Company, Ltd. (Peoples Republic of China) ........ 55 (Tenneco Automotive Operating Company Inc. owns 55%; and Shanghai Tractor and Internal Combustion Engine Company, Ltd., an unaffiliated company, owns 45%) Tenneco Asheville Inc. (Delaware) ........................................ 100 Tenneco Asia Inc. (Delaware) ............................................. 100 Tenneco Automotive Foreign Sales Corporation Limited (Jamaica) ........... 100 Tenneco Automotive Japan Ltd. (Japan) .................................... 100 Tenneco Automotive Nederlands BV. (Netherlands) .......................... 100 Tenneco Automotive RSA Company (Delaware) ................................ 100 Tenneco Automotive Trading Company (Delaware) ............................ 100 Tenneco Brake, Inc. (Delaware) ........................................... 100 Tenneco Europe Limited (Delaware) ........................................ 100 Wimetal S.A. (France) .................................................. <1 (Tenneco Europe Limited owns 1 share; Walker Limited owns 1 share; Walker France S.A. owns 99% and each of David Zerhusen, Howard van Schoyck, Daniel Barth, Daniel Bellanger, Herman Weltens and Theo Bonneu, affiliated persons, owns 1 share) Tenneco International Finance Limited (United Kingdom) ................... 100 Tenneco International Holding Corp. (Delaware) ........................... 100 Monroe Australia Pty. Limited (Australia) .............................. 100 Monroe Springs (Australia) Pty. Ltd. (Australia) ..................... 100 Monroe Superannuation Pty. Ltd. (Australia) .......................... 100 Walker Australia Pty. Limited (Australia) ............................ 100 Tenneco Automotive Europe N.V. (Belgium) ............................... 100 Monroe Amortisor Imalat Ve Ticaret A.S. (Turkey) ..................... 99.85 (Tenneco Automotive Europe N.V. owns 99.85%; and various unaffiliated individual stockholders own 0.15%) Monroe Packaging N.V. (Belgium) ...................................... 99.9 (Tenneco Automotive Europe N.V. owns 99.9%; and Tenneco Automotive France S.A. owns 0.1%) Tenneco Automotive Europe Coordination Center N.V. (Belgium) ......... 99.9 (Tenneco Automotive Europe N.V. owns 99.9%; and Tenneco Automotive France S.A. owns 0.1%)
1 2 TENNECO AUTOMOTIVE INC. SUBSIDIARIES AND AFFILIATES Subsidiaries of Tenneco Automotive Inc. (Delaware) Subsidiaries of Tenneco Automotive Operating Company Inc. (Delaware) Subsidiaries of Tenneco International Holding Corp. (Delaware) Tenneco Automotive Italia Srl. (Italy) ......................................... 85 % (Tenneco International Holding Corp. owns 85%; and Tenneco Automotive France, S.A. owns 15%) Tenneco Automotive Polska Sp. z.O.O. (Poland) .................................. 1 (Tenneco International Holding Corp. owns 1%; and Tenneco Global Holdings Inc. owns 99%) Tenneco Romania Srl (Romania) ................................................. 0.14 (Tenneco International Holding Corp. owns 0.14%; and Tenneco Global Holdings Inc. owns 99.86%) Tenneco Automotive Sverige A.B. (Sweden) ....................................... 100 Tenneco Canada Inc. (Ontario) .................................................. 100 Tenneco Global Holdings Inc. (Delaware) ........................................ 100 Fric-Rot S.A.I.C. (Argentina) ................................................ 55 (Tenneco Global Holdings Inc. owns 55%; Maco Inversiones S.A ............... owns 44.85%; and unaffiliated parties own .15%) Maco Inversiones S.A. (Argentina) ............................................ 100 Fric-Rot S.A.I.C. (Argentina) .............................................. 44.85 (Maco Inversiones S.A. owns 44.85%; Tenneco Global Holdings Inc. owns 55%; and unaffiliated parties own .15%) Monroe Springs (New Zealand) Pty. Ltd. (New Zealand) ......................... 100 Monroe Czechia s.r.o. (Czech Republic) ....................................... 100 Tenneco Automotive Iberica, S.A. (Spain) ..................................... 100 Tenneco Automotive Polska Sp. z.O.O. (Poland) ................................ 99 (Tenneco Global Holding's Inc. owns 99%; and Tenneco International Holding Corp. owns 1%) Tenneco Romania Srl (Romania) ................................................ 99.86 (Tenneco Global Holdings Inc. owns 99.86%; and Tenneco International Holding Corp. owns 0.14%) Tenneco Mauritius Limited (Mauritius) ........................................ 100 Hydraulics Limited (India) ................................................. 51 (Tenneco Mauritius Limited owns 51% and Bangalore Union Services Limited, an unaffiliated company, owns 49%) Renowned Automotive Products Manufacturers Ltd. (India) ........................... 83 (Hydraulics Limited owns 83%; and non-affiliates own 17%) Tenneco Automotive India Private Limited (India) ........................... 100 Walker Exhaust India Private Limited (India) ............................. <100 (Tenneco Automotive India Private Limited owns less than 100%; and an unaffiliated party owns the balance) Tenneco Holdings Danmark A/S (Denmark) ......................................... 100 Gillet Exhaust Technologie (Proprietary) Limited (South Africa) .............. 100 Gillet Lazne Belohrad, s.r.o. (Czech Republic) ............................... 100
3 TENNECO AUTOMOTIVE INC. SUBSIDIARIES AND AFFILIATES SUBSIDIARIES OF TENNECO AUTOMOTIVE INC. (DELAWARE) SUBSIDIARIES OF TENNECO AUTOMOTIVE OPERATING COMPANY INC. (DELAWARE) SUBSIDIARIES OF TENNECO INTERNATIONAL HOLDING CORP. (DELAWARE) SUBSIDIARIES OF TENNECO HOLDINGS DANMARK A/S (DENMARK) Kinetic Ltd. (Australia)............................................. >99 % (Tenneco Holdings Danmark A/S owns 99%+; and unaffiliated entities own less than 1%) ........................................ 51 Tenneco Automotive Holdings South Africa Pty. Ltd. (South Africa) (Tenneco Holdings Danmark A/S owns 51%; and an unaffiliated party owns 49%) Armstrong Hydraulics South Africa (Pty.) Ltd. (South Africa) ...... 100 Armstrong Properties (Pty.) Ltd. (South Africa) ................... 100 Monroe Manufacturing (Pty.) Ltd. (South Africa) ................... 100 Smiths Industrial (SWA) (Pty.) Ltd. (South Africa) ................ 100 Tenneco Automotive Port Elizabeth (Proprietary) Limited (South Africa) .................................................... 100 Tenneco Automotive Portugal-Componentes para Automovel, S.A. (Portugal) ........................................................ 100 Walker Danmark A/S (Denmark) ........................................ 100 Tenneco Automotive France S.A. (France) ............................... 100 (Tenneco International Holding Corp. owns 470,371 shares; Daniel Bellanger owns 16 shares; Robert Bellanger owns 8 shares; and each of Walker Europe, Inc., Alain Bellanger, Theodore Bonneu, Roy Kolotylo and David Zerhusen owns 1 share) Gillet Tubes Technologies G.T.T. (France) .......... ................ 100 Monroe Packaging N.V. (Belgium) ..................................... 0.1 (Tenneco Automotive Europe N.V. owns 99.9%; and Tenneco Automotive France S.A. owns 0.1%) Tenneco Automotive Europe Coordination Center N.V. (Belgium) ........ 0.1 (Tenneco Automotive Europe N.V. owns 99.9%; and Tenneco Automotive France S.A owns 0.1%) Tenneco Automotive Italia S.r.l. (Italy) . .......................... 15 (Tenneco International Holding Corp. owns 85%; and Tenneco Automotive France S.A. owns 15%) Walker France Constructeurs S.A.R.L. (France) ....................... 100 Wimetal S.A. (France) ............................................... 99 (Tenneco Automotive France S.A. owns 99%; Tenneco Europe Limited owns 1 share, Walker Limited owns 1 share; and each of David Zerhusen, Howard van Schoyck, Daniel Barth, Daniel Bellanger, Herman Weltens and Theo Bonneu, affiliated persons, owns 1 share) The Pullman Company (Delaware) ........................................... 100 Autopartes Walker S.A. de C.V. (Mexico) ................................ 100 Consorcio Terranova S.A. de C.V. (Mexico) ............................ 99.99 (Autopartes Walker S.A. de C.V, owns 99.99%; and Josan Latinamericana S.A. de C.V., an unaffiliated company, owns 0.01%)
4 TENNECO AUTOMOTIVE INC. SUBSIDIARIES AND AFFILIATES SUBSIDIARIES OF TENNECO AUTOMOTIVE INC. (DELAWARE) SUBSIDIARIES OF TENNECO AUTOMOTIVE OPERATING COMPANY INC. (DELAWARE) SUBSIDIARIES OF THE PULLMAN COMPANY (DELAWARE) SUBSIDIARIES OF AUTOPARTES WALKER S.A. DE C. V. (MEXICO) Monroe-Mexico S.A. de C.V. (Mexico) .......................................... 100% Tenneco Automotive Servicios de Mexico, S.A. de C.V. (Mexico) .............. 0.01 (Monroe-Mexico, S.A. de C.V. owns 1 share; and Proveedora Walker S. de R.L. de C.V, owns 49,999 shares) Proveedora Walker S. de R.L. de C.V. (Mexico) ................................ 99.99 (Autopartes Walker S.A. de C.V. owns 99.99%; and Pullmex S. de R.L. de C.V. owns .01%) Pullmex S. de R.L. de C.V. (Mexico) ........................................ 0.01 (Proveedora Walker S. de R.L. de C.V. owns 0.01% and Autopartes Walker S.A. de C.V. owns 99.99%) Tenneco Automotive Servicios de Mexico, S.A. de C.V. (Mexico) .............. 99.99 (Proveedora Walker S. de R.L. de C.V. owns 49,999 shares, and Monroe-Mexico, S.A. de C.V. owns 1 share) Pullmex S. de R.L. de C.V. (Mexico) .......................................... 99.99 (Autopartes Walker S.A. de C.V. owns 99.9%; and Proveedora Walker S. de R.L. de C.V. owns 0.1%) Proveedora Walker S. de R.L. de C.V. (Mexico) .............................. 0.01 (Pullmex S. de R.L. de C.V. owns 0.01%; and Autopartes Walker S.A. de C.V. owns 99.99%) Clevite Industries Inc. (Delaware) ............................................. 100 Peabody International Corporation (Delaware) ................................... 100 Barasset Corporation (Ohio) ....... .......................................... 100 Peabody Galion Corporation (Delaware) ........................................ 100 Peabody Gordon-Piatt, Inc. (Delaware) ........................................ 100 Peabody N.E., Inc. (Delaware) ................................................ 100 Peabody World Trade Corporation (Delaware) ................................... 100 Peabody-Myers Corporation (Illinois) ............ ............................ 100 Pullman Canada Ltd. (Canada) ....... ......................................... 61 (Peabody International Corporation owns 61%; and The Pullman Company owns 39%) Pullman Canada Ltd. (Canada) ................................................... 39 (The Pullman Company owns 39%; and Peabody International Corporation owns 61%) Pullman Standard Inc. (Delaware) ............................................... 100 Tenneco Brazil Ltda. (Brazil) .................................................. 100 Tenneco Automotive Brasil Ltda. (Brazil) ..................................... 100 Thompson and Stammers Dunmow (Number 6) Limited (United Kingdom) ................. 100 Thompson and Stammers Dunmow (Number 7) Limited (United Kingdom) ................. 100 TMC Texas Inc. (Delaware) ........................................................ 100 Walker Electronic Silencing Inc. (Delaware) ...................................... 100 Walker Europe, Inc. (Delaware) ................................................... 100
5 TENNECO AUTOMOTIVE INC. SUBSIDIARIES AND AFFILIATES Subsidiaries of Tenneco Automotive Inc. (Delaware) Subsidiaries of Tenneco Automotive Operating Company Inc. (Delaware) Subsidiaries of Walker Europe, Inc, (Delaware) Tenneco Automotive France S.A. (France) ........................................ <1 % (Tenneco International Holding Corp. owns 470,371 shares; Daniel Bellenger owns 16 shares; Robert Bellanger owns 8 shares; and each of Walker Europe, Inc., Alain Bellanger, Theodore Bonneu, Roy Kolotylo and David Zerhusen owns 1 share) Walker Limited (United Kingdom) .................................................. 100 Gillet Torsmaskiner UK Limited (United Kingdom) ................................ 50 (Walker Limited owns 100 A Ordinary Shares, 50% of total equity; and AB Torsmaskiner, an unaffiliated company, owns 100 B Ordinary Shares, 50% of total equity) Exhaust Systems Technology Limited (United Kingdom) .......................... 99.99 (Gillet Torsmaskiner UK Limited owns 99.99%; and Heinrich Gillet GmbH & Co. owns .01%) Tenneco Automotive UK Limited (United Kingdom) ................................. 100 Gillet Exhaust Manufacturing Limited (United Kingdom) ........................ 100 Gillet Pressings Cardiff Limited (United Kingdom) ............................ 100 Walker (UK) Limited (United Kingdom) ......................................... 100 J.W. Hartley (Motor Trade) Limited (United Kingdom) ........................ 100 Tenneco - Walker (U.K.) Ltd. (United Kingdom) .............................. 100 Tenneco Management (Europe) Limited (United Kingdom) ........................... 100 Wimetal S. A. (France) ......................................................... <1 (Walker Limited owns 1 share; Tenneco Europe Limited owns 1 share; Tenneco Automotive France S.A. owns 99%; and each of David Zerhusen, Howard van Schoyck, Daniel Barth, Daniel Bellanger, Herman Weltens and Theo Bonneu, affiliated persons, owns 1 share) Walker Manufacturing Company (Delaware) .......................................... 100 Ced's Inc. (Illinois) .......................................................... 100 Walker Norge A/S (Norway) ........................................................ 100 Tenneco Deutschland Holdinggesellschaft mbH (Germany) .............................. 99.97 (Tenneco Automotive Inc. owns 99.97%; and Atlas Vermoegensverwaltung, an unaffiliated company, owns 0.03%) GILLET Unternehmesverwaltungs GmbH (Germany) ..................................... 100 Heinrich Gillet GmbH & Co. KG (Germany) ........................................ 0.1 (GILLET Unternehmesverwaltungs GmbH owns 0.1% and Tenneco Deutschland Holdinggesellschaft mbH owns 99.9%. The subsidiaries of Heinrich Gillet GmbH & Co. KG are listed below.) Heinrich Gillet GmbH & Co. KG (Germany) .......................................... 99.9 (Tenneco Deutschland Holdinggesellschaft mbH owns 99.9%; and GILLET Unternehemesverwaltungs GmbH owns 0.1%) ELGIRA Montagebetrieb fur Abgasanlagen Rastatt GmbH (Germany) .................. 50 (Heinrich Gillet GmbH & Co. KG owns 50%; and an unaffiliated party owns 50%)
6 TENNECO AUTOMOTIVE INC. SUBSIDIARIES AND AFFILIATES Subsidiaries of Tenneco Automotive Inc., (Delaware) Subsidiaries of Tenneco Deutschland Holdinggesellschaft mbH (Germany) Subsidiaries of Heinrich Gillet GmbH & Co. KG (Germany) Exhaust Systems Technology Limited (United Kingdom) ................................. 0.01% (Heinrich Gillet GmbH & Co. KG owns 0.01%; and Gillet Torsmaskiner UK Limited owns 99.99%) Gillet-Abgassysteme Zickau Gmbh (Germany) ........................................... 100 Elagest AB (Sweden) .... .......................................................... 50 (Gillet-Abgassysteme Zickau GmbH owns 50%; and an unaffiliated party owns 50%) Mastra-Gillet Industria e Comercio Ltda. (Brazil) ................................... 50 (Heinrich Gillet GmbH & Co. KG owns 50%; and Mastra Industria e Comercio Ltda., an unaffiliated company, owns 50%) Montagewerk Abgastechnik Emden GmbH (Germany ........................................ 50 (Heinrich Gillet GmbH & Co. KG owns 50%; and an unaffiliated party owns 50%) Tenneco Automotive Deutschland GmbH (Germany) ......................................... 100 WALKER GILLET (Europe) GmbH (Germany) ................................................. 100
EX-23 9 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our report dated January 24, 2000, included in the Annual Report on Form 10-K of Tenneco Automotive Inc., formerly known as Tenneco Inc. ("Tenneco"), for the year ended December 31, 1999, into the following Registration Statements previously filed with the Securities and Exchange Commission:
REGISTRATION NO. FORM SECURITIES REGISTERED ---------------- ---- --------------------- 333-24291 S-3 $700,000,000 Tenneco debt securities of which $100,000,000 remains available for issuance. 333-17485 S-8 17,000,000 shares of Common Stock, par value $.01 per share of Tenneco ("Common Stock") issuable under the 1996 Tenneco Inc. Stock Ownership Plan (now known as the Tenneco Automotive Inc. Stock Ownership Plan). 333-30933 S-8 5,000 shares of Common Stock issuable under the Tenneco Thrift Plan for Hourly Employees ("Hourly Thrift Plan") and the Tenneco Thrift Plan ("Salaried Thrift Plan"). 333-17487 S-8 462,000 shares of Common Stock issuable under the Hourly Thrift Plan and the Salaried Thrift Plan. 333-41535 S-8 33,796 shares of Common Stock issuable under the 1996 Tenneco Inc. Stock Ownership Plan (now known as the Tenneco Automotive Inc. Stock Ownership Plan). 333-27279 S-8 64,000 shares of Common Stock issuable under the Hourly Thrift Plan. 333-23249 S-8 2,500,000 shares of Common Stock issuable under the 1997 Employee Stock Purchase Plan. 333-27281 S-8 395,000 shares of Common Stock issuable under the Hourly Thrift Plan and Salaried Thrift Plan. 333-41537 S-8 2,100 shares of Common Stock issuable under the Hourly Thrift Plan. 333-48777 S-8 710,000 shares of Common Stock issuable under the Hourly Thrift Plan and the Salaried Thrift Plan. 333-76261 S-8 740,000 shares of Common Stock issuable under the Hourly Thrift Plan and the Salaried Thrift Plan.
ARTHUR ANDERSEN LLP Chicago, Illinois March 22, 2000 EX-24 10 POWER OF ATTORNEY 1 EXHIBIT 24 TENNECO AUTOMOTIVE INC. POWER OF ATTORNEY The undersigned does hereby appoint Timothy R. Donovan, Mark A. McCollum and Kenneth R. Trammell, and each of them, with full power to act alone, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to execute the Annual Report on Form 10-K for the year ended December 31, 1999 of Tenneco Automotive Inc. ("Tenneco"), including any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purchases as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any one of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 16th day of March, 2000. /s/ DAVID B. PRICE, JR. -------------------------------------- Name: David B. Price, Jr. 2 TENNECO AUTOMOTIVE INC. POWER OF ATTORNEY The undersigned does hereby appoint Timothy R. Donovan, Mark A. McCollum and Kenneth R. Trammell, and each of them, with full power to act alone, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to execute the Annual Report on Form 10-K for the year ended December 31, 1999 of Tenneco Automotive Inc. ("Tenneco"), including any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purchases as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any one of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 16th day of March, 2000. /s/ DANA G. MEAD -------------------------------------- Name: Dana G. Mead 3 TENNECO AUTOMOTIVE INC. POWER OF ATTORNEY The undersigned does hereby appoint Timothy R. Donovan, Mark A. McCollum and Kenneth R. Trammell, and each of them, with full power to act alone, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to execute the Annual Report on Form 10-K for the year ended December 31, 1999 of Tenneco Automotive Inc. ("Tenneco"), including any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purchases as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any one of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 16th day of March, 2000. /s/ MARK P. FRISSORA -------------------------------------- Name: Mark P. Frissora 4 TENNECO AUTOMOTIVE INC. POWER OF ATTORNEY The undersigned does hereby appoint Timothy R. Donovan, Mark A. McCollum and Kenneth R. Trammell, and each of them, with full power to act alone, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to execute the Annual Report on Form 10-K for the year ended December 31, 1999 of Tenneco Automotive Inc. ("Tenneco"), including any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purchases as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any one of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 16th day of March, 2000. /s/ M. KATHRYN EICKHOFF -------------------------------------- Name: M. Kathryn Eickhoff 5 TENNECO AUTOMOTIVE INC. POWER OF ATTORNEY The undersigned does hereby appoint Timothy R. Donovan, Mark A. McCollum and Kenneth R. Trammell, and each of them, with full power to act alone, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to execute the Annual Report on Form 10-K for the year ended December 31, 1999 of Tenneco Automotive Inc. ("Tenneco"), including any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purchases as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any one of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 16th day of March, 2000. /s/ ROGER B. PORTER -------------------------------------- Name: Roger B. Porter 6 TENNECO AUTOMOTIVE INC. POWER OF ATTORNEY The undersigned does hereby appoint Timothy R. Donovan, Mark A. McCollum and Kenneth R. Trammell, and each of them, with full power to act alone, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to execute the Annual Report on Form 10-K for the year ended December 31, 1999 of Tenneco Automotive Inc. ("Tenneco"), including any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purchases as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any one of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 16th day of March, 2000. /s/ DAVID PLASTOW -------------------------------------- Name: Sir David Plastow 7 TENNECO AUTOMOTIVE INC. POWER OF ATTORNEY The undersigned does hereby appoint Timothy R. Donovan, Mark A. McCollum and Kenneth R. Trammell, and each of them, with full power to act alone, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to execute the Annual Report on Form 10-K for the year ended December 31, 1999 of Tenneco Automotive Inc. ("Tenneco"), including any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purchases as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any one of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 15th day of March, 2000. /s/ PAUL T. STECKO -------------------------------------- Name: Paul T. Stecko 8 TENNECO AUTOMOTIVE INC. POWER OF ATTORNEY The undersigned does hereby appoint Timothy R. Donovan, Mark A. McCollum and Kenneth R. Trammell, and each of them, with full power to act alone, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to execute the Annual Report on Form 10-K for the year ended December 31, 1999 of Tenneco Automotive Inc. ("Tenneco"), including any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purchases as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any one of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 16th day of March, 2000. /s/ MARK ANDREWS -------------------------------------- Name: Mark Andrews 9 TENNECO AUTOMOTIVE INC. POWER OF ATTORNEY The undersigned does hereby appoint Timothy R. Donovan and Mark A. McCollum, and each of them, with full power to act alone, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to execute the Annual Report on Form 10-K for the year ended December 31, 1999 of Tenneco Automotive Inc. ("Tenneco"), including any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purchases as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any one of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 16th day of March, 2000. /s/ KENNETH R. TRAMMELL -------------------------------------- Name: Kenneth R. Trammell 10 TENNECO AUTOMOTIVE INC. POWER OF ATTORNEY The undersigned does hereby appoint Timothy R. Donovan and Kenneth R. Trammell, and each of them, with full power to act alone, as his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to execute the Annual Report on Form 10-K for the year ended December 31, 1999 of Tenneco Automotive Inc. ("Tenneco"), including any and all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purchases as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any one of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN TESTIMONY WHEREOF, the undersigned has executed this instrument this 16th day of March, 2000. /s/ MARK A. MCCOLLUM -------------------------------------- Name: Mark A. McCollum EX-27.1 11 FINANCIAL DATA SCHEDULE-FISCAL YEAR ENDED 12/31/99
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 84 0 557 0 412 1,201 1,923 886 2,943 663 1,578 0 0 0 422 2,943 3,279 3,279 2,479 2,479 665 0 106 42 82 (63) (208) (18) (134) (423) (12.64) (12.64)
EX-27.2 12 FINANCIAL DATA SCHEDULE-FISCAL YEAR ENDED 12/31/98
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1,000,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 29 0 430 0 414 1,064 1,944 851 4,759 909 671 0 0 0 2,504 4,759 3,237 3,237 2,363 2,363 622 0 69 158 13 116 139 0 0 255 7.58 7.56
EX-27.3 13 FINANCIAL DATA SCHEDULE-FISCAL YEAR ENDED 12/31/97
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE TENNECO AUTOMOTIVE INC. AND CONSOLIDATED SUBSIDIARIES FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 29 0 402 0 378 1,050 1,767 738 4,682 691 713 0 0 0 2,528 4,682 3,226 3,226 2,337 2,337 531 0 58 337 80 234 127 0 (46) 315 9.25 9.22
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