-----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, EK6Ju99KvQ5TeoOT493QCBpja9nm0JHxcA90pZB3vgLljo4IhRXYXudncyVLoVK/ cP9bPoHe5ivklt28Ih4dnA== 0000950123-02-011934.txt : 20021217 0000950123-02-011934.hdr.sgml : 20021217 20021217162204 ACCESSION NUMBER: 0000950123-02-011934 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20020929 FILED AS OF DATE: 20021217 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARVINMERITOR INC CENTRAL INDEX KEY: 0001113256 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLE PARTS & ACCESSORIES [3714] IRS NUMBER: 383354643 STATE OF INCORPORATION: IN FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-15983 FILM NUMBER: 02860387 BUSINESS ADDRESS: STREET 1: 2135 W MAPLE ROAD CITY: TROY STATE: MI ZIP: 48084 BUSINESS PHONE: 2484351000 FORMER COMPANY: FORMER CONFORMED NAME: MU SUB INC DATE OF NAME CHANGE: 20000501 10-K 1 y66532e10vk.txt ARVINMERITOR, INC. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 29, 2002 COMMISSION FILE NUMBER 1-15983 ------------------------ ARVINMERITOR, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) INDIANA 38-3354643 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 2135 WEST MAPLE ROAD 48084-7186 TROY, MICHIGAN (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (248) 435-1000 ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- Common Stock, $1 Par Value New York Stock Exchange (including the associated Preferred Share Purchase Rights)
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 10-K or any amendment to this Form 10-K [X] The aggregate market value of the registrant's voting stock held by non-affiliates of the registrant on March 28, 2002 (the last business day of the most recently completed second fiscal quarter) was approximately $1.918 billion. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [X] No [ ] 67,942,966 shares of the registrant's Common Stock, par value $1 per share, were outstanding on October 31, 2002. DOCUMENTS INCORPORATED BY REFERENCE Certain information contained in the Proxy Statement for the Annual Meeting of Shareowners of the registrant to be held on February 19, 2003 is incorporated by reference into Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS. ArvinMeritor, Inc. (the "company" or "ArvinMeritor"), headquartered in Troy, Michigan, is a leading global supplier of a broad range of integrated systems, modules and components serving light vehicle, commercial truck, trailer and specialty original equipment manufacturers and certain aftermarkets. The company also provides coil coating applications to the transportation, appliance, construction and furniture industries. ArvinMeritor was incorporated in Indiana in March 2000 in connection with the merger ("Merger") of Meritor Automotive, Inc. ("Meritor") and Arvin Industries, Inc. ("Arvin"). The Merger of Meritor and Arvin into ArvinMeritor was effective on July 7, 2000. As used in this Annual Report on Form 10-K, the terms "company," "ArvinMeritor," "we," "us" and "our" include ArvinMeritor, its consolidated subsidiaries and its predecessors unless the context indicates otherwise. Whenever an item of this Annual Report on Form 10-K refers to information in the Proxy Statement for the Annual Meeting of Shareowners of ArvinMeritor to be held on February 19, 2003 (the "2003 Proxy Statement"), or under specific captions in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations or Item 8. Financial Statements and Supplementary Data, the information is incorporated in that item by reference. ArvinMeritor serves a broad range of original equipment manufacturer ("OEM") customers worldwide, including truck OEMs, light vehicle OEMs, semi-trailer producers and off-highway and specialty vehicle manufacturers, and certain aftermarkets. Our total sales in fiscal year 2002 were $6.9 billion. Our ten largest customers accounted for approximately 65% of fiscal year 2002 sales. We operated 153 manufacturing facilities in 26 countries around the world in fiscal year 2002, including facilities operated by joint ventures in which we have interests. Sales outside the United States accounted for approximately 50% of total sales in fiscal year 2002. We also participated in twelve joint ventures that generated unconsolidated revenues of $1.6 billion in fiscal 2002. We serve customers worldwide through three operating segments: - Light Vehicle Systems ("LVS") supplies air and emissions systems, aperture systems (roof and door systems and motion control products), and undercarriage systems (suspension and ride control systems and wheel products) for passenger cars, light trucks and sport utility vehicles to OEMs. - Commercial Vehicle Systems ("CVS") supplies drivetrain systems and components, including axles and drivelines, braking systems, suspension systems, and exhaust, ride control and filtration products for medium- and heavy-duty trucks, trailers and off-highway equipment and specialty vehicles to OEMs and to the commercial vehicle aftermarket. - Light Vehicle Aftermarket ("LVA") supplies exhaust, ride control and filter products to the passenger car, light truck and sport utility aftermarket. Our coil coating operation, which does not primarily focus on automotive products, is classified as "Other." Note 23 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data contains financial information by segment for each of the three years ended September 30, 2002, including information on sales and assets by geographic area for each segment. The heading "Products" below includes information on LVS, CVS, LVA and Other sales by product for each of the three years ended September 30, 2002. References in this Annual Report on Form 10-K to our being a leading supplier or the world's leading supplier, and other similar statements as to our relative market position are based principally on calculations we have made. These calculations are based on information we have collected, including company and industry sales data obtained from internal and available external sources, as well as our estimates. In addition 1 to such quantitative data, our statements are based on other competitive factors such as our technological capabilities, our research and development efforts and innovations and the quality of our products and services, in each case relative to that of our competitors in the markets we address. ArvinMeritor began operations as a combined company on July 7, 2000 and, accordingly, does not have an operating history as a combined company prior to that date. Except where otherwise noted, the historic financial information included in this Annual Report on Form 10-K for periods prior to July 7, 2000 reflects the results of Meritor and its consolidated subsidiaries. The information for periods after July 7, 2000 represents the results of ArvinMeritor and its consolidated subsidiaries. This information may not be indicative of our future results of operations, financial position or cash flows. INDUSTRY DEVELOPMENTS AND OUTLOOK The industry in which we operate is cyclical and has been characterized historically by periodic fluctuations in demand for vehicles for which we supply products. Industry cycles can have a positive or negative effect on our financial results. Lower demand in several of our principal markets, including commercial truck and light vehicle markets in North America and light vehicle replacement markets, had a negative effect on our financial results for fiscal years 2001 and 2002. For fiscal year 2003, our most recent outlook shows continued weakness in the North American commercial truck markets. We currently expect North American and Western European light vehicle production in fiscal year 2003 to remain relatively flat compared to fiscal year 2002 production. We also anticipate that the light vehicle replacement market for our exhaust and ride control products will remain soft. See "Seasonality; Cyclicality" and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview and Outlook and -- Results of Operations below. We have sought to mitigate the effects of down cycles in our markets by improving operational efficiencies and implementing restructuring programs and cost-reduction initiatives, which include reducing our salaried workforce and the number of our facilities. We undertook restructuring actions in fiscal years 2001 and 2002 to improve efficiency and realize cost savings. See "Strategic Initiatives" below and Note 5 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data below. BUSINESS STRATEGIES We are a global supplier of a broad range of integrated systems, modules and components for use in commercial, specialty and light vehicles worldwide and we have developed market positions as a leader in most of our served markets. In the short term, we seek to maintain these market positions in the face of the industry downturns described above. In the longer term, we work to enhance our leadership positions and capitalize on our existing customer, product and geographic strengths, and to increase sales, earnings and profitability. We employ various business strategies to achieve these goals. Several significant factors and trends in the automotive industry present opportunities and challenges to industry suppliers and influence our business strategies. These factors and trends include the cyclicality of the industry, consolidation and globalization of OEMs and their suppliers, increased outsourcing by OEMs, increased demand for modules and systems by OEMs, and an increasing emphasis on engineering and technology. Our business strategies, which are influenced by these industry factors and trends, include the following: Minimize the Risks of Cyclicality Through Business Diversity. As noted above, the automotive industry is cyclical in nature and subject to periodic fluctuations in demand for vehicles. This in turn results in fluctuation in demand for our products. We seek to diversify our business in order to mitigate the effects of market downturns and better accommodate the changing needs of OEMs. We strive to maintain diversity in three areas: - Revenues. We manufacture and sell a wide range of products in various segments of the automotive market. For fiscal year 2002, our annual sales include $3.6 billion for LVS, $2.3 billion for CVS, 2 $0.8 billion for LVA and $0.2 billion for Other. Our goal is to maintain this sales diversity rather than to focus primarily on one segment, and to be a leader in all three of our markets. - Customers. A diverse customer base helps to mitigate market fluctuations. We have a large customer base comprised of most major vehicle producers. Our top ten customers comprised approximately 65% of our sales in fiscal year 2002. - Global Presence. Cycles in the major geographic markets of the automotive industry are not necessarily concurrent or related. We seek to maintain a strong global presence and to expand our global operations to mitigate the effect of periodic fluctuations in demand in one or more geographic areas. A strong global presence also helps to meet the global sourcing needs of our customers. Focus on Organic Growth While Reviewing Strategic Opportunities. We have identified the most successful aspects of our business, and we are working to grow those areas. We seek to take advantage of opportunities for operating synergies and cross selling of products between our light vehicle and commercial vehicle businesses. The Merger provided opportunities for cross-marketing of products and services to customers of the two constituent companies, and we continue to pursue these opportunities. For example, CVS has been awarded its first contract to supply Caterpillar Inc. with exhaust products for commercial vehicles in North America. We also consider strategic opportunities that could enhance the company's growth. Automotive suppliers continue to consolidate into larger, more efficient and more capable companies and collaborate with each other in an effort to better serve the global needs of their OEM customers. We regularly evaluate various strategic and business development opportunities, including licensing agreements, marketing arrangements, joint ventures, acquisitions and dispositions. We remain committed to selectively pursuing alliances and acquisitions that would allow us to gain access to new customers and technologies, enter new product markets and implement our business strategies. We also intend to continue to review the prospects of our existing businesses to determine whether any of them should be modified, restructured, sold or otherwise discontinued. See "Strategic Initiatives" and "Joint Ventures" for information on initiatives in these areas. Grow Content Per Vehicle Through Technologically Advanced Systems and Modules. Increased outsourcing by OEMs has resulted in higher overall per vehicle sales by independent suppliers and presents an opportunity for supplier sales growth at a faster rate than the overall automotive industry growth trend. OEMs are also demanding modules and integrated systems that require little assembly by the OEM customer. In both light and commercial vehicle markets, we believe that the trend is also away from sales of components to customers, and toward integration of components into systems and eventual joint development of integrated vehicles with development partners. One of our significant growth strategies is to provide a higher level of engineering and design expertise, to develop new products and improve existing products that meet these customer needs. We will continue to invest in new technologies and product development, and will work closely with our customers to develop and implement design, engineering, manufacturing and quality improvements. We will also continue to integrate our existing product lines by using our design, engineering and manufacturing expertise and teaming with technology partners to expand sales of higher-value modules and systems. For example: - LVS has developed the Air2Air(TM) system, an integrated airflow system that expands our existing exhaust system products to incorporate air induction components that are customarily produced internally by OEMs. The first integrated system is scheduled for production on the 2003 Chevrolet SSR. - LVS is a leading supplier of complete roof modules comprised of a roof head liner bound to an outer shell using a patented process. These modules can also incorporate LVS sunroof technology and such items as sun visors, grab handles and interior lighting, as well as antennae and speakers. Our roof 3 module is featured in the DaimlerChrysler SMART car and has been accepted by a second global OEM. - LVS has been awarded a $300 million annual contract to provide a complete front suspension module for a popular sport utility vehicle. - CVS has a contract to provide advanced front and rear suspension systems for the new Blue Bird Wanderlodge M380 luxury motor coach. Management believes that the strategy of continuing to introduce new and improved systems and technologies will be an important factor in our efforts to achieve our growth objectives. We will draw upon the engineering resources of our Technical Centers in Troy, Michigan, and Columbus, Indiana, and our engineering centers of expertise in the United States, Brazil, Canada, France, Germany and the United Kingdom. See "Research and Development" below. Enhance Core Products to Address Safety and Environmental Issues. Another industry trend is the increasing amount of vehicle content that responds to changes in environmental and safety-related regulatory requirements. OEMs select suppliers based not only on the cost and quality of products, but also on responsiveness to these customer needs. In order to meet these demands, we focus significant attention on our core products and seek to develop products that address safety and environmental concerns. To address safety, our LVS group designs its aperture systems with stronger materials, creates designs that enhance the vehicle's crashworthiness and develops undercarriage systems that offer improved ride and vehicle control dynamics. Our CVS group, for example, is focusing on the integration of braking and stability products and suspension products, as well as the development of electronic control capabilities. CVS is also developing braking systems technology that would assist customers in meeting proposed U.S. regulations to improve braking performance and reduce stopping distances for commercial motor vehicles. With respect to environmental regulations, LVS is an industry leader in air and emissions systems that improve fuel economy and reduce air pollutants, and CVS is applying our expertise in light vehicle air and emissions to the commercial vehicle market. Looking forward, we continue to develop technical expertise that will permit us to assist customers in meeting new and more stringent emissions requirements that will be phased in over the next ten years in our primary markets in North America and Europe. Drive a Continuous Improvement Culture Focused on Economic Profit and Return on Capital. In 2001, we implemented the ArvinMeritor Performance System, a continuous improvement initiative that guides our philosophy for achieving operational excellence, eliminating waste, improving quality and earning customer loyalty. Throughout the company, continuous improvement teams have achieved significant cost savings, increased productivity and efficiency and streamlined operations. They have focused on eliminating non-value-added tasks, reducing lead and cycle times and improving customer service. A continuous improvement culture is important to our business operations and to maintaining and improving our earnings. Process improvement initiatives should help us achieve our goals with respect to economic profit, which is net operating profit after taxes less a cost of capital charge for net assets employed. We believe that economic profit is a key performance measure, and that our focus on economic profit in fiscal year 2002 helped us achieve strong cash flow and debt reduction. PRODUCTS ArvinMeritor designs, develops, manufactures, markets, distributes, sells, services and supports a broad range of products for use in commercial, specialty and light vehicles. In addition to sales of original equipment systems and components, we provide our products to OEMs, dealers, distributors, fleets and other end-users in certain aftermarkets. The following chart sets forth operating segment sales by product for each of the three fiscal years ended September 30, 2002. Product sales by Arvin and its subsidiaries are included only for periods after the date of 4 the Merger. A narrative description of the principal products of our three operating segments and other operations follows the chart. SALES BY PRODUCT
FISCAL YEAR ENDED SEPTEMBER 30, ------------------ 2002 2001 2000 ---- ---- ---- LVS: Air and Emissions Systems(1)........................... 26% 25% 7% Aperture Systems(1).................................... 17 17 23 Undercarriage Systems(1)............................... 10 11 9 --- --- --- Total LVS......................................... 53% 53% 39% --- --- --- CVS: Drivetrain Systems..................................... 15% 14% 26% Braking Systems........................................ 8 8 13 Specialty Systems...................................... 5 5 8 Suspension Systems and Trailer Products(1)............. 5 5 9 --- --- --- Total CVS......................................... 33% 32% 56% --- --- --- LVA(1): Filter Products........................................ 5% 4% 1% Exhaust Products....................................... 4 5 2 Ride Control Products.................................. 3 4 1 --- --- --- Total LVA......................................... 12% 13% 4% --- --- --- Other(1).................................................... 2% 2% 1% --- --- --- Total....................................................... 100% 100% 100% === === ===
- --------------- (1) Sales relating to motion control products (included in aperture systems), ride control systems (included in undercarriage systems and suspension systems and trailer products), air and emissions systems, LVA products and Other are included only for periods after the date of the Merger, July 7, 2000. Light Vehicle Systems A key strategy of LVS is to enhance our market position in air and emissions systems, aperture systems (including roof and door systems and motion control products), and undercarriage components and systems (including suspension and ride control systems and wheel products). The following products comprise our LVS portfolio. Air and Emissions Systems We are a leading global supplier of a complete line of exhaust system components, including mufflers, exhaust pipes, catalytic converters and exhaust manifolds. We sell these products to OEMs primarily as original equipment, while also supporting manufacturers' needs for replacement parts and dealers' needs for service parts. We also produce our Air2Air(TM) system, which combines air induction and exhaust systems into an integrated airflow system for OEM customers and provides an overall improved airflow system for better system performance with less development time. 5 We participate in this business both directly and through joint ventures and affiliates. These alliances include our 50% interest in Arvin Sango Inc., an exhaust joint venture based in North America, and our 49% interest in Zeuna Starker GmbH & Co., an exhaust systems supplier headquartered in Germany. See "Joint Ventures" below. Aperture Systems Roof Systems. ArvinMeritor is one of the world's leading independent suppliers of sunroofs and roof systems products for use in passenger cars, light trucks and sport utility vehicles. We make one-piece, modular roof systems, some of which incorporate sunroofs, that provide OEMs with cost savings by reducing assembly time and parts. Our roof system manufacturing facilities are located in North America, Europe and the Asia/ Pacific region. Door Systems. We are a leading supplier of integrated door modules and systems, including manual and power window regulators and latch systems. Our wide range of power and manual door system products utilize numerous technologies, including our own electric motors, which are designed for individual applications and to maximize operating efficiency and reduce noise levels. We manufacture window regulators at plants in North and South America, Europe and the Asia/Pacific region for light vehicle and heavy-duty commercial vehicle OEMs. We also supply manual and power activated latch systems to light vehicle and heavy-duty commercial vehicle manufacturers. Our access control products include modular and integrated door latches, actuators, trunk and hood latches and fuel flap locking devices with leadership market positions in Europe and a market presence in North America and the Asia/Pacific region. We have access control systems manufacturing and/or assembly facilities in North and South America, Europe and the Asia/Pacific region. Motion Control Products. We are a worldwide leader in the manufacture and supply of motion control and counterbalancing products for the automotive industry. Our products include gas lift supports and vacuum actuators. We have motion control products manufacturing facilities in the United States and the United Kingdom. Undercarriage Systems Suspension Systems. Through our 57%-owned joint venture with Mitsubishi Steel Manufacturing Co., we are one of the leading independent suppliers of products used in suspension systems for passenger cars, light trucks and sport utility vehicles in North America. Our suspension system products, which are manufactured at facilities in the United States and Canada, include coil springs, stabilizer bars and torsion bars. In addition, we supply automotive suspension components for the European light vehicle market from a manufacturing facility in England. Ride Control Systems. We provide ride control products, including shock absorbers, struts, ministruts and corner modules. We participate in this business both directly and through a joint venture. We manufacture ride control products and are a leading supplier in the European OEM market through a joint venture with Kayaba Industries, Inc. ("Kayaba"). See "Joint Ventures" below. Wheel Products. We are a leading supplier of steel wheel products to the light vehicle OEM market, principally in North and South America. We have wheel manufacturing facilities in Brazil and Mexico. Our wheel products include fabricated steel wheels, bead seat attached wheels, full-face designed wheels and clad wheels with the appearance of a chrome finish. Our cladding process offers enhanced styling options previously available only in aluminum wheels. Commercial Vehicle Systems Drivetrain Systems Truck Axles. We are one of the world's leading independent suppliers of axles for medium- and heavy-duty commercial vehicles, with axle manufacturing facilities located in North America, South America, 6 Europe and the Asia/Pacific region. Our extensive truck axle product line includes a wide range of drive and non-drive front steer axles and single and tandem rear drive axles, which can include driver-controlled differential lock for extra traction, aluminum carriers to reduce weight and pressurized filtered lubrication systems for longer life. Our front steer and rear drive axles can be equipped with our cam, wedge or air disc brakes, automatic slack adjusters and anti-lock braking systems. Drivelines and Other Products. We also supply universal joints and driveline components, including our Permalube(TM) universal joint, a permanently lubricated universal joint used in the high mileage on-highway market. Braking Systems We are a leading independent supplier of air and hydraulic brakes to medium- and heavy-duty commercial vehicle manufacturers in North America and Europe. In Brazil, the third largest truck and trailer market in the world, our 49%-owned joint venture with Randon S. A. Veiculos e Implementos is a leading supplier of brakes and brake-related products. Through manufacturing facilities located in North America and Europe, we manufacture a broad range of foundation air brakes, as well as automatic slack adjusters for brake systems. Our foundation air brake products include cam drum brakes, which offer improved lining life and tractor/trailer interchangeability; air disc brakes, which provide fade resistant braking for demanding applications; wedge drum brakes, which are lightweight and provide automatic internal wear adjustment; hydraulic brakes; and wheel end components such as hubs, drums and rotors. Federal regulations require that new heavy- and medium-duty vehicles sold in the United States be equipped with anti-lock braking systems ("ABS"). Our 50%-owned joint venture with WABCO Automotive Products ("WABCO"), a wholly-owned subsidiary of American Standard, Inc., is the leading supplier of ABS and a supplier of other electronic and pneumatic control systems for North American heavy-duty commercial vehicles. The joint venture also supplies hydraulic ABS to the North American medium-duty truck market. Specialty Systems Off-Highway Vehicle Products. We supply heavy-duty axles, brakes and drivelines for use in numerous off-highway vehicle applications, including construction, material handling, agriculture, mining and forestry, in North America, South America, Europe and the Asia/Pacific region. These products are designed to tolerate high tonnages and operate under extreme conditions. In October 2002, we announced an agreement to sell our off-highway planetary axle business. See "Strategic Initiatives" below. Government Products. We supply axles, brakes and brake system components including ABS, trailer products, transfer cases and drivelines for use in medium-duty and heavy-duty military tactical wheeled vehicles, principally in North America. Specialty Vehicle Products. We supply axles, brakes and transfer cases for use in buses, coaches and recreational, fire and other specialty vehicles in North America and Europe, and we are the leading supplier of bus and coach axles and brakes in North America. Suspension Systems and Trailer Products We believe we are the world's leading manufacturer of heavy-duty trailer axles, with leadership positions in North America and in Europe. Our trailer axles are available in over 40 models in capacities from 20,000 to 30,000 pounds for virtually all heavy trailer applications and are available with our broad range of brake products, including ABS. In addition, we supply trailer air suspension systems and products for which we have strong market positions in Europe and an increasing market presence in North America. 7 In August 2002, we entered into a 50%-owned joint venture with Randon Participacoes to develop, manufacture and sell truck suspensions, trailer axles and suspensions and related wheel-end products in the South American market. See "Joint Ventures" below. Transmissions Our 50%-owned joint venture with ZF Friedrichshafen AG ("ZF")produces technologically advanced transmission components and systems for heavy vehicle OEMs and the aftermarket in the United States, Canada and Mexico. This transmission product line enables us to supply a complete drivetrain system to heavy-duty commercial vehicle manufacturers in North America. The most recent additions to the joint venture's range of transmission models include FreedomLine(TM), a fully automated mechanical truck transmission without a clutch pedal, and SureShift(TM), a shift-by-wire system that provides the operating ease of an automatic transmission with full manual control by the driver. Light Vehicle Aftermarket The principal LVA products include mufflers; exhaust and tail pipes; catalytic converters; shock absorbers; struts; and automotive oil, air, and fuel filters. These products are sold under the brand names Arvin(R)(mufflers); Gabriel(R) (shock absorbers); and Purolator(R) (filters). LVA also markets products under private label to customers such as Pep Boys and CARQUEST (ride control) and Quaker State (filters). Other "Other" consists of business units that are not focused predominantly on automotive products and includes our coil coating operation. Coated steel and aluminum substrates are used in a variety of applications, which include consumer appliances; roofing and siding; garage and entry doors; heating, ventilation and air conditioning (HVAC); and transportation. CUSTOMERS; SALES AND MARKETING ArvinMeritor's operating segments have numerous customers worldwide and have developed long-standing business relationships with many of these customers. Our ten largest customers accounted for approximately 65% of our total sales in fiscal year 2002. Original Equipment. Both LVS and CVS market and sell products principally to OEMs. In North America, CVS also markets truck and trailer products directly to dealers, fleets and other end-users, which may designate the components and systems of a particular supplier for installation in the vehicles they purchase from OEMs. Consistent with industry practice, LVS and CVS make most of their sales to OEMs through open purchase orders, which do not require the purchase of a minimum number of products. The customer typically may cancel these purchase orders on reasonable notice. LVS and CVS also sell products to certain customers under long-term arrangements that require us to provide annual cost reductions (through price reductions or other cost benefits for the OEMs). If we were unable to generate sufficient cost savings in the future to offset such price reductions, our gross margins would be adversely affected. Both LVS and CVS are dependent upon large OEM customers with substantial bargaining power with respect to price and other commercial terms. Although we believe that our businesses generally enjoy good relations with our OEM customers, loss of all or a substantial portion of sales to any of our large volume customers for whatever reason (including, but not limited to, loss of contracts, reduced or delayed customer requirements, plant shutdowns, strikes or other work stoppages affecting production by such customers) could have a significant adverse effect on our financial results. During fiscal year 2002, DaimlerChrysler AG (which owns Chrysler, Mercedes-Benz AG and Freightliner Corporation) accounted for approximately $670 million of sales for LVS, $410 million of sales for CVS and $20 million of sales for LVA, or 16% of our total sales. In addition, General Motors Corporation accounted for approximately $840 million of sales for LVS, $65 million of sales for CVS and $15 million of sales for LVA, or 13% of our total sales, and Ford Motor Company 8 accounted for approximately $605 million of sales for LVS, $30 million of sales for CVS and $90 million of sales for LVA, or 11% of our total sales. No other customer accounted for over 10% of our total sales in fiscal year 2002. Except as noted above with respect to the North American market for heavy-duty trucks and trailers, LVS and CVS generally compete for new business from OEMs, both at the beginning of the development of new vehicle platforms and upon the redesign of existing platforms. New platform development generally begins two to four years prior to start-up of production. Once a supplier has been designated to supply products to a new platform, an OEM will generally continue to purchase those products from the supplier for the life of the platform, which typically lasts three to six years. Aftermarkets. CVS also provides truck and trailer products and off-highway and specialty products to OEMs, dealers and distributors in the aftermarket. LVA sells products primarily to wholesale distributors, retailers and installers. The light vehicle aftermarket includes fewer and larger customers as the market consolidates and as OEMs increase their presence in the market. Coil Coating. Our coil coating customers include steel companies, service centers and end manufacturers engaged in the transportation, appliance, construction and furniture industries. COMPETITION Each of ArvinMeritor's businesses operates in a highly competitive environment. LVS and CVS compete worldwide with a number of North American and international providers of components and systems, some of which belong to, or are associated with, some of our customers. Some of these competitors are larger and some are smaller than the company in terms of resources and market shares. The principal competitive factors are price, quality, service, product performance, design and engineering capabilities, new product innovation and timely delivery. LVS has numerous competitors across its various product lines worldwide, including Tenneco, Faurecia and Eberspaecher (air and emissions systems); Webasto and Inalfa (roof systems); Brose, Magna, Hi-Lex and Grupo Antolin (door systems); Kiekert and Valeo (latch systems); Stabilus (motion control products); Thyssen-Krupp and NHK Spring (suspension systems); Kayaba, Tenneco and Sachs (ride control systems); and Hayes-Lemmerz and Michelin (wheel products). The major competitors of CVS are Dana Corporation and Eaton Corporation (truck axles and drivelines); Knorr/Bendix and Haldex Braking Systems (braking systems); Hendrickson and Holland-Neway (suspension systems); Hendrickson and Dana (trailer products); and Eaton Corporation (transmissions). In addition, certain OEMs manufacture for their own use products of the types we supply, and any future increase in this activity could displace our sales. LVA competes with both OEMs and independent suppliers in North America and Europe and serves the market through our own sales force, as well as through a network of manufacturers' representatives. Major competitors include Tenneco, Goerlicks, Bosal, Flowmaster, Sebring and Remus (exhaust products); Tenneco, Kayaba and Sachs (ride control products); and Champion Laboratories, Honeywell, Dana, Mann & Hummel, Sogefi Filtration and Mahle (filtration products). Competitive factors include customer loyalty, competitive pricing, customized service, quality, timely delivery, product development and manufacturing process efficiency. Our coil coating operation competes with other coil coaters and with customers' internal painting systems. RAW MATERIALS AND SUPPLIES We believe we have adequate sources for the supply of raw materials and components for our business segments' manufacturing needs with suppliers located around the world. We do, however, concentrate our purchases of certain raw materials and parts over a limited number of suppliers, some of which are located in developing countries, and we are dependent upon the ability of our suppliers to meet performance and quality specifications and delivery schedules. Although we historically have not experienced any significant difficulties in obtaining an adequate supply of raw materials and components necessary for our manufacturing operations, 9 the loss of a significant supplier or the inability of a supplier to meet performance and quality specifications or delivery schedules could have an adverse effect on us. On March 5, 2002, President Bush, acting under Section 201 of the Trade Act of 1974, imposed tariffs of up to 30% on imports of most flat rolled carbon steel products for a three-year period. Imports of finished steel have decreased since imposition of the tariffs, and we began to experience rising steel prices and spot shortages of certain steel products as a result of these tariffs in the second half of fiscal year 2002. We cannot predict the effect of the tariffs on availability of steel in fiscal year 2003. If supplies are inadequate for our needs, or if prices increase significantly and we are unable to either pass these price increases to our customer base or mitigate the cost increases by alternative sourcing of material or components, our sales and operating income could be adversely affected. STRATEGIC INITIATIVES We regularly consider various strategic and business opportunities, including licensing agreements, marketing arrangements and acquisitions, and review the prospects of our existing businesses to determine whether any of them should be modified, restructured, sold or otherwise discontinued. The industry in which we operate continues to experience significant consolidation among suppliers. This trend is due in part to globalization and increased outsourcing of product engineering and manufacturing by OEMs, and in part to OEMs reducing the total number of their suppliers by more frequently awarding long-term, sole-source or preferred supplier contracts to the most capable global suppliers. Scale is an important competitive factor, with the largest industry participants able to maximize key resources and contain costs. Consistent with this trend, we completed the Merger of Arvin and Meritor in fiscal year 2000 in order to enhance the financial strength, diversity of operations and product lines of both companies and to better position ourselves to take advantage of global opportunities. In addition, we believe that efficiencies and cost savings resulting from the Merger enable us to improve upon and increase our strategic options and lower our average cost of capital. On October 31, 2002, we announced that we had entered into an agreement to sell our off-highway planetary axle business to Axle Tech International, an affiliate of Wynnchurch Capital, Ltd. The sale includes manufacturing sites at Oshkosh, Wisconsin and St. Etienne, France and the planetary axle operations in Osasco, Brazil, and Seoul, Korea and is contingent on the satisfaction of certain conditions. We expect to complete the transaction in the first half of fiscal year 2003. In the first quarter of fiscal 2002, we recorded a restructuring charge of $15 million to realign certain operations to reflect the weak demand in our major markets. The charge related to employee severance benefits for approximately 450 salaried employees. See Note 5 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data below. No assurance can be given as to whether or when any additional strategic initiatives will be consummated in the future. We will continue to consider acquisitions as a means of growing the company or adding needed technologies, but cannot predict whether our participation or lack of participation in industry consolidation will ultimately be beneficial to us. If an agreement with respect to any additional acquisitions were to be reached, we could finance such acquisitions by issuance of additional debt or equity securities or by using our accounts receivable securitization facility. The additional debt from any such acquisitions, if consummated, could increase our debt to capitalization ratio. In addition, the ultimate benefit of any acquisition would depend on our ability to successfully integrate the acquired entity or assets into our existing business and to achieve any projected synergies. JOINT VENTURES As the automotive industry has become more globalized, joint ventures and other cooperative arrangements have become an important element of our business strategies. At September 30, 2002, we participated in 26 joint ventures with interests in the United States, Brazil, Canada, China, Colombia, the Czech Republic, 10 Germany, Hungary, India, Italy, Japan, Mexico, South Africa, Spain, Turkey, Venezuela and the United Kingdom. In accordance with accounting principles generally accepted in the United States, our consolidated financial statements include the operating results of those majority-owned joint ventures in which we have control. Significant consolidated joint ventures include our 57%-owned North American joint venture with Mitsubishi Steel Manufacturing Co. (suspension products for passenger cars, light trucks and sport utility vehicles); and our 75% interest in a joint venture in Spain with Kayaba (ride control products). Significant unconsolidated joint ventures include our 50%-owned North American joint venture with WABCO (ABS systems for heavy-duty commercial vehicles); our 50%-owned joint venture in the United States with ZF (transmissions); our 50% interest in Arvin Sango Inc. in the United States and our 49% interest in Zeuna Starker GmbH & Co. in Germany (air and emissions systems). In August 2002, we formed a 50%-owned joint venture with Randon Participacoes to develop, manufacture and sell truck suspensions, trailer axles and suspensions and related wheel-end products in the South American market. The joint venture will combine our product technology and customer contacts with Randon's manufacturing and operations expertise and could enhance both our market penetration in South America and our product portfolio outside of the region. In October 2002, Kayaba purchased our 40% interest in a Spanish joint venture that manufactures steering pumps, and our participation in this joint venture was terminated. On December 17, 2002, we entered into agreements to purchase the remaining 51% interest in Zeuna Starker GmbH & Co. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity. RESEARCH AND DEVELOPMENT We have significant research, development, engineering and product design capabilities. We spent $132 million in fiscal year 2002, $136 million in fiscal year 2001, and $115 million in fiscal year 2000 on research, development and engineering. At September 30, 2002, we employed approximately 1,700 professional engineers and scientists. PATENTS AND TRADEMARKS We own or license many United States and foreign patents and patent applications in our manufacturing operations and other activities. While in the aggregate these patents and licenses are considered important to the operation of our businesses, management does not consider them of such importance that the loss or termination of any one of them would materially affect a business segment or ArvinMeritor as a whole. (See Item 3. Legal Proceedings for information regarding a patent infringement lawsuit filed against the company by Eaton Corporation and adverse judgments in the case.) Our registered trademarks ArvinMeritor(R), Arvin(R) and Meritor(R) are important to our business. Other significant trademarks owned by us include Gabriel(R) (shock absorbers and struts) and Purolator(R) (filters) with respect to LVA, and ROR(TM) (trailer axles) with respect to CVS. In connection with the 1997 spin-off of Meritor's common stock to the shareowners of Rockwell International Corporation (now Rockwell Automation, Inc., and referred to in this Annual Report on Form 10-K as "Rockwell") and the transfer of Rockwell's automotive businesses to Meritor, Meritor entered into an agreement that allows us to continue to apply the "Rockwell" brand name to our products until September 30, 2007. EMPLOYEES At September 30, 2002, we had approximately 32,000 full-time employees. At that date, approximately 4,500 employees in the United States and Canada were covered by collective bargaining agreements and most 11 of our facilities outside of the United States and Canada were unionized. We believe our relationship with unionized employees is satisfactory. No significant work stoppages have occurred in the past five years. ENVIRONMENTAL MATTERS Federal, state and local requirements relating to the discharge of substances into the environment, the disposal of hazardous wastes and other activities affecting the environment have, and will continue to have, an impact on our manufacturing operations. We record liabilities for environmental issues in the accounting period in which our responsibility is established and the cost can be reasonably estimated. At environmental sites in which more than one potentially responsible party has been identified, we record a liability for our allocable share of costs related to our involvement with the site, as well as an allocable share of costs related to insolvent parties or unidentified shares. At environmental sites in which we are the only potentially responsible party, we record a liability for the total estimated costs of remediation before consideration of recovery from insurers or other third parties. We have been designated as a potentially responsible party at eight Superfund sites, excluding sites as to which our records disclose no involvement or as to which our potential liability has been finally determined. Management estimates the total reasonably possible costs we could incur for the remediation of Superfund sites at September 30, 2002, to be approximately $34 million, of which $13 million is recorded as a liability. In addition to Superfund sites, various other lawsuits, claims and proceedings have been asserted against us, alleging violations of federal, state and local environmental protection requirements or seeking remediation of alleged environmental impairments, principally at previously disposed-of properties. For these matters, management has estimated the total reasonably possible costs we could incur at September 30, 2002, to be approximately $50 million, of which $21 million is recorded as a liability. The process of estimating environmental liabilities is complex and dependent on physical and scientific data at the site, uncertainties as to remedies and technologies to be used, and the outcome of discussions with regulatory agencies. The actual amount of costs or damages for which we may be held responsible could materially exceed the foregoing estimates because of these uncertainties and others (including the financial condition of other potentially responsible parties and the success of the remediation) that make it difficult to accurately predict actual costs. However, based on management's assessment, after consulting with Vernon G. Baker, II, Esq., General Counsel of ArvinMeritor, and subject to the difficulties inherent in estimating these future costs, we believe that our expenditures for environmental capital investment and remediation necessary to comply with present regulations governing environmental protection and other expenditures for the resolution of environmental claims will not have a material adverse effect on our business, financial condition or results of operations. In addition, in future periods, new laws and regulations, advances in technology and additional information about the ultimate clean-up remedy could significantly change our estimates. Management cannot assess the possible effect of compliance with future requirements. INTERNATIONAL OPERATIONS Approximately 40% of our total assets as of September 30, 2002 and 38% of fiscal year 2002 sales were outside North America. See Note 23 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data below for financial information by geographic area for the three fiscal years ended September 30, 2002. Management believes that international operations have significantly benefited our financial performance. However, our international operations are subject to a number of risks inherent in operating abroad, including, but not limited to: - risks with respect to currency exchange rate fluctuations; - local economic and political conditions; 12 - disruptions of capital and trading markets; - restrictive governmental actions (such as restrictions on transfer of funds and trade protection measures, including export duties and quotas and customs duties and tariffs); - changes in legal or regulatory requirements; - import or export licensing requirements; - limitations on the repatriation of funds; - difficulty in obtaining distribution and support; - nationalization; - the laws and policies of the United States affecting trade, foreign investment and loans; - tax laws; and - labor disruptions. There can be no assurance that these risks will not have a material adverse impact on our ability to increase or maintain our foreign sales or on our financial condition or results of operations. The impact that the euro and other currencies will have on our sales and operating income is difficult to predict in fiscal year 2003. We enter into foreign currency contracts to help minimize the risk of loss from currency rate fluctuations on foreign currency commitments entered into in the ordinary course of business. It is our policy not to enter into derivative financial instruments for speculative purposes and, therefore, we hold no derivative instruments for trading purposes. We have not experienced any material adverse effect on our business, financial condition or results of operations related to these foreign currency contracts. See Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Quantitative and Qualitative Disclosures About Market Risk below. SEASONALITY; CYCLICALITY LVS and CVS may experience seasonal variations in the demand for products to the extent automotive vehicle production fluctuates. Historically, for both segments, such demand has been somewhat lower in the quarters ended September 30 and December 31, when OEM plants may close during model changeovers and vacation and holiday periods. In addition, the industry in which LVS and CVS operate has been characterized historically by periodic fluctuations in overall demand for trucks, passenger cars and other vehicles for which we supply products, resulting in corresponding fluctuations in demand for our products. The cyclical nature of the automotive industry is outside our control and cannot be predicted with certainty. Cycles in the major automotive industry markets of North America and Europe are not necessarily concurrent or related. 13 The following table sets forth vehicle production in principal markets served by LVS and CVS for the last five fiscal years:
FISCAL YEAR ENDED SEPTEMBER 30, -------------------------------- 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- Light Vehicles (in millions): North America............................................. 16.4 15.6 17.5 16.9 15.4 South America............................................. 1.9 2.2 2.0 1.5 2.0 Western Europe (including Czech Republic)................. 16.4 16.9 16.7 16.5 16.1 Asia/Pacific.............................................. 17.1 16.9 17.5 15.6 15.4 Commercial Vehicles (in thousands): North America, Heavy-Duty Trucks.......................... 170 150 294 323 263 North America, Medium-Duty Trucks......................... 133 144 172 185 158 United States and Canada, Trailers........................ 145 208 367 366 327 Western Europe, Heavy- and Medium-Duty Trucks............. 354 386 400 376 362 Europe, Trailers.......................................... 101 110 119 124 130
- --------------- Source: Automotive industry publications and management estimates. We believe that the stronger heavy-duty truck demand in North America in fiscal year 2002 was partially due to the pre-buy before new U.S. emission standards went into effect on October 1, 2002. As a result, we anticipate the North American heavy-duty truck market to be slightly weaker in fiscal year 2003, with production at an estimated 161,000 units. In Western Europe, we expect production of heavy- and medium-duty trucks to decrease approximately 5% to 337,000 units. Our most recent outlook shows North American and Western European light vehicle production to be 16.0 million and 16.5 million vehicles, respectively, during fiscal year 2003. See "Industry Developments and Outlook" above and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations -- Overview and Outlook and -- Results of Operations below for information on downturns in certain markets and their effects on our sales and earnings. AVAILABLE INFORMATION We make available free of charge through our web site (www.arvinmeritor.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to those reports, and other filings with the Securities and Exchange Commission, as soon as reasonably practicable after they are filed. CAUTIONARY STATEMENT This Annual Report on Form 10-K contains statements relating to future results of the company (including certain projections and business trends) that are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements are typically identified by words or phrases such as "believe," "expect," "anticipate," "estimate," "should," "are likely to be" and similar expressions. Actual results may differ materially from those projected as a result of certain risks and uncertainties, including but not limited to global economic and market conditions; the demand for commercial, specialty and light vehicles for which the company supplies products; risks inherent in operating abroad, including foreign currency exchange rates; the availability and cost of raw materials; OEM program delays; demand for and market acceptance of new and existing products; successful development of new products; reliance on major OEM customers; labor relations of the company, its customers and suppliers; successful integration of acquired or merged businesses; achievement of the expected annual savings and synergies from past and future business combinations; competitive product and pricing pressures; the amount of the company's debt; the ability of the company to access capital markets; the credit ratings of the company's debt; the outcome of existing and any future legal proceedings, including any litigation with respect to environmental or asbestos-related matters; as well as other risks and uncertainties, including but not limited to those 14 detailed herein and from time to time in other filings of the company with the Securities and Exchange Commission. See also the following portions of this Annual Report on Form 10-K: Item 1. Business -- "Industry Developments and Outlook"; "Customers; Sales and Marketing"; "Competition"; "Raw Materials and Supplies"; "Strategic Initiatives"; "Environmental Matters"; "International Operations"; and "Seasonality; Cyclicality"; Item 3. Legal Proceedings; and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. These forward-looking statements are made only as of the date hereof, and the company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise, except as otherwise required by law. ITEM 2. PROPERTIES. At September 30, 2002, our operating segments and joint ventures had the following facilities in the United States, Europe, South America, Canada, Mexico, Australia, South Africa and the Asia/Pacific region:
MANUFACTURING ENGINEERING FACILITIES, SALES OFFICES, WAREHOUSES FACILITIES AND SERVICE CENTERS ------------- ------------------------------------------------- LVS................................ 88 45 CVS................................ 41 51 LVA................................ 20 17 Other.............................. 4 3
These facilities had an aggregate floor space of approximately 33.2 million square feet, substantially all of which is in use. We owned approximately 74% and leased approximately 26% of this floor space. There are no major encumbrances (other than financing arrangements that in the aggregate are not material) on any of our plants or equipment. In the opinion of management, our properties have been well maintained, are in sound operating condition and contain all equipment and facilities necessary to operate at present levels. A summary of floor space of these facilities at September 30, 2002, is as follows:
OWNED LEASED FACILITIES FACILITIES ------------------------------- ----------------------------- LOCATION LVS CVS LVA OTHER LVS CVS LVA OTHER TOTAL -------- ------ ------ ----- ----- ----- ----- ----- ----- ------ (IN THOUSANDS OF SQUARE FEET) United States............... 4,538 4,360 1,717 642 464 1,572 521 507 14,321 Canada...................... 449 413 -- -- 89 160 84 -- 1,195 Europe...................... 3,861 2,790 1,026 -- 2,639 150 644 -- 11,110 Asia/Pacific................ 448 471 -- -- 147 658 597 -- 2,321 Latin America............... 1,133 2,120 324 -- 89 42 186 -- 3,894 Africa...................... 304 -- -- -- -- 11 2 -- 317 ------ ------ ----- --- ----- ----- ----- --- ------ Total............. 10,733 10,154 3,067 642 3,428 2,593 2,034 507 33,158 ====== ====== ===== === ===== ===== ===== === ======
In October 2002, we announced an agreement to sell our off-highway planetary axle business. The sale includes two owned manufacturing facilities, in Oshkosh, Wisconsin, USA and St. Etienne, France, with a total of 834,000 square feet of floor space. ITEM 3. LEGAL PROCEEDINGS. On July 17, 1997, Eaton Corporation filed suit against Rockwell in the U.S. District Court in Wilmington, Delaware, asserting infringement of Eaton's U.S. Patent No. 4850236, which covers certain aspects of heavy-duty truck transmissions, by our Engine SynchroShift(TM) transmission for heavy-duty trucks, and seeking damages and injunctive relief. Meritor was joined as a defendant on June 11, 1998. The following judgments and orders have been issued in this case: - After trial, on July 1, 1998, a jury rendered a verdict in favor of Eaton, finding that Meritor had infringed Eaton's patent and awarding compensatory damages in an amount equal to 13% of total 15 product sales. On October 11, 2001, the judge entered an order granting damages to Eaton in the amount of $2.9 million, plus post-judgment interest. - A separate phase of the trial was held in April 1999, without a jury, with respect to Meritor's allegations that Eaton had engaged in inequitable conduct in obtaining its patent and that the patent was therefore unenforceable. On February 9, 2001, the judge ruled against us on the second phase of the proceedings, finding that we had not provided clear and convincing evidence of inequitable conduct by Eaton in obtaining its patent. - On September 19, 2001, the judge granted Eaton's request for a permanent injunction against our manufacturing or selling the Engine SynchroShift(TM) transmission and any "colorable variations." - On October 11, 2001, the judge denied our motions for a new trial and for judgment as a matter of law. We have appealed these judgments and orders to the United States Court of Appeals for the Federal Circuit and oral arguments were held in October 2002. Based on advice of M. Lee Murrah, Esq., Chief Intellectual Property Counsel of ArvinMeritor, management believes our truck transmissions do not infringe Eaton's patent. We intend to continue to defend this suit vigorously. Maremont Corporation ("Maremont," a subsidiary of ArvinMeritor) and many other companies are defendants in suits brought by individuals claiming personal injuries as a result of exposure to asbestos-containing products. Maremont manufactured friction products containing asbestos from 1953 through 1977, when it sold its friction product business. Arvin acquired Maremont in 1986. During fiscal years 1997 through 2002, Maremont paid approximately $52 million to address asbestos-related claims, substantially all of which was reimbursed by insurance. Maremont's potential liabilities for asbestos-related claims include the following: - Unbilled committed settlements entered into by the Center for Claims Resolution: Maremont participated in the Center for Claims Resolution ("CCR") and agreed to share with other CCR members in the payments of defense and indemnity costs for asbestos-related claims. The CCR handled the resolution and processing of asbestos claims on behalf of its members until February 1, 2001, when it was reorganized and discontinued negotiating shared settlements. - Pending claims: Since February 1, 2001, Maremont has hired its own litigation counsel and is committed to examining the merits of each asbestos-related claim. For purposes of establishing reserves for pending asbestos-related claims, Maremont estimates its defense and indemnity costs based on the history and nature of filed claims to date and Maremont's experience since February 1, 2001. Maremont had approximately 37,500 and 27,500 pending asbestos-related claims at September 30, 2002 and 2001, respectively. Although Maremont has been named in these cases, in the cases where actual injury has been alleged, very few claimants have established that a Maremont product caused their injuries. - Shortfall: Several former members of the CCR have filed for bankruptcy protection, and these members have failed, or may fail, to pay certain financial obligations with respect to settlements that were reached while they were CCR members. Maremont is subject to claims for payment of a portion of these defaulted member shares. In an effort to resolve the affected settlements, Maremont has entered into negotiations with plaintiffs' attorneys, and an estimate of Maremont's obligation for the shortfall is included in the total asbestos-related reserves (discussed below). In addition, Maremont and its insurers are engaged in legal proceedings to determine whether existing insurance coverage should reimburse any potential liability related to this issue. Maremont has insurance that reimburses a substantial portion of the costs incurred defending against asbestos-related claims. The coverage also reimburses Maremont for any indemnity paid on those claims. The coverage is provided by several insurance carriers based on the insurance agreements in place. Based on its assessment of the history and nature of filed claims to date, and of Maremont's insurance carriers, 16 management believes that existing insurance coverage is adequate to cover substantially all costs relating to pending and future asbestos-related claims. At September 30, 2002, Maremont had established reserves of $66 million relating to these potential asbestos-related liabilities and corresponding asbestos-related recoveries of $59 million. The amounts recorded for the asbestos-related reserves and recoveries from insurance companies are based upon assumptions and estimates derived from currently known facts. All such estimates of liabilities for asbestos-related claims are subject to considerable uncertainty because such liabilities are influenced by variables that are difficult to predict. If the assumptions with respect to the nature of pending claims, the cost to resolve claims and the amount of available insurance prove to be incorrect, the actual amount of Maremont's liability for asbestos-related claims, and the effect on ArvinMeritor, could differ materially from current estimates. Maremont does not have sufficient information to make a reasonable estimate of its potential liability for asbestos-related claims that may be asserted against it in the future, and has not accrued reserves for these unknown claims. See Item 1. Business, "Environmental Matters" for information relating to environmental proceedings. Various other lawsuits, claims and proceedings have been or may be instituted or asserted against ArvinMeritor or our subsidiaries relating to the conduct of our business, including those pertaining to product liability, intellectual property, safety and health, and employment matters. Although the outcome of litigation cannot be predicted with certainty and some lawsuits, claims or proceedings may be disposed of unfavorably to ArvinMeritor, management believes, after consulting with Vernon G. Baker, II, Esq., ArvinMeritor's General Counsel, that the disposition of matters that are pending will not have a material adverse effect on our business, financial condition or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. There were no matters submitted to a vote of security holders during the fourth quarter of fiscal year 2002. ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY. The name, age, positions and offices held with ArvinMeritor and principal occupations and employment during the past five years of each of our executive officers as of November 30, 2002, are as follows: LARRY D. YOST, 64 -- Chairman of the Board and Chief Executive Officer since July 2000. Chairman of the Board and Chief Executive Officer of Meritor from May 1997 to July 2000; Acting President, Light Vehicle Systems of Meritor from January 1998 to March 1999. VERNON G. BAKER, II, 49 -- Senior Vice President and General Counsel since July 2000. Secretary of ArvinMeritor from July 2000 to November 2001; Senior Vice President, General Counsel and Secretary of Meritor from August 1999 to July 2000; Vice President and General Counsel, Corporate Research and Technology of Hoechst Celanese Corporation, a subsidiary of Hoechst AG (pharmaceuticals and industrial chemicals), from 1989 to July 1999. DIANE S. BULLOCK, 45 -- Vice President and Controller since August 2001. Vice President, Corporate Development of ArvinMeritor from July 2000 to December 2000; Vice President and Controller of Meritor from September 1998 to July 2000; Assistant Controller of Meritor from January 1998 to September 1998; Controller -- Body Systems N.A. of ITT Automotive, Inc. (automotive component supplier) from 1995 to 1997. LINDA M. CUMMINS, 55 -- Senior Vice President, Communications since July 2000. Senior Vice President, Communications of Meritor from April 2000 to July 2000; Vice President, Communications of Meritor from August 1999 to April 2000; Vice President of Advanced Marketing and Worldwide Communications of United Technologies Automotive (automotive component supplier) from August 1997 to August 1999. WILLIAM K. DANIEL, 37 -- Senior Vice President and President, Light Vehicle Aftermarket since July 2000. President of Arvin Replacement Products business group from December 1999 to July 2000; Managing 17 Director of Arvin Replacement Products in Europe from January 1998 to November 1999; Managing Director of Gabriel Europe from May 1996 to December 1997. JUAN L. DE LA RIVA, 58 -- Senior Vice President, Corporate Development & Strategy, Engineering and Procurement since October 2001. Senior Vice President, Corporate Development and Strategy of ArvinMeritor from July 2000 to October 2001; Senior Vice President, Business Development of Meritor from February 2000 to July 2000; Senior Vice President, Business Development and Communications of Meritor from February 1999 to February 2000; Vice President, Business Development and Communications of Meritor from September 1998 to February 1999; Managing Director -- Wheels, Light Vehicle Systems of Meritor from September 1997 to September 1998. THOMAS A. GOSNELL, 52 -- Senior Vice President and President, Commercial Vehicle Systems since November 2000. Senior Vice President and President, Heavy Vehicle Systems Aftermarket Products of ArvinMeritor from July 2000 to November 2000; Senior Vice President and President, Worldwide Aftermarket of Meritor from September 1999 to July 2000; Vice President and General Manager, Aftermarket, of Meritor from February 1998 to September 1999; General Manager, Worldwide Aftermarket Services, Heavy Vehicle Systems, of Meritor from September 1997 to February 1998. PERRY L. LIPE, 56 -- Senior Vice President and Chief Information Officer since July 2000. Vice President, Information Technology of Arvin from September 1998 to July 2000; Vice President, Information Technology of Fisher Controls International, Inc. (valves, regulators and instrumentation) from September 1992 to August 1998. TERRENCE E. O'ROURKE, 55 -- President and Chief Operating Officer since June 2002. Senior Vice President and President, Light Vehicle Systems of ArvinMeritor from July 2000 to May 2002; Senior Vice President and President, Light Vehicle Systems of Meritor from March 1999 to July 2000; Group Vice President and President -- Ford Division of Lear Corporation (automotive component supplier) from January 1996 to January 1999. DEBRA L. SHUMAR, 46 -- Senior Vice President, Continuous Improvement and Quality since July 2002. Vice President, Quality of ArvinMeritor from July 2000 to July 2002; Vice President, Quality of Meritor from 1999 to July 2000; Director, Quality, Light Vehicle Systems of Meritor from 1998 to 1999; Director, Quality, Structural Systems of ITT Automotive (automotive component supplier) from 1994 to 1998. S. CARL SODERSTROM, JR., 49 -- Senior Vice President and Chief Financial Officer since July 2001. Senior Vice President, Engineering, Quality and Procurement of ArvinMeritor from July 2000 to July 2001; Senior Vice President, Engineering, Quality and Procurement of Meritor from February 1998 to July 2000; Vice President, Engineering and Quality, Heavy Vehicle Systems of Meritor from September 1997 to February 1998. CRAIG M. STINSON, 41 -- Senior Vice President and President, Light Vehicle Systems, since June 2002. Senior Vice President and President, Exhaust Systems, of ArvinMeritor from September 2000 to May 2002; Executive Vice President, Exhaust Systems of ArvinMeritor from July 2000 to September 2000; Executive Vice President, Exhaust Systems of Arvin from January 2000 to July 2000; Vice President -- General Motors Business Group, Exhaust Systems of Arvin from June 1998 to January 2000; Vice President -- DaimlerChrysler Business Group, Exhaust Systems of Arvin from February 1995 to June 1998. FRANK A. VOLTOLINA, 42 -- Vice President and Treasurer since October 2000. Vice President and Treasurer of Mallinckrodt Inc. (medical products) from October 1997 to October 2000; Staff Vice President -- Director of Corporate Tax of Mallinckrodt from October 1995 to October 1997. ERNEST T. WHITUS, 47 -- Senior Vice President, Human Resources, since April 2001. Vice President, Human Resources-Commercial Vehicle Systems of ArvinMeritor from July 2000 to April 2001; Vice President, Human Resources-Heavy Vehicle Systems of Meritor from October 1998 to July 2000; Director, Human Resources-Heavy Vehicle Systems of Meritor from September 1997 to October 1998. 18 BONNIE WILKINSON, 52 -- Vice President and Secretary since November 2001. Assistant General Counsel of ArvinMeritor from July 2000 to November 2001; Assistant General Counsel of Meritor from September 1997 to July 2000. There are no family relationships, as defined in Item 401 of Regulation S-K, between any of the above executive officers and any director, executive officer or person nominated to become a director or executive officer. No officer of ArvinMeritor was selected pursuant to any arrangement or understanding between him or her and any person other than ArvinMeritor. All executive officers are elected annually. PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. ArvinMeritor's common stock, par value $1 per share ("Common Stock"), is listed on the New York Stock Exchange and trades under the symbol "ARM." On November 30, 2002, there were 34,091 shareowners of record of ArvinMeritor's Common Stock. The high and low sale prices per share of ArvinMeritor Common Stock for each quarter of fiscal years 2002 and 2001 were as follows:
2002 2001 --------------- --------------- QUARTER ENDED HIGH LOW HIGH LOW - ------------- ------ ------ ------ ------ December 31................................ $20.95 $13.35 $17.06 $ 8.88 March 31................................... 30.29 18.74 17.00 11.00 June 30.................................... 32.50 22.89 16.80 12.78 September 30............................... 25.00 17.67 21.87 12.10
Quarterly cash dividends in the following amounts per share were declared and paid in each quarter of the last two fiscal years.
QUARTER ENDED 2002 2001 - ------------- ----- ----- December 31................................................. $0.10 $0.22 March 31.................................................... 0.10 0.22 June 30..................................................... 0.10 0.22 September 30................................................ 0.10 0.10
On July 1, 2002, we issued 750 shares of Common Stock to two non-employee directors of ArvinMeritor, in lieu of cash payment of the quarterly retainer fee for board service. These shares were issued pursuant to the terms of our Directors Stock Plan and the issuance was exempt from registration under the Securities Act of 1933, as amended, as a transaction not involving a public offering under Section 4(2). See Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters for information on securities authorized for issuance under equity compensation plans. ITEM 6. SELECTED FINANCIAL DATA. The following sets forth selected consolidated financial data. The data should be read in conjunction with the information included under Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Item 8. Financial Statements and Supplementary Data below. 19 ARVINMERITOR, INC. SELECTED FINANCIAL DATA
YEAR ENDED SEPTEMBER 30, ------------------------------------------ 2002 2001 2000 1999 1998 SUMMARY OF OPERATIONS ------ ------ ------ ------ ------ (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Sales Light Vehicle Systems........................... $3,632 $3,588 $2,031 $1,575 $1,475 Commercial Vehicle Systems...................... 2,249 2,199 2,872 2,875 2,361 Light Vehicle Aftermarket....................... 844 859 209 -- -- Other........................................... 157 159 41 -- -- ------ ------ ------ ------ ------ Total................................... $6,882 $6,805 $5,153 $4,450 $3,836 ====== ====== ====== ====== ====== Net income before cumulative effect of accounting change.......................................... $ 149 $ 35 $ 218 $ 194 $ 147 Cumulative effect of accounting change............ (42) -- -- -- -- ------ ------ ------ ------ ------ Net income(1)..................................... $ 107 $ 35 $ 218 $ 194 $ 147 ====== ====== ====== ====== ====== Basic earnings per share before effect of accounting change............................... $ 2.24 $ 0.53 $ 4.12 $ 3.75 $ 2.84 Cumulative effect of accounting change............ (0.63) -- -- -- -- ------ ------ ------ ------ ------ Basic earnings per share(1)....................... $ 1.61 $ 0.53 $ 4.12 $ 3.75 $ 2.84 ====== ====== ====== ====== ====== Diluted earnings per share before cumulative effect of accounting change..................... $ 2.22 $ 0.53 $ 4.12 $ 3.75 $ 2.84 Cumulative effect of accounting change............ (0.63) -- -- -- -- ------ ------ ------ ------ ------ Diluted earnings per share(1)..................... $ 1.59 $ 0.53 $ 4.12 $ 3.75 $ 2.84 ====== ====== ====== ====== ====== Cash dividends per share.......................... $ 0.40 $ 0.76 $ 0.64 $ 0.56 $ 0.56 ====== ====== ====== ====== ====== FINANCIAL POSITION AT SEPTEMBER 30 Total assets...................................... $4,651 $4,362 $4,720 $2,796 $2,086 Short-term debt................................... 15 94 183 44 34 Long-term debt.................................... 1,435 1,313 1,537 802 313 Preferred capital securities...................... 39 57 74 -- --
- --------------- (1) Fiscal year 2002 net income and basic and diluted earnings per share include a restructuring charge of $15 million ($10 million after-tax, or $0.15 per share) and a gain on sale of the exhaust accessories manufacturing operations of $6 million ($4 million after-tax, or $0.06 per share). Net income and basic and diluted earnings per share for fiscal year 2001 includes restructuring costs of $67 million ($45 million after-tax, or $0.68 per share), an employee separation charge of $12 million ($8 million after-tax, or $0.12 per share), and an environmental charge of $5 million ($3 million after-tax, or $0.05 per share). Net income and basic and diluted earnings per share for fiscal year 2000 includes a one-time gain of $83 million ($51 million after-tax, or $0.96 per share) for the sale of the seat adjusting systems business, restructuring costs of $26 million ($16 million after-tax, or $0.30 per share), and other one-time charges of $4 million ($3 million after-tax, or $0.06 per share). Net income and basic and diluted earnings per share for fiscal year 1999 includes restructuring costs of $28 million ($17 million after-tax, or $0.33 per share) and a one-time gain of $24 million ($18 million after-tax, or $0.34 per share) recorded to reflect the formation of a transmission and clutch joint venture with ZF Friedrichshafen AG. Net income and basic and diluted earnings per share for fiscal year 1998 includes a one-time charge of $31 million ($19 million after-tax, or $0.36 per share) relating to the settlement of interest rate agreements. 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW AND OUTLOOK We operate in a cyclical industry that has been characterized historically by periodic fluctuations in demand for light, commercial and specialty vehicles, and related aftermarkets. Light vehicle production volumes peaked in North America in fiscal 2000 at 17.5 million units and in Western Europe (including Czech Republic) in fiscal 2001 at 16.9 million units. Vehicle build rates for heavy-duty trucks in North America were 294,000 units in fiscal 2000 and fell nearly 50 percent in fiscal 2001. Lower demand in most of our principal markets in fiscal 2002 and 2001 had a negative effect on our financial results. The following sets forth vehicle production in our principal markets for the last three fiscal years:
YEAR ENDED SEPTEMBER 30, ------------------ 2002 2001 2000 ---- ---- ---- Light Vehicles (in millions): North America............................................. 16.4 15.6 17.5 South America............................................. 1.9 2.2 2.0 Western Europe (including Czech Republic)................. 16.4 16.9 16.7 Asia/Pacific.............................................. 17.1 16.9 17.5 Commercial Vehicles (in thousands): North America, Heavy-Duty Trucks.......................... 170 150 294 North America, Medium-Duty Trucks......................... 133 144 172 United States and Canada, Trailers........................ 145 208 367 Western Europe, Heavy- and Medium-Duty Trucks............. 354 386 400 Europe, Trailers.......................................... 101 110 119
- --------------- Source: Automotive industry publications and management estimates. Our fiscal 2003 outlook for light vehicle production is 16.0 million vehicles in North America and 16.5 million vehicles in Western Europe. We expect that North American heavy-duty (also referred to as Class 8) truck production will decline about five percent in fiscal 2003 to 161,000 units. Despite continued soft markets, we plan to grow our sales as a result of new business awards and greater market penetration. Over the past two years, we have focused on reducing our break-even levels and driving a continuous improvement culture throughout the organization. We will continue to identify aggressive cost-reduction actions in order to improve our financial results in fiscal 2003. Our industry is rapidly transforming to keep pace with the continued OEM trends toward outsourcing, increased OEM demand for modules and systems and an increasing emphasis on engineering and technology. The increased competitive pressures and complexity of the industry are presenting suppliers with challenges, as well as growth opportunities. We believe that ArvinMeritor has all the ingredients and qualities in place to be a leading Tier One supplier. Our broad customer, product and geographic base, coupled with our technological capabilities, position us to be one of the industry's strongest competitors and to take further advantage of industry trends. 21 RESULTS OF OPERATIONS The following sets forth the sales, operating income and net income of the company for the years ended September 30, 2002, 2001 and 2000, as well as pro forma amounts for fiscal 2000.
AS REPORTED PRO FORMA ------------------------ (UNAUDITED)(1) YEAR ENDED SEPTEMBER 30, 2002 2001 2000 2000 - ------------------------ ------ ------ ------ -------------- (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Sales Light Vehicle Systems.............................. $3,632 $3,588 $2,031 $3,668 Commercial Vehicle Systems......................... 2,249 2,199 2,872 2,926 Light Vehicle Aftermarket.......................... 844 859 209 950 Other.............................................. 157 159 41 178 ------ ------ ------ ------ SALES................................................ $6,882 $6,805 $5,153 $7,722 ====== ====== ====== ====== Operating Income Light Vehicle Systems.............................. $ 196 $ 213 $ 149 $ 232 Commercial Vehicle Systems......................... 94 32 221 231 Light Vehicle Aftermarket.......................... 58 44 6 43 Other.............................................. 4 (10) -- 9 ------ ------ ------ ------ SEGMENT OPERATING INCOME............................. 352 279 376 515 Restructuring costs................................ (15) (67) (26) (30) Gain on sale of business........................... 6 -- 83 83 Other (charges) credits, net....................... -- (17) (4) 6 ------ ------ ------ ------ OPERATING INCOME..................................... 343 195 429 574 Equity in earnings (losses) of affiliates.......... (3) 4 29 40 Non-operating one-time items....................... -- -- -- (3) Interest expense, net and other.................... (105) (136) (89) (142) ------ ------ ------ ------ INCOME BEFORE INCOME TAXES........................... 235 63 369 469 Provision for income taxes......................... (75) (21) (141) (177) Minority interests................................. (11) (7) (10) (5) ------ ------ ------ ------ INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE............................................. 149 35 218 287 Cumulative effect of accounting change............. (42) -- -- -- ------ ------ ------ ------ NET INCOME........................................... $ 107 $ 35 $ 218 $ 287 ====== ====== ====== ====== DILUTED EARNINGS PER SHARE Before cumulative effect of accounting change...... $ 2.22 $ 0.53 $ 4.12 $ 4.02 Cumulative effect of accounting change............. (0.63) -- -- -- ------ ------ ------ ------ Diluted earnings per share......................... $ 1.59 $ 0.53 $ 4.12 $ 4.02 ====== ====== ====== ====== DILUTED AVERAGE COMMON SHARES OUTSTANDING............ 67.2 66.1 52.9 71.4 ====== ====== ====== ======
- --------------- (1) Pro forma financial information is presented as if the merger had occurred at the beginning of fiscal 2000 and reflects (a) the amortization of goodwill from the merger and the elimination of historical Arvin goodwill amortization expense; (b) the adjustment to interest expense for borrowings to fund the Arvin cash consideration and other financing costs; (c) the income tax effects of (a) and (b) above; and (d) the adjustment of shares outstanding representing the exchange of one share of Meritor common stock for 0.75 share of ArvinMeritor common stock and one share of Arvin common stock for one share of ArvinMeritor common stock, based on the average shares outstanding for each year. See Note 4 of the Notes to Consolidated Financial Statements for more information on the ArvinMeritor merger. 22 TOTAL COMPANY 2002 COMPARED TO 2001 Sales for fiscal 2002 were $6,882 million, up $77 million, or one percent, over last year. The sales increase was primarily attributable to higher production volumes for North American heavy-duty trucks and the favorable impact of a stronger euro. To improve comparability of operating income on a year-over-year basis, the following information is presented (in millions):
YEAR ENDED SEPTEMBER 30, ------------------------------ AS REPORTED PRO FORMA ------------------ --------- 2002 2001 2000 2000 ---- ---- ---- --------- Operating income as reported......................... $343 $195 $429 $574 Restructuring costs................................ 15 67 26 30 Gain on sale of business........................... (6) -- (83) (83) Other charges (credits), net....................... -- 17 4 (6) ---- ---- ---- ---- Segment operating income............................. 352 279 376 515 Add back goodwill amortization..................... -- 24 19 25 ---- ---- ---- ---- Segment operating income adjusted for goodwill....... $352 $303 $395 $540 ==== ==== ==== ====
Operating income for fiscal 2002 was $343 million, up $148 million from fiscal 2001. Fiscal 2002 operating margin improved to 5.0 percent, up from 2.9 percent last year. The company has been able to improve its operating margin through savings generated by cost-reduction initiatives and restructuring programs. In the first quarter of fiscal 2002, the company recorded a restructuring charge of $15 million for severance and other employee costs related to a net reduction of approximately 450 employees. The company also recorded restructuring costs of $67 million in fiscal 2001. This charge included severance and other employee costs of approximately $48 million related to a net reduction of approximately 1,350 employees, with the balance primarily associated with facility-related costs from the rationalization of operations. For more information concerning the status of the company's restructuring programs, see Note 5 of the Notes to Consolidated Financial Statements. Fiscal 2002 results include a gain on sale of the company's exhaust accessories manufacturing business of $6 million. Other charges in fiscal 2001 include $12 million related to an employee separation agreement and $5 million related to environmental liability costs. In fiscal 2002 the company adopted Statement of Financial Accounting Standards No. 142 (SFAS 142), "Goodwill and Other Intangible Assets", which eliminated goodwill amortization expense of $24 million. Excluding restructuring costs, gain on sale of business and other charges, as well as adjusting for goodwill amortization in fiscal 2001, segment operating income was $352 million in fiscal 2002, up $49 million from $303 million in fiscal 2001. Equity in losses of affiliates was $3 million in fiscal 2002, as compared to equity in earnings of affiliates of $4 million a year ago. The decline was primarily related to the company's commercial vehicle affiliates. Interest expense, net and other for fiscal 2002 was $105 million, down $31 million, or 23 percent, from fiscal 2001, principally as a result of lower average debt levels and the favorable interest rate environment. The effective income tax rate in fiscal 2002 was 32 percent, down from 33.5 percent in fiscal 2001 (31 percent, after excluding goodwill amortization). 23 Income before cumulative effect of accounting change was $149 million in fiscal 2002, compared to $35 million in fiscal 2001. As required by SFAS 142, the company reviewed the fair values of each of its reporting units, using discounted cash flows and market multiples. As a result of this review, the company recorded an impairment loss on goodwill as a cumulative effect of accounting change for its coil coating operations (classified as "Other" for segment reporting) of $42 million ($42 million after-tax, or $0.63 per diluted share) in the first quarter of fiscal 2002. Increased competition, consolidation in the coil coating applications industry and the struggling U.S. steel market caused a decrease in the fair value of this business. Net income for fiscal 2002 was $107 million, or $1.59 per diluted share, as compared to fiscal 2001 net income of $35 million, or $0.53 per diluted share. Net income in fiscal 2002 included restructuring costs ($10 million after-tax or $0.15 per diluted share), a gain on sale of business ($4 million after-tax or $0.06 per diluted share) and the cumulative effect of the goodwill accounting change ($42 million after-tax or $0.63 per diluted share). Excluding the impact of these items, diluted earnings per share was $2.31. Net income in fiscal 2001 included goodwill amortization expense ($20 million after-tax or $0.30 per diluted share), restructuring costs ($45 million after-tax or $0.68 per diluted share) and certain other charges ($11 million after-tax or $0.17 per diluted share). Excluding the impact of these items, diluted earnings per share was $1.68. 2001 COMPARED TO 2000 Sales for fiscal 2001 were $6,805 million, up $1,652 million, or 32 percent, over fiscal 2000 sales. Fiscal 2001 results include incremental sales of $2,439 million, attributable to the merger with Arvin, for the first three quarters of the year. Fiscal 2000 results include Arvin results for the fourth quarter only. The increase in sales related to the merger was significantly offset by a decline in the company's Commercial Vehicle Systems (CVS) segment sales of $673 million. CVS sales were lower in fiscal 2001 due to the steep decline in CVS heavy-duty truck and trailer markets in North America. Fiscal 2001 operating income was $195 million, down $234 million from fiscal 2000 operating income of $429 million. Operating margin was 2.9 percent in fiscal 2001 compared to 8.3 percent in fiscal 2000. The decline in operating income was driven by the impact of the significant decrease in CVS sales. The merger with Arvin added operating income of $100 million on the incremental sales of $2,439 million. 2001 COMPARED TO PRO FORMA 2000 Sales for fiscal 2001 were $6,805 million, down $917 million, or 12 percent, from pro forma fiscal 2000 sales. The decline in sales was driven by the company's CVS segment, which experienced a steep decline in the heavy-duty truck and trailer markets in North America. Also contributing to the decline were lower volumes in the North American light vehicle market and a softening of demand in the aftermarket. Fiscal 2001 operating income as reported was $195 million, down $379 million from pro forma fiscal 2000. Operating margin was 2.9 percent in fiscal 2001, as compared to 7.4 percent in pro forma fiscal 2000. As previously discussed, included in operating income in fiscal 2001, were restructuring costs of $67 million and other charges of $17 million. In pro forma fiscal 2000, the company also recorded $30 million in restructuring costs. This included approximately $19 million related to a net reduction of approximately 500 employees, $4 million associated with a voluntary early retirement plan in the U.S. and the balance primarily associated with facility-related costs from the rationalization of operations. In addition, pro forma fiscal 2000 results included $6 million of other credits and a one-time gain on the sale of business of $83 million related to the company's sale of its Light Vehicle Systems (LVS) seat adjusting systems business. Excluding restructuring costs, gain on sale of business and other charges, operating income for fiscal 2001 was $279 million, down $236 million from $515 million in pro forma fiscal 2000. Operating margin before the effect of these items was 4.1 percent in fiscal 2001, as compared to 6.7 percent in pro forma fiscal 2000. The substantial decrease in operating income was principally due to lower CVS sales, resulting from weakness in CVS markets, particularly in North America. Additionally, operating income from the Other segment (business units not focused on automotive products) decreased $19 million. 24 Equity in earnings of affiliates was $4 million in fiscal 2001, as compared to $40 million in pro forma fiscal 2000. The decline was primarily due to lower earnings from commercial vehicle affiliates. Interest expense, net and other for fiscal 2001 was $136 million, down $6 million, or four percent, from pro forma fiscal 2000 reflecting lower debt levels and interest rates. Net income for fiscal 2001 was $35 million, or $0.53 per diluted share, as compared to pro forma fiscal 2000 net income of $287 million, or $4.02 per diluted share. Net income in fiscal 2001 included restructuring costs ($45 million after-tax or $0.68 per diluted share) and certain one-time charges ($11 million after-tax or $0.17 per diluted share). Excluding the impact of these items, diluted earnings per share was $1.38. Net income in pro forma fiscal 2000 included restructuring costs ($19 million after-tax or $0.27 per diluted share), other credits ($3 million after tax or $0.04 per diluted share) and gain on sale of business ($51 million after tax or $0.69 per diluted share). Excluding the impact of these items, diluted earnings per share on a pro forma basis was $3.56. BUSINESS SEGMENTS LIGHT VEHICLE SYSTEMS -- To improve comparability on a year-over-year basis, the following information is presented (in millions):
YEAR ENDED SEPTEMBER 30, ----------------------------------------- AS REPORTED PRO FORMA ----------------------------- --------- 2002 2001 2000 2000 ------ ----------- ------ --------- Sales......................................... $3,632 $3,588 $2,031 $3,668 ====== ====== ====== ====== Segment operating income...................... $ 196 $ 213 $ 149 $ 232 Add back goodwill amortization................ -- 6 5 6 ------ ------ ------ ------ Segment operating income adjusted for goodwill.................................... $ 196 $ 219 $ 154 $ 238 ====== ====== ====== ====== Restructuring Costs........................... $ (7) $ (27) $ (10) $ (14) ====== ====== ====== ======
2002 COMPARED TO 2001 LVS sales increased to $3,632 million in fiscal 2002, up $44 million from $3,588 million a year ago. Acquisition activity added approximately $80 million to sales in fiscal 2002 and included additional investments in two previously unconsolidated joint ventures in Germany and China. LVS also sold its seat motors business in August 2001 and divested its investment in a majority-owned joint venture in North America effective September 30, 2001. These businesses contributed sales of approximately $120 million in fiscal 2001. In addition, sales were up in fiscal 2002 principally due to new business awards. LVS operating income was $196 million in fiscal 2002, down $17 million, or eight percent, from fiscal 2001. Operating margin declined to 5.4 percent from 5.9 percent in fiscal 2001 (6.1 percent, after excluding goodwill amortization). Pricing pressure from the vehicle manufacturers continued to negatively impact operating margin. Also contributing to the operating margin decline were higher engineering costs, start-up costs associated with a new Detroit manufacturing facility and increases in steel costs. Restructuring costs related to the LVS segment totaled $7 million and $27 million in fiscal 2002 and 2001, respectively. LVS continues to identify and implement cost-reduction initiatives to mitigate the pricing pressures from the vehicle manufacturers. 2001 COMPARED TO PRO FORMA 2000 On a reported basis, sales in fiscal 2001 were up $1,557 million and operating income was up $64 million. Incremental sales and operating income of $1,633 million and $74 million, respectively, related to the merger with Arvin. 25 LVS sales were $3,588 million in fiscal 2001, a decrease of $80 million, compared to pro forma fiscal 2000. Unfavorable foreign currency translation and divestiture activity lowered sales in fiscal 2001 by approximately $130 million and $30 million, respectively. Excluding these items, sales were up two percent, despite lower vehicle build rates in North America. This increase was principally related to higher sales in air and emission systems. LVS operating income was $213 million in fiscal 2001, down $19 million from pro forma 2000 operating income of $232 million. Operating margin was 5.9 percent in fiscal 2001, compared to 6.3 percent in pro forma fiscal 2000. Pricing pressure from the vehicle manufacturers contributed to the operating margin decline. Furthermore, the higher sales of air and emission systems included sales of catalytic converters, which typically carry low operating margins. In fiscal 2001 and pro forma 2000, LVS implemented restructuring and other programs aimed at lowering fixed costs. Restructuring costs related to these programs were $27 million and $14 million in fiscal 2001 and pro forma 2000, respectively. COMMERCIAL VEHICLE SYSTEMS -- To improve comparability on a year-over-year basis, the following information is presented (in millions):
YEAR ENDED SEPTEMBER 30, ----------------------------------------- AS REPORTED PRO FORMA ----------------------------- --------- 2002 2001 2000 2000 ------ ----------- ------ --------- Sales......................................... $2,249 $2,199 $2,872 $2,926 ====== ====== ====== ====== Segment operating income...................... $ 94 $ 32 $ 221 $ 231 Goodwill amortization impact.................. -- 12 12 12 ------ ------ ------ ------ Segment operating income adjusted for goodwill.................................... $ 94 $ 44 $ 233 $ 243 ====== ====== ====== ====== Restructuring Costs........................... $ (6) $ (40) $ (16) $ (16) ====== ====== ====== ======
2002 COMPARED TO 2001 CVS sales were $2,249 million, up $50 million, or two percent, compared to fiscal 2001. Vehicle build rates in CVS markets were mixed in fiscal 2002. A 13-percent increase in North American Class 8 truck volumes drove higher drivetrain and braking systems sales of approximately $70 million. However, declines in worldwide trailer markets contributed to lower suspension systems and trailer product sales of approximately $35 million. CVS operating income was $94 million, an increase of $62 million from fiscal 2001. Operating margin improved to 4.2 percent, up from 1.5 percent in fiscal 2001 (2.0 percent, after excluding goodwill amortization). Restructuring charges attributable to the CVS segment were $6 million and $40 million, respectively, in fiscal 2002 and 2001. The cost savings resulting from these restructuring programs and other cost-reduction actions have allowed CVS to lower its fixed cost structure and contributed to the operating margin improvement. 2001 COMPARED TO PRO FORMA 2000 On a reported basis, sales in fiscal 2001 were down $673 million and operating income was down $189 million. Incremental sales and operating income of $41 million and $6 million, respectively, related to the merger with Arvin. CVS sales were $2,199 million in fiscal 2001, down $727 million from pro forma fiscal 2000. Sales in North America were down approximately $600 million, principally due to the 49-percent decline in the North American Class 8 truck market and the 43-percent decline in the trailer market in U.S. and Canada. The impact of foreign currency translation contributed approximately $80 million to the sales decline in fiscal 2001. CVS operating income was $32 million, a decrease of $199 million from pro forma fiscal 2000. Operating margin declined to 1.5 percent in fiscal 2001, from 7.9 percent in pro forma fiscal 2000. Lower production 26 volumes in North America for heavy- and medium-duty trucks and trailers drove the margin decline. In response to the significant decline in its markets, CVS initiated restructuring programs with a total cost of $56 million in fiscal 2001 and pro forma 2000. LIGHT VEHICLE AFTERMARKET -- To improve comparability on a year-over-year basis, the following information is presented (in millions):
YEAR ENDED SEPTEMBER 30, ------------------------------ AS REPORTED PRO FORMA ------------------ --------- 2002 2001 2000 2000 ---- ---- ---- --------- Sales........................................ $844 $859 $209 $950 ==== ==== ==== ==== Segment operating income..................... $ 58 $ 44 $ 6 $ 43 Add back goodwill amortization............... -- 4 1 4 ---- ---- ---- ---- Segment operating income adjusted for goodwill................................... $ 58 $ 48 $ 7 $ 47 ==== ==== ==== ==== Restructuring costs.......................... $ (1) $ -- $ -- $ -- ==== ==== ==== ====
2002 COMPARED TO 2001 LVA sales were $844 million in fiscal 2002, a two percent decrease from $859 million in the prior year. LVA continued to experience lower demand in exhaust and ride control products during fiscal 2002. The quality of original equipment parts continues to weaken demand for these products. LVA operating income was $58 million in fiscal 2002, with an operating margin of 6.9 percent, compared to operating income of $44 million and an operating margin of 5.1 percent in fiscal 2001 (5.6 percent, after excluding goodwill amortization). Despite lower sales for aftermarket parts, LVA was able to increase its operating margin, as the result of improved pricing and cost-reduction activities. 2001 COMPARED TO PRO FORMA 2000 On a reported basis, sales were up $650 million and operating income was up $38 million. The increase in sales and operating income was due to the merger with Arvin. The full year of merger activity in fiscal 2001 added $648 million to sales and $28 million to operating income. LVA sales were $859 million in fiscal 2001, a decline of $91 million, or 10 percent, compared to pro forma fiscal 2000. Softening customer demand resulted in depressed volumes in this segment. LVA operating income was $44 million in fiscal 2001, up slightly from $43 million in pro forma fiscal 2000. Operating margin was 5.1 percent compared to pro forma fiscal 2000 operating margin of 4.5 percent. The operating margin increase is the result of improved pricing, the favorable impact of cost-reduction actions and lower changeover spending. AFFILIATES At September 30, 2002, the company had investments in 12 joint ventures which were accounted for under the equity method of accounting, as they were not majority-owned or controlled. These strategic alliances provide for sales, product design, development and manufacturing in certain product and geographic areas. Aggregate sales of these affiliates were $1,565 million, $1,641 million and $924 million in fiscal 2002, 2001 and 2000, respectively. The company's equity in earnings (losses) of affiliates was $(3) million in fiscal 2002, $4 million in fiscal 2001, and $29 million in fiscal 2000. Cash dividends to ArvinMeritor were $19 million, $24 million and $32 million in fiscal 2002, 2001 and 2000, respectively. The decrease in earnings of affiliates over the three-year period is primarily a result of lower earnings from commercial vehicle affiliates. 27 FINANCIAL CONDITION The company remains committed to strong cash flow generation and investment grade capital structure. During fiscal 2002, the company strengthened its capital structure by replacing its bank revolver borrowings with long-term notes, the earliest of which mature in 2007. In addition, the company replaced its $750 million one-year bank revolving facility with a new $400 million three-year bank revolver. The company's primary source of liquidity continues to be cash generated from operations, supplemented by its accounts receivables securitization program and, as required, borrowings on the revolving credit facilities. The company's total debt to capitalization ratio was 65 percent at September 30, 2002 compared to 67 percent at September 30, 2001. CASH FLOWS See Statement of Consolidated Cash Flows for additional detail on the company's cash flows. OPERATING CASH FLOW -- Cash flow from operations was $184 million in fiscal 2002, down $421 million from $605 million in fiscal 2001. The decrease is largely attributable to the accounts receivable securitization program. During fiscal 2001, the company commenced an accounts receivable securitization program and had $211 million outstanding at the end of the fiscal year. As a result of strong cash flow, the company reduced its balance outstanding under the accounts receivable securitization program by $106 million in fiscal 2002. Also contributing to the decrease in operating cash flow were higher pension and retiree medical contributions of $39 million and higher working capital levels, offset partially by higher income. Working capital as a percentage of sales at September 30, 2002, 2001 and 2000 was 4.3 percent, 4.2 percent and 6.9 percent, respectively. In computing this ratio, the company included the receivables sold under the securitization program and excluded short-term debt and cash and cash equivalents. Cash flow from operations was $228 million in fiscal 2000. INVESTING CASH FLOW -- Cash used for investing activities was $198 million in fiscal 2002, $210 million in fiscal 2001 and $200 million in fiscal 2000, primarily as a result of capital expenditures. Capital expenditures were $184 million in fiscal 2002, down from $206 million in fiscal 2001 and $225 million in fiscal 2000. Capital expenditures, as a percentage of sales, were 2.7 percent in fiscal 2002 and 3.0 percent in fiscal 2001, down significantly from 4.4 percent in fiscal 2000. Management, at all levels, follows a rigorous process to review capital expenditures. The company's focus on economic profit, which applies a capital charge on assets employed, also helps assure that each capital project generates positive economic profit. In fiscal 2000, proceeds of $148 million were received from dispositions of property and businesses, primarily relating to the sale of the seat adjusting systems business. These proceeds were substantially offset by cash payments of $74 million for acquisitions of businesses and investments and $49 million relating to the merger between Arvin and Meritor. FINANCING CASH FLOW -- Cash used for financing activities was $32 million in fiscal 2002, compared to $402 million in fiscal 2001. Cash provided by financing activities was $38 million in fiscal 2000. During fiscal 2002, the company completed two public note offerings. Proceeds from the note offerings of $591 million were used to pay outstanding indebtedness under the company's revolving credit facilities and for general corporate purposes. The company reduced total debt, including preferred capital securities, by $27 million and $320 million in fiscal 2002 and 2001, respectively. Total debt increased by $245 million in fiscal 2000. The company paid dividends of $27 million, $51 million and $35 million in fiscal 2002, 2001 and 2000, respectively. In fiscal 2001 and 2000, the company made payments of $31 million and $172 million, respectively, for the repurchase of its stock. 28 LIQUIDITY The company is contractually obligated to make payments as follows (in millions):
PAYMENTS DUE BY FISCAL PERIOD -------------------------------------- 2004- 2007- THERE- TOTAL 2003 2006 2008 AFTER ------ ---- ----- ----- ------ Total debt(1).......................... $1,402 $15 $ 39 $299 $1,049 Operating leases....................... 153 26 63 34 30 Preferred capital securities........... 39 -- -- -- 39 ------ --- ---- ---- ------ Total contractual obligations.......... $1,594 $41 $102 $333 $1,118 ====== === ==== ==== ======
- --------------- (1) Excludes fair value adjustment of notes of $48 million Excluded from the contractual obligation table are open purchase orders at September 30, 2002 for raw materials and supplies used in the normal course of business, supply contracts with customers, distribution agreements, joint venture agreements and other contracts without express funding requirements. In 1998, the company acquired a 49-percent interest in a German joint venture, Zeuna Starker GmbH & Co. KG, an air and emissions systems company. Under the terms of the shareholders' agreement, the owners of the majority interest in the joint venture have the right to exercise a put option to require the company to purchase the remaining 51 percent. On December 17, 2002, the majority shareholders exercised the put option, and the company entered into agreements to purchase the remaining 51 percent interest for a purchase price of approximately $75 million. The company expects to complete the transaction in the second quarter of fiscal 2003. REVOLVING AND OTHER DEBT -- The company has two unsecured credit facilities, which mature on June 27, 2005: a three-year, $400-million revolving credit facility and a five-year, $750-million revolving credit facility. The company also has a $50-million uncommitted line of credit. The credit facilities require the company to maintain a total net debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") ratio of 3.25x and a minimum fixed charge coverage ratio (EBITDA less capital expenditures to interest expense) of 1.50x. At September 30, 2002, the company was in compliance with all covenants. The company has $150 million remaining under a shelf registration filed with the SEC in April 2001 (see Note 15 of the Notes to Consolidated Financial Statements). LEASES -- Certain operating leases require the company to maintain financial ratios that are similar to those required by the company's revolving credit agreements. At September 30, 2002, the company was in compliance with all covenants (see Note 15 of the Notes to Consolidated Financial Statements). ACCOUNTS RECEIVABLE SECURITIZATION FACILITY -- As discussed in Note 8 of the Notes to Consolidated Financial Statements, the company participates in an accounts receivable securitization facility to improve financial flexibility and lower interest costs. ArvinMeritor Receivables Corporation (ARC), a wholly owned subsidiary of the company, has entered into an agreement to sell an undivided interest in up to $250 million of trade receivables to a group of banks. As of September 30, 2002 and 2001, the company had utilized $105 million and $211 million, respectively, of the accounts receivable securitization facility. The accounts receivable securitization program matures in September 2003 and the company expects to renew the facility at that time. If the company's credit ratings are reduced to certain levels, or if certain receivables performance-based covenants are not met, it would constitute a termination event, which, at the option of the banks, could result in termination of the facility. At September 30, 2002, the company was in compliance with all covenants. 29 CRITICAL ACCOUNTING POLICIES Critical accounting policies are those that are most important to the portrayal of the company's financial condition and results of operations. These policies require management's most difficult, subjective or complex judgments in the preparation of the financial statements and accompanying notes. Management makes estimates and assumptions about the effect of matters that are inherently uncertain, relating to the reporting of assets, liabilities, revenues, expenses and the disclosure of contingent assets and liabilities. The company's most critical accounting policies are discussed below. PENSIONS -- The company's pension obligations are measured as of June 30. The U.S. plans include a qualified and non-qualified pension plan. Non-U.S. includes plans primarily in the United Kingdom, Canada and Germany. The following are the assumptions used in the measurement of the projected benefit obligation (PBO) and net periodic pension expense:
2002 2001 ------------------- ------------------- U.S. NON-U.S. U.S. NON-U.S. ---- ------------ ---- ------------ Assumptions as of June 30 Discount rate..................... 7.25% 6.00 - 6.75% 7.50% 6.00 - 6.75% Assumed return on plan assets..... 8.50% 8.00 - 8.50% 9.50% 9.00% Rate of compensation increase..... 4.25% 2.50 - 3.50% 4.25% 2.50 - 4.00%
The discount rate is the rate that the PBO is discounted. The rate is determined based on high-quality fixed income investments that match the duration of expected benefit payments. The company has typically used the corporate AA/Aa bond rate for this assumption. The assumed return on plan assets noted above represents a forward projection of the average rate of earnings expected on the pension assets. This rate is used in the calculation of assumed rate of return on plan assets, a component of net periodic pension expense. As of June 30, 2002, the company has lowered the assumed rates of return on plan assets in the United States to 8.50 percent, in the United Kingdom to 8.00 percent and in Canada to 8.50 percent. These revised assumed rates of return will be used for fiscal 2003 net periodic pension expense. The rate of compensation increase represents the long-term assumption for expected increases to salaries for pay-related plans. Management expects to fund at least the minimum pension plan contributions required by government regulations for the various plans and anticipates that pension plan funding will be between $90 million and $100 million in fiscal 2003. RETIREE MEDICAL -- The company has retirement medical plans that cover the majority of its U.S. and certain non-U.S. employees and provide for medical payments to eligible employees and dependents upon retirement. The company's retiree medical obligations are measured as of June 30. The following are the assumptions used in the measurement of the accumulated projected benefit obligation (APBO):
2002 2001 ---- ----- Assumptions as of June 30 Discount rate.......................................... 7.25% 7.50% Health care cost trend rate (weighted average)......... 9.00% 11.00% Ultimate health care trend rate........................ 5.00% 5.00% Years to ultimate rate (2011).......................... 8 9
The discount rate is the rate that the accumulated projected benefit obligation is discounted and is determined similarly to the discount rate used for pensions. The health care cost trend rate represents the company's expected annual rates of change in the cost of health care benefits. The trend rate noted above represents a forward projection of health care costs as of the measurement date. The company's projection for fiscal 2003 is an increase in health care costs of 9.0 percent from fiscal 2002. For measurement purposes, the annual increase in health care costs was assumed to decrease gradually to 5.0 percent for fiscal 2011 and remain at that level thereafter. Retirement medical plan benefit payments are expected to be approximately $65 million in fiscal 2003, up from $60 million in fiscal 2002. 30 A one-percentage point change in the assumed health care cost trend rate for all years to, and including, the ultimate rate would have the following effects (in millions):
2002 2001 ---- ---- Effect on total of service and interest cost 1% Increase............................................ $ 4 $ 4 1% Decrease............................................ (4) (4) Effect on APBO 1% Increase............................................ 50 42 1% Decrease............................................ (46) (38)
WARRANTY -- Accruals for product warranty costs are recorded at the time of shipment of products to customers. Accruals for product recall campaigns are recorded at the time the company's obligation is known and can be reasonably estimated. Warranty reserves are based on several factors, including past claims experience, sales history, product manufacturing and engineering changes, industry developments and various other considerations. ASBESTOS -- There are three categories of reserves related to asbestos: unbilled committed settlements, pending claims, and shortfall and other. For purposes of establishing reserves for pending asbestos-related claims, Maremont (a subsidiary of the company) estimates its defense and indemnity costs based on the history and nature of filed claims to date and Maremont's experience since February 1, 2001. See Note 22 of the Notes to Consolidated Financial Statements for additional information concerning asbestos-related reserves and recoveries. All such estimates of liabilities for asbestos-related claims are subject to considerable uncertainty because such liabilities are influenced by variables that are difficult to predict. If the assumptions with respect to the nature of pending claims, the cost to resolve claims and the amount of available insurance prove to be incorrect, the actual amount of liability for asbestos-related claims, and the effect on the company, could differ materially from current estimates. Maremont records receivables from insurance companies for a substantial portion of the costs incurred defending against asbestos-related claims and any indemnity paid on those claims. Management believes that existing insurance coverage is adequate to cover substantially all costs relating to pending and future asbestos-related claims. ENVIRONMENTAL -- The company records liabilities for environmental issues in the accounting period in which its responsibility is established and the cost can be reasonably estimated. At environmental sites in which more than one potentially responsible party has been identified, the company records a liability for its allocable share of costs related to its involvement with the site, as well as an allocable share of costs related to insolvent parties or unidentified shares. At environmental sites in which the company is the only potentially responsible party, a liability is recorded for the total estimated costs of remediation before consideration of recovery from insurers or other third parties. The process of estimating environmental liabilities is complex and dependent on physical and scientific data at the site, uncertainties as to remedies and technologies to be used and the outcome of discussions with regulatory agencies. NEW ACCOUNTING PRONOUNCEMENTS Effective October 1, 2001, the company adopted SFAS 142, "Goodwill and Other Intangible Assets". Upon adoption, the company recorded an impairment loss on goodwill as a cumulative effect of accounting change of $42 million in the first quarter of fiscal 2002 (see Note 3 of the Notes to Consolidated Financial Statements). There were no other new accounting pronouncements adopted in fiscal 2002 that had a material impact on the company's business, financial condition or results of operations. In October 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 144 (SFAS 144), "Accounting for the Impairment or Disposal of Long-Lived Assets". The new standard requires one model of accounting for long-lived assets to be disposed of, and 31 broadens the definition of discontinued operations to include a component of a segment. The company adopted this standard effective October 1, 2002. The company does not expect the adoption of SFAS 144 to have a significant impact on its financial position or results of operations. In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", which nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in Restructuring)". The new standard requires a liability for a cost associated with an exit or disposal activity to be recognized and measured initially at its fair value in the period in which the liability is incurred, rather than at the time of commitment to an exit plan. The standard is effective for exit or disposal activities initiated after December 31, 2002. INTERNATIONAL OPERATIONS Approximately 40 percent of the company's total assets as of September 30, 2002, and 38 percent of fiscal 2002 sales were outside North America. Management believes that international operations have significantly benefited the financial performance of the company. However, the company's international operations are subject to a number of risks inherent in operating abroad. There can be no assurance that these risks will not have a material adverse impact on the company's ability to increase or maintain its foreign sales or on its financial condition or results of operations. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company is exposed to foreign currency exchange rate risk related to its transactions denominated in currencies other than the U.S. dollar and interest rate risk associated with the company's debt. The impact the euro and other currencies will have on the company's sales and operating income is difficult to predict in the upcoming year. The company uses foreign exchange contracts to offset the effect of exchange rate fluctuations on foreign currency denominated payables and receivables to help minimize the risk of loss from changes in exchange rates (see Note 16 of the Notes to Consolidated Financial Statements). The company also uses interest rate swaps to offset the effects on interest rate fluctuations on the fair value of its debt portfolio (see Note 15 of the Notes to Consolidated Financial Statements). It is the policy of the company not to enter into derivative instruments for speculative purposes, and therefore the company holds no derivative instruments for trading purposes. The company has performed a sensitivity analysis assuming a hypothetical 10-percent adverse movement in foreign currency exchange rates and interest rates applied to the underlying exposures described above. As of September 30, 2002, the analysis indicated that such market movements would not have a material effect on the company's business, financial condition or results of operations. Actual gains or losses in the future may differ significantly from that analysis, however, based on changes in the timing and amount of interest rate and foreign currency exchange rate movements and the company's actual exposures. 32 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareowners of ArvinMeritor, Inc. Troy, Michigan We have audited the accompanying consolidated balance sheets of ArvinMeritor, Inc. and subsidiaries (the "Company") as of September 30, 2002 and 2001, and the related consolidated statements of income, shareowners' equity, and cash flows for each of the three years in the fiscal year ended September 30, 2002. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, such consolidated financial statements present fairly, in all material respects, the financial position of ArvinMeritor, Inc. and subsidiaries at September 30, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the fiscal year ended September 30, 2002 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 3 to the consolidated financial statements, the Company changed its method of accounting for goodwill in fiscal 2002. DELOITTE & TOUCHE LLP November 6, 2002 (December 17, 2002 as to paragraph 2 of Note 26) Detroit, Michigan 33 ARVINMERITOR, INC. STATEMENT OF CONSOLIDATED INCOME (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED SEPTEMBER 30, --------------------------- 2002 2001 2000 ------- ------- ------- Sales....................................................... $ 6,882 $ 6,805 $ 5,153 Cost of sales............................................... (6,142) (6,106) (4,423) ------- ------- ------- GROSS MARGIN................................................ 740 699 730 Selling, general and administrative....................... (388) (396) (335) Goodwill amortization..................................... -- (24) (19) Restructuring costs....................................... (15) (67) (26) Gain on sale of business.................................. 6 -- 83 Other charges, net........................................ -- (17) (4) ------- ------- ------- OPERATING INCOME............................................ 343 195 429 Equity in earnings (losses) of affiliates................. (3) 4 29 Interest expense, net and other........................... (105) (136) (89) ------- ------- ------- INCOME BEFORE INCOME TAXES.................................. 235 63 369 Provision for income taxes................................ (75) (21) (141) Minority interests........................................ (11) (7) (10) ------- ------- ------- INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE........ 149 35 218 Cumulative effect of accounting change.................... (42) -- -- ------- ------- ------- NET INCOME.................................................. $ 107 $ 35 $ 218 ======= ======= ======= BASIC EARNINGS PER SHARE Before cumulative effect of accounting change............. $ 2.24 $ 0.53 $ 4.12 Cumulative effect of accounting change.................... (0.63) -- -- ------- ------- ------- Basic earnings per share.................................. $ 1.61 $ 0.53 $ 4.12 ======= ======= ======= DILUTED EARNINGS PER SHARE Before cumulative effect of accounting change............. $ 2.22 $ 0.53 $ 4.12 Cumulative effect of accounting change.................... (0.63) -- -- ------- ------- ------- Diluted earnings per share................................ $ 1.59 $ 0.53 $ 4.12 ======= ======= ======= Basic Average Common Shares Outstanding..................... 66.4 66.1 52.9 ======= ======= ======= Diluted Average Common Shares Outstanding................... 67.2 66.1 52.9 ======= ======= =======
See Notes to Consolidated Financial Statements 34 ARVINMERITOR, INC. CONSOLIDATED BALANCE SHEET (IN MILLIONS)
SEPTEMBER 30, --------------- 2002 2001 ------ ------ ASSETS CURRENT ASSETS Cash and cash equivalents................................. $ 56 $ 101 Receivables (less allowance for doubtful accounts: 2002, $18; 2001, $18)........................................ 1,251 965 Inventories............................................... 458 457 Other current assets...................................... 211 232 ------ ------ TOTAL CURRENT ASSETS.............................. 1,976 1,755 ------ ------ NET PROPERTY................................................ 1,179 1,200 NET GOODWILL................................................ 808 835 OTHER ASSETS................................................ 688 572 ------ ------ TOTAL ASSETS...................................... $4,651 $4,362 ====== ====== LIABILITIES AND SHAREOWNERS' EQUITY CURRENT LIABILITIES Short-term debt........................................... $ 15 $ 94 Accounts payable.......................................... 1,150 1,054 Accrued compensation and benefits......................... 283 184 Accrued income taxes...................................... 65 26 Other current liabilities................................. 230 314 ------ ------ TOTAL CURRENT LIABILITIES......................... 1,743 1,672 ------ ------ LONG-TERM DEBT.............................................. 1,435 1,313 ACCRUED RETIREMENT BENEFITS................................. 512 459 OTHER LIABILITIES........................................... 123 141 MINORITY INTERESTS.......................................... 58 69 PREFERRED CAPITAL SECURITIES................................ 39 57 SHAREOWNERS' EQUITY Common stock (2002, 71.0 shares issued and 67.9 outstanding; 2001, 71.0 shares issued and 66.5 outstanding)........................................... 71 71 Additional paid-in capital................................ 554 547 Retained earnings......................................... 530 450 Treasury stock (2002, 3.1 shares; 2001, 4.5 shares)....... (46) (69) Unearned compensation..................................... (12) (12) Accumulated other comprehensive loss...................... (356) (336) ------ ------ TOTAL SHAREOWNERS' EQUITY......................... 741 651 ------ ------ TOTAL LIABILITIES AND SHAREOWNERS' EQUITY......... $4,651 $4,362 ====== ======
See Notes to Consolidated Financial Statements 35 ARVINMERITOR, INC. STATEMENT OF CONSOLIDATED CASH FLOWS (IN MILLIONS)
YEAR ENDED SEPTEMBER 30, ------------------------ 2002 2001 2000 ------ ------ ------ OPERATING ACTIVITIES Income before cumulative effect of accounting change...... $ 149 $ 35 $ 218 Adjustments to income to arrive at cash provided by operating activities: Depreciation and other amortization.................... 196 193 143 Goodwill amortization.................................. -- 24 19 Gain on sale of business............................... (6) -- (83) Restructuring costs, net of expenditures............... 5 51 19 Deferred income taxes.................................. (33) (57) 32 Pension and retiree medical expense.................... 78 62 58 Pension and retiree medical contributions.............. (136) (97) (89) Changes in assets and liabilities, excluding effects of acquisitions, divestitures and foreign currency adjustments: Changes in receivable securitization................. (106) 211 -- Receivables.......................................... (144) 87 15 Inventories.......................................... (1) 107 (10) Accounts payable..................................... 63 3 (28) Changes in other working capital..................... 40 (14) (66) Other assets and liabilities......................... 79 -- -- ----- ----- ----- CASH PROVIDED BY OPERATING ACTIVITIES....................... 184 605 228 ----- ----- ----- INVESTING ACTIVITIES Capital expenditures...................................... (184) (206) (225) Acquisitions of businesses and investments, net of cash acquired............................................... (25) (34) (74) Payment of certain merger-related assumed liabilities..... -- -- (49) Proceeds from disposition of property and businesses...... 11 30 148 ----- ----- ----- CASH USED FOR INVESTING ACTIVITIES.......................... (198) (210) (200) ----- ----- ----- FINANCING ACTIVITIES Net increase (decrease) in revolving and other debt....... (600) (178) 245 Payment of notes.......................................... -- (125) -- Proceeds from issuance of notes........................... 591 -- -- Purchase of preferred capital securities.................. (18) (17) -- ----- ----- ----- Net increase (decrease) in debt............................. (27) (320) 245 Cash dividends............................................ (27) (51) (35) Purchase of treasury stock................................ -- (31) (172) Proceeds from exercise of stock options................... 22 -- -- ----- ----- ----- CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES............ (32) (402) 38 ----- ----- ----- EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... 1 (8) (18) CHANGE IN CASH.............................................. (45) (15) 48 CASH AT BEGINNING OF YEAR................................... 101 116 68 ----- ----- ----- CASH AT END OF YEAR......................................... $ 56 $ 101 $ 116 ===== ===== =====
See Notes to Consolidated Financial Statements 36 ARVINMERITOR, INC. STATEMENT OF CONSOLIDATED SHAREOWNERS' EQUITY (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED SEPTEMBER 30, ------------------------------ 2002 2001 2000 -------- -------- -------- COMMON STOCK Beginning balance......................................... $ 71 $ 71 $ 69 Shares issued to Arvin shareowners........................ -- -- 24 Conversion of outstanding Meritor shares.................. -- -- (15) Cancellation of Meritor treasury stock.................... -- -- (7) ----- ----- ----- Ending balance............................................ 71 71 71 ----- ----- ----- ADDITIONAL PAID-IN CAPITAL Beginning balance......................................... 547 546 158 Shares issued to Arvin shareowners and Arvin stock options converted.............................................. -- -- 492 Conversion of outstanding Meritor shares.................. -- -- 15 Cancellation of Meritor treasury stock.................... -- -- (119) Exercise of stock options................................. 4 -- -- Issuance of restricted stock and other.................... 3 1 -- ----- ----- ----- Ending balance............................................ 554 547 546 ----- ----- ----- RETAINED EARNINGS Beginning balance......................................... 450 466 283 Net income................................................ 107 35 218 Cash dividends (per share: 2002, $0.40; 2001, $0.76; 2000, $0.64)................................................. (27) (51) (35) ----- ----- ----- Ending balance............................................ 530 450 466 ----- ----- ----- TREASURY STOCK Beginning balance......................................... (69) (53) (6) Cancellation of Meritor treasury stock.................... -- -- 125 Purchase of treasury stock................................ -- (31) (172) Exercise of stock options................................. 18 -- -- Issuance of restricted stock.............................. 5 15 -- ----- ----- ----- Ending balance............................................ (46) (69) (53) ----- ----- ----- UNEARNED COMPENSATION Beginning balance......................................... (12) -- -- Issuance of restricted stock.............................. (6) (16) -- Compensation expense...................................... 6 4 -- ----- ----- ----- Ending balance............................................ (12) (12) -- ----- ----- ----- ACCUMULATED OTHER COMPREHENSIVE LOSS Beginning balance......................................... (336) (237) (156) Foreign currency translation adjustments.................. 46 (53) (81) Minimum pension liability, net of tax..................... (66) (46) -- ----- ----- ----- Ending balance............................................ (356) (336) (237) ----- ----- ----- TOTAL SHAREOWNERS' EQUITY......................... $ 741 $ 651 $ 793 ===== ===== ===== COMPREHENSIVE INCOME (LOSS) Net income................................................ $ 107 $ 35 $ 218 Foreign currency translation adjustments.................. 46 (53) (81) Minimum pension liability, net of tax..................... (66) (46) -- ----- ----- ----- TOTAL COMPREHENSIVE INCOME (LOSS)................. $ 87 $ (64) $ 137 ===== ===== =====
See Notes to Consolidated Financial Statements 37 ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION ArvinMeritor, Inc. (the company or ArvinMeritor) is a leading global supplier of a broad range of integrated systems, modules and components serving light vehicle, commercial truck, trailer and specialty original equipment manufacturers and certain aftermarkets. The company also provides coil coating applications to the transportation, appliance, construction and furniture industries. On July 7, 2000, Meritor Automotive, Inc. (Meritor) and Arvin Industries, Inc. (Arvin) merged into ArvinMeritor (see Note 4). The merger was accounted for utilizing the purchase method of accounting. The financial information for the period prior to July 7, 2000, reflects the results of Meritor and its consolidated subsidiaries. The information for periods after July 7, 2000, represents the results of ArvinMeritor and its consolidated subsidiaries. The company's fiscal quarters end on the Sundays nearest December 31, March 31, and June 30 and its fiscal year ends on the Sunday nearest September 30. Fiscal 2002 ended on September 29, 2002. All year and quarter references relate to the company's fiscal year and fiscal quarters unless otherwise stated. Certain prior year amounts have been reclassified to conform to current year presentation. 2. SIGNIFICANT ACCOUNTING POLICIES Use of Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States (U.S.) requires the use of estimates and assumptions related to the reporting of assets, liabilities, revenues, expenses and the disclosure of contingent assets and liabilities. Significant estimates and assumptions were used to value accrued product warranties (see Note 13), retiree medical and pension obligations (see Notes 19 and 20), income taxes (see Note 21), and contingencies including asbestos and environmental matters (see Note 22). Consolidation and Joint Ventures The consolidated financial statements include the accounts of the company and those majority-owned subsidiaries in which the company has control. All significant intercompany accounts and transactions are eliminated in consolidation. The accounts and results of operations of controlled subsidiaries where ownership is greater than 50 percent, but less than 100 percent, are included in the consolidated results and are offset by a related minority interest expense and liability recorded for the minority interest ownership. Investments in affiliates that are not controlled or majority-owned are reported using the equity method of accounting (see Note 12). Foreign Currency Local currencies are generally considered the functional currencies outside the U.S. For operations reporting in local currencies, assets and liabilities are translated at year-end exchange rates with cumulative currency translation adjustments included as a component of Accumulated Other Comprehensive Loss. Income and expense items are translated at average rates of exchange during the year. Impairment of Long-Lived Assets including Goodwill Management periodically reviews long-lived assets, including goodwill and other intangible assets, for potential impairment. Goodwill is reviewed annually, or more frequently if certain indicators arise, by using discounted cash flows and market multiples to determine fair value (see Note 3). Fair value of all other long-lived assets is determined based on useful lives, cash flows and profitability projections. An impairment loss would be recognized if the review indicates that the carrying value of the asset exceeds the fair value. 38 ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Revenue Recognition Revenues are recognized upon shipment of product and transfer of ownership to the customer. Provisions for customer sales allowances and incentives are made at the time of product shipment. Earnings per Share Basic earnings per share are based upon the weighted average number of shares outstanding during each year. Diluted earnings per share assumes the exercise of common stock options and the impact of restricted stock when dilutive. A reconciliation of basic average common shares outstanding to diluted average common shares outstanding is as follows (in millions):
SEPTEMBER 30, ------------------ 2002 2001 2000 ---- ---- ---- Basic average common shares outstanding.................. 66.4 66.1 52.9 Impact of restricted stock............................... 0.4 -- -- Impact of stock options.................................. 0.4 -- -- ---- ---- ---- Diluted average common shares outstanding................ 67.2 66.1 52.9 ==== ==== ====
Other Information relative to other accounting policies is included in the related notes, specifically, inventories (see Note 9), customer reimbursable tooling and engineering (see Note 10), property and depreciation (see Note 11), capitalized software (see Note 12), financial instruments (see Note 16) and stock options (see Note 18). New Accounting Standards In October 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 144 (SFAS 144), "Accounting for the Impairment or Disposal of Long-Lived Assets". The new standard requires one model of accounting for long-lived assets to be disposed of, and broadens the definition of discontinued operations to include a component of a segment. The company adopted this standard effective October 1, 2002. The company does not expect the adoption of SFAS 144 to have a significant impact on its financial position or results of operations. In June 2002, the FASB issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", which nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in Restructuring)". The new standard requires a liability for a cost associated with an exit or disposal activity to be recognized and measured initially at its fair value in the period in which the liability is incurred, rather than at the time of commitment to an exit plan. The standard is effective for exit or disposal activities initiated after December 31, 2002. 3. GOODWILL IMPAIRMENT Effective October 1, 2001, the company adopted Statement of Financial Accounting Standards No. 142 (SFAS 142), "Goodwill and Other Intangible Assets", which requires goodwill to be subject to an annual impairment test, or more frequently if certain indicators arise, and also eliminates goodwill amortization. Prior to the adoption of SFAS 142, goodwill was amortized using the straight-line method for periods not to exceed 39 ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 40 years. As required by this standard, the company reviews the fair values of each of its reporting units using discounted cash flows and market multiples. Upon adoption of SFAS 142, the company recorded an impairment loss on goodwill as a cumulative effect of accounting change for its coil coating operations (classified as "Other" for segment reporting) of $42 million ($42 million after-tax, or $0.63 per diluted share) in the first quarter of fiscal 2002. Increased competition, consolidation in the coil coating applications industry and the struggling U.S. steel market caused a decrease in the fair value of this business. There have been no changes in the carrying value of goodwill since September 30, 2001, other than the impairment loss on goodwill for the coil coating operations and fluctuations due to changes in foreign currency exchange rates. Income before cumulative effect of accounting change and basic and diluted earnings per share before cumulative effect of accounting change would have been as follows had the company been accounting for goodwill under SFAS 142 for fiscal 2001 and 2000 (in millions, except per share amounts):
2002 2001 2000 ----- ----- ----- Reported income before cumulative effect of accounting change.............................................. $ 149 $ 35 $ 218 Add back goodwill amortization expense, net of tax.... -- 20 16 ----- ----- ----- Adjusted income before cumulative effect of accounting change.............................................. $ 149 $ 55 $ 234 ===== ===== ===== Reported basic earnings per share before cumulative effect of accounting change......................... $2.24 $0.53 $4.12 Add back goodwill amortization expense, net of tax.... -- 0.30 0.30 ----- ----- ----- Adjusted basic earnings per share before cumulative effect of accounting change......................... $2.24 $0.83 $4.42 ===== ===== ===== Reported diluted earnings per share before cumulative effect of accounting change......................... $2.22 $0.53 $4.12 Add back goodwill amortization expense, net of tax.... -- 0.30 0.30 ----- ----- ----- Adjusted diluted earnings per share before cumulative effect of accounting change......................... $2.22 $0.83 $4.42 ===== ===== =====
Information regarding other intangible assets, which includes trademarks, patents and licenses, is included in Note 12, and goodwill by segment is included in Note 23. 4. ARVINMERITOR MERGER On July 7, 2000, Meritor and Arvin merged to form ArvinMeritor. Under the terms of the merger agreement, each share of Meritor common stock was converted into the right to receive 0.75 share of common stock of ArvinMeritor, and each share of Arvin common stock was converted into the right to receive one share of common stock of ArvinMeritor plus $2.00 in cash. In total, approximately 62.3 million shares of Meritor, 24.3 million shares of Arvin and $48.5 million in cash were exchanged for approximately 71.0 million shares of ArvinMeritor. All share and per share data for periods prior to the merger have been restated to conform with the exchange of Meritor shares to ArvinMeritor shares on a one to 0.75 basis in connection with the merger with Arvin. The merger was accounted for utilizing the purchase method of accounting. Accordingly, the results of operations of Arvin are included with those of the company for the period subsequent to the date of the merger. Pro forma sales, net income and basic and diluted earnings per share for the fiscal year ended September 30, 2000, would have been $7,722 million, $287 million and $4.02 per share, respectively, and exclude a non-recurring charge of $70 million ($58 million after-tax or $0.81 per basic and diluted share) for 40 ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) merger-related expenses. The pro forma adjustments are based upon available information and certain assumptions that management believes are reasonable. The pro forma data is not necessarily indicative of the results of operations of ArvinMeritor that would have been achieved if the merger had in fact occurred on such dates. The pro forma data does not give effect to any restructuring costs or to cost savings or other synergies that have resulted from the merger. 5. RESTRUCTURING COSTS In the first-quarter of fiscal 2002, the company recorded a restructuring charge of $15 million ($10 million after-tax, or $0.15 per basic and diluted share) for severance and other employee costs related to a net reduction of approximately 450 employees. All employees have been terminated under this restructuring action, and $5 million of restructuring reserves relating to severance payments remained in the consolidated balance sheet at September 30, 2002. During fiscal 2001, the company recorded a net restructuring charge of $67 million ($45 million after-tax, or $0.68 per basic and diluted share). The restructuring charge was net of approximately $4 million of restructuring reserves established in fiscal 2000 that were reversed due to a change in circumstances and $12 million of restructuring reserves established in fiscal 2001 that were reversed primarily due to actions taken to minimize severance costs related to cost-reduction programs in Europe. The fiscal 2001 net charges include severance and other employee costs of approximately $48 million related to a net reduction of approximately 1,350 employees, with the balance primarily associated with facility related costs from the rationalization of operations. All employees have been terminated under this restructuring action, and $2 million of restructuring reserves relating to severance payments remained in the consolidated balance sheet at September 30, 2002. In fiscal 2001, the company also recorded approximately $34 million of restructuring costs that were incurred as a result of the ArvinMeritor merger and were reflected in the purchase price allocation. These costs include approximately $17 million related to a net reduction of approximately 1,200 employees, with the balance primarily associated with facility related costs from the rationalization of operations. All employees have been terminated under this restructuring action, and $2 million of restructuring reserves relating to severance payments remained in the consolidated balance sheet at September 30, 2002. 41 ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of restructuring charges and merger-related restructuring reserves as of September 30, 2002 is as follows (in millions):
EMPLOYEE TERMINATION ASSET BENEFITS IMPAIRMENT OTHER TOTAL ----------- ---------- ----- ----- Fiscal 2001 original charge............. $ 60 $ 19 $ 4 $ 83 Reversal of charge in 2001.............. (12) -- -- (12) Write-down of assets.................... -- (19) -- (19) Cash payments through 9/30/02........... (46) -- (4) (50) ---- ---- --- ---- Subtotal...................... 2 -- -- 2 ---- ---- --- ---- Fiscal 2001 merger-related reserves..... 17 17 -- 34 Cash payments through 9/30/02........... (15) -- -- (15) Write-down of assets.................... -- (17) -- (17) ---- ---- --- ---- Subtotal...................... 2 -- -- 2 ---- ---- --- ---- Fiscal 2002 charge...................... 15 -- -- 15 Cash payments through 9/30/02........... (10) -- -- (10) ---- ---- --- ---- Subtotal...................... 5 -- -- 5 ---- ---- --- ---- Reserve balance at 9/30/02.............. $ 9 $ -- $-- $ 9 ==== ==== === ====
6. SALE OF BUSINESSES In the third quarter of fiscal 2002, the company completed the sale of its exhaust accessories manufacturing operations for approximately $11 million in cash, resulting in a one-time gain of $6 million ($4 million after-tax, or $0.06 per basic and diluted share). In the first quarter of fiscal 2000, the company completed the sale of its Light Vehicle Systems (LVS) seat adjusting systems business for approximately $135 million in cash, resulting in a one-time gain of $83 million ($51 million after-tax, or $0.96 per basic and diluted share). 7. OTHER CHARGES, NET During fiscal 2001, the company recorded $12 million ($8 million after-tax, or $0.12 per basic and diluted share) for an employee separation agreement and $5 million ($3 million after-tax, or $0.05 per basic and diluted share) for environmental liability costs. During fiscal 2000, the company incurred $10 million in merger expenses ($6 million after-tax, or $0.11 per basic and diluted share) related to the ArvinMeritor merger (see Note 4), and recorded a gain on sale of land of $6 million ($3 million after-tax, or $0.05 per basic and diluted share). 8. ASSET SECURITIZATION The company sells substantially all of the trade receivables of certain subsidiaries to ArvinMeritor Receivables Corporation (ARC), a wholly owned special purpose subsidiary. ARC has entered into an agreement to sell an undivided interest in up to $250 million of eligible receivables, as defined, to certain bank conduits that fund their purchases through the issuance of commercial paper. As of September 30, 2002 and 2001, $105 million and $211 million, respectively, of trade receivables had been sold and are excluded from receivables in the consolidated balance sheet. The company has no retained interest in the receivables sold, but does perform collection and administrative functions. The receivables were sold at fair market value and a discount on the sale was recorded in interest expense, net and other. A discount of $6 million and $3 million 42 ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) was recorded in the fiscal years ended September 30, 2002 and 2001, respectively. As of September 30, 2002 and 2001, the banks had a preferential interest in approximately $201 million and $202 million, respectively, of the remainder of the receivables held at ARC to secure the obligation under the asset securitization facility. The gross amount of proceeds received from the sale of receivables under this program was approximately $2,400 million and $700 million for fiscal 2002 and 2001, respectively. The accounts receivable securitization program matures in September 2003. If the company's credit ratings are reduced to certain levels, or if certain receivables performance-based covenants are not met, it would constitute a termination event, which, at the option of the banks, could result in termination of the facility. At September 30, 2002 the company was in compliance with all covenants. 9. INVENTORIES Inventories are stated at the lower of cost (using LIFO, FIFO or average methods) or market (determined on the basis of estimated realizable values) and are summarized as follows (in millions):
SEPTEMBER 30, ------------- 2002 2001 ----- ----- Finished goods.............................................. $207 $238 Work in process............................................. 131 118 Raw materials, parts and supplies........................... 171 152 ---- ---- Total............................................. 509 508 Less allowance to adjust the carrying value of certain inventories (2002, $78; 2001, $69) to a LIFO basis........ (51) (51) ---- ---- Inventories....................................... $458 $457 ==== ====
10. OTHER CURRENT ASSETS Other Current Assets are summarized as follows (in millions):
SEPTEMBER 30, ------------- 2002 2001 ----- ----- Current deferred income taxes (see Note 21)................. $116 $138 Customer reimbursable tooling and engineering............... 33 30 Asbestos-related recoveries (see Note 22)................... 20 24 Prepaid and other........................................... 42 40 ---- ---- Other Current Assets........................................ $211 $232 ==== ====
Costs incurred for engineering and tooling projects, principally for light vehicle products, for which customer reimbursement is contractually guaranteed are classified as Other Current Assets. These costs are billed to the customer and recorded as a receivable upon completion of the engineering or tooling project. Provisions for losses are provided at the time management expects costs to exceed anticipated customer reimbursement. 11. NET PROPERTY Property is stated at cost. Depreciation of property is based on estimated useful lives, generally using the straight-line method. Significant renewals and betterments are capitalized, and replaced units are written off. Maintenance and repairs, as well as renewals of minor amounts, are charged to expense. Company-owned 43 ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) tooling is classified as property and depreciated over the shorter of its expected life or the life of the related vehicle platform. Net Property is summarized as follows (in millions):
SEPTEMBER 30, ----------------- 2002 2001 ------- ------- Property at cost: Land and land improvements.............................. $ 57 $ 55 Buildings............................................... 441 416 Machinery and equipment................................. 1,677 1,596 Company-owned tooling................................... 212 206 Construction in progress................................ 103 131 ------- ------- Total..................................................... 2,490 2,404 Less accumulated depreciation............................. (1,311) (1,204) ------- ------- Net Property.............................................. $ 1,179 $ 1,200 ======= =======
12. OTHER ASSETS Other Assets are summarized as follows (in millions):
SEPTEMBER 30, ---------------- 2002 2001 ---- ---- Long-term deferred income taxes (see Note 21)............. $187 $119 Investments in affiliates................................. 167 186 Prepaid pension costs (see Note 20)....................... 98 87 Fair value of interest rate swaps (see Note 16)........... 48 -- Net capitalized software costs............................ 44 42 Asbestos-related recoveries (see Note 22)................. 39 36 Trademarks................................................ 23 23 Patents and licenses (less accumulated amortization: September 30, 2002, $5 and September 30, 2001, $3)...... 11 13 Other..................................................... 71 66 ---- ---- Other Assets.............................................. $688 $572 ==== ====
At September 30, 2002 and 2001, the company had investments in 12 and 14 joint ventures, respectively, which were accounted for using the equity method of accounting, as they were not controlled or majority-owned. Costs relating to internally developed or purchased software are capitalized and amortized utilizing the straight-line basis over periods not to exceed seven years. The company's trademarks, which were determined to have an indefinite life, are not amortized, and patents and licenses are amortized over their contractual lives. The company anticipates amortization expense for patents and licenses of approximately $2 million per year for fiscal 2003 and 2004 and approximately $1 million per year for fiscal 2005 through 2007. 44 ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. OTHER CURRENT LIABILITIES Other Current Liabilities are summarized as follows (in millions):
SEPTEMBER 30, ------------- 2002 2001 ----- ----- Accrued product warranties.................................. $ 89 $ 94 Accrued taxes other than income taxes....................... 37 48 Asbestos-related reserves (see Note 22)..................... 20 24 Accrued interest expense.................................... 12 6 Accrued restructuring (see Note 5).......................... 9 46 Environmental reserves (see Note 22)........................ 8 18 Other....................................................... 55 78 ---- ---- Other Current Liabilities................................... $230 $314 ==== ====
Accruals for product warranty costs are recorded at the time of shipment of products to customers. Accruals for product recall campaigns are recorded at the time the company's obligation is known and can be reasonably estimated. Warranty reserves are based on several factors including past claims experience, sales history, product manufacturing and engineering changes, industry developments and various other considerations. As of September 30, 2002, accrued product warranties included a liability related to a recall campaign associated with TRW model 20-EDL tie rod ends (see Note 22). 14. OTHER LIABILITIES Other Liabilities are summarized as follows (in millions):
SEPTEMBER 30, ------------- 2002 2001 ----- ----- Asbestos-related reserves (see Note 22)..................... $ 46 $ 47 Environmental reserves (see Note 22)........................ 26 25 Deferred payments........................................... 4 29 Other....................................................... 47 40 ---- ---- Other Liabilities........................................... $123 $141 ==== ====
45 ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 15. LONG-TERM DEBT Long-Term Debt, net of discount where applicable, is summarized as follows (in millions):
SEPTEMBER 30, --------------- 2002 2001 ------ ------ 6 5/8 percent notes due 2007................................ $ 199 $ -- 6 3/4 percent notes due 2008................................ 100 100 7 1/8 percent notes due 2009................................ 150 150 6.8 percent notes due 2009.................................. 499 498 8 3/4 percent notes due 2012................................ 400 -- Bank revolving credit facilities............................ 27 495 Lines of credit and other................................... 27 164 Fair value adjustment of notes.............................. 48 -- ------ ------ Subtotal.................................................. 1,450 1,407 Less current maturities..................................... (15) (94) ------ ------ Long-Term Debt.............................................. $1,435 $1,313 ====== ======
Credit Facilities and Lines of Credit The company has two unsecured credit facilities, which mature on June 27, 2005: a three-year, $400-million revolving credit facility and a five-year, $750-million revolving credit facility. Borrowings are subject to interest based on quoted LIBOR rates plus a margin, and a facility fee, both of which are based upon the company's credit rating. At September 30, 2002, the margin over the LIBOR rate was 105 basis points, and the facility fee was 20 basis points. The company also has a $50-million uncommitted line of credit. Included in lines of credit and other at September 30, 2001 are approximately $50 million of borrowings from a non-consolidated affiliate. There were no borrowings from related parties at September 30, 2002. Debt Securities On April 12, 2001, the company filed a shelf registration statement with the Securities and Exchange Commission registering $750 million aggregate principal amount of debt securities that may be offered in one or more series on terms to be determined at the time of sale. On February 26, 2002, the company completed a public offering of debt securities under the shelf registration consisting of $400 million 10-year fixed-rate 8 3/4 percent notes due March 1, 2012. The notes were offered to the public at 100 percent of their principal amount. On July 1, 2002, the company completed a second public offering of debt securities under the shelf registration consisting of $200 million 5-year fixed-rate 6 5/8 percent notes due June 15, 2007. The notes were offered to the public at 99.684 percent of their principal amount. The proceeds of both offerings, net of underwriting discounts and commissions, were used to repay outstanding indebtedness under the revolving credit facilities and for general corporate purposes. Capital Securities Included in the Consolidated Balance Sheet as of September 30, 2002 and 2001, are $39 million and $57 million, respectively, of 9.5 percent company-obligated mandatorily redeemable preferred capital securities (capital securities), issued by a wholly owned subsidiary trust of ArvinMeritor, due February 1, 2027, and callable in February 2007. The company fully and unconditionally guarantees the subsidiary trust's obligation under the capital securities. 46 ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Interest Rate Swap Agreements The company entered into two interest rate swap agreements in March 2002. These swap agreements, in effect, converted $300 million notional amount of the 8 3/4 percent notes and $100 million notional amount of the 6.8 percent notes to variable interest rates. The fair value of the swaps was $48 million as of September 30, 2002, and is recorded in other assets, with an offsetting amount recorded in long-term debt. The swaps have been designated as fair value hedges and the impact of the changes in their fair values is offset by an equal and opposite change in the carrying value of the related notes. Under the terms of the swap agreements, the company receives a fixed rate of interest of 8.75 percent and 6.8 percent on notional amounts of $300 million and $100 million, respectively, and pays variable rates based on 3-month LIBOR plus a weighted-average spread of 2.51 percent. The payments under the agreements coincide with the interest payment dates on the hedged debt instruments, and the difference between the amounts paid and received is included in interest expense, net and other. Leases The company has entered into agreements to lease certain assets. These assets are held by special purpose entities (SPEs), which were established and are owned by independent third parties. These leases are accounted for as operating leases, and the lease payments are charged to operating income. Under current accounting principles generally accepted in the U.S., the assets and the related obligations are excluded from the consolidated balance sheet, and the SPEs are not consolidated. During fiscal 2002, the company purchased certain assets for $35 million that were previously leased under one of these arrangements. At September 30, 2002 and 2001, the original cost of the assets under such arrangements was $120 million and $131 million, respectively. Future minimum lease payments under these and other operating leases are $26 million in 2003, $22 million in 2004, $21 million in 2005, $20 million in 2006, $18 million in 2007 and $46 million thereafter. These amounts reflect the future minimum lease payments under the existing agreements, discussed above. Covenants The credit facilities require the company to maintain a total net debt to earnings before interest, taxes depreciation and amortization (EBITDA) ratio of 3.25x and a minimum fixed charge coverage ratio (EBITDA less capital expenditures to interest expense) of 1.50x. In addition, certain operating leases require the company to maintain financial ratios that are similar to those required under the company's credit facilities. At September 30, 2002, the company was in compliance with all covenants. 16. FINANCIAL INSTRUMENTS The company's financial instruments include cash and cash equivalents, short-term debt, long-term debt, preferred capital securities, interest rate swaps, and foreign exchange contracts. The company uses derivatives for hedging and non-trading purposes in order to manage its interest rate and foreign exchange rate exposures. The company's interest rate swap agreements are discussed in Note 15. Foreign Exchange Contracts The company uses foreign exchange contracts to offset the effect of exchange rate fluctuations on foreign currency denominated payables and receivables. These contracts help minimize the risk of loss from changes in exchange rates and are generally of short duration (less than three months). The company has elected not to designate the foreign exchange contracts as hedges, therefore, changes in the fair value of the foreign exchange contracts are recognized in operating income. The net income impact of recording these contracts at fair value in fiscal 2002 and 2001 did not have a significant effect on the company's results of operations. As of 47 ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) September 30, 2002 and 2001, the fair value of foreign exchange contracts was not material. It is the policy of the company not to enter into derivative instruments for speculative purposes. Fair Value Fair values of financial instruments are summarized as follows (in millions):
SEPTEMBER 30, --------------------------------------------------------- 2002 2001 --------------------------- --------------------------- CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE -------------- ---------- -------------- ---------- Cash and cash equivalents............ $ 56 $ 56 $ 101 $ 101 Short-term debt...................... 15 15 94 94 Long-term debt....................... 1,435 1,433 1,313 1,310 Preferred capital securities......... 39 40 57 41 Interest rate swaps -- asset......... 48 48 -- --
Cash and cash equivalents -- All highly liquid investments purchased with maturity of three months or less are considered to be cash equivalents. The carrying value approximates fair value because of the short maturity of these instruments. Short-term debt -- The carrying value of short-term debt approximates fair value because of the short maturity of these borrowings. Long-term debt and preferred capital securities -- Fair values are based on the company's current incremental borrowing rate for similar types of borrowing arrangements. Interest rate swaps -- Fair values are estimated by obtaining quotes from external sources. 17. CAPITAL STOCK Common Stock The company is authorized to issue 500 million shares of Common Stock, with a par value of $1 per share, and 30 million shares of Preferred Stock, without par value, of which two million shares are designated as Series A Junior Participating Preferred Stock (Junior Preferred Stock). Under the Company Rights Plan, a Preferred Share Purchase Right (Right) is attached to each share of Common Stock pursuant to which the holder may, in certain takeover-related circumstances, become entitled to purchase from the company 1/100th of a share of Junior Preferred Stock at a price of $100, subject to adjustment. Also, in certain takeover-related circumstances, each Right (other than those held by an acquiring person) will be exercisable for shares of Common Stock or stock of the acquiring person having a market value of twice the exercise price. In certain events, the company may exchange each Right for one share of Common Stock or 1/100th of a share of Junior Preferred Stock. The Rights will expire on July 7, 2010, unless earlier exchanged or redeemed at a redemption price of $0.01 per Right. Until a Right is exercised, the holder, as such, will have no voting, dividend or other rights as a shareowner of the company. The company has reserved approximately 15.6 million shares of Common Stock in connection with its Long-Term Incentives Plan (the LTIP), Directors Stock Plan, Incentive Compensation Plan, 1998 and 1988 Stock Benefit Plans, and Employee Stock Benefit Plan for grants of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock and stock awards to key employees and directors. At September 30, 2002, there were 5.9 million shares available for future grants under these plans. 48 ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Restricted Stock Restricted stock grants to officers and other employees are summarized as follows:
GRANT NUMBER OF DATE TOTAL RECOGNITION GRANT DATE: PRICE SHARES VESTED COMPENSATION PERIOD - ----------- ------- --------- --------- ------------ ----------- January 2002(1)....................... $19.640 291,000 Jan. 2005 $ 6 million 3 years July 2001(2).......................... $18.850 681,832 July 2006 $13 million 3 years January 2001(1)....................... $11.375 296,900 Jan. 2004 $ 3 million 3 years
- --------------- (1) In January 2002 and 2001, the company granted shares of restricted stock to certain employees in accordance with the LTIP and the Employee Stock Benefit Plan. The restricted shares are subject to continued employment by the employee and vest after three years. (2) In June 2001, the company commenced an offer to exchange certain outstanding stock options for restricted shares of the company's Common Stock. All outstanding stock options issued under the LTIP, the Employee Stock Benefit Plan, the 1998 and the 1988 Stock Benefit Plans (together, "the plans") that were held by active employees and had an exercise price of $22.25 or more per share (except options that expired in June 2001) were eligible for exchange. The exchange rate was based on a percentage of the present value of the options and the market price of the Common Stock on May 25, 2001 of $15.31 per share. In July 2001, 2,810,471 eligible options were cancelled and restricted shares of Common Stock were issued under the plans in exchange for those options. The restricted stock will vest in July 2006, if the holder remains an active employee through that period, or earlier if certain performance measures are achieved. Total compensation related to the exchange is being expensed over a three-year recognition period assuming that the performance measures will be met. During fiscal 2001, certain restricted stock issued with this exchange vested early, resulting in the recognition of compensation expense of $2 million. Since the grant of restricted stock relates to future service, the total compensation expense is recorded as unearned compensation and is shown as a separate reduction of shareowners' equity. The unearned compensation is then expensed over the recognition period. The company has granted the restricted stock from treasury shares, and cash dividends on the restricted stock are reinvested in additional shares of Common Stock during the period. Total compensation expense recognized for restricted stock was $6 million and $4 million for fiscal 2002 and 2001, respectively. Treasury Stock In July 2000, the board of directors authorized a program to repurchase up to $100 million of the company's Common Stock. This program was terminated in November 2001. Prior to the termination, 5.4 million shares of ArvinMeritor Common Stock were purchased at an aggregate cost of approximately $84 million, or an average of $15.39 per share. During fiscal 2002, approximately 1.5 million shares of treasury stock were issued in connection with the exercise of stock options and issuance of restricted stock under the company's incentive plans. 18. STOCK OPTIONS Under the company's incentive plans, stock options are granted at prices equal to the fair value on the date of grant and have a maximum term of 10 years. Vesting periods are generally three years from the date of grant. 49 ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Information relative to stock options is as follows (shares in thousands, exercise price represents a weighted average):
2002 2001 2000(1) ----------------- ----------------- ----------------- EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ------ -------- ------ -------- ------ -------- Outstanding -- beginning of year................. 4,692 $23.00 6,395 $28.04 2,724 $29.49 Granted................... 1,553 19.93 1,573 15.06 729 22.09 Exercised................. (1,172) 18.35 (2) 19.31 -- -- Conversion of Arvin options(2).............. -- -- -- -- 3,118 28.10 Conversion to restricted stock(3)................ -- -- (2,810) 29.98 -- -- Cancelled or expired...... (183) 22.57 (464) 24.82 (176) 26.96 ------ ------ ----- Outstanding -- end of year.................... 4,890 23.16 4,692 23.00 6,395 28.04 ====== ====== ===== Exercisable -- end of year.................... 2,533 27.58 3,273 25.86 4,878 28.77 ====== ====== =====
- --------------- (1) All Meritor option quantities and exercise prices have been adjusted by the exchange ratio of one Meritor share for .75 ArvinMeritor share as part of the merger (see Note 4). (2) In connection with the merger, each Arvin outstanding option was converted to an ArvinMeritor option on a one-to-one basis, plus $1.00 per share reduction in the exercise price. (3) In July 2001, certain stock options were converted to restricted shares of Common Stock (see Note 17). The following table provides additional information about outstanding stock options at September 30, 2002 (shares in thousands, exercise price represents a weighted average):
OUTSTANDING EXERCISABLE ----------------------------- ----------------- EXERCISE REMAINING EXERCISE EXERCISE PRICE RANGE SHARES YEARS PRICE SHARES PRICE - ----------- ------ --------- -------- ------ -------- $14.00 to $20.00.......................... 2,807 8.5 $18.07 553 $17.61 $20.01 to $27.00.......................... 337 5.9 23.05 234 22.93 $27.01 to $34.00.......................... 1,393 4.6 29.66 1,393 29.66 $34.01 to $41.00.......................... 353 5.5 38.08 353 38.08 ----- ----- 4,890 2,533 ===== =====
The company accounts for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Since stock options are granted at prices equal to fair market value, no compensation expense is recognized in connection with stock options granted to employees. The company's net income and earnings per share would have been reduced to the pro forma amounts shown below if the company accounted for its stock options using the fair value method provided by 50 ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock Based Compensation" (in millions, except per share amounts):
2002 2001 2000 ----- ----- ----- Net income -- As reported........................................ $ 107 $ 35 $ 218 Pro forma.......................................... 104 32 212 Basic earnings per share -- As reported........................................ $1.61 $0.53 $4.12 Pro forma.......................................... 1.57 0.48 4.01 Diluted earnings per share -- As reported........................................ $1.59 $0.53 $4.12 Pro forma.......................................... 1.55 0.48 4.01
The weighted average fair value of options granted was $6.81, $3.93 and $8.16 per share in fiscal 2002, 2001 and 2000, respectively. The fair value of each option was estimated on the date of grant using the Black-Scholes pricing model and the following assumptions:
2002 2001 2000 ---- ---- ---- Average risk-free interest rate...................... 5.1% 5.7% 6.1% Expected dividend yield.............................. 1.7% 5.0% 5.0% Expected volatility.................................. 36.0% 37.0% 35.0% Expected life (years)................................ 5 5 5
19. RETIREMENT MEDICAL PLANS ArvinMeritor has retirement medical plans that cover the majority of its U.S. and certain non-U.S. employees and provide for medical payments to eligible employees and dependents upon retirement. The company's retiree medical obligations are measured as of June 30. The following are the assumptions used in the measurement of the accumulated projected benefit obligation (APBO):
2002 2001 ---- ----- Assumptions as of June 30 Discount rate............................................. 7.25% 7.50% Health care cost trend rate (weighted average)............ 9.00% 11.00% Ultimate health care trend rate........................... 5.00% 5.00% Years to ultimate rate (2011)............................. 8 9
The discount rate is the rate that the accumulated projected benefit obligation is discounted. This rate is determined based on high-quality fixed income investments that match the duration of expected retiree medical benefits. The company has typically used the corporate AA/Aa bond rate for this assumption. The health care cost trend rate represents the company's expected annual rates of change in the cost of health care benefits. The trend rate noted above represents a forward projection of health care costs as of the measurement date. The company's projection for fiscal 2003 is an increase in health care costs of 9.0 percent. 51 ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The APBO for retiree medical as of the June 30 measurement date is summarized as follows (in millions):
APBO 2002 2001 - ---- ---- ---- Retirees.................................................... $502 $467 Employees eligible to retire................................ 17 20 Employees not eligible to retire............................ 57 55 ---- ---- Total....................................................... $576 $542 ==== ====
The following reconciles the change in the APBO and the amounts included in the consolidated balance sheet (in millions):
2002 2001 ----- ----- APBO -- beginning of year................................... $ 542 $ 465 Service cost.............................................. 4 4 Interest cost............................................. 38 36 Plan amendments........................................... (36) 5 Actuarial losses.......................................... 88 85 Benefit payments.......................................... (60) (53) ----- ----- APBO -- end of year......................................... 576 542 Items not yet recognized in the balance sheet -- Plan amendments........................................... 40 7 Actuarial (losses)/gains: Discount rate............................................. (60) (47) Health care cost trend rate............................... 4 41 Demographic and other..................................... (251) (225) ----- ----- Accrued retiree medical liability........................... $ 309 $ 318 ===== =====
The increase in the APBO was driven primarily by actuarial losses. The actuarial losses resulted from the decrease in the discount rate assumption and unfavorable health care cost trend experience. The demographic and other actuarial losses relate to earlier than expected retirements due to certain plant closings and restructuring actions. In accordance with Statement of Financial Accounting Standards No. 106 (SFAS 106), "Employers' Accounting for Postretirement Benefits Other than Pensions", a portion of the actuarial losses is not subject to amortization. The actuarial losses that are subject to amortization are generally amortized over the average expected remaining service life, which is approximately 14 years. Union plan amendments are generally amortized over the contract period, or 3 years. The company has approved changes to certain retiree medical plans. These plan amendments will be effective in fiscal 2003 and have been reflected in the APBO as of September 30, 2002. 52 ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The accrued retiree medical liability is included in the consolidated balance sheet as follows (in millions):
SEPTEMBER 30, ------------- 2002 2001 ----- ----- Current -- included in accrued compensation and benefits.... $ 60 $ 50 Long-term -- included in accrued retirement benefits........ 249 268 ---- ---- Accrued retiree medical liability........................... $309 $318 ==== ====
The components of retiree medical expense are as follows (in millions):
2002 2001 2000 ---- ---- ---- Service cost.............................................. $ 4 $ 4 $ 2 Interest cost............................................. 38 36 33 Amortization of -- Prior service cost................................... (3) (3) (6) Actuarial gains and losses........................... 12 4 5 --- --- --- Retiree medical expense................................... $51 $41 $34 === === ===
A one-percentage point change in the assumed health care cost trend rate for all years to, and including, the ultimate rate would have the following effects (in millions):
2002 2001 ---- ---- Effect on total service and interest cost 1% Increase............................................ $ 4 $ 4 1% Decrease............................................ (4) (4) Effect on APBO 1% Increase............................................ 50 42 1% Decrease............................................ (46) (38)
20. RETIREMENT PENSION PLANS ArvinMeritor sponsors defined benefit pension plans that cover most of its U.S. employees and certain non-U.S. employees. Pension benefits for salaried employees are based on years of credited service and compensation. Pension benefits for hourly employees are based on years of service and specified benefit amounts. The company's funding policy provides that annual contributions to the pension trusts will be at least equal to the minimum amounts required by ERISA in the U.S. and the actuarial recommendations or statutory requirements in other countries. Certain of the company's non-U.S. subsidiaries provide limited non-pension benefits to retirees in addition to government-sponsored programs. The cost of these programs is not significant to the company. Most retirees outside the U.S. are covered by government-sponsored and administered programs. The company's pension obligations are measured as of June 30. The U.S. plans include a qualified and non-qualified pension plan. Non-U.S. includes plans primarily in the United Kingdom, Canada and Germany. 53 ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following are the assumptions used in the measurement of the projected benefit obligation (PBO) and net periodic pension expense:
2002 2001 -------------------- -------------------- U.S. NON U.S. U.S. NON U.S. ----- ------------ ----- ------------ Assumptions as of June 30 Discount Rate....................... 7.25% 6.00 - 6.75% 7.50% 6.00 - 6.75% Assumed return on plan assets....... 8.50% 8.00 - 8.50% 9.50% 9.00% Rate of compensation increase....... 4.25% 2.50 - 3.50% 4.25% 2.50 - 4.00%
The discount rate is the rate that the PBO is discounted. The rate is determined based on high-quality fixed income investments that match the duration of expected benefit payments. The company has typically used the corporate AA/Aa bond rate for this assumption. The assumed return on plan assets noted above represents a forward projection of the average rate of earnings expected on the pension assets. This rate is used in the calculation of assumed rate of return on plan assets, a component of net periodic pension expense. As of June 30, 2002 the company has lowered the assumed rates of return on plan assets in the U.S. to 8.50 percent, in the United Kingdom to 8.00 percent and in Canada to 8.50 percent. These revised assumed rates of return will be used for fiscal 2003 net periodic pension expense. The rate of compensation increase represents the long-term assumption for expected increases to salaries for pay-related plans. The following table reconciles the change in the PBO and the change in plan assets (in millions):
2002 2001 ------------------------- ------------------------ U.S. NON U.S. TOTAL U.S. NON U.S. TOTAL JUNE 30 MEASUREMENT DATE ----- -------- ------ ----- -------- ----- PBO -- beginning of year................. $ 596 $390 $ 986 $ 490 $362 $ 852 Service cost........................ 20 12 32 18 13 31 Interest cost....................... 45 24 69 40 22 62 Participant contributions........... -- 3 3 -- 2 2 Amendments.......................... 5 -- 5 -- -- -- Actuarial loss...................... 11 2 13 59 19 78 Divestitures........................ -- -- -- -- (2) (2) Termination benefits and early retirement........................ -- -- -- 17 1 18 Benefit payments.................... (32) (19) (51) (28) (25) (53) Foreign currency rate changes....... -- 19 19 -- (2) (2) ----- ---- ------ ----- ---- ----- PBO -- end of year....................... 645 431 1,076 596 390 986 ----- ---- ------ ----- ---- ----- Change in plan assets Fair value of assets -- beginning of year................................... 398 372 770 409 421 830 Actual return on plan assets........ (32) (40) (72) (17) (28) (45) Employer contributions.............. 52 9 61 34 10 44 Participant contributions........... -- 3 3 -- 2 2 Divestitures........................ -- -- -- -- (2) (2) Benefit payments.................... (32) (19) (51) (28) (25) (53) Foreign currency rate changes....... -- 16 16 -- (6) (6) ----- ---- ------ ----- ---- ----- Fair value of assets -- end of year...... 386 341 727 398 372 770 ----- ---- ------ ----- ---- ----- Funded status............................ $(259) $(90) $ (349) $(198) $(18) $(216) ===== ==== ====== ===== ==== =====
54 ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following reconciles the funded status with the amount included in the consolidated balance sheet (in millions):
2002 2001 ------------------------- ------------------------ U.S. NON U.S. TOTAL U.S. NON U.S. TOTAL JUNE 30 MEASUREMENT DATE ----- -------- ------ ----- -------- ----- Funded status............................ $(259) $(90) $ (349) $(198) $(18) $(216) Items not yet recognized in balance sheet: Actuarial losses.................... 243 143 386 161 63 224 Prior service cost.................. 2 12 14 (3) 10 7 Initial net asset................... -- (6) (6) -- (8) (8) Sept. 2002 employer contribution......... 15 -- 15 -- -- -- ----- ---- ------ ----- ---- ----- Net prepaid/(liability).................. $ 1 $ 59 $ 60 $ (40) $ 47 $ 7 ===== ==== ====== ===== ==== =====
The increase in the PBO due to actuarial losses for fiscal 2002 and 2001 relates primarily to the reduction in the discount rate assumptions. In accordance with Statement of Financial Accounting Standards No. 87 (SFAS 87), "Employers' Accounting for Pensions", a portion of the actuarial losses is not subject to amortization. The actuarial losses that are subject to amortization are generally amortized over the expected remaining service life, which ranges from 12 to 18 years, depending on the plan. The most significant impact on the funded status has been the underperformance of the pension assets for both fiscal 2002 and 2001. This was driven by worldwide financial market conditions, which also contributed to the company's revision of the expected rate of return on plan assets. Also in accordance with SFAS 87, the company utilizes a market- related value of assets, which recognizes changes in the fair value of assets over a five-year period. The increase in the unfunded status resulted in the company recording an additional minimum pension liability for both fiscal 2002 and 2001. SFAS 87 requires a company to record a minimum liability that is at least equal to the unfunded accumulated benefit obligation. The company recorded an additional minimum pension liability adjustment of $116 million and $75 million in fiscal 2002 and 2001, respectively. The additional minimum pension liability, net of a deferred tax asset, is charged to accumulated other comprehensive loss. Amounts included in the consolidated balance sheet at September 30 are comprised of the following (in millions):
2002 2001 ------------------------ ------------------------ U.S. NON U.S. TOTAL U.S. NON U.S. TOTAL ----- -------- ----- ----- -------- ----- Prepaid pension asset..................... $ -- $ 98 $ 98 $ -- $ 87 $ 87 Accrued pension liability................. (175) (56) (231) (115) (43) (158) Deferred tax asset........................ 67 4 71 29 -- 29 Accumulated other comprehensive loss...... 108 4 112 46 -- 46 Intangible asset and other................ 1 6 7 -- 3 3 Minority interest liability............... -- 3 3 -- -- -- ----- ---- ----- ----- ---- ----- Net amount recognized..................... $ 1 $ 59 $ 60 $ (40) $ 47 $ 7 ===== ==== ===== ===== ==== =====
55 ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The accrued pension liability is included in Accrued Retirement Benefits in the consolidated balance sheet as follows (in millions):
SEPTEMBER 30, ------------- 2002 2001 ----- ----- Accrued pension liability................................... $231 $158 Accrued retiree medical liability -- long term (see Note 19)....................................................... 249 268 Other....................................................... 32 33 ---- ---- Accrued Retirement Benefits................................. $512 $459 ==== ====
In accordance with Statement of Financial Accounting Standards No. 132, "Employer's Disclosures about Pensions and Other Postretirement Benefits", the PBO, accumulated benefit obligation (ABO) and fair value of plan assets is required to be disclosed for all plans where the ABO is in excess of plan assets. The difference between the PBO and ABO is that the PBO includes projected compensation increases. Additional information is as follows (in millions):
2002 2001 ------------------------- ------------------------ ABO ASSETS ABO ASSETS EXCEEDS EXCEED EXCEEDS EXCEED ASSETS ABO TOTAL ASSETS ABO TOTAL ------- ------ ------ ------- ------ ----- PBO................................. $739 $337 $1,076 $641 $345 $986 ABO................................. 663 288 951 548 294 842 Plan Assets......................... 418 309 727 398 372 770
The components of net periodic pension expense were as follows (in millions):
2002 2001 2000 ---- ---- ---- Service cost............................................ $ 32 $ 31 $ 22 Interest cost........................................... 69 62 37 Assumed return on plan assets........................... (79) (74) (40) Amortization of prior service cost...................... 3 3 4 Amortization of transition asset........................ (2) (2) (2) Recognized actuarial loss............................... 4 1 3 ---- ---- ---- Net periodic pension expense............................ $ 27 $ 21 $ 24 ==== ==== ====
The company also sponsors certain defined contribution savings plans for eligible employees. Expense related to these plans was $11 million, $11 million and $8 million for fiscal 2002, 2001 and 2000, respectively. 21. INCOME TAXES The components of the Provision for Income Taxes are summarized as follows (in millions):
2002 2001 2000 ---- ---- ---- Current tax expense (benefit): U.S. .............................................. $ 8 $ 23 $ 17 Foreign............................................ 94 61 91 State and local.................................... 6 (6) 1 ---- ---- ---- Total current tax expense..................... 108 78 109 ---- ---- ---- Deferred tax expense (benefit): U.S. .............................................. 28 (32) 30 Foreign............................................ (53) (24) (3) State and local.................................... (8) (1) 5 ---- ---- ---- Total deferred tax expense (benefit).......... (33) (57) 32 ---- ---- ---- Provision for Income Taxes.............................. $ 75 $ 21 $141 ==== ==== ====
56 ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The deferred tax expense represents tax deductions related to previously accrued expenses. The deferred tax benefit represents the tax benefit of current year net operating losses and tax credits carried forward, and the tax impact related to certain accrued expenses that have been recorded for financial statement purposes but are not deductible for income tax purposes until paid. Net deferred income tax benefits included in Other Current Assets in the accompanying consolidated balance sheet consist of the tax effects of temporary differences related to the following (in millions):
SEPTEMBER 30, ------------- 2002 2001 ----- ----- Accrued compensation and benefits........................... $ 49 $ 36 Accrued product warranties.................................. 29 32 Inventories................................................. 19 21 Receivables................................................. 10 19 Accrued restructuring....................................... 3 16 Other, net.................................................. 6 14 ---- ---- Current deferred income taxes............................... $116 $138 ==== ====
Net deferred income tax benefits included in Other Assets in the accompanying consolidated balance sheet consist of the tax effects of temporary differences related to the following (in millions):
SEPTEMBER 30, ------------- 2002 2001 ----- ----- Accrued retiree medical liability........................... $ 95 $103 Loss and tax credit carryforwards........................... 212 91 Accrued pension liability................................... 21 12 Taxes on undistributed income............................... (32) (30) Property.................................................... (83) (54) Other, net.................................................. (15) 6 ---- ---- Subtotal.................................................... 198 128 Valuation allowance......................................... (11) (9) ---- ---- Long-term deferred income taxes............................. $187 $119 ==== ====
Management believes it is more likely than not that current and long-term deferred tax benefits will reduce future income tax payments. Significant factors considered by management in its determination of the probability of the realization of the deferred tax benefits include: (a) historical operating results, (b) expectations of future earnings and (c) the extended period of time over which the retirement medical liability will be paid. The valuation allowance represents the amount of tax benefits related to net operating loss and tax credit carryforwards, which management believes are not likely to be realized. The carryforward periods for $145 million of net operating losses and tax credit carryforwards expire between 2003 and 2022. The carryforward period for the remaining net operating losses and tax credits is indefinite. 57 ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The company's effective tax rate was different from the U.S. statutory rate for the reasons set forth below:
2002 2001 2000 ---- ---- ---- Statutory tax rate....................................... 35.0% 35.0% 35.0% State and local income taxes............................. (0.6) (4.3) 1.2 Foreign income taxes..................................... (2.4) (2.8) 0.7 Goodwill................................................. -- 7.2 1.0 Recognition of basis differences......................... (1.8) (8.9) (0.4) Tax on undistributed foreign earnings.................... 1.0 3.2 0.7 Other.................................................... 0.8 4.1 -- ---- ---- ---- Effective tax rate....................................... 32.0% 33.5% 38.2% ==== ==== ====
The income tax provisions were calculated based upon the following components of income before income taxes (in millions):
2002 2001 2000 ---- ---- ---- U.S. income (loss)...................................... $109 $(31) $139 Foreign income.......................................... 126 94 230 ---- ---- ---- Total................................................... $235 $ 63 $369 ==== ==== ====
No provision has been made for U.S., state or additional foreign income taxes related to approximately $190 million of undistributed earnings of foreign subsidiaries that have been or are intended to be permanently reinvested. 22. CONTINGENCIES Environmental Federal, state and local requirements relating to the discharge of substances into the environment, the disposal of hazardous wastes and other activities affecting the environment have, and will continue to have, an impact on the manufacturing operations of the company. The process of estimating environmental liabilities is complex and dependent on physical and scientific data at the site, uncertainties as to remedies and technologies to be used and the outcome of discussions with regulatory agencies. The company records liabilities for environmental issues in the accounting period in which its responsibility is established and the cost can be reasonably estimated. At environmental sites in which more than one potentially responsible party has been identified, the company records a liability for its allocable share of costs related to its involvement with the site, as well as an allocable share of costs related to insolvent parties or unidentified shares. At environmental sites in which ArvinMeritor is the only potentially responsible party, the company records a liability for the total estimated costs of remediation before consideration of recovery from insurers or other third parties. The company has been designated as a potentially responsible party at 8 Superfund sites, excluding sites as to which the company's records disclose no involvement or as to which the company's potential liability has been finally determined. Management estimates the total reasonably possible costs the company could incur for the remediation of Superfund sites at September 30, 2002, to be approximately $34 million, of which $13 million is recorded as a liability. In addition to the Superfund sites, various other lawsuits, claims and proceedings have been asserted against the company, alleging violations of federal, state and local environmental protection requirements, or seeking remediation of alleged environmental impairments, principally at previously disposed-of properties. For these matters, management has estimated the total reasonably possible costs the company could incur at September 30, 2002, to be approximately $50 million, of which $21 million is 58 ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) recorded as a liability. Following are the components of the Superfund and Non-Superfund environmental reserves (in millions):
SEPTEMBER 30, -------------- 2002 2001 ----- ----- Superfund sites............................................. $13 $18 Non-Superfund sites......................................... 21 25 --- --- Total environmental reserves................................ $34 $43 === ===
A portion of the environmental reserves is included in Other Current Liabilities (see Note 13), with the majority of the amounts recorded in Other Liabilities (see Note 14). The actual amount of costs or damages for which the company may be held responsible could materially exceed the foregoing estimates because of uncertainties, including the financial condition of other potentially responsible parties, the success of the remediation and other factors that make it difficult to accurately predict actual costs. However, based on management's assessment, the company believes that its expenditures for environmental capital investment and remediation necessary to comply with present regulations governing environmental protection and other expenditures for the resolution of environmental claims will not have a material adverse effect on the company's business, financial condition or results of operations. In addition, in future periods, new laws and regulations, advances in technology and additional information about the ultimate clean up remedy could significantly change the company's estimates. Management cannot assess the possible effect of compliance with future requirements. Asbestos Maremont Corporation ("Maremont", a subsidiary of the company) and many other companies are defendants in suits brought by individuals claiming personal injuries as a result of exposure to asbestos-containing products. Maremont manufactured friction products containing asbestos from 1953 through 1977, when it sold its friction product business. Arvin acquired Maremont in 1986. During fiscal 1997 through 2002, Maremont paid approximately $52 million to address asbestos-related claims, substantially all of which was reimbursed by insurance. Maremont's asbestos-related reserves and corresponding asbestos-related recoveries are summarized as follows (in millions):
SEPTEMBER 30, -------------- 2002 2001 ----- ----- Unbilled committed settlements.............................. $ 9 $12 Pending claims.............................................. 50 48 Shortfall and other......................................... 7 11 --- --- Total asbestos-related reserves................... $66 $71 === === Asbestos-related recoveries................................. $59 $60 === ===
A portion of the asbestos-related recoveries and reserves are included in current assets and liabilities, with the majority of the amounts recorded in noncurrent assets and liabilities (see Notes 10, and 12 through 14). The unbilled committed settlements reserve relates to committed settlements that Maremont agreed to pay when Maremont participated in the Center for Claims Resolution (CCR). Maremont shared in the payments of defense and indemnity costs of asbestos-related claims with other CCR members. The CCR 59 ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) handled the resolution and processing of asbestos claims on behalf of its members until February 1, 2001, when it was reorganized and discontinued negotiating shared settlements. Since February 1, 2001, Maremont has hired its own litigation counsel and is committed to examining the merits of each asbestos-related claim. For purposes of establishing reserves for pending asbestos-related claims, Maremont estimates its defense and indemnity costs based on the history and nature of filed claims to date and Maremont's experience since February 1, 2001. Maremont had approximately 37,500 and 27,500 pending asbestos-related claims at September 30, 2002 and 2001, respectively. Although Maremont has been named in these cases, in the cases where actual injury has been alleged, very few claimants have established that a Maremont product caused their injuries. Several former members of the CCR have filed for bankruptcy protection, and these members have failed, or may fail, to pay certain financial obligations with respect to settlements that were reached while they were CCR members. Maremont is subject to claims for payment of a portion of these defaulted member shares ("shortfall"). In an effort to resolve the affected settlements, Maremont has entered into negotiations with plaintiffs' attorneys, and an estimate of Maremont's obligation for the shortfall is included in the total asbestos-related reserves. In addition, Maremont and its insurers are engaged in legal proceedings to determine whether existing insurance coverage should reimburse any potential liability related to this issue. Maremont has insurance that reimburses a substantial portion of the costs incurred defending against asbestos-related claims. The coverage also reimburses Maremont for any indemnity paid on those claims. The coverage is provided by several insurance carriers based on the insurance agreements in place. Based on its assessment of the history and nature of filed claims to date, and of Maremont's insurance carriers, management believes that existing insurance coverage is adequate to cover substantially all costs relating to pending and future asbestos-related claims. The amounts recorded for the asbestos-related reserves and recoveries from insurance companies are based upon assumptions and estimates derived from currently known facts. All such estimates of liabilities for asbestos-related claims are subject to considerable uncertainty because such liabilities are influenced by variables that are difficult to predict. If the assumptions with respect to the nature of pending claims, the cost to resolve claims and the amount of available insurance prove to be incorrect, the actual amount of Maremont's liability for asbestos-related claims, and the effect on the company, could differ materially from current estimates. Maremont has not accrued reserves for unknown claims that may be asserted against it in the future. Maremont does not have sufficient information to make a reasonable estimate of its potential liability for asbestos-related claims that may be asserted against it in the future. Product Recall Campaign The company has recalled certain of its commercial vehicle axles equipped with TRW model 20-EDL tie rod ends because of potential safety-related defects in those ends. TRW, Inc. (TRW) manufactured the affected tie rod ends from June 1999 through June 2000 and supplied them to the company for incorporation into its axle products. TRW commenced recall campaigns in August 2000 and June 2001, covering 24 weeks of production, due to a purported manufacturing anomaly identified by TRW. However, after an analysis of field returns and customer reports of excessive wear, ArvinMeritor concluded that the defect was based on the design of a bearing used in the ball socket, which is part of the tie rod end, and not on the purported anomaly in the manufacturing process. The company reported its finding to the National Highway Transportation Safety Administration in April 2002 and expanded the recall campaign to cover all of its axle products that had incorporated TRW model 20-EDL tie rod ends. 60 ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) ArvinMeritor estimates the cost of recalling all TRW model 20-EDL tie rod ends to be approximately $30 million, of which approximately $13 million is estimated to be covered by TRW's recall campaigns. The company believes that it is entitled to reimbursement by TRW for its costs associated with the campaigns. On May 6, 2002, the company filed suit against TRW in the U.S. District Court for the Eastern District of Michigan, claiming breach of contract and breach of warranty, and seeking compensatory and consequential damages in connection with the recall campaign. The company has recorded a liability and offsetting receivable for the estimated cost of the recall campaign, which is not covered by TRW's recall campaign. As of September 30, 2002, the company has recorded a receivable from TRW for $17 million and has accrued product warranty reserves of $15 million, net of claims paid to date. In addition, as of September 30, 2002 the company has recorded a $4 million receivable from TRW for reimbursement of customer claims paid to date that are covered by TRW's recall campaign. Other Various other lawsuits, claims and proceedings have been or may be instituted or asserted against the company, relating to the conduct of the company's business, including those pertaining to product liability, intellectual property, safety and health, and employment matters. Although the outcome of litigation cannot be predicted with certainty, and some lawsuits, claims or proceedings may be disposed of unfavorably to the company, management believes the disposition of matters that are pending will not have a material adverse effect on the company's business, financial condition or results of operations. 23. BUSINESS SEGMENT INFORMATION The company has three reportable operating segments: Light Vehicle Systems (LVS), Commercial Vehicle Systems (CVS), and Light Vehicle Aftermarket (LVA). LVS is a major supplier of air and emission systems, aperture systems (roof and door systems and motion control products), and undercarriage systems (suspension and ride control systems and wheel products) for passenger cars, light trucks and sport utility vehicles to original equipment manufacturers. CVS supplies drivetrain systems and components, including axles and drivelines, braking systems, suspension systems and exhaust, ride control and filtration products for medium- and heavy-duty trucks, trailers and off-highway equipment and specialty vehicles. LVA supplies exhaust, ride control and filter products to the light vehicle aftermarket. Business units that are not focused on automotive products are classified as "Other". The company's coil coating operation is included in this classification. Segment information is summarized as follows (in millions): Sales:
2002 2001 2000 ------ ------ ------ Light Vehicle Systems.................................... $3,632 $3,588 $2,031 Commercial Vehicle Systems............................... 2,249 2,199 2,872 Light Vehicle Aftermarket................................ 844 859 209 Other.................................................... 157 159 41 ------ ------ ------ Total.................................................... $6,882 $6,805 $5,153 ====== ====== ======
61 ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Earnings:
2002 2001 2000 ----- ----- ----- Operating Income: Light Vehicle Systems..................................... $ 196 $ 213 $ 149 Commercial Vehicle Systems................................ 94 32 221 Light Vehicle Aftermarket................................. 58 44 6 Other..................................................... 4 (10) -- ----- ----- ----- Segment operating income............................... 352 279 376 Restructuring costs....................................... (15) (67) (26) Gain on sale of business.................................. 6 -- 83 Other charges, net........................................ -- (17) (4) ----- ----- ----- Operating income....................................... 343 195 429 Equity in earnings (losses) of affiliates................. (3) 4 29 Interest expense, net and other........................... (105) (136) (89) ----- ----- ----- Income before income taxes................................ 235 63 369 Provision for income taxes................................ (75) (21) (141) Minority interests........................................ (11) (7) (10) ----- ----- ----- Income before cumulative effect of accounting change...... $ 149 $ 35 $ 218 ===== ===== ===== Depreciation and Amortization: 2002 2001 2000 ----- ----- ----- Light Vehicle Systems..................................... $ 97 $ 98 $ 55 Commercial Vehicle Systems................................ 73 93 98 Light Vehicle Aftermarket................................. 19 19 7 Other..................................................... 7 7 2 ----- ----- ----- Total Depreciation and Amortization....................... $ 196 $ 217 $ 162 ===== ===== ===== Capital Expenditures: 2002 2001 2000 ----- ----- ----- Light Vehicle Systems..................................... $ 84 $ 110 $ 106 Commercial Vehicle Systems................................ 46 73 112 Light Vehicle Aftermarket................................. 15 18 5 Other..................................................... 39 5 2 ----- ----- ----- Total Capital Expenditures................................ $ 184 $ 206 $ 225 ===== ===== =====
62 ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Segment Assets:
2002 2001 2000 ------ ------ ------ Light Vehicle Systems.................................... $1,873 $1,766 $1,794 Commercial Vehicle Systems............................... 1,594 1,565 1,775 Light Vehicle Aftermarket................................ 718 738 749 Other.................................................... 161 197 228 ------ ------ ------ Segment total assets.................................. 4,346 4,266 4,546 Corporate(1)............................................... 305 96 174 ------ ------ ------ Total assets............................................... $4,651 $4,362 $4,720 ====== ====== ======
Net Goodwill:
2002 2001 2000 ---- ---- ---- Light Vehicle Systems.................................... $225 $221 $129 Commercial Vehicle Systems............................... 408 400 412 Light Vehicle Aftermarket................................ 175 172 173 Other.................................................... -- 42 42 ---- ---- ---- Total goodwill........................................... $808 $835 $756 ==== ==== ====
- --------------- (1) Corporate assets consist primarily of cash, taxes and prepaid pension costs. For fiscal 2002 and 2001, segment assets include $105 million and $211 million, respectively, of receivables sold under the accounts receivable securitization program (see Note 8). As a result, corporate assets are reduced by these amounts to account for the impact of the sale. Information on the company's geographic areas is summarized as follows (in millions): Sales by Geographic Area:
2002 2001 2000 ------ ------ ------ U.S. .................................................... $3,416 $3,476 $2,576 Canada................................................... 521 507 441 Mexico................................................... 312 312 235 ------ ------ ------ Total North America.............................. 4,249 4,295 3,252 France................................................... 405 384 394 U.K. .................................................... 552 481 345 Other Europe............................................. 1,134 1,159 769 ------ ------ ------ Total Europe..................................... 2,091 2,024 1,508 Other...................................................... 542 486 393 ------ ------ ------ Total sales................................................ $6,882 $6,805 $5,153 ====== ====== ======
63 ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Assets by Geographic Area:
2002 2001 2000 ------ ------ ------ U.S. .................................................... $2,463 $2,289 $2,537 Canada................................................... 168 166 176 Mexico................................................... 142 130 135 ------ ------ ------ Total North America.............................. 2,773 2,585 2,848 U.K. .................................................... 583 566 542 France................................................... 216 203 226 Other Europe............................................. 746 692 725 ------ ------ ------ Total Europe..................................... 1,545 1,461 1,493 Other...................................................... 333 316 379 ------ ------ ------ Total assets............................................... $4,651 $4,362 $4,720 ====== ====== ======
Sales to DaimlerChrysler AG represented 16 percent, 15 percent and 18 percent of the company's sales in fiscal 2002, 2001, and 2000, respectively. Sales to General Motors Corporation comprised 13 percent and 12 percent of the company's sales in fiscal 2002 and 2001, respectively. Sales to Ford Motor Company comprised 11 percent of the company's sales in fiscal 2002. No other customer comprised 10 percent or more of the company's sales in each of the three years ended September 30, 2002. 24. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The following is a condensed summary of the company's unaudited quarterly results of operations for fiscal 2002 and 2001 and stock price data for fiscal 2002. The per share amounts are based on the weighted average shares outstanding for that quarter.
2002 FISCAL QUARTERS ------------------------------------------ FIRST SECOND THIRD FOURTH 2002 ------ ------ ------ ------ ------ (IN MILLIONS, EXCEPT SHARE-RELATED DATA) Sales............................................. $1,566 $1,687 $1,883 $1,746 $6,882 Cost of sales..................................... 1,412 1,511 1,667 1,552 6,142 Income before cumulative effect of accounting change.......................................... 11 35 62 41 149 Basic earnings per share before cumulative effect of accounting change............................ 0.17 0.53 0.93 0.61 2.24 Diluted earnings per share before cumulative effect of accounting change..................... 0.17 0.52 0.91 0.61 2.22
First quarter 2002 net income included a restructuring charge of $15 million ($10 million after-tax, or $0.15 per basic and diluted share) and third quarter 2002 net income included a gain on the sale of the company's exhaust accessories manufacturing operations of $6 million ($4 million after-tax, or $0.06 per basic and diluted share).
2002 FISCAL QUARTERS ------------------------------------------ FIRST SECOND THIRD FOURTH 2002 ------ ------ ------ ------ ------ Stock Prices High............................................ $20.95 $30.29 $32.50 $25.00 $32.50 Low............................................. $13.35 $18.74 $22.89 $17.67 $13.35
64 ARVINMERITOR, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2001 FISCAL QUARTERS ------------------------------------------ FIRST SECOND THIRD FOURTH 2001 ------ ------ ------ ------ ------ (IN MILLIONS, EXCEPT SHARE-RELATED DATA) Sales............................................. $1,659 $1,787 $1,794 $1,565 $6,805 Cost of sales..................................... 1,492 1,609 1,607 1,398 6,106 Net income (loss)................................. (10) 21 30 (6) 35 Earnings (loss) per share (basic and diluted)..... (0.15) 0.32 0.46 (0.09) 0.53
First quarter 2001 net loss included a restructuring charge of $46 million ($30 million after-tax, or $0.45 per share), second quarter 2001 net income included a restructuring charge of $9 million ($6 million after-tax, or $0.09 per share), third quarter 2001 net income included a restructuring charge of $(1) million ($(1) million after-tax, or $(0.02) per share), and fourth quarter 2001 net loss included a restructuring charge of $13 million ($10 million after-tax, or $0.15 per share), a charge associated with an employee separation agreement of $12 million ($8 million after-tax, or $0.12 per share), and a charge of $5 million ($3 million after-tax, or $0.05 per share) for environmental liability costs. Earnings per share for the year may not equal the sum of the four fiscal quarters earnings per share due to changes in basic and diluted shares outstanding. 25. SUPPLEMENTAL FINANCIAL INFORMATION
2002 2001 2000 ---- ---- ---- (IN MILLIONS) Statement of income data: Maintenance and repairs expense.................... $103 $106 $ 86 Research, development and engineering expense...... 132 136 115 Rental expense..................................... 32 28 26 Statement of cash flows data: Interest payments.................................. $104 $139 $ 95 Income tax payments................................ 58 79 100
26. SUBSEQUENT EVENTS On October 31, 2002, the company announced an agreement to sell its CVS off-highway planetary axle business. The off-highway planetary axle business had fiscal 2002 sales of approximately $90 million. Completion of the sale is contingent on satisfaction of certain conditions and the company expects to complete the transaction in the first half of fiscal 2003. In 1998, the company acquired a 49-percent interest in a German joint venture, Zeuna Starker GmbH & Co. KG, an air and emissions systems company. Under the terms of the shareholders' agreement, the owners of the majority interest in the joint venture have the right to exercise a put option to require the company to purchase the remaining 51 percent. On December 17, 2002, the majority shareholders exercised the put option, and the company entered into agreements to purchase the remaining 51 percent interest for a purchase price of approximately $75 million. The company expects to complete the transaction in the second quarter of fiscal 2003. 65 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF ARVINMERITOR. See the information under the captions Election of Directors and Information as to Nominees for Directors and Continuing Directors in the 2003 Proxy Statement. No nominee for director was selected pursuant to any arrangement or understanding between the nominee and any person other than ArvinMeritor pursuant to which such person is or was to be selected as a director or nominee. There are no family relationships, as defined in Item 401 of Regulation S-K, between any of the directors or nominees for directors and any other director, executive officer or person nominated to become a director or executive officer. See also the information with respect to executive officers of ArvinMeritor under Item 4a of Part I. ITEM 11. EXECUTIVE COMPENSATION. See the information under the captions Compensation of Directors, Executive Compensation, Agreements with Named Executive Officers and Retirement Benefits in the 2003 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT See the information under the captions Voting Securities and Ownership by Management of Equity Securities in the 2003 Proxy Statement. SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS The number of stock options outstanding under our equity compensation plans, the weighted average exercise price of outstanding options, and the number of securities remaining available for issuance, as of September 30, 2002, were as follows:
(COLUMN A) (COLUMN B) (COLUMN C) NUMBER OF SECURITIES TO WEIGHTED AVERAGE NUMBER OF SECURITIES REMAINING BE ISSUED UPON EXERCISE EXERCISE PRICE OF AVAILABLE FOR FUTURE ISSUANCE OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, UNDER EQUITY COMPENSATION PLANS PLAN CATEGORY WARRANTS AND RIGHTS(1) WARRANTS AND RIGHTS (EXCLUDING SECURITIES REFLECTED IN COLUMN A) - ------------- ----------------------- -------------------- -------------------------------------------- Equity compensation plans approved by security holders................ 4,075,551 $23.31 5,517,606 Equity compensation plans not approved by security holders(2).... 814,400 $22.41 358,766 ---------- ------ ---------- Total.......... 4,889,951(3) $23.16(3) 5,876,372(4) ========== ====== ==========
- --------------- (1) In addition to stock options, as of September 30, 2002, an aggregate of 923,244 shares of Common Stock, restricted Common Stock, and deferred Common Stock were outstanding under equity compensation plans approved by security holders and 610,225 shares of restricted Common Stock were outstanding under equity compensation plans not approved by security holders. (2) All of our equity compensation plans except the Employee Stock Benefit Plan were approved by the shareholders of either Arvin or Meritor. The Employee Stock Benefit Plan was adopted by the Arvin board of directors in 1998 and expires in 2008. It is intended to provide compensation arrangements that 66 will attract, retain and reward key non-officer employees and to provide these employees with a proprietary interest in the company. The Plan provides for the issuance of incentive awards to non-officer employees in the form of stock options, tandem or non-tandem stock appreciation rights, restricted stock, performance shares or performance units. For further information, see the Plan document, which is filed as Exhibit 10-i to this Annual Report on Form 10-K, and Notes 17 and 18 of the Notes to Consolidated Financial Statements under Item 8. Financial Statements and Supplementary Data below. (3) The table includes options granted under Arvin's 1988 Stock Benefit Plan, 1998 Stock Benefit Plan and Employee Stock Benefit Plan, which we assumed in connection with the Merger. A total of 3,118,255 options issued under these plans, with a weighted average exercise price of $28.10, were assumed at the time of the Merger. (4) The following number of shares remained available for issuance under each of our equity compensation plans at September 30, 2002. Grants under these plans may be in the form of any of the listed types of awards:
NUMBER OF PLAN SHARES TYPE OF AWARD - ---- --------- ------------------------------------- 1997 Long-Term Incentives Plan.... 4,862,707 Stock options, restricted stock, non-tandem stock appreciation rights, common stock Incentive Compensation Plan....... 194,071 Common stock, restricted stock Directors Stock Plan.............. 67,575 Stock options, common stock, restricted stock 1998 Stock Benefit Plan........... 393,253 Stock options, restricted stock, non-tandem stock appreciation rights, performance shares, performance units Employee Stock Benefit Plan....... 358,766 Stock options, restricted stock, non-tandem stock appreciation rights, performance shares, performance units
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. None. PART IV ITEM 14. CONTROLS AND PROCEDURES. As required by Rule 13a-15 under the Securities Exchange Act of 1934, within the 90 days prior to the date of this report, we carried out an evaluation under the supervision and with the participation of ArvinMeritor's management, including Larry D. Yost, Chairman of the Board and Chief Executive Officer, and S. Carl Soderstrom, Jr., Senior Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. There have been no significant changes in ArvinMeritor's internal controls or in other factors that could significantly affect these controls subsequent to the date of that evaluation. In connection with the rule, we currently are in the process of further reviewing and documenting our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and 67 may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with the business. ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) Financial Statements, Financial Statement Schedules and Exhibits. (1) Financial Statements (all financial statements listed below are those of the company and its consolidated subsidiaries): Statement of Consolidated Income, years ended September 30, 2002, 2001 and 2000. Consolidated Balance Sheet, September 30, 2002 and 2001. Statement of Consolidated Cash Flows, years ended September 30, 2002, 2001 and 2000. Statement of Consolidated Shareowners' Equity, years ended September 30, 2002, 2001 and 2000. Notes to Consolidated Financial Statements. Independent Auditors' Report. (2) Financial Statement Schedule for the years ended September 30, 2002, 2001 and 2000.
PAGE ---- Schedule II -- Valuation and Qualifying Accounts............ S-1
Schedules not filed with this Annual Report on Form 10-K are omitted because of the absence of conditions under which they are required or because the information called for is shown in the financial statements or related notes. (3) Exhibits 3-a Restated Articles of Incorporation of ArvinMeritor, filed as Exhibit 4.01 to ArvinMeritor's Registration Statement on Form S-4, as amended (Registration Statement No. 333-36448) ("Form S-4") is incorporated by reference. 3-b By-laws of ArvinMeritor, filed as Exhibit 3 to ArvinMeritor's Quarterly Report on Form 10-Q for the quarterly period ended April 1, 2001 (File No. 1-15983), is incorporated by reference. 4-a Rights Agreement, dated as of July 3, 2000, between ArvinMeritor and The Bank of New York (successor to EquiServeTrust Company, N.A.), as rights agent, filed as Exhibit 4.03 to the Form S-4, is incorporated by reference. 4-b Indenture, dated as of April 1, 1998, between ArvinMeritor and BNY Midwest Trust Company (successor to The Chase Manhattan Bank), as trustee, filed as Exhibit 4 to Meritor's Registration Statement on Form S-3 (Registration No. 333-49777), is incorporated by reference. 4-b-1 First Supplemental Indenture, dated as of July 7, 2000, to the Indenture, dated as of April 1, 1998, between ArvinMeritor and BNY Midwest Trust Company (successor to The Chase Manhattan Bank), as trustee, filed as Exhibit 4-b-1 to ArvinMeritor's Annual Report on Form 10-K for the fiscal year ended September 30, 2000 (File No. 1-15983) ("2000 Form 10-K"), is incorporated by reference. 4-c Indenture dated as of July 3, 1990, as supplemented by a First Supplemental Indenture dated as of March 31, 1994, between ArvinMeritor and Harris Trust and Savings Bank, as trustee, filed as Exhibit 4-4 to Arvin's Registration Statement on Form S-3 (Registration No. 33-53087), is incorporated by reference. 4-c-1 Second Supplemental Indenture, dated as of July 7, 2000, to the Indenture dated as of July 3, 1990, between ArvinMeritor and Harris Trust and Savings Bank, as trustee, filed as Exhibit 4-c-1 to the 2000 Form 10-K, is incorporated by reference.
68 4-d Indenture, dated as of January 28, 1997, between ArvinMeritor and Wilmington Trust Company, as trustee, filed as Exhibit 4.4 to Arvin's Registration Statement on Form S-3 (Registration No. 333-18521), is incorporated by reference. 4-d-1 First Supplemental Indenture, dated as of January 28, 1997, to Indenture dated as of January 28, 1997, between ArvinMeritor and Wilmington Trust Company, as trustee, filed as Exhibit 4.5 to Arvin's Current Report on Form 8-K dated February 10, 1997 (File No. 1-302), is incorporated by reference. 4-d-2 Second Supplemental Indenture, dated as of July 7, 2000, to Indenture dated as of January 28, 1997, between ArvinMeritor and Wilmington Trust Company, filed as Exhibit 4-d-2 to the 2000 Form 10-K, is incorporated by reference. 10-a-1 Amended and Restated Five-Year Revolving Credit Agreement dated as of June 27, 2001, among ArvinMeritor, the foreign subsidiary borrowers and lenders from time to time party to the agreement, Bank One, NA, as Administrative Agent, JP Morgan Chase Bank as Syndication Agent, and Citicorp USA, Inc. and Bank of America, NA, as Documentation Agents, filed as Exhibit 10-b to ArvinMeritor's Quarterly Report on Form 10-Q for the quarterly period ended July 1, 2001 (File No. 1-15983), is incorporated by reference. 10-a-2 Amendment No. 2, dated as of February 1, 2002, to Amended and Restated Five-Year Revolving Credit Agreement, filed as Exhibit 10a to ArvinMeritor's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2002 (File No. 1-15983), is incorporated by reference. 10-a-3 Amendment No. 3, dated as of June 26, 2002, to Amended and Restated Five-Revolving Credit Agreement, filed as Exhibit 10a to ArvinMeritor's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002 (File No. 1-15983), is incorporated by reference. 10-b 3-Year Credit Agreement dated as of June 26, 2002, among ArvinMeritor, the lenders from time to time party to the agreement, Bank One, NA, as Administrative Agent, JP Morgan Chase Bank as Syndication Agent, and Deutsche Bank Securities Inc., Citicorp USA, Inc., and UBS Warburg LLC, as Documentation Agents, filed as Exhibit 10b to ArvinMeritor's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002 (File No. 1-15983), is incorporated by reference. *10-c-1 1997 Long-Term Incentives Plan, as amended and restated. *10-c-2 Form of Restricted Stock Agreement under the 1997 Long-Term Incentives Plan, filed as Exhibit 10-a-2 to Meritor's Annual Report on Form 10-K for the fiscal year ended September 30, 1997 ("1997 Form 10-K"), is incorporated by reference. *10-c-3 Form of Option Agreement under the 1997 Long-Term Incentives Plan, filed as Exhibit 10(a) to Meritor's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998 (File No. 1-13093), is incorporated by reference. *10-d-1 Directors Stock Plan, filed as Exhibit 10-b-1 to the 1997 Form 10-K, is incorporated by reference. *10-d-2 Form of Restricted Stock Agreement under the Directors Stock Plan, filed as Exhibit 10-b-2 to the 1997 Form 10-K, is incorporated by reference. *10-d-3 Form of Option Agreement under the Directors Stock Plan, filed as Exhibit 10(b) to Meritor's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 1998 (File No. 1-13093), is incorporated by reference. *10-e Incentive Compensation Plan, filed as Exhibit 10-c-1 to the 1997 Form 10-K, is incorporated by reference. *10-f Copy of resolution of the Board of Directors of ArvinMeritor, adopted on July 6, 2000, providing for its Deferred Compensation Policy for Non-Employee Directors, filed as Exhibit 10-f to the 2000 Form 10-K, is incorporated by reference. *10-g Deferred Compensation Plan, filed as Exhibit 10-e-1 to Meritor's Annual Report on Form 10-K for the fiscal year ended September 30, 1998 (File No. 1-13093), is incorporated by reference.
69 *10-h 1998 Stock Benefit Plan, as amended, filed as Exhibit (d)(2) to ArvinMeritor's Schedule TO, Amendment No. 3 (File No. 5-61023), is incorporated by reference. *10-i Employee Stock Benefit Plan, as amended, filed as Exhibit (d)(3) to ArvinMeritor's Schedule TO, Amendment No. 3 (File No. 5-61023), is incorporated by reference. *10-j 1988 Stock Benefit Plan, as amended, filed as Exhibit 10 to Arvin's Quarterly Report on Form 10-Q for the quarterly period ended July 3, 1988, and as Exhibit 10(E) to Arvin's Quarterly Report on Form 10-Q for the quarter ended July 4, 1993 (File No. 1-302), is incorporated by reference. 10-k Second Amended and Restated Receivables Sale Agreement, dated as of September 26, 2002, among ArvinMeritor Receivables Corporation, ArvinMeritor, Credit Lyonnais, Bayerische Landesbank, New York Branch, ABN AMRO N.V., Giro Balanced Funding Corporation, La Fayette Asset Securitization LLC, Amsterdam Funding Corporation and the other purchasers party thereto. 10-l Second Amendment to Restated Purchase and Sale Agreement, dated as of September 26, 2002, among the originators named therein and ArvinMeritor Receivables Corporation. 12 Computation of ratio of earnings to fixed charges. 21 List of subsidiaries of ArvinMeritor. 23-a Consent of M. Lee Murrah, Esq., Chief Intellectual Property Counsel of ArvinMeritor. 23-b Consent of Vernon G. Baker, II, Esq., Senior Vice President and General Counsel of ArvinMeritor. 23-c Independent auditors' consent. 24 Power of Attorney authorizing certain persons to sign this Annual Report on Form 10-K on behalf of certain directors and officers of ArvinMeritor. 99-a Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act. 99-b Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act.
- --------------- * Management contract or compensatory plan or arrangement. (b) Reports on Form 8-K. We filed a Current Report on Form 8-K on July 3, 2002, reporting under Item 5, Other Events and Regulation FD Disclosure, that ArvinMeritor issued and sold in an underwritten public offering $200 million principal amount of its 6 5/8% Notes due 2007 on July 1, 2002, and filing under Item 7, Financial Statements and Exhibits, certain exhibits relating to the new series of notes. We filed a Current Report on Form 8-K on August 6, 2002, reporting under Item 5, Other Events and Regulation FD Disclosure, that on August 6, 2002 the Chief Executive Officer and Chief Financial Officer of the company had filed with the Securities and Exchange Commission the certifications required by Order No. 4-460, and filing those certifications as exhibits under Item 7, Financial Statements and Exhibits. 70 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. ARVINMERITOR, INC. By: /s/ VERNON G. BAKER, II ------------------------------------ Vernon G. Baker, II Senior Vice President and General Counsel Date: December 17, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on the 17th day of December, 2002 by the following persons on behalf of the registrant and in the capacities indicated. Larry D. Yost* Chairman of the Board and Chief Executive Officer (principal executive officer) and Director Terrence E. O'Rourke* President and Chief Operating Officer and Director Joseph B. Anderson, Jr., Directors Steven C. Beering, Rhonda L. Brooks, Joseph P. Flannery, William D. George, Jr., Richard W. Hanselman, Charles H. Harff, Victoria B. Jackson, James E. Marley, James E. Perrella, and Martin D. Walker* S. Carl Soderstrom, Jr.* Senior Vice President and Chief Financial Officer (principal financial officer) Diane S. Bullock * Vice President and Controller (principal accounting officer) *By: /s/ BONNIE WILKINSON ------------------------------------------------ Bonnie Wilkinson Attorney-in-fact** **By authority of powers of attorney filed herewith.
71 CERTIFICATIONS I, Larry D. Yost, Chairman of the Board and Chief Executive Officer of ArvinMeritor, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of ArvinMeritor, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ LARRY D. YOST -------------------------------------- Larry D. Yost, Chairman of the Board and Chief Executive Officer Date: December 17, 2002 72 I, S. Carl Soderstrom, Jr., Senior Vice President and Chief Financial Officer of ArvinMeritor, Inc., certify that: 1. I have reviewed this annual report on Form 10-K of ArvinMeritor, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c. presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ S. CARL SODERSTROM, JR. -------------------------------------- S. Carl Soderstrom, Jr. Senior Vice President and Chief Financial Officer Date: December 17, 2002 73 SCHEDULE II ARVINMERITOR, INC. VALUATION AND QUALIFYING ACCOUNTS FOR THE YEAR ENDED SEPTEMBER 30, 2002, 2001, AND 2000
BALANCE AT CHARGED BALANCE AT BEGINNING TO COSTS OTHER END DESCRIPTION OF YEAR(A) AND EXPENSES DEDUCTIONS OTHER OF YEAR(A) ----------- ---------- ------------ ---------- ----- ---------- Year ended September 30, 2002: Allowance for doubtful accounts........ $18.1 $ 9.3 $ 9.4(b) $ 0.1 $18.1 Year ended September 30, 2001: Allowance for doubtful accounts........ $21.7 $10.2 $14.0(b) $ 0.2 $18.1 Year ended September 30, 2000: Allowance for doubtful accounts........ $10.4 $ 2.8 $ 2.4(b) $10.9(c) $21.7
- --------------- (a) Includes allowances for trade and other long-term receivables. (b) Uncollectible accounts written off. (c) Includes increase in allowance of $11.9 million due to Merger. S-1 EX-10.C.1 3 y66532exv10wcw1.txt 1997 LONG-TERM INCENTIVES PLAN Exhibit 10-c-1 ARVINMERITOR, INC. 1997 LONG-TERM INCENTIVES PLAN (Amended and Restated as of July 6, 2000) 1. PURPOSE The purpose of the 1997 Long-Term Incentives Plan is to foster creation of and enhance ArvinMeritor, Inc. (ArvinMeritor) shareowner value by linking the compensation of officers and other key employees of the Corporation to increases in the price of ArvinMeritor stock or by offering the incentives of long-term monetary rewards to key employees of ArvinMeritor or its business units directly linked to their contribution to the creation of ArvinMeritor shareowner value, thus providing means by which persons of outstanding abilities can be attracted, motivated and retained. 2. DEFINITIONS For the purpose of the Plan, the following terms shall have the meanings set forth below: (a) ArvinMeritor. ArvinMeritor, Inc. or its predecessor, Meritor Automotive, Inc., as the context requires. (b) Assumed Rockwell Options. Options granted under the Rockwell Plan on or after December 9, 1996 to persons who were Employees (as herein defined) on the Distribution Date which (i) by action of the board of directors of Rockwell under Section 11 of the Rockwell Plan have been adjusted as of the Distribution Date to entitle the grantee thereof to purchase Shares; (ii) as so adjusted, have been assigned to ArvinMeritor; and (iii) by action of the Board of Directors have been assumed by ArvinMeritor under Section 5 of this Plan. (c) Board of Directors. The Board of Directors of ArvinMeritor. (d) Committee. The Compensation and Management Development Committee designated by the Board of Directors from among its members who are not eligible to receive a Grant under the Plan. (e) Corporation. ArvinMeritor and those of its subsidiary corporations or affiliates designated by the Committee to participate in the Plan. (f) Distribution Date. The date of the pro-rata distribution by Rockwell to its shareowners of all the issued and outstanding stock of ArvinMeritor. (g) Employees. Officers and other key employees of the Corporation, but not directors who are not also employees of the Corporation. 1 Exhibit 10-c-1 (h) Executive Officer. An Employee who is an executive officer of ArvinMeritor as defined in Rule 3b-7 under the Securities Exchange Act of 1934, as amended, or any successor provision. (i) Fair Market Value. The closing price of Shares as reported in the New York Stock Exchange--Composite Transactions on the date of a determination (or on the next preceding day Shares were traded if not traded on the date of a determination). (j) Grant. A grant made pursuant to the Plan by the Grant Committee to an Employee in the form of Options, Stock Appreciation Rights or Restricted Shares or a grant made pursuant to the Rockwell Plan of Assumed Rockwell Options. (k) Grant Committee. The Committee excluding those members of the Committee who are not at the time any Grant is made both "outside directors" as defined for purposes of Section 162(m) and the regulations thereunder and "Non-Employee Directors" as defined in rule 16b-3(b)(3)(i) under the Securities Exchange Act of 1934, as amended, for purposes of Section 16 of that Act and the rules thereunder. (l) Option. An option to purchase Shares granted to an Employee by the Grant Committee pursuant to Section 5 or 8 of the Plan or an Assumed Rockwell Option. (m) Participant. Any Employee to whom a Grant is made. (n) Performance Cycle. Any period of three or more consecutive fiscal years of ArvinMeritor established for ArvinMeritor or a designated business component under a Performance Plan. (o) Performance Measure. Criteria established to serve as a measure of performance of ArvinMeritor or a designated business component during a Performance Cycle under a Performance Plan. (p) Performance Objectives. Levels of achievement, related to the Performance Measure, established as goals for a Performance Cycle to be used in determining whether and to what extent grants under a Performance Plan shall be deemed to be earned. (q) Performance Plan. A performance plan applicable to ArvinMeritor or one or more business components of the Corporation authorized pursuant to Section 4 of the Plan. (r) Plan. This 1997 Long-Term Incentives Plan. (s) Restricted Period. The period (i) not less than three years or (ii) until achievement of performance goals specified at the time of Grant by the Grant Committee with respect to a Grant of Restricted Shares during which the Shares are subject to forfeiture if the grantee does not continue as an Employee. 2 Exhibit 10-c-1 (t) Restricted Shares. Shares subject to conditions prescribed by the Committee under Section 7 of the Plan. (u) Rockwell. Rockwell International Corporation. (v) Rockwell Plan. The 1995 Long-Term Incentives Plan of Rockwell International Corporation. (w) Section 162(m). Section 162(m) of the Internal Revenue Code, as amended, or any successor provision. (x) Shares. Shares of Common Stock of ArvinMeritor. (y) Stock Appreciation Right. A right granted to an Employee by the Grant Committee pursuant to Section 6 or 8 of the Plan (i) in conjunction with all or any part of any Option, which entitles the Employee, upon exercise of such right, to surrender such Option, or any part thereof, and to receive a payment equal to the excess of the Fair Market Value, on the date of such exercise, of the Shares covered by such Option, or part thereof, over the purchase price of such Shares pursuant to the Option (a Tandem Stock Appreciation Right) or (ii) separate and apart from any Option, which entitles the Employee, upon exercise of such right, to receive a payment measured by the increase in the Fair Market Value of a number of Shares designated by such right from the date of grant of such right to the date on which the Employee exercises such right (a Freestanding Stock Appreciation Right). (z) Supplementary Stock Plan. A supplementary stock plan applicable to Employees subject to the tax laws of one or more countries other than the United States authorized pursuant to Section 8 of the Plan. 3. PLAN ADMINISTRATION (a) The Grant Committee shall determine the Employees to whom Grants are made, the number of Shares or Stock Appreciation Rights to be subject to each Grant and the Restricted Period for any Grant of Restricted Shares. (b) The Committee shall exercise all other responsibilities, powers and authority relating to the administration of the Plan not reserved to the Board of Directors. (c) The Board of Directors reserves the right, in its sole discretion, to exercise or authorize another committee or person to exercise some of or all the responsibilities, powers and authority vested in the Committee and the Grant Committee under the Plan. (d) In making their determinations with respect to Grants under the Plan or grants under any Performance Plan, the Grant Committee and the Committee may consider recommendations of the Chief Executive Officer of ArvinMeritor and shall take into 3 Exhibit 10-c-1 account such factors as the Employee's level of responsibility, performance, performance potential, level and type of compensation and potential value of Grants. 4. PERFORMANCE PLANS (a) The Committee may authorize Performance Plans applicable to ArvinMeritor or one or more business components of the Corporation on such terms and conditions, not inconsistent with the Plan, and applicable to such Employees or categories of Employees as the Committee shall determine. In connection with its authorization of any Performance Plan, the Committee may authorize ArvinMeritor's Chief Executive Officer to approve the definitive terms and conditions of that Performance Plan, including but not limited to the Employees or categories of Employees to which that Performance Plan shall apply and the committee or person who shall be delegated authority to administer that Performance Plan, except that authorization by the Committee shall be required for participation by any Executive Officer in any Performance Plan. Each Performance Plan shall include provision for: (i) establishment of Performance Cycles of not less than three consecutive fiscal years for ArvinMeritor (if a Performance Plan applicable to it should be authorized), and each designated business component, provided that no Performance Cycle shall begin later than September 30, 2007 and only one Performance Cycle for ArvinMeritor or any designated business component shall begin with any one fiscal year; (ii) establishment of a Performance Measure and Performance Objectives for each Performance Cycle established for ArvinMeritor and each designated business component; and (iii) approval by the Committee of any grants thereunder to any Executive Officer. In addition, a Performance Plan may but need not provide for (x) grants under such Performance Plan with respect to a Performance Cycle to be made at any time during the Performance Cycle, provided that any grant made after the first fiscal year of the Performance Cycle shall provide for a pro-rated award; (y) adjustment (up or down) of the Performance Objectives or modification of the Performance Measure (or both) for a Performance Cycle for ArvinMeritor or any designated business component if the Committee (or with the Committee's approval, the committee or person delegated to administer the Performance Plan except insofar as it relates to any Executive Officer) determines that conditions, including but not limited to changes in the economy, changes in laws or government regulations, changes in generally accepted accounting principles, or acquisitions or dispositions determined by the Committee to be material, so warrant; and (z) a Change-of-Control contingency similar to Section 13(f) of the Plan. (b) Potential awards granted to participating Employees under Performance Plans shall be expressed as cash amounts (whether in currency or in units having a currency equivalent) and shall be paid in accordance with determinations of the Committee. Payments shall be in cash unless the Committee determines to make payment to one or more named participating Employees in Shares (which may be Restricted Shares) or a combination of cash and Shares. Any payment which is made in cash may be made in a lump sum, in installments or on a deferred basis. Any payment which is made in Shares shall be valued at the Fair Market Value on the last trading day of the week preceding the day of the Committee's determination to make payment in Shares. No award under a 4 Exhibit 10-c-1 Performance Plan shall bear interest except as may be determined by the Committee in respect of payments made in installments or on a deferred basis. (c) If and to the extent an award under a Performance Plan for any Performance Cycle becomes payable to a participating Employee whose compensation is subject to the limitation on deductibility under Section 162(m) for the applicable year and the amount of that award when combined with all base, incentive or other compensation of such Employee for the applicable year which constitutes "applicable employee remuneration," as defined for purposes of Section 162(m), would exceed the limitation of Section 162(m)(1), the amount payable pursuant to the Performance Plan in excess of that limitation, whether payable in cash, Shares or a combination of both, may in the sole discretion of the Grant Committee be deferred until and paid on the first business day of the calendar year following the Corporation's fiscal year in which such Employee's employment by the Corporation terminates. Any Shares to which a participating Employee will become entitled in respect of a payment deferred pursuant to this paragraph shall be held in book-entry accounts subject to the direction of ArvinMeritor (or if ArvinMeritor elects, certificates therefor may be issued in the Employee's name but delivered to and held by ArvinMeritor) and any dividends that may be paid in cash or otherwise on those Shares shall be delivered to and held by ArvinMeritor until the end of the period for which such payment is deferred unless the Grant Committee determines at the time it determines to defer any payment pursuant to this paragraph that the Employee shall be entitled to receive when paid dividends on Shares the delivery of which has been so deferred. At the end of the deferral period under this paragraph, the restrictions on the book-entry accounts for those Shares shall be released (or any certificates issued shall be delivered), and any dividends and any cash payment deferred pursuant to this paragraph shall be delivered, to the Employee, together with interest on the amount of any cash dividends and any such cash payment so delivered computed at the same rate and in the same manner as interest credited from time to time under ArvinMeritor's Deferred Compensation Plan. 5. OPTIONS As of the Distribution Date, the Assumed Rockwell Options are assumed by ArvinMeritor as Options under this Plan with the terms and conditions specified on the respective dates of grant thereof under the Rockwell Plan as adjusted pursuant to Section 11 of the Rockwell Plan. Thereafter, the Grant Committee may grant from time to time to Employees, Options which may be incentive stock options (as defined in Section 422 of the Internal Revenue Code), nonqualified stock options, or both, to purchase Shares on terms and conditions determined by the Grant Committee, consistent with the provisions of the Plan, including the following: (a) The purchase price of the Shares subject to any Option shall not be less than the Fair Market Value on the date the Option is granted. (b) Each Option may be exercised in whole or in part from time to time during such period as the Option shall specify; provided, however, that if the Grant Committee 5 Exhibit 10-c-1 does not establish a different exercise schedule at or before the date of grant of an Option, the Option shall become exercisable in three approximately equal installments on each of the first, second and third anniversaries of the date the Option is granted; and provided, further, that no Option shall be exercisable prior to one year (except as provided in Section 9(c) or 13(f)) nor after ten years from the date of the grant thereof. (c) Each Option may provide for related Stock Appreciation Rights. The aggregate Fair Market Value (determined as of the date the Option is granted) of the Shares for which any Employee may be granted incentive stock options which are exercisable for the first time in any calendar year under all plans of the Corporation and any parent or subsidiary of the Corporation shall not exceed $100,000 (or such other amount as may be fixed as the maximum amount permitted by Section 422(d) of the Internal Revenue Code, as amended, or any successor provision). The Grant Committee shall grant incentive stock options only to employees of ArvinMeritor or a corporation which is a subsidiary of ArvinMeritor within the meaning of Section 425(f) of the Internal Revenue Code. (d) The purchase price of the Shares with respect to which an Option or portion thereof is exercised shall be payable in full in cash or in Shares or in a combination of cash and Shares. The value of any Share delivered in payment of the purchase price shall be its Fair Market Value on the date the Option is exercised. 6. STOCK APPRECIATION RIGHTS (a) The Grant Committee may grant Tandem Stock Appreciation Rights to an Employee either at the time of grant of an Option or at any time thereafter during the term of an Option. A Tandem Stock Appreciation Right shall be exercisable only when and to the extent that the related Option is exercisable. (b) The Grant Committee may grant from time to time to Employees, Freestanding Stock Appreciation Rights on terms and conditions determined by the Grant Committee, consistent with the provisions of the Plan. (c) The payment to which the grantee of a Stock Appreciation Right is entitled upon exercise thereof may be made in Shares valued at Fair Market Value on the date of exercise, or in cash or partly in cash and partly in Shares, as the Grant Committee may determine. (d) Upon exercise of a Tandem Stock Appreciation Right and surrender of the related Option or part thereof, such Option, to the extent surrendered, shall not thereafter be exercisable, and the Shares covered by the surrendered Option shall not again be available for Grants pursuant to the Plan, or awards under a Performance Plan. (e) Upon exercise of a Freestanding Stock Appreciation Right, any Shares delivered in payment thereof shall not again be available for Grants pursuant to the Plan, or awards under a Performance Plan. 6 Exhibit 10-c-1 7. RESTRICTED SHARES The Grant Committee may grant from time to time to Employees, Restricted Shares on terms determined by the Grant Committee, consistent with the provisions of the Plan, including the following: (a) The Grant Committee shall specify a Restricted Period and may specify performance or other criteria for each Grant of Restricted Shares, and the Restricted Shares granted shall be forfeited if the grantee does not continue as an Employee throughout the Restricted Period, or if and to the extent the specified performance or other criteria are not met during the Restricted Period, except as otherwise provided in Section 9(a), 9(b) or 13(f). (b) Restricted Shares granted to an Employee shall have all the attributes of outstanding Shares, except that the registered owner shall have no right to direct the transfer thereof. Restricted Shares shall be held in book-entry accounts subject to the direction of ArvinMeritor (or if ArvinMeritor elects, certificates therefor may be issued in the Employee's name but delivered to and held by ArvinMeritor), and, unless the Grant Committee determines otherwise at time of grant, any dividends that may be paid in cash or otherwise on Restricted Shares shall be delivered to and held by ArvinMeritor, so long as the Restricted Shares remain subject to forfeiture. As and to the extent that Restricted Shares are no longer subject to forfeiture, the Employee shall have the right to direct the transfer thereof, the restrictions on the book-entry accounts for those Restricted Shares shall be released, and certificates that may have been issued for those Restricted Shares and any dividends thereon held by ArvinMeritor shall be delivered to the Employee. There shall also be paid to the Employee at such time interest on the amount of cash dividends so delivered computed at the same rate and in the same manner as interest credited from time to time under ArvinMeritor's Deferred Compensation Plan. 8. SUPPLEMENTARY STOCK PLANS (a) The Committee may authorize Supplementary Stock Plans applicable to Employees subject to the tax laws of one or more countries other than the United States and providing for the grant of Options, Stock Appreciation Rights, Restricted Shares or any combination thereof to such Employees on terms and conditions, consistent with the Plan, determined by the Committee which may differ from the terms and conditions of Grants pursuant to Sections 5, 6 and 7 of the Plan for the purpose of complying with the conditions for qualification of Options, Stock Appreciation Rights or Restricted Shares for favorable treatment under foreign tax laws. (b) Notwithstanding any other provision hereof, Options granted under any Supplementary Stock Plan shall include provisions that conform with Sections 5(a), (b), (c) and (e) and 6(d); Restricted Shares granted under any Supplementary Stock Plan shall include provisions that conform with Sections 7(a) and (b); and subject to Section 3(c), 7 Exhibit 10-c-1 only the Grant Committee shall have authority to grant Options, Stock Appreciation Rights or Restricted Shares under any Supplementary Stock Plan. 9. EFFECT OF DEATH OR TERMINATION OF EMPLOYMENT (a) If a participating Employee's employment by the Corporation terminates prior to the end of a Performance Cycle under a Performance Plan or the Restricted Period applicable to any Grant of Restricted Shares because of the Employee's (i) death or (ii) retirement under a retirement plan of the Corporation not less than one year after the beginning of that Performance Cycle or the date of that Grant, the amount of the award under the Performance Plan or the number of Restricted Shares such Employee shall be deemed to have earned shall be the amount or number thereof determined as though such Employee's employment had not terminated prior to the end of the Performance Cycle or Restricted Period. (b) If a participating Employee's employment by the Corporation terminates prior to the end of a Performance Cycle under a Performance Plan or the Restricted Period applicable to any Grant of Restricted Shares, for any reason other than (i) death or (ii) retirement under a retirement plan of the Corporation not less than one year after the beginning of that Performance Cycle or the date of that Grant, such Employee shall be deemed not to have earned any award for purposes of the Performance Plan or Restricted Shares except as and to the extent the Committee (or with the Committee's approval, the committee or person delegated to administer a Performance Plan except insofar as it relates to any Executive Officer), taking into account the purpose of the Plan and such other factors as in its sole discretion it deems appropriate, may determine, provided that the amount of the award or the number of Restricted Shares which may be so determined by the Committee to have been earned shall not exceed the amount or number which would have been earned had the provisions of paragraph (a) above been applicable. (c) If the employment by the Corporation of a Participant who (or whose permitted transferee) holds an outstanding Grant of Options or Stock Appreciation Rights terminates by reason of the death of the Participant, the Options or Stock Appreciation Rights subject to that Grant and not theretofore exercised may be exercised from and after the date of the death of the Participant for a period of three years (or until the expiration date specified in the Grant if earlier) even if any of them was not exercisable at the date of death. (d) If a Participant who (or whose permitted transferee) holds an outstanding Grant of Options or Stock Appreciation Rights retires under a retirement plan of the Corporation, at any time after a portion of the Options or Stock Appreciation Rights subject to a particular Grant has become exercisable, the Options or Stock Appreciation Rights subject to that Grant and not theretofore exercised may be exercised from and after the date upon which they are first exercisable under that Grant for a period of five years from the date of retirement (or until the expiration date specified in the Grant if earlier) even if any of them was not exercisable at the date of retirement. 8 Exhibit 10-c-1 (e) If the employment by the Corporation of a Participant who (or whose permitted transferee) holds an outstanding Grant of Options or Stock Appreciation Rights is terminated for any reason other than death or retirement under a retirement plan of the Corporation, the Options or Stock Appreciation Rights subject to that Grant and not theretofore exercised may be exercised only within three months after the termination of such employment (or until the expiration date specified in the Grant if earlier) and only to the extent the grantee thereof (or a permitted transferee) was entitled to exercise the Options or Stock Appreciation Rights at the time of termination of such employment, unless and except to the extent the Committee may otherwise determine; provided, however, that the Committee shall not in any event permit a longer period of exercise than would have been applicable had the provisions of paragraph (d) above been applicable. 10. SHARES AVAILABLE (a) The total number of Shares which may be delivered in payment and upon exercise of Grants and in payments of awards under Performance Plans shall not exceed 9 million*, as adjusted from time to time as herein provided, and the total number of Shares as to which Grants may be made in any one fiscal year of ArvinMeritor beginning after September 30, 1998 shall not exceed 3%** of the total number of Shares outstanding (including for this purpose Shares held in Treasury) as of the date of determination. Shares which may be delivered in payment or upon exercise of Grants or in payment of awards under Performance Plans may consist in whole or in part of unissued or reacquired Shares; provided, however, that unless otherwise determined by the Committee, Shares which may be granted as Restricted Shares shall consist only of reacquired Shares. Subject to Sections 6(d) and (e), if for any reason Shares as to which an Option has been granted cease to be subject to purchase thereunder or Shares granted as Restricted Shares are forfeited to the Corporation, then such Shares shall again be available under the Plan. (b) The total number of Shares subject to Options and Stock Appreciation Rights granted to any one Employee in any one fiscal year of ArvinMeritor under all plans of ArvinMeritor and any parent or subsidiary of ArvinMeritor shall in no event exceed 500,000, as adjusted from time to time as herein provided. (c) No Option, Freestanding Stock Appreciation Right or Restricted Shares shall be granted under the Plan or any Supplementary Stock Plan after September 30, 2007, but Options or Stock Appreciation Rights and Restricted Shares granted theretofore may extend beyond that date, and Tandem Stock Appreciation Rights may be granted after that date with respect to Options outstanding on that date. - -------- * Amended July 6, 2000 to increase the number of shares of Meritor Automotive, Inc. common stock authorized for issuance under the plan from 7 million to 12 million shares. At the exchange ratio applicable upon the merger of Meritor Automotive, Inc. and Arvin Industries, Inc., these shares were converted to 9 million shares of ArvinMeritor common stock. ** Amended July 6, 2000 to increase the annual limit to 3%. Previous limit for any one fiscal year beginning after September 30, 1998 was 1-1/2% of the total number of outstanding shares. 9 Exhibit 10-c-1 11. ADJUSTMENTS If there shall be any change in or affecting Shares on account of any merger, consolidation, reorganization, recapitalization, reclassification, stock dividend, stock split or combination, or other distribution to holders of Shares (other than a cash dividend), there shall be made or taken such amendments to the Plan and such adjustments and actions thereunder as the Board of Directors may deem appropriate under the circumstances. Such amendments, adjustments and actions may include, without limitation, changes in the number of Shares which may be issued or transferred, in the aggregate or to any one Employee, pursuant to the Plan, the number of Shares subject to outstanding Options and Stock Appreciation Rights and the related price per share; provided, however, that no such amendment, adjustment or action may change the limitation prescribed by Section 10(b) to a number of Shares that is a greater proportion of the total number of Shares outstanding and held in Treasury as of the effective date of that amendment, adjustment or action than the proportion of the number of Shares prescribed by Section 10(b) to the total number of Shares outstanding and held in Treasury immediately prior thereto. 12. AMENDMENT AND TERMINATION The Committee shall have the power in its discretion to amend, suspend or terminate the Plan or Grants thereunder at any time except that, subject to the provisions of Section 11, (a) without the consent of the person affected, no such action shall cancel or reduce a Grant theretofore made other than as provided for or contemplated in the agreement evidencing the Grant and (b) without the approval of the shareowners of ArvinMeritor, the Committee may not (i) change the class of persons eligible to receive incentive stock options, (ii) increase the number of Shares provided in Section 10(a) or 10(b), (iii) reduce the Option exercise price of any Option below the Fair Market Value on the date such Option was granted or decrease the forfeiture period for any Grant below that permitted under the Plan. 13. MISCELLANEOUS (a) Except as determined by the Committee, no person shall have any claim to receive a Grant or any payment under a Performance Plan, to receive payment in respect of a Grant or under a Performance Plan in any form other than the Committee shall approve or, in circumstances where Section 9 is applicable, to be deemed to have earned any award under a Performance Plan or Restricted Shares or to be entitled to exercise Options or Stock Appreciation Rights for any particular period after termination of employment. There is no obligation for uniformity of treatment of Employees under the Plan or any Performance Plan. No Employee shall have any right as a Participant or a participant under any Performance Plan to continue in the employ of the Corporation for any period of time or to a continuation of any particular rate of compensation, and the Corporation expressly reserves the right to discharge or change the assignment of any Employee at any time. 10 Exhibit 10-c-1 (b) No Option, Stock Appreciation Right or right related to Restricted Shares granted pursuant to the Plan or right to payment of an award under any Performance Plan may be assigned, pledged or transferred except (i) by will or by the laws of descent and distribution; or (ii) in the case of any Grant (other than an Option granted as an incentive stock option) or any right to payment of an award under a Performance Plan, by gift to any member of the Employee's immediate family or to a trust for the benefit of one or more members of the Employee's immediate family, if permitted in the applicable agreement governing that Grant or right to payment; or (iii) as otherwise determined by the Committee. Each Option, Stock Appreciation Right or right related to Restricted Shares shall be exercisable, and each payment of an award under a Performance Plan shall be payable, during the lifetime of the Employee to whom granted or awarded only by or to such Employee, and any payment of an award under a Performance Plan made after the death of a participating Employee entitled thereto shall be paid to the legal representative of the estate or to the designated beneficiary of such Employee, unless in any such case, the Grant or right to payment has been transferred in accordance with the provisions of the applicable agreement governing that Grant or right to payment, to a member of the Employee's immediate family or a trust for the benefit of one or more members of the Employee's immediate family, in which case it shall be exercisable or payable only by or to such transferee (or to the legal representative of the estate or to the heirs or legatees of such transferee). For purposes of this provision, an Employee's "immediate family" shall mean the Employee's spouse and natural, adopted or step-children and grandchildren. (c) No person shall have the rights or privileges of a shareowner with respect to Shares subject to an Option or deliverable as a payment upon exercise of a Stock Appreciation Right or under a Performance Plan until exercise of the Option or Stock Appreciation Right or delivery as a payment under the Performance Plan. (d) No fractional Shares shall be issued or transferred pursuant to the Plan. If the portion of any payment pursuant to the Plan or a Performance Plan to be made in Shares is not equal to the value of a whole number of Shares, the person entitled thereto shall be paid an amount equal to the Fair Market Value as of the date of exercise of any fractional Share deliverable in respect of exercise of a Stock Appreciation Right and the Fair Market Value as of the date of payment of any fractional Share deliverable in respect of any payment under a Performance Plan. (e) The Corporation, the Board of Directors, the Committee, the Grant Committee and the officers of ArvinMeritor shall be fully protected in relying in good faith on the computations and reports made pursuant to or in connection with the Plan by the independent certified public accountants who audit the Corporation's accounts or others (who may include Employees) whose services are used by the Board of Directors, Committee or Grant Committee in its administration of the Plan. (f) Notwithstanding any other provision of the Plan, if a Change of Control (as defined in Article 8, Section 8.10(a) of ArvinMeritor's Amended By-Laws) shall occur, then unless prior to the occurrence thereof, the Board of Directors shall have determined 11 Exhibit 10-c-1 otherwise by vote of at least two-thirds of its members, (i) all Performance Cycles (except those under Performance Plans that do not provide for a Change-of-Control contingency) not then complete shall be deemed completed forthwith, the Performance Objectives therefor shall be deemed to have been attained, and each participating Employee shall be deemed to have earned the maximum amount that could have been earned thereunder; (ii) all Options and any Stock Appreciation Rights then outstanding pursuant to the Plan shall forthwith become fully exercisable whether or not otherwise then exercisable; and (iii) the restrictions on all Restricted Shares granted under the Plan shall forthwith lapse. (g) The Corporation shall have the right in connection with the delivery of any Shares in payment of a Grant or a payment under a Performance Plan or upon exercise of an Option to require as a condition of such delivery that the recipient represent that such Shares are being acquired for investment and not with a view to the distribution thereof. (h) The Corporation shall have the right in connection with any payment under a Performance Plan, exercise of any Option or Stock Appreciation Right or termination of the Restricted Period for any Restricted Shares, to deduct from any such payment or any other payment by the Corporation, an amount equal to any taxes required by law to be withheld with respect thereto or to require the Employee or other person receiving such payment, effecting such exercise or entitled to Shares and related payments on termination of such Restricted Period, as a condition of and prior to such payment or exercise or delivery of Shares on such termination, to pay to the Corporation an amount sufficient to provide for any such taxes so required to be withheld. (i) Unless otherwise determined by the Committee or provided in an agreement between any Employee and the Corporation, for purposes of the Plan an Employee on authorized leave of absence will be considered as being in the employ of the Corporation. (j) The Corporation shall bear all expenses and costs in connection with the operation of the Plan, including costs related to the purchase, issue or transfer of Shares, but excluding taxes imposed on any person receiving a payment or delivery of Shares under the Plan or a Performance Plan. 14. INTERPRETATIONS AND DETERMINATIONS The Committee shall have the power from time to time to interpret the Plan, to adopt, amend and rescind rules, regulations and procedures relating to the Plan, to make, amend and rescind determinations under the Plan and to take all other actions that the Committee shall deem necessary or appropriate for the implementation and administration of the Plan. All interpretations, determinations and other actions by the Committee not revoked or modified by the Board of Directors shall be final, conclusive and binding upon all parties. 12 Exhibit 10-c-1 15. EFFECTIVE DATE Upon approval by the shareowners of ArvinMeritor, the Plan shall become effective as of September 30, 1997. 13 EX-10.K 4 y66532exv10wk.txt 2ND AMENDED & RESTATED RECEIVABLES SALE AGREEMENT Exhibit 10-k ================================================================================ SECOND AMENDED AND RESTATED RECEIVABLES SALE AGREEMENT DATED AS OF SEPTEMBER 26, 2002 AMONG ARVINMERITOR RECEIVABLES CORPORATION, AS THE SELLER, ARVINMERITOR, INC., AS THE INITIAL COLLECTION AGENT, CREDIT LYONNAIS, ACTING THROUGH ITS NEW YORK BRANCH, AS THE AGENT AND AS A PURCHASER AGENT, BAYERISCHE LANDESBANK, NEW YORK BRANCH, AS A PURCHASER AGENT ABN AMRO BANK N.V., AS A PURCHASER AGENT THE OTHER PURCHASER AGENTS FROM TIME TO TIME HERETO, THE RELATED COMMITTED PURCHASERS FROM TIME TO TIME PARTY HERETO, GIRO BALANCED FUNDING CORPORATION, AS A CONDUIT PURCHASER, LA FAYETTE ASSET SECURITIZATION LLC, AS A CONDUIT PURCHASER, AMSTERDAM FUNDING CORPORATION, AS A CONDUIT PURCHASER AND THE OTHER CONDUIT PURCHASERS FROM TIME TO TIME PARTY HERETO ================================================================================ Exhibit 10-k TABLE OF CONTENTS
PAGE ARTICLE I PURCHASES FROM SELLER AND SETTLEMENTS..................................................1 Section 1.1. Sales..................................................................................1 Section 1.2. Interim Liquidations...................................................................4 Section 1.3. Selection of Discount Rates and Tranche Periods........................................4 Section 1.4. Fees and Other Costs and Expenses......................................................4 Section 1.5. Maintenance of Sold Interest; Deemed Collection........................................5 Section 1.6. Reduction in Commitments...............................................................5 Section 1.7. Repurchases............................................................................5 Section 1.8. Security Interest......................................................................6 ARTICLE II SALES TO AND FROM CONDUIT PURCHASERS; ALLOCATIONS......................................7 Section 2.1. Required Purchases from a Conduit Purchaser............................................7 Section 2.2. Purchases by a Conduit Purchaser.......................................................7 Section 2.3. Allocations and Distributions..........................................................7 ARTICLE III ADMINISTRATION AND COLLECTIONS.........................................................9 Section 3.1. Appointment of Collection Agent........................................................9 Section 3.2. Duties of Collection Agent............................................................10 Section 3.3. Reports...............................................................................10 Section 3.4. Lock-Box Arrangements.................................................................11 Section 3.5. Enforcement Rights....................................................................11 Section 3.6. Collection Agent Fee..................................................................11 Section 3.7. Responsibilities of the Seller........................................................12 Section 3.8. Actions by Seller.....................................................................12 Section 3.9. Indemnities by the Collection Agent...................................................12 ARTICLE IV REPRESENTATIONS AND WARRANTIES........................................................13 Section 4.1. Representations and Warranties of the Seller..........................................13 Section 4.2. Representations and Warrants of the Initial Collection Agent..........................15 ARTICLE V COVENANTS.............................................................................17 Section 5.1. Covenants of the Seller...............................................................17 Section 5.2. Covenants of the Initial Collection Agent.............................................22 ARTICLE VI INDEMNIFICATION.......................................................................25 Section 6.1. Indemnities by the Seller.............................................................25 Section 6.2. Increased Cost and Reduced Return.....................................................27 Section 6.3. Other Costs and Expenses..............................................................27
-i-
PAGE Section 6.4. Withholding Taxes.....................................................................28 Section 6.5. Payments and Allocations..............................................................29 ARTICLE VII CONDITIONS PRECEDENT..................................................................29 Section 7.1. Conditions to Closing.................................................................29 Section 7.2. Conditions to Each Purchase...........................................................30 Section 7.3. Addition and Removal of Originators...................................................30 ARTICLE VIII THE AGENT.............................................................................32 Section 8.1. Appointment and Authorization.........................................................32 Section 8.2. Delegation of Duties..................................................................32 Section 8.3. Exculpatory Provisions................................................................32 Section 8.4. Reliance by Agent and Purchaser Agents................................................33 Section 8.5. Assumed Payments......................................................................33 Section 8.6. Notice of Termination Events..........................................................34 Section 8.7. Non-Reliance on Agent and Other Purchasers............................................34 Section 8.8. Agent, Purchaser Agents and Affiliates................................................34 Section 8.9. Indemnification.......................................................................35 Section 8.10. Successor Agent.......................................................................35 ARTICLE IX MISCELLANEOUS.........................................................................35 Section 9.1. Termination...........................................................................35 Section 9.2. Notices...............................................................................35 Section 9.3. Payments and Computations.............................................................36 Section 9.4. Sharing of Recoveries.................................................................36 Section 9.5. Right of Setoff.......................................................................37 Section 9.6. Amendments............................................................................37 Section 9.7. Waivers...............................................................................37 Section 9.8. Successors and Assigns; Participations; Assignments...................................38 Section 9.9. Waiver of Confidentiality.............................................................40 Section 9.10. Confidentiality of Agreement..........................................................40 Section 9.11. Agreement Not to Petition.............................................................40 Section 9.12. Excess Funds..........................................................................41 Section 9.13. No Recourse...........................................................................41 Section 9.14. Headings; Counterparts................................................................41 Section 9.15. Cumulative Rights and Severability....................................................41 Section 9.16. Governing Law; Submission to Jurisdiction.............................................42 Section 9.17. Waiver of Trial by Jury...............................................................42 Section 9.18. Intended Tax Characterization.........................................................42 Section 9.19. Entire Agreement......................................................................42 Section 9.20. Extensions of Scheduled Termination Date..............................................42
-ii- SCHEDULES DESCRIPTION Schedule I Definitions Schedule II Purchasers EXHIBITS DESCRIPTION Exhibit A Form of Incremental Purchase Request Exhibit B Form of Periodic Report Exhibit C Addresses and Names of Seller and Originators Exhibit D Lock-Boxes and Lock-Box Banks Exhibit E Form of Lock-Box Letter Exhibit F Form of Compliance Certificate Exhibit G Credit and Collection Policy Exhibit H Form of Amendment and Reaffirmation of Limited Guaranty Exhibit I Form of Supplement to Schedules
-iii- Exhibit 10-k SECOND AMENDED AND RESTATED RECEIVABLES SALE AGREEMENT THIS SECOND AMENDED AND RESTATED RECEIVABLES SALE AGREEMENT, dated as of September 26, 2002, among ArvinMeritor Receivables Corporation, a Delaware corporation (the "Seller"), ArvinMeritor, Inc., an Indiana corporation (the "Initial Collection Agent," and, together with any successor thereto, the "Collection Agent"), the Related Committed Purchasers party hereto (the "Related Committed Purchasers"), Giro Balanced Funding Corporation ("GBFC"), La Fayette Asset Securitization LLC ("La Fayette"), Amsterdam Funding Corporation ("Amsterdam"), the other Conduit Purchasers from time to time party hereto, Credit Lyonnais, acting through its New York Branch, as agent for the Purchasers (the "Agent") and as a Purchaser Agent, Bayerische Landesbank, New York Branch ("BLB"), as a Purchaser Agent, ABN AMRO Bank N.V. ("ABN AMRO"), as a Purchaser Agent and the other Purchaser Agents from time to time to the party hereto. Certain capitalized terms used herein, and certain rules of construction, are defined in Schedule I. PRELIMINARY STATEMENT The Seller, Initial Collection Agent, Agent, BLB, Atlantic Asset Securitization Corp. ("Atlantic"), GBFC, La Fayette, ABN AMRO, Amsterdam, and certain related committed purchasers are parties to an Amended and Restated Receivables Sale Agreement, dated as of September 27, 2001 (such Amended and Restated Receivables Sale Agreement, as heretofore amended, being referred to herein as the "Original Agreement"); and Subject to and upon the terms and conditions set forth herein, the parties desire to amend and restate the Original Agreement in the form of this Agreement to, among other things, provide for the appointment of Credit Lyonnais, acting through its New York Branch, as successor agent under this Agreement; NOW, THEREFORE, in consideration of the mutual agreements contained herein and the other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: ARTICLE I PURCHASES FROM SELLER AND SETTLEMENTS Section 1.1. Sales. (a) The Sold Interest. Subject to the terms and conditions hereof, the Seller may, from time to time before the Termination Date, sell to the Conduit Purchasers or, only if a Conduit Purchaser declines to make the applicable purchase, ratably to the Related Committed Purchasers for such Conduit Purchaser, an undivided percentage ownership interest in the Receivables, the Related Security and all related Collections. Any such purchase (a "Purchase") shall be made by each relevant Purchaser remitting funds to the Seller, through the Agent, pursuant to Section 1.1(c) or by the Collection Agent remitting Collections to the Seller pursuant to Section 1.1(d). The aggregate percentage ownership interest so acquired by a Purchaser in the Receivables, the Related Security and related Collections (its "Purchase Interest") shall equal at any time the sum of the following percentages: I + PRP ----- ER where: I = the outstanding Investment of such Purchaser at such time; ER = the Eligible Receivables Balance at such time; and PRP = the Purchaser Reserve Percentage at such time. Except during a Liquidation Period for a Purchaser, such Purchaser's Purchase Interest will change whenever its Investment, its Purchaser Reserve Percentage or the Eligible Receivables Balance changes. During a Liquidation Period for a Purchaser its Purchase Interest shall remain constant at the percentage in effect as of the day immediately preceding the commencement of the relevant Liquidation Period, except for redeterminations to reflect Investment acquired from or transferred to another Purchaser under the Transfer Agreement. The sum of all Purchasers' Purchase Interests at any time is referred to herein as the "Sold Interest," which at any time is the aggregate percentage ownership interest then held by the Purchasers in the Receivables, the Related Security and Collections. (b) Conduit Purchasers' Purchase Option and Committed Purchasers' Commitments. Subject to Section 1.1(d) concerning Reinvestment Purchases, at no time will a Conduit Purchaser have any obligation to make a Purchase. Each Committed Purchaser severally hereby agrees, subject to Section 7.2 and the other terms and conditions hereof, (including, in the case of an Incremental Purchase (as defined below), that the related Conduit Purchaser has refused to make a requested Purchase), to make Purchases before the Termination Date, based on the applicable Purchaser Group's Ratable Share of each Purchase (and, in the case of each Committed Purchaser, its Commitment Percentage of its Purchaser Group's Ratable Share of such Purchase), to the extent its Investment would not thereby exceed its Commitment and the Matured Aggregate Investment would not thereby exceed the Aggregate Commitments. Each Purchaser's first Purchase and each additional Purchase by such Purchaser not made from Collections pursuant to Section 1.1(d) is referred to herein as an "Incremental Purchase." Each Purchase made by a Purchaser with the proceeds of Collections in which it has a Purchase Interest, which does not increase the outstanding Investment of such Purchaser, is referred to herein as a "Reinvestment Purchase." All Purchases hereunder shall be made ratably by each Purchaser Group in accordance with the Commitment of such Purchaser Group. (c) Incremental Purchases. In order to request an Incremental Purchase from a Purchaser, the Seller must provide to the Agent and each Purchaser Agent an irrevocable written request (including by telecopier or other facsimile communication) substantially in the form of Exhibit A, by (i) 10:00 a.m. (New York City time) three Business Days before the requested date -2- (the "Purchase Date") of such Purchase, in the case of each Purchase by a Conduit Purchaser and in the case of each Purchase by the Committed Purchasers that is to accrue Discount at the Eurodollar Rate and (ii) 10:00 a.m. (New York City time) one Business Day before the requested Purchase Date in the case of each Purchase by the Committed Purchasers that is to accrue Discount at the Prime Rate. Each such notice shall specify the requested Purchase Date (which must be a Business Day) and the requested amount (the "Purchase Amount") of such Purchase, which must be in a minimum amount of $1,000,000 and multiples thereof (or, if less, an amount equal to the Maximum Incremental Purchase Amount). All Incremental Purchases must be requested ratably from all Conduit Purchasers unless upon such request, a Conduit Purchaser, in its sole discretion, determines not to make its Ratable Share of the requested Purchase (which determination shall be made within one Business Day after the Seller's request for an Incremental Purchase), in which case the Seller may request such Ratable Share of the Incremental Purchase be made by the Related Committed Purchasers of such Conduit Purchaser on the originally requested Purchase Date. Each Purchaser Agent shall promptly notify the related Purchasers from which a Purchase is requested of the contents of such request. If a Ratable Share of an Incremental Purchase is requested from a Conduit Purchaser and such Conduit Purchaser determines, in its sole discretion, to make the requested Purchase, such Conduit Purchaser shall transfer to the Agent's Account its Ratable Share of such Incremental Purchase by no later than 12:00 noon (New York City time) on the Purchase Date. If a Ratable Share of an Incremental Purchase is requested from the Committed Purchasers for a Purchaser Group, subject to Section 7.2 and the other terms and conditions hereof, each Committed Purchaser for a Purchaser Group shall transfer the applicable Purchaser Group's Ratable Share of the requested Purchase Amount (and, in the case of each Committed Purchaser, its Commitment Percentage of its Purchaser Group's Ratable Share of such Purchase) into the Agent's Account by no later than 12:00 noon (New York City time) on the Purchase Date. The Agent shall transfer to the Seller Account the proceeds of any Incremental Purchase delivered into the Agent's Account. (d) Reinvestment Purchases. Unless a Conduit Purchaser has provided to the Agent, its Purchaser Agent, the Seller, and the Collection Agent a notice (which notice has not been revoked) that it no longer wishes to make Reinvestment Purchases (in which case such Conduit Purchaser's Reinvestment Purchases, but not those of its Related Committed Purchasers shall cease), on each day before the Termination Date that any Collections are received by the Collection Agent and no Interim Liquidation is in effect a Purchaser's Purchase Interest in such Collections shall automatically be used to make a Reinvestment Purchase by such Purchaser, but only to the extent such Reinvestment Purchase would not cause the Purchaser's Investment to increase above the amount of such Investment at the start of the day plus any Incremental Purchases made by the Purchaser on that day. A Conduit Purchaser may revoke any notice provided under the first sentence of this Section 1.1(d) by notifying the Agent, its Purchaser Agent, the Seller and the Collection Agent that it will make Reinvestment Purchases. (e) Assignments. Pursuant to the Original Agreement, the Purchaser Agents (on behalf of the related Conduit Purchasers) have from time to time purchased Receivables which are currently outstanding in the amount of $105,000,000. The parties hereto are amending and restating the Original Agreement in order to remove Atlantic as a Conduit Purchaser hereunder and ABN AMRO as the Agent. Pursuant to the terms of a Transfer Supplement, Atlantic has -3- sold and assigned to La Fayette, and La Fayette has purchased and assumed from Atlantic a Purchased Interest in the Receivables which are held by Credit Lyonnais for the benefit of Atlantic in the amount of $10,500,000 for La Fayette. Amsterdam hereby sells and assigns to La Fayette, and La Fayette hereby purchases and assumes from Amsterdam, a Purchased Interest in the Receivables which are held by ABN AMRO for the benefit of Amsterdam in the amount of $10,500,000 such that the Purchased Interests of La Fayette in Receivables which are outstanding on the date hereof shall equal $42,000,000 and the Purchased Interest of Amsterdam shall equal $31,500,000. Amsterdam represents and warrants that it is the legal and beneficial owner of the Purchased Interest assigned by it hereunder and that such Purchased Interest is free and clear of any Adverse Claim created by ABN AMRO and/or Amsterdam. Section 1.2. Interim Liquidations. (a) Optional. The Seller may at any time direct that Reinvestment Purchases cease and that an Interim Liquidation commence for all Purchasers by giving the Agent, each Purchaser Agent and the Collection Agent at least three Business Days' prior written (including telecopy or other facsimile communication) notice specifying the date on which the Interim Liquidation shall commence and, if desired, when such Interim Liquidation shall cease (identified as a specific date prior to the Termination Date or as when the Aggregate Investment is reduced to a specified amount). If the Seller does not so specify the date on which an Interim Liquidation shall cease, it may cause such Interim Liquidation to cease at any time before the Termination Date, subject to Section 1.2(b) below, by notifying the Agent, each Purchaser Agent and the Collection Agent in writing (including by telecopy or other facsimile communication) at least three Business Days before the date on which it desires such Interim Liquidation to cease. (b) Mandatory. If at any time before the Termination Date any condition in Section 7.2 is not fulfilled, the Seller shall immediately notify the Agent, each Purchaser Agent and the Collection Agent, whereupon Reinvestment Purchases shall cease and an Interim Liquidation shall commence, which shall only cease upon the Seller confirming to the Agent that the conditions in Section 7.2 are fulfilled. Section 1.3. Selection of Discount Rates and Tranche Periods. The Discount Rates, Tranche Periods and related matters for all Investment of each Purchaser Group shall be set forth in and governed by the terms of, the Rate Supplement for such Purchaser Group. Each such Rate Supplement shall supplement this Agreement with respect to the terms and provisions set forth therein. Section 1.4. Fees and Other Costs and Expenses. (a) The Seller shall pay to each Purchaser Agent for the benefit of its Purchaser Group, such amounts as agreed to with the Seller in the Fee Letter for such Purchaser Group. (b) Investment and Discount shall be payable solely from Collections and from amounts payable under Sections 1.5, 1.7 and 6.1 (to the extent amounts paid under Section 6.1 indemnify against reductions in or non-payment of Receivables). The Seller shall pay, as a full recourse obligation, all other amounts payable hereunder and under the Rate Supplements (other than Discount), including, without limitation, fees described in the Fee Letters and amounts payable under Article VI. -4- Section 1.5. Maintenance of Sold Interest; Deemed Collection. (a) General. If at any time before the Termination Date the Eligible Receivables Balance is less than the sum of the Aggregate Investment (or, if a Termination Event exists, the Matured Aggregate Investment) plus the Total Reserve, the Seller shall immediately pay to the Agent an amount equal to such deficiency for application to reduce the Investments of the Purchasers ratably in accordance with the principal amount of their respective Investments, applied with respect to each such Purchaser first to such Purchaser's Prime Tranches, if any, and second to the other Tranches applicable to the Investment of such Purchaser with the shortest remaining maturities unless otherwise specified by the Seller. (b) Deemed Collections. If on any day the outstanding balance of a Receivable is reduced or cancelled as a result of any defective or rejected goods or services, any cash discount or adjustment (including any adjustment resulting from the application of any special refund or other discounts or any reconciliation), any setoff or credit (whether such claim or credit arises out of the same, a related, or an unrelated transaction) or any other reason other than the financial inability of the Obligor to pay undisputed indebtedness, the Seller shall be deemed to have received on such day a Collection on such Receivable in the amount of such reduction or cancellation. If on any day any representation, warranty, covenant or other agreement of the Seller related to a Receivable is not true or is not satisfied, the Seller shall be deemed to have received on such day a Collection in the amount of the outstanding balance of such Receivable. All such Collections deemed received by the Seller under this Section 1.5(b) shall be remitted by the Seller to the Collection Agent in accordance with Section 5.1(i). (c) Adjustment to Sold Interest. At any time before the Termination Date that the Seller is deemed to have received any Collection under Section 1.5(b) ("Deemed Collections") that derives from a Receivable that is otherwise reported as an Eligible Receivable, so long as no Liquidation Period then exists, the Seller may satisfy its obligations to deliver such amount to the Collection Agent by instead notifying the Agent that the Sold Interest should be recalculated by decreasing the Eligible Receivables Balance by the amount of such Deemed Collections, so long as such adjustment does not cause the Sold Interest to exceed 100%. (d) Payment Assumption. Unless an Obligor otherwise specifies or another application is required by contract or law, any payment received by the Seller from any Obligor shall be applied as a Collection of Receivables of such Obligor (starting with the oldest such Receivable) and remitted to the Collection Agent as such. Section 1.6. Reduction in Commitments. The Seller may, upon thirty days' notice to the Agent and each Purchaser Agent, reduce the Aggregate Commitment in increments of $1,000,000, so long as the Aggregate Commitment as so reduced is no less than the Matured Aggregate Investment. Each such reduction in the Aggregate Commitment shall reduce the Commitment of each Purchaser Group in accordance with its Ratable Share (and, in the case of each Committed Purchaser, its Commitment in accordance with its Commitment Percentage of its Purchaser Group's Ratable Share of such reduction). Section 1.7. Optional Repurchases. At any time that the Aggregate Investment is less than 10% of the Aggregate Commitment in effect on the date hereof, the Seller may, upon thirty -5- days' notice to the Agent and each Purchaser Agent, repurchase the entire Sold Interest from the Purchasers at a price equal to the outstanding Matured Aggregate Investment and all other amounts then owed hereunder. Section 1.8. Security Interest. (a) The Seller hereby grants to the Agent, for its own benefit and for the ratable benefit of the Purchaser Agents and Purchasers, a security interest in all Receivables, Related Security, Collections and Lock-Box Accounts to secure the payment of all amounts other than Investment owing hereunder and (to the extent of the Sold Interest) to secure the repayment of all Investment. (b) The Seller hereby assigns and otherwise transfers to the Agent (for the benefit of the Agent, each Purchaser Agent, each Purchaser and any other Person to whom any amount is owed hereunder), all of the Seller's right, title and interest in, to and under the Purchase Agreement. The Seller shall execute, file and record all financing statements, continuation statements and other documents required to perfect or protect such assignment. This assignment includes (a) all monies due and to become due to the Seller from the Originators under or in connection with the Purchase Agreement (including fees, expenses, costs, indemnities and damages for the breach of any obligation or representation related to such agreements) and (b) all rights, remedies, powers, privileges and claims of the Seller against the Originators under or in connection with the Purchase Agreement. All provisions of the Purchase Agreement shall inure to the benefit of, and may be relied upon by, the Agent, each Purchaser Agent, each Purchaser and each such other Person. At any time that a Termination Event has occurred and is continuing, the Agent shall have the sole right to enforce the Seller's rights and remedies under the Purchase Agreement to the same extent as the Seller could absent this assignment, but without any obligation on the part of the Agent, any Purchaser Agent, any Purchaser or any other such Person to perform any of the obligations of the Seller under the Purchase Agreement (or the promissory note executed thereunder). All amounts distributed to the Seller under the Purchase Agreement from Receivables sold to the Seller thereunder shall constitute Collections hereunder and shall be applied in accordance herewith. (c) This agreement shall be a security agreement for purposes of the UCC. Upon the occurrence of a Termination Event, the Agent shall have all rights and remedies provided under the UCC as in effect in all applicable jurisdictions. (d) ABN AMRO as the prior Agent under the Original Agreement (the "Prior Agent") hereby assigns and transfers to Credit Lyonnais as the Agent under this Agreement all of its right, title and interest in, to and under the liens and security interests granted to ABN AMRO as the Prior Agent pursuant to Section 1.8 of the Original Agreement and all financing statements filed in connection therewith, all without recourse, representation and warranty of any nature whatsoever. -6- ARTICLE II SALES TO AND FROM CONDUIT PURCHASERS; ALLOCATIONS Section 2.1. Required Purchases from a Conduit Purchaser. (a) Each Conduit Purchaser may, at any time, sell to its Related Committed Purchasers pursuant to the relevant Transfer Agreement any percentage designated by such Conduit Purchaser of such Conduit Purchaser's Investment and its related Conduit Purchaser Settlement (each, a "Put"). (b) Any portion of any Investment of a Conduit Purchaser and related Conduit Purchaser Settlement purchased by a Committed Purchaser shall be considered part of such Committed Purchaser's Investment and related Conduit Purchaser Settlement from the date of the relevant Put. Immediately upon any purchase by a Committed Purchaser of any portion of the relevant Conduit Purchaser's Investment, the Seller shall pay to the relevant Purchaser Agent (for the ratable benefit of each such Purchaser) an amount equal to the sum of (i) the Assigned Settlement and (ii) all unpaid Discount owed to such Conduit Purchaser (whether or not then due) to the end of each applicable Tranche Period to which any Investment being Put has been allocated, (iii) all accrued but unpaid fees (whether or not then due) payable to such Conduit Purchaser in connection herewith at the time of such purchase and (iv) all accrued and unpaid costs, expenses and indemnities due to such Conduit Purchaser from the Seller in connection herewith. Section 2.2. Purchases by a Conduit Purchaser. Each Conduit Purchaser may at any time deliver to its Purchaser Agent and each of its Related Committed Purchasers a notification of assignment in substantially the form provided by the relevant Transfer Agreement. If a Conduit Purchaser delivers such notice, each of its Related Committed Purchasers shall sell to such Conduit Purchaser and such Conduit Purchaser shall purchase in full from each such Related Committed Purchasers, the Investment of such Related Committed Purchasers on the last day of the relevant Tranche Periods, at a purchase price equal to such Investment plus accrued and unpaid Discount thereon. Any sale from any Related Committed Purchaser to the relevant Conduit Purchaser pursuant to this Section 2.2 shall be without recourse, representation or warranty except for the representation and warranty that the Investment sold by such Related Committed Purchaser is free and clear of any Adverse Claim created or granted by such Related Committed Purchaser and that such Related Committed Purchaser has not suffered a Bankruptcy Event. Section 2.3. Allocations and Distributions. (a) Non-Reinvestment Periods. Before the Termination Date unless an Interim Liquidation is in effect, on each day during a period that a Conduit Purchaser is not making Reinvestment Purchases (as established under Section 1.1(d)), the Collection Agent (i) shall set aside and hold in trust solely for the benefit of the applicable Conduit Purchaser (or deliver to the applicable Purchaser Agent, if so instructed pursuant to Section 3.2(a)) such Conduit Purchaser's Purchase Interest in all Collections received on such day and (ii) shall distribute on the last day of each CP Tranche Period to the applicable Purchaser Agent (for the benefit of such Conduit Purchaser) the amounts so set aside up to the amount of such Conduit Purchaser's Purchase Interest and, to the extent not already paid in full, all Discount thereon and all other amounts then due from the Seller in connection with such -7- Purchase Interest and Tranche Period. If any part of the Sold Interest in any Collections is applied to pay any such amounts pursuant to this Section 2.3(a) and after giving effect to such application the Sold Interest is greater than 100%, the Seller shall pay for distribution as part of the Sold Interest in Collections, to the Collection Agent the amount so applied to the extent necessary so that after giving effect to such payment the Sold Interest is no greater than 100%. (b) Termination Date and Interim Liquidations. On each day during any Interim Liquidation and on each day on and after the Termination Date, the Collection Agent shall set aside and hold solely for the account of each Purchaser Agent, for the benefit of each Purchaser Group to the extent provided below, (or deliver to each Purchaser Agent, if so instructed pursuant to Section 3.2(a)) and for the account of the Agent, all Collections received on such day and such Collections shall be allocated as follows: (i) first, to the Collection Agent until all amounts owed to the Collection Agent under the Agreement have been paid in full; (ii) second, ratably to each Purchaser Group until all Investment of, and Discount and interest due but not already paid to, each Purchaser Group has been paid in full; (iii) third, ratably to such Purchaser Group until all other amounts owed to such Purchaser Group under the Transaction Documents have been paid in full; (iv) fourth, to the Agent until all amounts owed to the Agent (other than amounts owing the Agent in its role as a Purchaser Agent) have been paid in full; (v) fifth, to each Purchaser Agent until all amounts owed to the Purchaser Agents under the Transaction Documents have been paid in full; (vi) sixth, to any other Person to whom any amounts are owed under the Transaction Documents until all such amounts have been paid in full; and (vii) seventh, to the Seller (or as otherwise required by applicable law). Unless an Interim Liquidation has ended by such date (in which case Reinvestment Purchases shall resume to the extent provided in Section 1.1(d)), on the last day of each Tranche Period (unless otherwise instructed by a Purchaser Agent pursuant to Section 3.2(a)), the Collection Agent shall pay to the appropriate parties, from such set aside Collections, all amounts allocated to such Tranche Period and all Tranche Periods that ended before such date that are due in accordance with the priorities in clauses (ii) and (iii) above. No distributions shall be made to pay amounts under clauses (iv), (v), (vi) and (vii) above until sufficient Collections have been set aside to pay all amounts described in clauses (ii) and (iii) that may become payable for all outstanding Tranche Periods. All distributions by the Agent shall be made ratably within each priority level in accordance with the respective amounts then due each Person included in such level unless otherwise agreed by all Purchaser Agents. If any part of the Sold Interest in any Collections is applied to pay any amounts, payable hereunder that are obligations of the Seller -8- pursuant to Section 1.4(b) and after giving effect to such application the Sold Interest is greater than 100%, the Seller shall pay for distribution in respect of each applicable Purchaser's Investment as part of the Sold Interest in Collections, to the Collection Agent the amount so applied to the extent necessary so that after giving effect to such payment the Sold Interest is no greater than 100%. ARTICLE III ADMINISTRATION AND COLLECTIONS Section 3.1. Appointment of Collection Agent. (a) The servicing, administering and collecting of the Receivables shall be conducted by a Person (the "Collection Agent") designated to so act on behalf of the Purchasers under this Article III. As the Initial Collection Agent, the Parent is hereby designated as, and agrees to perform the duties and obligations of, the Collection Agent. The Initial Collection Agent acknowledges that the Agent, each Purchaser Agent, and each Purchaser have relied on the Initial Collection Agent's agreement to act as Collection Agent (and the agreement of any of the sub-collection agents to so act) in making the decision to execute and deliver this Agreement and agrees that it will not voluntarily resign as Collection Agent nor permit any sub-collection agent to voluntarily resign as a sub-collection agent. At any time after the occurrence and during the continuance of a Termination Event, the Agent may designate a new Collection Agent to succeed the Initial Collection Agent (or any successor Collection Agent). (b) The Initial Collection Agent may (with prior written notice to the Agent), and if requested by the Agent shall, delegate its duties and obligations as Collection Agent to an Affiliate of the Initial Collection Agent (acting as a sub-collection agent). The Initial Collection Agent shall delegate certain duties with respect to Receivables originated by such respective Originator to that respective Originator pursuant to the terms of the Letter Agreement. Notwithstanding such delegation, the Initial Collection Agent shall remain primarily liable for the performance of the duties and obligations so delegated, and the Agent, each Purchaser Agent and each Purchaser shall have the right to look solely to the Initial Collection Agent for such performance. The Agent may at any time remove or replace any sub-collection agent. (c) If replaced, the Collection Agent agrees it will terminate, and will cause each existing sub-collection agent to terminate, its collection activities in a manner requested by the Agent to facilitate the transition to a new Collection Agent. The Collection Agent shall cooperate with and assist any new Collection Agent (including providing access to, and transferring, all Records and allowing (to the extent permitted by applicable law and contract) the new Collection Agent to use all licenses, hardware or software necessary or desirable to collect the Receivables). The Initial Collection Agent irrevocably agrees to act (if requested to do so) as the data-processing agent for any new Collection Agent (in substantially the same manner as the Initial Collection Agent conducted such data-processing functions while it acted as the Collection Agent). -9- Section 3.2. Duties of Collection Agent. (a) The Collection Agent shall take, or cause to be taken, all action necessary or advisable to collect each Receivable in accordance with this Agreement, the Credit and Collection Policy and all applicable laws, rules and regulations using the skill and attention the Collection Agent exercises in collecting other receivables or obligations owed solely to it. The Collection Agent shall, in accordance herewith, set aside all Collections to which a Purchaser is entitled and pay from such Collections all Discount and the fees set forth in the Fee Letters when due. If so instructed by the Agent, the Collection Agent shall transfer to the Agent the amount of Collections to which the Agent, each Purchaser Agent and the Purchasers are entitled by the Business Day following receipt. Each party hereto hereby appoints the Collection Agent to enforce such Person's rights and interests in the Receivables, but (notwithstanding any other provision in any Transaction Document) the Agent shall at all times have the sole right to direct the Collection Agent to commence or settle any legal action to enforce collection of any Receivable. (b) If no Termination Event exists and the Collection Agent determines that such action is appropriate in order to maximize the Collections, the Collection Agent may, in accordance with the applicable Credit and Collection Policy, extend the maturity of any Receivable, and extend the maturity or adjust the outstanding balance of any Defaulted Receivables as the Collection Agent may determine to be appropriate to maximize collections thereof; provided, however, that if a Termination Event has occurred the Collection Agent may make such extension or adjustment only upon written approval of the Agent. Any such extension or adjustment shall not alter the status of a Receivable as a Defaulted Receivable, affect the computation of the Delinquency Ratio or limit any rights of the Agent or the Purchasers hereunder. If a Termination Event exists, the Collection Agent may make such extensions or adjustments only with the prior consent of the Instructing Group. (c) The Collection Agent shall turn over to the Seller (i) any percentage of Collections in excess of the Sold Interest, less all reasonable costs and expenses of the Collection Agent for servicing, collecting and administering the Receivables and (ii) subject to Section 1.5(d), the collections and records for any indebtedness owed to the Seller that is not a Receivable. The Collection Agent shall have no obligation to remit any such funds or records to the Seller until the Collection Agent receives evidence (satisfactory to the Agent) that the Seller is entitled to such items. The Collection Agent has no obligations concerning indebtedness that is not a Receivable other than to deliver the collections and records for such indebtedness to the Seller when required by this Section 3.2(c). Section 3.3. Reports. On or before the 25th day of each month, and, after the occurrence and during the continuance of a Termination Event, at such other times covering such other periods as is requested by the Agent or the Instructing Group, the Collection Agent shall deliver to the Agent and each Purchaser Agent a report reflecting information as of the close of business of the Collection Agent for the immediately preceding calendar month or such other preceding period as is requested (each a "Periodic Report"), containing the information described on Exhibit B (with such modifications or additional information as requested by the Agent or the Instructing Group); provided, however, if the Parent's long-term unsecured debt rating from both Moody's and S&P is less than Baa3 and BBB-, the Collection Agent shall deliver the Periodic Report to the Agent and each Purchaser Agent on or before Wednesday of each week for the -10- immediately preceding calendar week; provided, further, however, if the Parent's long-term unsecured debt rating is less than "Ba2" from Moody's or less than "BB" from S&P, respectively, the Collection Agent shall deliver the Periodic Report to the Agent and each Purchaser Agent on each Business Day. Section 3.4. Lock-Box Arrangements. The Agent is hereby authorized to give notice at any time to any or all Lock-Box Banks that the Agent is exercising its rights under the Lock-Box Letters and to take all actions permitted under the Lock-Box Letters. The Seller agrees to take any action requested by the Agent to facilitate the foregoing. After the Agent takes any such action under the Lock-Box Letters, the Seller shall immediately deliver to the Agent any Collections received by the Seller. If the Agent takes control of any Lock-Box Account, the Agent shall distribute Collections it receives in accordance herewith and shall deliver to the Collection Agent, for distribution under Section 3.2, all other amounts it receives from such Lock-Box Account. Section 3.5. Enforcement Rights. (a) The Agent may, at any time, direct the Obligors and the Lock-Box Banks to make all payments on the Receivables directly to the Agent or its designee. The Agent may, and the Seller shall at the Agent's request, withhold the identity of the Purchasers from the Obligors and Lock-Box Banks. Upon the Agent's request and only after a Potential Termination Event, the Seller (at the Seller's expense) shall (i) give notice to each Obligor of the Purchasers' ownership of the Sold Interest and direct that payments on Receivables be made directly to the Agent or its designee, (ii) assemble for the Agent all Records and collateral security for the Receivables and the Related Security and transfer to the Agent (or its designee), or (to the extent permitted by applicable law and contract) license to the Agent (or its designee) the use of, all software useful to collect the Receivables and (iii) segregate in a manner acceptable to the Agent all Collections the Seller receives and, promptly upon receipt, remit such Collections in the form received, duly endorsed or with duly executed instruments of transfer, to the Agent or its designee. (b) The Seller hereby irrevocably appoints the Agent as its attorney-in-fact coupled with an interest, with full power of substitution and with full authority in the place of the Seller, to take any and all steps deemed desirable by the Agent, in the name and on behalf of the Seller to (i) collect any amounts due under any Receivable, including endorsing the name of the Seller on checks and other instruments representing Collections and enforcing such Receivables and the Related Security, and (ii) exercise any and all of the Seller's rights and remedies under the Purchase Agreement. The Agent's powers under this Section 3.5(b) shall not subject the Agent to any liability if any action taken by it proves to be inadequate or invalid, nor shall such powers confer any obligation whatsoever upon the Agent. (c) None of the Agent, any Purchaser Agent or any Purchaser shall have any obligation to take or consent to any action to realize upon any Receivable or Related Security or to enforce any rights or remedies related thereto. Section 3.6. Collection Agent Fee. On or before the 25th day of each calendar month, the Seller shall pay to the Collection Agent a fee for the immediately preceding calendar month as compensation for its services (the "Collection Agent Fee") equal to (a) at all times the Initial -11- Collection Agent or an Affiliate of the Initial Collection Agent is the Collection Agent, the Seller Servicing Fee, the sufficiency of which is hereby acknowledged, and (b) at all times any other Person is the Collection Agent, the Outside Servicing Fee. The Agent may, with the consent of the Instructing Group, pay the Collection Agent Fee to the Collection Agent from the Sold Interest in Collections. The Seller shall be obligated to reimburse any such payment to the extent required by Section 1.5 or 2.3. Section 3.7. Responsibilities of the Seller. The Seller shall pay when due all Taxes payable in connection with the Receivables and the Related Security or their creation or satisfaction. The Seller shall cause each Originator to perform all of its obligations under agreements related to the Receivables and the Related Security to the same extent as if interests in the Receivables and the Related Security had not been transferred hereunder or under the Purchase Agreement. The Agent's or any Purchaser's exercise of any rights hereunder shall not relieve the Seller or an Originator from such obligations. None of the Agent, any Purchaser Agent or any Purchaser shall have any obligation to perform any obligation of the Seller or an Originator or any other obligation or liability in connection with the Receivables or the Related Security. Section 3.8. Actions by Seller. If any goods related to a Receivable are repossessed, the Seller agrees to resell, or to have the related Originator or another Affiliate resell, such goods in a commercially reasonable manner for the account of the Agent and remit, or have remitted, to the Agent the Purchasers' share in the gross sale proceeds thereof net of any out-of-pocket expenses and any equity of redemption of the Obligor thereon. Any such moneys collected by the Seller or the related Originator or other Affiliate of the Seller pursuant to this Section 3.8 shall be segregated and held in trust for the Agent and remitted to the Agent's Account within one Business Day of receipt as part of the Sold Interest in Collections for application as provided herein. Section 3.9. Indemnities by the Collection Agent. Without limiting any other rights any Person may have hereunder or under applicable law, the Collection Agent hereby indemnifies and holds harmless the Agent, each Purchaser Agent and each Purchaser and their respective officers, directors, agents and employees (each a "Collection Agent Indemnified Party") from and against any and all damages, losses, claims, liabilities, penalties, Taxes, costs and expenses (including reasonable attorneys' fees and court costs) (all of the foregoing collectively, the "Collection Agent Indemnified Losses") at any time imposed on or incurred by any Collection Agent Indemnified Party arising out of or otherwise relating to: (i) any representation or warranty made by, on behalf of or in respect of, the Collection Agent in this Agreement, any other Transaction Document, any Periodic Report or any other information or report delivered by the Collection Agent pursuant hereto, which shall have been false or incorrect in any material respect when made; (ii) the failure by the Collection Agent to comply with any applicable law, rule or regulation related to any Receivable or the Related Security; -12- (iii) any loss of a perfected security interest (or in the priority of such security interest) as a result of any commingling by the Collection Agent of funds to which the Agent, any Purchaser Agent or any Purchaser is entitled hereunder with any other funds; (iv) the imposition of any Adverse Claim with respect to any Receivable, Related Security or Lock-Box Account as a result of any action taken by the Collection Agent; or (v) any failure of the Collection Agent to perform its duties or obligations in accordance with the provisions of this Agreement (including, without limitation, compliance with the Credit and Collection Policy) or any other Transaction Document to which the Collection Agent is a party; whether arising by reason of the acts to be performed by the Collection Agent hereunder or otherwise, excluding only Collection Agent Indemnified Losses to the extent (a) a final judgment of a court of competent jurisdiction determined that such Collection Agent Indemnified Losses resulted from gross negligence or willful misconduct of the Collection Agent Indemnified Party seeking indemnification, (b) solely due to the credit risk of the Obligor and for which reimbursement would constitute recourse to the Collection Agent for uncollected or uncollectible Receivables, or (c) such Collection Agent Indemnified Losses include Taxes on, or measured by, the overall net income of the Agent or any Purchaser computed in accordance with the Intended Tax Characterization; provided, however, that nothing contained in this sentence shall limit the liability of the Collection Agent or limit the recourse of the Agent, any Purchaser Agent and each Purchaser to the Collection Agent for any amounts otherwise specifically provided to be paid by the Collection Agent hereunder. ARTICLE IV REPRESENTATIONS AND WARRANTIES Section 4.1. Representations and Warranties of the Seller. The Seller represents and warrants to the Agent, each Purchaser Agent and each Purchaser that: (a) Corporate Existence and Power. The Seller is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and in each jurisdiction in which the conduct of its business requires that it be qualified to do business in such jurisdiction and has all corporate power and authority and all governmental licenses, authorizations, consents and approvals required to carry on its business in each jurisdiction in which its business is now conducted, except where failure to obtain such license, authorization, consent or approval would not have a material adverse effect on (i) its ability to perform its obligations under, or the enforceability of, any Transaction Document, (ii) its business or financial condition, (iii) the interests of the Agent, any Purchaser Agent or any Purchaser under any Transaction Document or (iv) the enforceability or collectibility of any material portion of the Receivables. -13- (b) Corporate Authorization and No Contravention. The execution, delivery and performance by the Seller of each Transaction Document to which it is a party (i) are within its corporate powers, (ii) have been duly authorized by all necessary corporate action, (iii) do not contravene or constitute a default under (A) any applicable law, rule or regulation, (B) its charter or by-laws or (C) any agreement, order or other instrument to which it is a party or its property is subject and (iv) will not result in any Adverse Claim on any Receivable, the Related Security or Collections (other than the Sold Interest) or give cause for the acceleration of any indebtedness of the Seller. (c) No Consent Required. No approval, authorization or other action by, or filings with, any Governmental Authority or other Person is required in connection with the execution, delivery and performance by the Seller of any Transaction Document or any transaction contemplated thereby. (d) Binding Effect. Each Transaction Document to which the Seller is a party constitutes the legal, valid and binding obligation of the Seller enforceable against it in accordance with its terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting the enforcement of creditor's rights generally. (e) Perfection of Ownership Interest. The Seller owns the Receivables free of any Adverse Claim other than the interests of the Agent, the Purchaser Agent and the Purchasers therein that are created hereby, and each Purchaser shall at all times have a valid undivided percentage ownership interest, which shall be a first priority perfected security interest for purposes of Article 9 of the applicable Uniform Commercial Code, in the Receivables, the Related Security and Collections to the extent of its Purchase Interest then in effect. (f) Accuracy of Information. All written information furnished by the Seller to the Agent, any Purchaser Agent or any Purchaser in connection with any Transaction Document, or any transaction contemplated thereby, is true and accurate in all material respects as of the date of such information or the date furnished, as applicable (and is not incomplete by omitting any information necessary to prevent such information from being materially misleading as of the date of such information or the date furnished, as applicable). (g) No Actions, Suits. There are no actions, suits or other proceedings (including matters relating to environmental liability) pending or threatened against or affecting the Seller or any of its properties, that (i) if adversely determined (individually or in the aggregate), may have a material adverse effect on the financial condition of the Seller or on the collectibility of the Receivables or (ii) involve any Transaction Document or any transaction contemplated thereby. The Seller is not in default of any contractual obligation or in violation of any order, rule or regulation of any Governmental Authority, which default or violation may have a material adverse effect upon (i) the financial condition of the Seller or (ii) the collectibility of the Receivables. -14- (h) No Material Adverse Change. Since the date of its formation there has been no material adverse change in the collectibility of the Receivables or the Seller's (i) financial condition, business, operations or prospects or (ii) ability to perform its obligations under any Transaction Document. (i) Accuracy of Exhibits; Lock-Box Arrangements. All information on Exhibits C-D (listing offices and states of organization of the Seller and the Originators and where they maintain Records; and Lock-Boxes) is true and complete, subject to any changes permitted by, and notified to the Agent in accordance with, Article V. The Seller has not granted any interest in any Lock-Box or Lock-Box Account to any Person other than the Agent and, upon execution and delivery of the Lock-Box Agreements and delivery to a Lock-Box Bank of the related Lock-Box Letter, the Seller will have title to each Lock-Box Account and the Agent will have exclusive ownership and control of the Lock-Box Account at such Lock-Box Bank. (j) Sales by an Originator. Each sale by each Originator to the Seller of an interest in Receivables originated by such Originator and Collections thereof has been made in accordance with the terms of the Purchase Agreement, including the payment by the Seller to such Originator of the purchase price described in the Purchase Agreement. Each such sale has been made for "reasonably equivalent value" (as such term is used in Section 548 of the Bankruptcy Code) and not for or on account of "antecedent debt" (as such term is used in Section 547 of the Bankruptcy Code) owed by such Originator to the Seller. (k) No Potential Termination Event. No Potential Termination Event has occurred and is continuing. (l) Eligible Receivables. Each Receivable included in the Eligible Receivables Balance as an Eligible Receivable on the date of any Purchase or Incremental Purchase or listed as such on a Periodic Report is an Eligible Receivable. (m) Underwriting/Collection Practices. To the extent that the Initial Collection Agent is the Collection Agent and the Originators are sub-collection agents, it has complied with the Credit and Collection Policy in all material respects, and such policy has not changed in any material respect since the date hereof. Section 4.2. Representations and Warrants of the Initial Collection Agent. The Initial Collection Agent represents and warrants to the Agent, each Purchaser Agent and each Purchaser that: (a) Corporate Existence and Power. The Initial Collection Agent is a corporation duly organized, validly existing and in good standing under the laws of the State of Indiana and in each jurisdiction in which the conduct of its business requires that it be qualified to do business in such jurisdiction and has all corporate power and authority and all governmental licenses, authorizations, consents and approvals required to carry on its business in each jurisdiction in which its business is now conducted, except -15- where failure to obtain such license, authorization, consent or approval would not have a material adverse effect on (i) its ability to perform its obligations under, or the enforceability of, any Transaction Document, (ii) its business or financial condition, (iii) the interests of the Agent, any Purchaser Agent or any Purchaser under any Transaction Document or (iv) the enforceability or collectibility of any material portion of the Receivables. (b) Corporate Authorization and No Contravention. The execution, delivery and performance by the Initial Collection Agent of each Transaction Document to which it is a party (i) are within its corporate powers, (ii) have been duly authorized by all necessary corporate action, (iii) do not contravene or constitute a default under (A) any applicable law, rule or regulation, (B) its charter or by-laws or (C) any agreement, order or other instrument to which it is a party or its property is subject where the contravention or default would have a material adverse effect on (w) its ability to perform its obligations under, or the enforceability of, any Transaction Document, (x) its business or financial condition, (y) the interests of the Agent, any Purchaser Agent or any Purchaser under any Transaction Document or (z) the enforceability or collectibility of any material portion of the Receivables and (iv) will not result in any Adverse Claim on any Receivable, the Related Security or Collections other than the Sold Interest or give cause for the acceleration of any indebtedness of the Initial Collection Agent. (c) No Consent Required. No approval, authorization or other action by, or filings with, any Governmental Authority or other Person is required in connection with the execution, delivery and performance by the Initial Collection Agent of any Transaction Document or any transaction contemplated thereby. (d) Binding Effect. Each Transaction Document to which the Initial Collection Agent is a party constitutes the legal, valid and binding obligation of the Initial Collection Agent enforceable against it in accordance with its terms, except as may be limited by applicable bankruptcy, insolvency, reorganization, moratorium and similar laws affecting the enforcement of creditor's rights generally. (e) Accuracy of Information. All written information furnished by the Initial Collection Agent to the Agent, any Purchaser Agent or any Purchaser in connection with any Transaction Document, or any transaction contemplated thereby, is true and accurate in all material respects as of the date of such information or the date furnished, as applicable (and is not incomplete by omitting any information necessary to prevent such information from being materially misleading as of the date of such information or the date furnished, as applicable). (f) No Actions, Suits. There are no actions, suits or other proceedings (including matters relating to environmental liability) pending or threatened against or affecting the Initial Collection Agent, or any of its properties, that (i) if adversely determined (individually or in the aggregate), is likely to have a material adverse effect on the financial condition of the Initial Collection Agent and its Subsidiaries, taken as whole, or on the collectibility of the Receivables or (ii) involve any Transaction -16- Document or any transaction contemplated thereby. The Initial Collection Agent is not in default of any contractual obligation or in violation of any order, rule or regulation of any Governmental Authority, which default or violation is likely to have a material adverse effect upon (i) the financial condition of the Initial Collection Agent and its Subsidiaries, taken as whole, or (ii) the collectibility of the Receivables. (g) No Material Adverse Change. Since December 31, 2001, there has been no material adverse change in the collectibility of the Receivables or the Initial Collection Agent's (i) financial condition, business, operations or prospects other than as publicly disclosed prior to the date hereof or (ii) ability to perform its obligations under any Transaction Document. (h) Accuracy of Exhibits; Lock-Box Arrangements. All information on Exhibits C-D (listing offices of the Initial Collection Agent and the Originators and where they maintain Records; and Lock-Boxes) is true and complete, subject to any changes permitted by, and notified to the Agent in accordance with, Article V. (i) No Potential Termination Event. No Potential Termination Event has occurred and is continuing. (j) Underwriting/Collection Practices. To the extent that the Initial Collection Agent is the Collection Agent and the Originators are sub-collection agents, it has complied with the Credit and Collection Policy in all material respects, and such policy has not changed in any material respect since the date hereof. ARTICLE V COVENANTS Section 5.1. Covenants of the Seller. The Seller hereby covenants and agrees to comply with the following covenants and agreements, unless the Agent (with the consent of the Instructing Group) shall otherwise consent: (a) Financial Reporting. The Seller will maintain a system of accounting established and administered in accordance with GAAP and will furnish to the Agent, each Purchaser Agent and each Purchaser: (i) Annual Financial Statements. Within 120 days after each fiscal year of the Seller copies of its annual balance sheet (and an annual profit and loss statement), certified by a Designated Financial Officer thereof, prepared on a consolidated basis in conformity with GAAP; (ii) Quarterly Financial Statements. Within 60 days after each (except the last) fiscal quarter of each fiscal year of the Seller, copies of its quarterly balance sheet (and a profit and loss statement) for the period from the beginning -17- of the fiscal year to the close of such quarter), certified by a Designated Financial Officer and prepared in a manner consistent with the financial statements described in clause (i) of this Section 5.l(a); (iii) Officer's Certificate. Each time financial statements are furnished pursuant to clause (i) or (ii) of Section 5.1(a), a compliance certificate (in substantially the form of Exhibit F) signed by a Designated Financial Officer, dated the date of such financial statements; (iv) Public Reports. Promptly upon becoming available, a copy of each report or proxy statement filed by the Parent with the Securities and Exchange Commission or any securities exchange; and (v) Other Information. With reasonable promptness, such other information (including non-financial information) respecting the Receivables or the conditions and operations, financial or otherwise, of the Seller and any Seller Entity as the Agent or any Purchaser Agent from time to time reasonably may request in order to protect the interests of the Agent or Committed Purchasers under this Agreement. (b) Notices. As soon as possible and in any event within 5 Business Days of becoming actually aware of any of the following the Seller will notify the Agent and each Purchaser Agent and provide a description of: (i) Potential Termination Events. The occurrence of any Potential Termination Event; (ii) Downgrading. The downgrading, withdrawal or suspension of any rating by any rating agency of any indebtedness of any Special Obligor or of the Parent; or (iii) Further Information. Any other information that the Parent is required to deliver pursuant to the Credit Agreement at the same time the Parent delivers such information to the required parties pursuant to the Credit Agreement. (c) Conduct of Business. The Seller will perform all actions necessary to remain duly incorporated, validly existing and in good standing in its jurisdiction of incorporation and to maintain all requisite authority to conduct its business in each jurisdiction in which it conducts business. (d) Compliance with Laws. The Seller will comply with all laws, regulations, judgments and other directions or orders imposed by any Governmental Authority to which it or any Receivable, any Related Security or Collection may be subject. -18- (e) Furnishing Information and Inspection of Records. The Seller will furnish to the Agent, the Purchaser Agents and the Purchasers such information concerning the Receivables and the Related Security as the Agent, a Purchaser Agent or a Purchaser may request. The Seller will, and will cause each Originator to, permit, at any time during regular business hours upon reasonable notice to the Seller, the Agent, any Purchaser (or any representatives thereof) (i) to examine and make copies of all Records, (ii) to visit the offices and properties of the Seller and each Originator for the purpose of examining the Records and (iii) to discuss matters relating hereto with any of the Seller's or such Originator's officers, directors, employees or independent public accountants having knowledge of such matters. No more than once a calendar year or any time after the occurrence of a Termination Event, the Agent may (at the expense of the Seller) or at any time (at the expense of the Purchasers) have an independent public accounting firm conduct an audit of the Records or make test verifications of the Receivables and Collections. (f) Keeping Records. (i) The Seller will, and will cause each Originator to, have and maintain (A) administrative and operating procedures (including an ability to recreate Records if originals are destroyed), (B) adequate facilities, personnel and equipment and (C) all Records and other information necessary or advisable for collecting the Receivables (including Records adequate to permit the immediate identification of each new Receivable and all Collections of, and adjustments to, each existing Receivable). The Seller will give the Agent prior notice of any material change in such administrative and operating procedures. (ii) The Seller will, (A) at all times from and after the date hereof, clearly and conspicuously mark its computer and master data processing books and records with a legend describing the Agent's and the Purchasers' interest in the Receivables and the Collections and (B) upon the request of the Agent, so mark each contract relating to a Receivable and deliver to the Agent all such contracts (including all multiple originals of such contracts), with any appropriate endorsement or assignment, or segregate (from all other receivables then owned or being serviced by the Seller) the Receivables and all contracts relating to each Receivable and hold in trust and safely keep such contracts so legended in separate filing cabinets or other suitable containers at such locations as the Agent may specify. (g) Perfection. (i) The Seller will, and will cause each Originator to, at its expense, promptly execute and deliver all instruments and documents and take all action necessary or requested by the Agent (including the execution and filing of financing or continuation statements, amendments thereto or assignments thereof) to enable the Agent to exercise and enforce all its rights hereunder and to vest and maintain vested in the Agent a valid, first priority perfected security interest in the Receivables, the Collections, the Related Security, the Purchase Agreement, the Lock-Box Accounts and proceeds thereof free and clear of any Adverse Claim other than the Seller's interest therein (and a perfected ownership interest in the Receivables, Related Security and Collections to the extent of the Sold Interest). The Agent will be permitted to sign and file any continuation -19- statements, amendments thereto and assignments thereof without the Seller's signature, but shall provide prompt notice to the Seller of any such filing. (ii) The Seller will only change its name, identity or corporate structure or relocate its state of organization or its chief executive office or the Records following notice to the Agent and the delivery to the Agent of all financing statements, instruments and other documents (including direction letters) requested by the Agent. (iii) The Seller will at all times maintain its chief executive offices within a jurisdiction in the USA (other than in the states of Alabama, Florida, Maryland and Tennessee) in which Article 9 of the UCC is in effect. If the Seller or an Originator moves its chief executive office to a location that imposes Taxes, fees or other charges to perfect the Agent's and the Purchasers' interests hereunder or the Seller's interests under the Purchase Agreement, the Seller will pay all such amounts and any other costs and expenses incurred in order to maintain the enforceability of the Transaction Documents, the Sold Interest and the interests of the Agent, the Purchaser Agents and the Purchasers in the Receivables, the Related Security, Collections, Purchase Agreement and Lock-Box Accounts. (h) Performance of Duties. The Seller will perform its duties or obligations in accordance with the provisions of each of the Transaction Documents. The Seller (at its expense) will (i) fully and timely perform in all material respects all agreements required to be observed by it in connection with each Receivable, (ii) comply in all material respects with the Credit and Collection Policy, and (iii) refrain from any action that may impair the rights of the Agent, the Purchaser Agents or the Purchasers in the Receivables, the Related Security, Collections, Purchase Agreement or Lock-Box Accounts. (i) Payments on Receivables, Lock-Box Accounts. The Seller will, and will cause each Originator to, at all times instruct all Obligors to deliver payments on the Receivables (including Deemed Collections) to a Lock-Box or Lock-Box Account and will not change any such instructions without the prior written consent of the Agent. If any such payments or other Collections are received by the Seller, it shall hold such payments in trust for the benefit of the Agent, the Purchaser Agents and the Purchasers and promptly (but in any event within two Business Days after receipt) remit such funds into a Lock-Box Account. The Seller will cause each Lock-Box Bank to comply with the terms of each applicable Lock-Box Letter. The Seller will only permit Collections to be deposited into any Lock-Box Account. If such funds are nevertheless deposited into any Lock-Box Account, the Seller will promptly identify and separate such funds for segregation. The Seller will not, and will not permit any Collection Agent or other Person to, commingle Collections or other funds to which the Agent or any Purchaser is entitled with any other funds (other than funds of Affiliates of the Seller in concentration accounts). The Seller shall only add a Lock-Box Bank, Lock-Box, or Lock-Box Account to those listed on Exhibit D if the Agent has received notice of and has consented to such addition, a copy of any new Lock-Box Agreement and an executed and acknowledged copy of a Lock-Box Letter substantially in the form of Exhibit E (with such changes as are acceptable to the Agent) from any new Lock-Box Bank. The Seller shall only -20- terminate a Lock-Box Bank or Lock-Box, or close a Lock-Box Account, upon 30 days advance notice to the Agent. (j) Sales and Adverse Claims Relating to Receivables or Related Security. Except as otherwise provided herein, the Seller will not (by operation of law or otherwise), dispose of or otherwise transfer, or create or suffer to exist any Adverse Claim upon, any Receivables, Related Security or any proceeds thereof. (k) Extension or Amendment of Receivables. Except as otherwise permitted in Section 3.2(b) and then subject to Section 1.5, the Seller will not extend, amend, rescind or cancel any Receivable. (l) Change in Credit and Collection Policy. The Seller will not make any change in its Credit and Collection Policy which change would impair the collectibility of any Receivable. (m) Accounting for Sale. The Seller will not, account for, or otherwise treat, the transactions contemplated hereby other than as a sale of Receivables or inconsistent with the Purchasers' ownership interests in the Receivables, Related Security and Collections. (n) Certain Agreements. Except as otherwise permitted by this Agreement, the Seller will not amend, modify, waive, revoke or terminate any Transaction Document to which it is a party or any provision of Seller's certificate of incorporation or by-laws. (o) Other Business. The Seller will not: (i) engage in any business other than the transactions contemplated by the Transaction Documents, (ii) create, incur or permit to exist any Debt of any kind (or cause or permit to be issued for its account any letters of credit or bankers' acceptances) other than pursuant to this Agreement and the Subordinated Notes, or (iii) form any Subsidiary or make any investments in any other Person; provided, however, that the Seller shall be permitted to incur minimal obligations to the extent necessary for the day-to-day operations of the Seller (such as expenses for stationery, audits, maintenance of legal status, etc.). (p) Net Worth. The Seller shall not, as of the last day of each calendar quarter, permit Net Worth to be less than $9,000,000. (q) Nonconsolidation. The Seller will operate in such a manner that the separate corporate existence of the Seller and each Seller Entity and Affiliate thereof would not be disregarded in the event of the bankruptcy or insolvency of any Seller Entity and Affiliate thereof and, without limiting the generality of the foregoing: (i) the Seller will not engage in any activity other than those activities expressly permitted under the Seller's organizational documents and the Transaction Documents, nor will the Seller enter into any agreement other than this Agreement, the other Transaction Documents to which it is a party and, with -21- the prior written consent of the Agent, any other agreement necessary to carry out more effectively the provisions and purposes hereof or thereof; (ii) the Seller will cause the financial statements and books and records of the Seller and each Seller Entity to reflect the separate corporate existence of the Seller; (iii) except as otherwise expressly permitted hereunder, under the other Transaction Documents and under the Seller's organizational documents, the Seller will not permit any Seller Entity or Affiliate thereof to (A) pay the Seller's expenses, (B) guarantee the Seller's obligations, or (C) advance funds to the Seller for the payment of expenses or otherwise; (iv) the Seller will not act as agent for any Seller Entity or Affiliate, but instead will present itself to the public as a corporation separate from each such Person and independently engaged in the business of purchasing and financing Receivables; and (v) the Seller will always have an independent director on its Board of Directors. (r) Lock-Box Letters. Not later than October 25, 2002 the Seller shall deliver to the Agent fully executed Lock-Box Letters with respect to each Lock-Box set forth on Exhibit D hereto. Section 5.2. Covenants of the Initial Collection Agent. The Initial Collection Agent hereby covenants and agrees to comply with the following covenants and agreements, unless the Agent (with the consent of the Instructing Group) shall otherwise consent: (a) Financial Reporting. The Initial Collection Agent will maintain a system of accounting established and administered in accordance with GAAP and will furnish to the Agent, each Purchaser Agent and each Purchaser: (i) Annual Financial Statements. Within 120 days after each fiscal year of the Parent copies of its annual audited financial statements (including a consolidated balance sheet, consolidated statement of income and retained earnings and statement of cash flows, with related footnotes) certified by Deloitte & Touche, LLP or another firm of independent certified public accountants of nationally recognized standing (which accountants shall have acknowledged the reliance of the Agent, the Purchaser Agents and the Purchasers on the financial statements audited by such accountants) and prepared on a consolidated basis in conformity with GAAP; (ii) Quarterly Financial Statements. Within 60 days after each (except the last) fiscal quarter of each fiscal year of the Parent, copies of its unaudited financial statements (including at least a consolidated balance sheet as of the close -22- of such quarter and statements of earnings and sources and applications of funds for the period from the beginning of the fiscal year to the close of such quarter) certified by a Designated Financial Officer and prepared in a manner consistent with the financial statements described in clause (i) of this Section 5.l(a); (iii) Officer's Certificate. Each time financial statements are furnished pursuant to clause (i) or (ii) of Section 5.1(a), a compliance certificate (in substantially the form of Exhibit F) signed by a Designated Financial Officer, dated the date of such financial statements; (iv) Public Reports. Promptly upon becoming available, a copy of each report or proxy statement filed by the Parent with the Securities and Exchange Commission or any securities exchange; and (v) Other Information. With reasonable promptness, such other information (including non-financial information) respecting the Receivables or the conditions and operations, financial or otherwise, of the Initial Collection Agent and any Seller Entity as the Agent from time to time reasonably may request in order to protect the interests of the Agent or Committed Purchasers under this Agreement. (b) Notices. As soon as possible and in any event within 5 Business Days of becoming actually aware of any of the following the Initial Collection Agent will notify the Agent and each Purchaser Agent and provide a description of: (i) Potential Termination Events. The occurrence of any Potential Termination Event; (ii) Downgrading. The downgrading, withdrawal or suspension of any rating by any rating agency of any indebtedness of any Special Obligor or of the Parent; or (iii) Further Information. Any other information that the Parent is required to deliver pursuant to the Credit Agreement at the same time the Parent delivers such information to the required parties pursuant to the Credit Agreement. If the Agent or any Purchaser Agent receives such a notice, the Agent or such Purchaser Agent shall promptly give notice thereof to each Purchaser and, until each Conduit Purchaser has no Investment after the Termination Date, to each CP Dealer and each Rating Agency. (c) Conduct of Business. The Initial Collection Agent will perform all actions necessary to remain duly incorporated, validly existing and in good standing in its jurisdiction of incorporation and to maintain all requisite authority to conduct its business in each jurisdiction in which it conducts business. -23- (d) Compliance with Laws. The Initial Collection Agent will comply with all laws, regulations, judgments and other directions or orders imposed by any Governmental Authority to which it or any Receivable, any Related Security or Collection may be subject. (e) Furnishing Information and Inspection of Records. The Initial Collection Agent will furnish to the Agent, the Purchaser Agents and the Purchasers such information concerning the Receivables and the Related Security as the Agent, a Purchaser Agent or a Purchaser may request. The Initial Collection Agent will, and will cause each Originator to, permit, at any time during regular business hours upon reasonable notice to the Initial Collection Agent, the Agent, any Purchaser Agent or any Purchaser (or any representatives thereof) (i) to examine and make copies of all Records, (ii) to visit the offices and properties of the Initial Collection Agent and each Originator for the purpose of examining the Records and (iii) to discuss matters relating hereto with any of the Initial Collection Agent's or such Originator's officers, directors, employees or independent public accountants having knowledge of such matters. No more than once a calendar year or any time after the occurrence of a Termination Event, the Agent may (at the expense of the Initial Collection Agent) or at any time (at the expense of the Purchasers) have an independent public accounting firm conduct an audit of the Records or make test verifications of the Receivables and Collections. (f) Keeping Records. (i) The Initial Collection Agent will, and will cause each Originator to, have and maintain (A) administrative and operating procedures (including an ability to recreate Records if originals are destroyed), (B) adequate facilities, personnel and equipment and (C) all Records and other information necessary or advisable for collecting the Receivables (including Records adequate to permit the immediate identification of each Obligor and each new Receivable and all Collections of, and adjustments to, each existing Receivable). The Initial Collection Agent will give the Agent prior notice of any material change in such administrative and operating procedures. (ii) The Initial Collection Agent will, (A) at all times from and after the date hereof, clearly and conspicuously mark its computer and master data processing books and records with a legend describing the Agent's and the Purchasers' interest in the Receivables and the Collections and (B) upon the request of the Agent, so mark each contract relating to a Receivable and deliver to the Agent all such contracts (including all multiple originals of such contracts), with any appropriate endorsement or assignment, or segregate (from all other receivables then owned or being serviced by the Initial Collection Agent) the Receivables and all contracts relating to each Receivable and hold in trust and safely keep such contracts so legended in separate filing cabinets or other suitable containers at such locations as the Agent may specify. (g) Performance of Duties. The Initial Collection Agent will perform its duties or obligations in accordance with the provisions of each of the Transaction Documents. The Initial Collection Agent (at its expense) will (i) fully and timely perform in all material respects all agreements required to be observed by it in connection -24- with each Receivable, (ii) comply in all material respects with the Credit and Collection Policy, and (iii) refrain from any action that may impair the rights of the Agent, the Purchaser Agents or the Purchasers in the Receivables, the Related Security, Collections, Purchase Agreement or Lock-Box Accounts. (h) Payments on Receivables, Lock-Box Accounts. If any payments on Receivables or other Collections are received by the Initial Collection Agent, it shall hold such payments in trust for the benefit of the Agent, the Purchaser Agents and the Purchasers and promptly (but in any event within two Business Days after receipt) remit such funds into a Lock-Box Account. Except as set forth in Section 5.1(i) hereof, the Initial Collection Agent will only permit Collections to be deposited into any Lock-Box Account. If such funds of any Affiliate or Seller Entity are deposited into any Lock-Box Account, the Initial Collection Agent will promptly identify and separate such funds for segregation. Except as set forth in Section 5.1(i) hereof, the Initial Collection Agent will not, and will not permit any other Person to, commingle Collections or other funds to which the Agent or any Purchaser is entitled with any other funds. (i) Extension or Amendment of Receivables. Except as otherwise permitted in Section 3.2(b) and then subject to Section 1.5, the Initial Collection Agent will not extend, amend, rescind or cancel any Receivable. (j) Change in Business or Credit and Collection Policy. The Initial Collection Agent will not make any change in its business or in the Originator's Credit and Collection Policy which change would impair the collectibility of any Receivable. ARTICLE VI INDEMNIFICATION Section 6.1. Indemnities by the Seller. Without limiting any other rights any such Person may have hereunder or under applicable law, the Seller hereby indemnifies and holds harmless, on an after-Tax basis, the Agent, each Purchaser Agent and each Purchaser and their respective officers, directors, agents and employees (each an "Indemnified Party") from and against any and all damages, losses, claims, liabilities, penalties, Taxes, costs and expenses (including reasonable attorneys' fees and court costs) (all of the foregoing collectively, the "Indemnified Losses") at any time imposed on or incurred by any Indemnified Party arising out of or otherwise relating to any Transaction Document, the transactions contemplated thereby or the acquisition of any portion of the Sold Interest, any commingling of funds, any failure of a Lock-Box Bank to comply with the terms of a Lock-Box Letter, any Receivables or Collections, or any action taken or omitted by any of the Indemnified Parties (including any action taken by the Agent as attorney-in-fact for the Seller pursuant to Section 3.5(b)), whether arising by reason of the acts to be performed by the Seller hereunder or otherwise, excluding only Indemnified Losses to the extent (a) such Indemnified Losses to the extent such losses result from gross negligence or willful misconduct of the Indemnified Party seeking indemnification, (b) solely due to the credit risk of the Obligor and for which reimbursement would constitute recourse to -25- the Seller or the Collection Agent for uncollected or uncollectible Receivables or (c) such Indemnified Losses are, or include Taxes on, or measured by, the overall net income or gross receipts of the Agent, any Purchaser Agent or any Purchaser computed in accordance with the Intended Tax Characterization; provided, however, that nothing contained in this sentence shall limit the liability of the Seller or the Collection Agent or limit the recourse of the Agent, each Purchaser Agent and each Purchaser to the Seller or the Collection Agent for any amounts otherwise specifically provided to be paid by the Seller or the Collection Agent hereunder. Without limiting the foregoing indemnification, but subject to the limitation set forth in clauses (a), (b) and (c) of the previous sentence, the Seller shall indemnify the Agent, each Purchaser Agent and each Purchaser for Indemnified Losses (including losses in respect of uncollectible Receivables, regardless of whether reimbursement therefor would constitute recourse to the Seller or the Collection Agent) relating to or resulting from: (i) reliance on any representation or warranty made by the Seller or Collection Agent (or any officers of the Seller or the Collection Agent) under or in connection with this Agreement, any Periodic Report or any other information or report delivered by the Seller or the Collection Agent pursuant hereto, which shall have been false or incorrect in any material respect when made or deemed made; (ii) the failure by the Seller or any Seller Entity to comply with any applicable law, rule or regulation with respect to any Receivable, or the nonconformity of any Receivable with any such applicable law, rule or regulation; (iii) the failure of the Seller to vest and maintain vested in the Agent, for the benefit of the Purchaser Agents and the Purchasers, a perfected interest in the Sold Interest and the property conveyed pursuant to Section 1.1(a) and Section 1.8, free and clear of any Adverse Claim; (iv) any commingling of funds to which the Agent, any Purchaser Agent or any Purchaser is entitled hereunder with any other funds; (v) failure of any Lock Box Bank (if appointed or designated by the Seller or if otherwise a Lock Box Bank on the date hereof) to comply with the terms of the applicable Lock Box Letter; (vi) any dispute, claim, offset or defense (other than discharge in bankruptcy of the Obligor) of the Obligor to the payment of any Receivable resulting from the sale or lease of goods or the rendering of services related to such Receivable or the furnishing or failure to furnish any such goods or services; (vii) any failure of the Seller or any Seller Entity to perform its duties or obligations in accordance with the provisions of this Agreement and each of the other Transaction Documents to which it is a party; or (viii) any environmental liability claim, products liability claim or personal injury or property damage suit or other similar or related claim or action of whatever sort, -26- arising out of or in connection with any Receivable or any other suit, claim or action of whatever sort relating to any of the Transaction Documents. Section 6.2. Increased Cost and Reduced Return. By way of clarification, and not of limitation, of Section 6.1, if the adoption of any applicable law, rule or regulation not in effect as of the date hereof, or any change therein, or any change in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof, or compliance by any Funding Source, the Agent, any Purchaser Agent or any Purchaser (collectively, the "Funding Parties") with any request or directive (whether or not having the force of law) of any such Governmental Authority (a "Regulatory Change") (a) subjects any Funding Party to any charge or withholding on or in connection with a Funding Agreement or this Agreement (collectively, the "Funding Documents") or any Receivable, (b) changes the basis of taxation of payments to any of the Funding Parties of any amounts payable under any of the Funding Documents (except for changes in the rate of Tax on the overall net income of such Funding Party), (c) imposes, modifies or deems applicable any reserve, assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of, or any credit extended by, any of the Funding Parties, (d) has the effect of reducing the rate of return on such Funding Party's capital to a level below that which such Funding Party could have achieved but for such adoption, change or compliance (taking into consideration such Funding Party's policies concerning capital adequacy) or (e) imposes any other condition, and the result of any of the foregoing is (x) to impose a cost on, or increase the cost to, any Funding Party of its commitment under any Funding Document or of purchasing, maintaining or funding any interest acquired under any Funding Document, (y) to reduce the amount of any sum received or receivable by, or to reduce the rate of return of, any Funding Party under any Funding Document or (z) to require any payment calculated by reference to the amount of interests held or amounts received by it hereunder, then, upon demand by the Agent, the Seller shall pay to the Agent for the account of the Person such additional amounts as will compensate such Agent, such Purchaser Agent or such Purchaser (or, in the case of a Conduit Purchaser, will enable a Conduit Purchaser to compensate any Funding Source) for such increased cost or reduction. Without limiting the foregoing, the Seller acknowledges and agrees that the fees and other amounts payable by the Seller to the Purchasers and the Agent have been negotiated on the basis that the unused portion of each Committed Purchaser's Commitment is treated as a "short term commitment" for which there is no regulatory capital requirement. If any Committed Purchaser determines it is required to maintain capital against its Unused Commitment (or any Purchaser is required to maintain capital against its Investment) in excess of the amount of capital it would be required to maintain against a funded loan in the same amount, such Purchaser shall be entitled to compensation under this Section 6.2. Section 6.3. Other Costs and Expenses. Also by way of clarification, and not of limitation, of Section 6.1, the Seller shall pay to the Agent (with respect to amounts owned to it) or the applicable Purchaser Agent (with respect to amounts owed to it or any Purchaser in its Purchaser Group) on demand all costs and expenses in connection with (a) the preparation, execution, delivery and administration (including amendments of any provision) of the Transaction Documents, (b) the sale of the Sold Interest, (c) the perfection of the Agent's rights in the Receivables, Related Security and Collections, (d) the enforcement by the Agent, any Purchaser Agent or the Purchasers of the obligations of the Seller under the Transaction -27- Documents or of any Obligor under a Receivable and (e) the maintenance by the Agent of the Lock-Boxes and Lock-Box Accounts, including fees, costs and expenses of legal counsel for the Agent and each Purchaser Agent relating to any of the foregoing or to advising the Agent, any Purchaser Agent and any Funding Source about its rights and remedies under any Transaction Document or any related Funding Agreement and all costs and expenses (including counsel fees and expenses) of the Agent, each Purchaser Agent, each Purchaser and each Funding Source in connection with the enforcement of the Transaction Documents or any Funding Agreement and in connection with the administration of the Transaction Documents following a Termination Event. The Seller shall reimburse the Agent and each Conduit Purchaser for the cost of the Agent's or such Conduit Purchaser's auditors (which may be employees of such Person) auditing the books, records and procedures of the Seller. The Seller shall reimburse each Conduit Purchaser for any amounts such Conduit Purchaser must pay to any Committed Purchaser pursuant to the related Transfer Agreement, this Agreement and the Funding Agreements related thereto on account of any Tax. The Seller shall reimburse each Conduit Purchaser on demand for all other costs and expenses incurred by such Conduit Purchaser or any shareholder of such Conduit Purchaser in connection with the Transaction Documents or the transactions contemplated thereby, including the cost of auditing such Conduit Purchaser's books by certified public accountants, the cost of the Ratings and the fees and out-of-pocket expenses of counsel of the Agent, each Conduit Purchaser or any shareholder, or administrator, of such Conduit Purchaser for advice relating to such Conduit Purchaser's operation. Section 6.4. Withholding Taxes. (a) All payments made by the Seller hereunder shall be made without withholding for or on account of any present or future taxes (other than overall net income taxes on the recipient). If any such withholding is so required, the Seller shall make the withholding, pay the amount withheld to the appropriate authority before penalties attach thereto or interest accrues thereon and pay such additional amount as may be necessary to ensure that the net amount actually received by each Purchaser, each Purchaser Agent and the Agent free and clear of such taxes (including such taxes on such additional amount) is equal to the amount that such Purchaser, such Purchaser Agent or the Agent (as the case may be) would have received had such withholding not been made. If the Agent, any Purchaser Agent or any Purchaser pays any such taxes, penalties or interest the Seller shall reimburse the Agent, Purchaser Agent or such Purchaser for that payment on demand. If the Seller pays any such taxes, penalties or interest, it shall deliver official tax receipts evidencing that payment or certified copies thereof to the Purchaser, each Purchaser Agent or the Agent on whose account such withholding was made (with a copy to the Agent if not the recipient of the original) on or before the thirtieth day after payment. (b) Before the first date on which any amount is payable hereunder for the account of any Purchaser not incorporated under the laws of the USA such Purchaser shall deliver to the Seller and the Agent each two (2) duly completed copies of United States Internal Revenue Service Form W-8BEN or W-8ECI (or successor applicable form) certifying that such Purchaser is entitled to receive payments hereunder without deduction or withholding of any United States federal income taxes. Each such Purchaser shall replace or update such forms when necessary to maintain any applicable exemption and as requested by the Agent or the Seller. -28- Section 6.5. Payments and Allocations. If any Person seeks compensation pursuant to this Article VI, such Person shall deliver to the Seller and its Purchaser Agent a certificate setting forth the amount due to such Person, a description of the circumstance giving rise thereto and the basis of the calculations of such amount, which certificate shall be conclusive absent manifest error. The Seller shall pay to the Agent amounts owed to it or to the applicable Purchaser Agent amounts owed to such Purchaser Agent or owed to any Purchaser in its Purchase Group, for the account of such Person the amount shown as due on any such certificate within thirty (30) days after receipt of the notice. ARTICLE VII CONDITIONS PRECEDENT Section 7.1. Conditions to Closing. This Agreement shall become effective on the first date all conditions in this Section 7.1 are satisfied. On or before such date, the Seller (or, in the case of Section 7.1(e)(ii), the Committed Purchasers) shall deliver to the Agent the following documents in form, substance and quantity acceptable to the Agent: (a) A certificate of the Secretary of the Seller and each Seller Entity certifying (i) the resolutions of the Seller's and each Seller Entity's board of directors approving each Transaction Document to which it is a party, (ii) the name, signature, and authority of each officer who executes on the Seller's or each Seller Entity's behalf a Transaction Document (on which certificate the Agent, each Purchaser Agent and each Purchaser may conclusively rely until a revised certificate is received), (iii) the Seller's and each Seller Entity's certificate or articles of incorporation or limited liability company agreement, as applicable, certified by the Secretary or Assistant Secretary of such entity, (iv) a copy of the Seller's and each Seller Entity's by-laws and (v) good standing certificates issued by the Secretaries of State of each jurisdiction where the Seller and each Seller Entity is organized. (b) All instruments and other documents required, or deemed desirable by the Agent, to perfect the Agent's first priority interest in the Receivables, Related Security, Collections, the Purchase Agreement and the Lock-Box Accounts in all appropriate jurisdictions. (c) UCC search reports from all jurisdictions the Agent requests. (d) Executed copies of (i) all consents and authorizations necessary in connection with the Transaction Documents (ii) direction letters executed by the Seller authorizing the Agent to inspect and make copies from the Seller's books and records maintained at any off-site data processing or storage facilities, (iii) a Periodic Report covering the month ended August 31, 2002, and (iv) each Transaction Document. (e) Favorable opinions of counsel to the Seller and each Seller Entity covering such matters as any Purchaser Agent or the Agent may request. -29- (f) A fully executed assignment agreement from ABN AMRO to the Agent pursuant to which ABN AMRO assigns all of its right, title and interest in, to and under the Lock-Box Letters and related Lock-Boxes in form and substance satisfactory to the Agent. (g) Such other approvals, opinions or documents as the Agent or any Purchaser Agent may reasonably request. Section 7.2. Conditions to Each Purchase. The obligation of each Committed Purchaser to make any Purchase, and the right of the Seller to request or accept any Purchase, are subject to the conditions (and each Purchase shall evidence the Seller's representation and warranty that clauses (a)-(d) of this Section 7.2 have been satisfied) that on the date of such Purchase before and after giving effect to the Purchase: (a) no Potential Termination Event shall then exist or shall occur as a result of the Purchase; (b) the Termination Date has not occurred and, after giving effect to the application of the proceeds of such Purchase, the outstanding Matured Aggregate Investment would not exceed the Aggregate Commitment; (c) the representations and warranties of the Seller, each Originator and the Collection Agent contained herein or in any other Transaction Document are true and correct in all material respects on and as of such date (except to the extent such representations and warranties relate solely to an earlier date and then as of such earlier date); (d) each of the Seller and each Seller Entity is in full compliance with the Transaction Documents to which it is a party (including all covenants and agreements in Article V); and (e) all legal matters related to the Purchase are reasonably satisfactory to the Purchasers. Nothing in this Section 7.2 limits the obligations (including those in Section 2.1) of each Related Committed Purchaser to its related Conduit Purchaser (including any applicable Transfer Agreement). Section 7.3. Addition and Removal of Originators. (a) Addition of Originators. From time to time the Seller may request that an additional entity (a "New Originator") be added as an Originator hereunder and under the Purchase Agreement. Each such New Originator shall become a party to the Purchase Agreement and an Originator hereunder on the date all of the conditions set forth in this Section 7.3(a) are satisfied. On or before such date, the Seller shall deliver to the Agent the following documents in form, substance and quantity acceptable to the Agent: -30- (i) a certificate of the Secretary of the New Originator certifying (A) the resolutions of the New Originator's board of directors approving each Transaction Document to which it is a party, (B) the name, signature, and authority of each officer who executes on the New Originator's behalf a Transaction Document (on which certificate the Agent, each Purchaser Agent and each Purchaser may conclusively rely until a revised certificate is received), (C) the New Originator's certificate or articles of incorporation or limited liability company agreement, as applicable, certified by the Secretary or Assistant Secretary of such entity, (D) a copy of the New Originator's by-laws and (v) good standing certificates issued by the Secretaries of State of each jurisdiction where the New Originator is organized; (ii) all instruments and other documents required, or deemed desirable by the Agent, to perfect the Agent's first priority interest in the Receivables, Related Security, Collections, the Purchase Agreement and the Lock-Box Accounts in all appropriate jurisdictions; (iii) UCC search reports from all jurisdictions the Agent requests; (iv) executed copies of (A) a fully executed Joinder Agreement from the New Originator in the form attached to the Purchase Agreement as Exhibit B, (B) a fully executed Amendment and Reaffirmation of Limited Guaranty executed by the Parent in the form attached hereto as Exhibit H and (C) a fully executed Supplement to Exhibits in the form attached hereto as Exhibit I; (v) favorable opinions of counsel to the Seller and each Seller Entity covering such matters as any Purchaser Agent or the Agent may request; (vi) the written consent of the Agent and the Purchaser Agents to the addition of the New Originator; and (vii) such other approvals, opinions or documents as the Agent or any Purchaser Agent may reasonably request. (b) Removal of Originator. From time to time, the Seller may request that one or more Originators be removed as "Originators" hereunder and under the Purchase Agreement by delivery to the Agent of written notice of such request, which notice shall set forth the date on which such Originator(s) shall be removed (a "Removal Date"), which date shall be no earlier than five Business Days after the date such notice was delivered. On the Removal Date, the Purchasers shall no longer purchase any Receivables originated by such Originator; provided, however, that in no event shall such Originator be relieved of any of its obligations under the Purchase Agreement or other Transaction Documents with respect to any Receivables previously sold to the Seller. -31- ARTICLE VIII THE AGENT Section 8.1. Appointment and Authorization. (a) Each Purchaser and each Purchaser Agent hereby irrevocably designates and appoints Credit Lyonnais, acting through its New York Branch, as the "Agent" under the Transaction Documents and authorizes the Agent to take such actions and to exercise such powers as are delegated to the Agent hereby and to exercise such other powers as are reasonably incidental thereto. The Agent shall hold, in its name, for the benefit of each Purchaser, the Purchase Interest of such Purchaser. The Agent shall not have any duties other than those expressly set forth in the Transaction Documents or any fiduciary relationship with any Purchaser, and no implied obligations or liabilities shall be read into any Transaction Document, or otherwise exist, against the Agent. The Agent does not assume, nor shall it be deemed to have assumed, any obligation to, or relationship of trust or agency with, the Seller. Notwithstanding any provision of this Agreement or any other Transaction Document, in no event shall the Agent ever be required to take any action which exposes the Agent to personal liability or which is contrary to the provision of any Transaction Document or applicable law. (b) Each Purchaser hereby irrevocably designates and appoints the respective institution identified on the applicable signature page hereto or in the related Transfer Supplement (as applicable) as its Purchaser Agent hereunder, and each authorizes such Purchaser Agent to take such action on its behalf under the provisions of this Agreement and to exercise such powers and perform such duties as are expressly delegated to such Purchaser Agent by the terms of this Agreement, if any, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement, no Purchaser Agent shall have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any Purchaser or other Purchaser Agent or the Agent, and no implied obligations or liabilities on the part of such Purchaser Agent shall be read into this Agreement or otherwise exist against such Purchaser Agent. No Purchaser Agent assumes, nor shall it be deemed to have assumed, any obligation to, or relationship of trust or agency with, the Seller. Section 8.2. Delegation of Duties. The Agent and each Purchaser Agent may execute any of its duties through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. Neither the Agent nor any Purchaser Agent shall be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. Section 8.3. Exculpatory Provisions. None of the Agent, any Purchaser Agent or any of their respective directors, officers, agents or employees shall be liable for any action taken or omitted (i) with the consent or at the direction of the Instructing Group or (ii) in the absence of such Persons gross negligence or willful misconduct. Neither the Agent nor any Purchaser Agent shall be responsible to any Purchaser or other Person for any recitals, representations, warranties or other statements made by the Seller, any Seller Entity or any of its Affiliates, (ii) the value, validity, effectiveness, genuineness, enforceability or sufficiency of any Transaction Document, (iii) any failure of the Seller, and Seller Entity or any of its Affiliates to perform any obligation or (iv) the satisfaction of any condition specified in Article VII. Neither -32- the Agent nor any Purchaser Agent shall have any obligation to any Purchaser to ascertain or inquire about the observance or performance of any agreement contained in any Transaction Document or to inspect the properties, books or records of the Seller, any Seller Entity or any of its Affiliates. Section 8.4. Reliance by Agent and Purchaser Agents. (a) The Agent and each Purchaser Agent shall in all cases be entitled to rely, and shall be fully protected in relying, upon any document, other writing or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person and upon advice and statements of legal counsel (including counsel to the Seller), independent accountants and other experts selected by the Agent or such Purchaser Agent. The Agent and each Purchaser Agent shall in all cases be fully justified in failing or refusing to take any action under any Transaction Document unless it shall first receive such advice or concurrence of the Purchasers, and assurance of its indemnification, as it deems appropriate. (b) The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement in accordance with a request of the Instructing Group, and such request and any action taken or failure to act pursuant thereto shall be binding upon all Purchasers, the Agent and Purchaser Agents. (c) Each Purchaser Agent shall determine with its Purchaser Group the number of such Purchasers (each, a "Voting Block"), which shall be required to request or direct such Purchaser Agent to take action, or refrain from taking action, under this Agreement on behalf of such Purchasers. Such Purchaser Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement in accordance with a request of its appropriate Voting Block, and such request and any action taken or failure to act pursuant thereto shall be binding upon all of such Purchaser Agent's Purchasers. (d) Unless otherwise advised in writing by a Purchaser Agent or by any Purchaser on whose behalf such Purchaser Agent is purportedly acting, each party to this Agreement may assume that (i) such Purchaser Agent is acting for the benefit and on behalf of each of the Purchasers in respect of which such Purchaser Agent is identified as being the "Purchaser Agent" in the definition of "Purchaser Agent" hereto, as well as for the benefit of each assignee or other transferee from any such Person, and (ii) each action taken by such Purchaser Agent has been duly authorized and approved by all necessary action on the part of the Purchasers on whose behalf it is purportedly acting. Each Purchaser Agent and the Purchasers in its Purchaser Group shall agree amongst themselves as to the circumstances and procedures for removal and resignation of such Purchaser Agent. Section 8.5. Assumed Payments. Unless the Agent shall have received notice from the applicable Purchaser Agent before the date of any Incremental Purchase that the applicable Purchaser Group will not make available to the Agent the amount it is scheduled to remit as part of such Incremental Purchase, the Agent may assume such Purchaser Group has made such amount available to the Agent when due (an "Assumed Payment") and, in reliance upon such assumption, the Agent may (but shall have no obligation to) make available such amount to the appropriate Person. If and to the extent that any Purchaser in a Purchaser Group shall not have -33- made its Assumed Payment available to the Agent, such Purchaser and the Seller hereby agree to pay the Agent forthwith on demand such unpaid portion of such Assumed Payment up to the amount of funds actually paid by the Agent, together with interest thereon for each day from the date of such payment by the Agent until the date the requisite amount is repaid to the Agent, at a rate per annum equal to the Federal Funds Rate for the first three days such amounts are past due and thereafter at a rate per annum equal to the Federal Funds Rate plus 2%. Section 8.6. Notice of Termination Events. Neither any Purchaser Agent nor the Agent shall be deemed to have knowledge or notice of the occurrence of any Potential Termination Event unless the Agent or such Purchaser Agent has received notice from any Purchaser or the Seller stating that a Potential Termination Event has occurred hereunder and describing such Potential Termination Event. If the Agent receives such a notice, it shall promptly give notice thereof to each Purchaser Agent whereupon each Purchaser Agent shall promptly give notice thereof to the members of its Purchaser Group. If a Purchaser Agent receives such a notice from any Person other than the Agent, it shall promptly give notice thereof to the Agent and each Purchaser Agent whereupon each Purchaser Agent shall promptly give notice thereof to the members of its Purchaser Group. The Agent shall take such action concerning a Potential Termination Event as may be directed by the Instructing Group (or, if required for such action, all of the Purchasers), but until the Agent receives such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, as the Agent deems advisable and in the best interests of the Purchasers. Section 8.7. Non-Reliance on Agent and Other Purchasers. Each Purchaser expressly acknowledges that none of the Agent, the Purchaser Agents nor any of their respective officers, directors, employees, agents, attorneys-in-fact or Affiliates has made any representations or warranties to it and that no act by the Agent hereafter taken, including any review of the affairs of the Seller or any Seller Entity, shall be deemed to constitute any representation or warranty by the Agent. Each Purchaser represents and warrants to the Agent and the Purchaser Agents that, independently and without reliance upon the Agent, any Purchaser Agent or any other Purchaser and based on such documents and information as it has deemed appropriate, it has made and will continue to make its own appraisal of and investigation into the business, operations, property, prospects, financial and other conditions and creditworthiness of the Seller, the Seller Entities and the Receivables and its own decision to enter into this Agreement and to take, or omit, action under any Transaction Document. The Agent shall deliver each month to any Purchaser that so requests a copy of the Periodic Report(s) received covering the preceding calendar month. Except for items specifically required to be delivered hereunder, the Agent shall not have any duty or responsibility to provide any Purchaser or any Purchaser Agent with any information concerning the Seller, any Seller Entity or any of its Affiliates that comes into the possession of the Agent or any of its officers, directors, employees, agents, attorneys-in-fact or Affiliates. Section 8.8. Agent, Purchaser Agents and Affiliates. The Agent, each Purchaser Agent and their respective Affiliates may extend credit to, accept deposits from and generally engage in any kind of business with the Seller, any Seller Entity or any of their Affiliates and Credit Lyonnais may exercise or refrain from exercising its rights and powers as if it were not the Agent. The parties acknowledge that Credit Lyonnais acts as agent for La Fayette and subagent -34- for La Fayette's management company in various capacities, as well as providing credit facilities and other support for La Fayette not contained in the Transaction Documents. Section 8.9. Indemnification. Each Purchaser Group shall indemnify and hold harmless the Agent and its officers, directors, employees, representatives and agents (to the extent not reimbursed by the Seller or any Seller Entity and without limiting the obligation of the Seller or any Seller Entity to do so), ratably in accordance with its Ratable Share from and against any and all liabilities, claims, obligations, losses, damages, penalties, costs, expenses and disbursements of any kind whatsoever that may at any time be imposed on, incurred by or asserted against the Agent or such Person as a result of or related to, any of the transactions contemplated by the Transaction Documents or the execution, delivery or performance of the Transaction Documents or any other document furnished in connection therewith (but excluding any such liabilities, claims, obligations, losses, damages, penalties, costs, expenses or disbursements resulting solely from the gross negligence or willful misconduct of the Agent or such Person as finally determined by a court of competent jurisdiction). Section 8.10. Successor Agent. The Agent may, upon at least five (5) days notice to the Seller and each Purchaser Agent, resign as Agent. Such resignation shall not become effective until a successor agent is appointed by an Instructing Group and has accepted such appointment. Upon such acceptance of its appointment as Agent hereunder by a successor Agent, such successor Agent shall succeed to and become vested with all the rights and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under the Transaction Documents. After any retiring Agent's resignation hereunder, the provisions of Article VI and this Article VIII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was the Agent. ARTICLE IX MISCELLANEOUS Section 9.1. Termination. Each Conduit Purchaser shall cease to be a party hereto when the Termination Date has occurred, such Conduit Purchaser holds no Investment and all amounts payable to it hereunder have been indefeasibly paid in full. This Agreement shall terminate following the Termination Date when no Investment is held by a Purchaser and all other amounts payable hereunder have been indefeasibly paid in full, but the rights and remedies of the Agent, each Purchaser Agent and each Purchaser concerning any representation, warranty or covenant made, or deemed to be made, by the Seller, and under Section 3.9, Article VI, Section 8.9, Section 9.12 and Section 9.13, shall survive such termination. Section 9.2. Notices. Unless otherwise specified, all notices and other communications hereunder shall be in writing (including by telecopier or other facsimile communication), given to the appropriate Person at its address or telecopy number set forth on the signature pages hereof or at such other address or telecopy number as such Person may specify, and effective when received at the address specified by such Person. Each party hereto, however, authorizes the Agent and each Purchaser Agent to act on telephone notices of Purchases and Discount Rate and -35- Tranche Period selections from any person the Agent or such Purchaser Agent in good faith believes to be acting on behalf of the relevant party and, at the Agent's or such Purchaser Agent's option, to tape record any such telephone conversation. Each party hereto agrees to deliver promptly to the Agent and each Purchaser Agent a confirmation of each telephone notice given or received by such party (signed by an authorized officer of such party), but the absence of such confirmation shall not affect the validity of the telephone notice. The Agent's or such Purchaser Agent's records of all such conversations shall be deemed correct and, if the confirmation of a conversation differs in any material respect from the action taken by the Agent or such Purchaser Agent, the records of the Agent or such Purchaser Agent shall govern absent manifest error. The number of days for any advance notice required hereunder may be waived (orally or in writing) by the Person receiving such notice and, in the case of notices to the Agent or such Purchaser Agent, the consent of each Person to which the Agent or such Purchaser Agent is required to forward such notice. Section 9.3. Payments and Computations. Notwithstanding anything herein to the contrary, any amounts to be paid or transferred by the Seller or the Collection Agent to, or for the benefit of, any Purchaser, or any other Person shall be paid or transferred to the Agent or the appropriate Purchaser Agent (for the benefit of such Purchaser or other Person). The Agent or the appropriate Purchaser Agent shall promptly (and, if reasonably practicable, on the day it receives such amounts) forward each such amount to the Person entitled thereto and such Person shall apply the amount in accordance herewith. All amounts to be paid or deposited hereunder shall be paid or transferred on the day when due in immediately available Dollars (and, if due from the Seller or Collection Agent, by 11:00 a.m. (New York City time), with amounts received after such time being deemed paid on the Business Day following such receipt). The Seller hereby authorizes the Agent to debit the Seller Account for application to any amounts owed by the Seller hereunder. The Seller shall, to the extent permitted by law, pay to the Agent or the appropriate Purchaser Agent upon demand, for the account of the applicable Person, interest on all amounts not paid or transferred by the Seller or the Collection Agent when due hereunder at a rate equal to the Prime Rate plus 1%, calculated from the date any such amount became due until the date paid in full. Any payment or other transfer of funds scheduled to be made on a day that is not a Business Day shall be made on the next Business Day, and any Discount Rate or interest rate accruing on such amount to be paid or transferred shall continue to accrue to such next Business Day. All computations of interest, fees and Discount shall be calculated for the actual days elapsed based on a 360 day year. Section 9.4. Sharing of Recoveries. Each Purchaser agrees that if it receives any recovery, through set-off, judicial action or otherwise, on any amount payable or recoverable hereunder in a greater proportion than should have been received hereunder or otherwise inconsistent with the provisions hereof, then the recipient of such recovery shall purchase for cash an interest in amounts owing to the other Purchasers (as return of Investment or otherwise), without representation or warranty except for the representation and warranty that such interest is being sold by each such other Purchaser free and clear of any Adverse Claim created or granted by such other Purchaser, in the amount necessary to create proportional participation by the Purchasers in such recovery (as if such recovery were distributed pursuant to Section 2.3). If all or any portion of such amount is thereafter recovered from the recipient, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest. -36- Section 9.5. Right of Setoff. During a Termination Event, each Purchaser is hereby authorized (in addition to any other rights it may have) to setoff, appropriate and apply (without presentment, demand, protest or other notice which are hereby expressly waived) any deposits and any other indebtedness held or owing by such Purchaser (including by any branches or agencies of such Purchaser) to, or for the account of, the Seller against amounts owing by the Seller hereunder (even if contingent or unmatured). Section 9.6. Amendments. Except as otherwise expressly provided herein, no amendment or waiver hereof shall be effective unless signed by the Seller and the Instructing Group. In addition, no amendment of any Transaction Document shall, without the consent of (a) all the Related Committed Purchasers, (i) extend the Termination Date (including an extension effected through a waiver of a Termination Event) or the date of any payment or transfer of Collections by the Seller to the Collection Agent or by the Collection Agent to the Agent, (ii) reduce the rate or extend the time of payment of Discount for any Eurodollar Tranche or Prime Tranche, (iii) reduce or extend the time of payment of any fee payable to the Related Committed Purchasers, (iv) except as provided herein, release, transfer or modify any Committed Purchaser's Purchase Interest or change any Commitment, (v) amend the definition of Instructing Group, Termination Event or Section 1.1, 1.2, 1.5, 1.8, 2.1, 2.2, 2.3, 6.1, 6.2, 6.3, 6.4, 7.2 or 9.6 or any provision of the Limited Guaranty, (vi) consent to the assignment or transfer by the Seller or any Originator of any interest in the Receivables other than transfers hereunder, or (vii) amend any defined term relevant to the restrictions in clauses (i) through (vi) in a manner which would circumvent the intention of such restrictions or (b) the Agent and each affected Purchaser Agent, amend any provision hereof if the effect thereof is to affect the indemnities to, or the rights or duties of, the Agent or any Purchaser Agent or to reduce any fee payable for the Agent's or such Purchaser Agent's own account. Notwithstanding the foregoing, the amount of any fee or other payment due and payable from the Seller to any Person may be changed or otherwise adjusted solely with the consent of the Seller and the party to which such payment is payable. Any amendment hereof shall apply to each Purchaser equally and shall be binding upon the Seller, the Purchasers, each Purchaser Agent and the Agent. If required by the Rating Agencies for any Conduit Purchaser, no material amendment hereof or assignment, termination, resignation or removal hereunder shall be effective unless a statement is obtained from the applicable Rating Agencies that its Rating will not be downgraded, withdrawn or suspended as a result of such amendment, assignment, termination, resignation or removal. Section 9.7. Waivers. No failure or delay of the Agent, any Purchaser Agent or any Purchaser in exercising any power, right, privilege or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right, privilege or remedy preclude any other or further exercise thereof or the exercise of any other power, right, privilege or remedy. Any waiver hereof shall be effective only in the specific instance and for the specific purpose for which such waiver was given; provided that any waiver of a Termination Event shall be in writing. After any waiver, the Seller, the Purchasers, the Purchaser Agents and the Agent shall be restored to their former position and rights and any Potential Termination Event waived shall be deemed to be cured and not continuing, but no such waiver shall extend to (or impair any right consequent upon) any subsequent or other Potential Termination Event. Any additional Discount that has accrued after a Termination Event before the execution of a waiver thereof, -37- solely as a result of the occurrence of such Termination Event, may be waived by the Agent or related Purchaser Agent at the direction of the Purchaser entitled thereto. Section 9.8. Successors and Assigns; Participations; Assignments. (a) Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Except as otherwise provided herein, the Seller may not assign or transfer any of its rights or delegate any of its duties without the prior consent of the Agent and the Purchasers Agents. (b) Participations. Any Purchaser may sell to one or more Persons affiliated with the Purchaser without the prior consent of the Seller, and to one or more other Persons with the prior consent of the Seller (which consent shall not be unreasonably withheld) (each a "Participant") participating interests in the interests of such Purchaser hereunder and under the applicable Transfer Agreement. Such Purchaser shall remain solely responsible for performing its obligations hereunder, and the Seller, the applicable Purchaser Agent and the Agent shall continue to deal solely and directly with such Purchaser in connection with such Purchaser's rights and obligations hereunder and under the applicable Transfer Agreement. Each Participant shall be entitled to the benefits of Article VI and shall have the right of setoff through its participation in amounts owing hereunder and under the applicable Transfer Agreement to the same extent as if it were a Purchaser hereunder and under the applicable Transfer Agreement, which right of setoff is subject to such Participant's obligation to share with the Purchasers as provided in Section 9.4. A Purchaser shall not agree with a Participant to restrict such Purchaser's right to agree to any amendment hereto or to the applicable Transfer Agreement, except amendments described in clause (a) of Section 9.6. (c) Assignments by Related Committed Purchasers. Any Related Committed Purchaser may assign to one or more Persons ("Purchasing Committed Purchasers"), acceptable to the applicable Purchaser Agent in its sole discretion and, prior to the occurrence of a Termination Event, subject to the prior written consent of the Seller (which consent will not be unreasonably withheld) any portion of its Commitment as a Related Committed Purchaser hereunder and under the applicable Transfer Agreement and Purchase Interest pursuant to a supplement hereto and to the Transfer Agreement (a "Transfer Supplement") in form satisfactory to the applicable Purchaser Agent executed by each such Purchasing Committed Purchaser, such selling Committed Purchaser and the applicable Purchaser Agent. Any such assignment by a Related Committed Purchaser must be for an amount of at least Ten Million Dollars. Each Purchasing Committed Purchaser shall pay a fee of Three Thousand Dollars to the applicable Purchaser Agent. Any partial assignment shall be an assignment of an identical percentage of such selling Related Committed Purchaser Investment and its Commitment as a Related Committed Purchaser hereunder and under any applicable Transfer Agreement. Upon the execution and delivery to the applicable Purchaser Agent of the Transfer Supplement and payment by the Purchasing Committed Purchaser to the selling Related Committed Purchaser of the agreed purchase price, such selling Related Committed Purchaser shall be released from its obligations hereunder and under the applicable Transfer Agreement to the extent of such assignment and such Purchasing Committed Purchaser shall for all purposes be a Related Committed Purchaser party hereto and shall have all the rights and obligations of a Related Committed Purchaser hereunder to the same extent as if it were an original party hereto and to the applicable Transfer -38- Agreement with a Commitment as a Related Committed Purchaser, any Investment and any related Assigned Settlement described in the Transfer Supplement. (d) Replaceable Related Committed Purchaser. If any Related Committed Purchaser other than a Committed Purchaser (including Credit Lyonnais) that provides program enhancement to a Conduit Purchaser (a "Replaceable Purchaser") shall (i) petition the Seller for any amounts under Section 6.2 or 6.4 or (ii) have a short-term debt rating lower than the "A-1" by S&P and "P-1" by Moody's, and, if the commercial paper of the applicable Conduit Purchaser is rated by Fitch, "F1" by Fitch, the Seller or applicable Conduit Purchaser may designate a replacement financial institution (a "Replacement Related Committed Purchaser") acceptable to the Agent and the applicable Conduit Purchaser, in its sole discretion and, prior to the occurrence of a Termination Event, subject to the prior written consent of the Seller (which consent will not be unreasonably withheld) to which such Replaceable Related Committed Purchaser shall, subject to its receipt of an amount equal to its Investment, any related Assigned Settlement, and accrued Discount and fees thereon (plus, from the Seller, any Early Payment Fee that would have been payable if such transferred Investment had been paid on such date) and all amounts payable under Section 6.2, promptly assign all of its rights, obligations and Commitment hereunder and under the applicable Transfer Agreement, together with all of its Purchase Interest, and any related Assigned Settlement, to the Replacement Related Committed Purchaser in accordance with Section 9.8(c). (e) Assignment by Conduit Purchasers. Each party hereto agrees and consents (i) to each Conduit Purchaser's assignment, participation, grant of security interests in or other transfers of any portion of not less than $25,000,000 of, or any of its beneficial interest in, the Purchase Interest and the related Assigned Settlement and (ii) to the complete assignment by such Conduit Purchaser of all of its rights and obligations hereunder to any Person reasonably acceptable to Agent, and upon such assignment such Conduit Purchaser shall be released from all obligations and duties hereunder; provided, however, that a Conduit Purchaser may not, without the prior consent of its Related Committed Purchaser, transfer any of its rights under the related Transfer Agreement to cause its Related Committed Purchaser to purchase the Purchaser Interest of such Conduit Purchaser and the Assigned Settlement unless the assignee (i) is a corporation whose principal business is the purchase of assets similar to the Receivables, (ii) has the related Purchaser Agent as its administrative agent and (iii) issues commercial paper with credit ratings substantially comparable to the then current ratings of such Conduit Purchaser. Each new Conduit Purchaser shall pay a fee of Three Thousand Dollars to the Agent. Each Conduit Purchaser shall notify the Seller prior to any such assignment and shall promptly notify each other party hereto of any such assignment. Upon such an assignment of any portion of a Conduit Purchaser's Purchase Interest and the related Assigned Settlement and the payment to the Agent of the fee specified above, the assignee shall have all of the rights of such Conduit Purchaser hereunder relate to such Purchase Interest and related Assigned Settlement. (f) Opinions of Counsel. If required by the Agent or any Purchaser Agent or to maintain the Ratings, each Transfer Supplement must be accompanied by an opinion of counsel of the assignee as to such matters as the Agent or such Purchaser Agent may reasonably request. -39- Section 9.9. Waiver of Confidentiality. The Seller hereby consents to the disclosure of any nonpublic information relating thereto among the Agent, the Purchaser Agents and the Purchasers and by the Agent, the Purchaser Agents or the Purchasers to (i) any officers, directors, members, managers, employees or outside accountants, auditors or attorneys thereof, (ii) any prospective or actual assignee or participant, (iii) any rating agency, surety, guarantor or credit or liquidity enhancer to the Agent, any Purchaser Agent or any Purchaser, (iv) any entity organized to purchase, or make loans secured by, financial assets for which a Purchaser Agent provides managerial services or acts as an administrative agent, (v) any Conduit Purchaser's administrator, management company, referral agents, issuing agents or depositaries or CP Dealers and (vi) Governmental Authorities with appropriate jurisdiction. Section 9.10. Confidentiality of Agreement. (a) Unless otherwise required by applicable law, order of any court or administrative agency, or otherwise by any governmental authority, the Seller agrees to maintain the confidentiality of the Transaction Documents (and all drafts thereof) in its communications with third parties and otherwise; provided, however, that the Transaction Documents may be disclosed to third parties to the extent such disclosure is (i) required in connection with a sale of receivables of Seller, (ii) made solely to Persons who are legal counsel for the purchaser of such receivables, and (iii) made pursuant to a written agreement of confidentiality in form and substance reasonably satisfactory to the Agent and each Purchaser Agent; provided further, however, that the Transaction Documents may be disclosed to the Seller's legal counsel and independent auditors; and provided further, however, that neither the Seller nor the Collection Agent have any obligation of confidentiality in respect of any information which may be generally available to the public or becomes available to the public through no fault of the Seller or the Collection Agent. (b) Unless otherwise required by applicable law, order of any court or administrative agency, or otherwise by any Governmental Authority, the Agent and each Purchaser Agent agree to maintain the confidentiality, in its communications with third parties and otherwise, of any information regarding the Seller obtained in connection with the Transaction Documents which has been identified by the Seller to the Agent as confidential in nature (the "Confidential Material"); provided, however, that the Confidential Material may be disclosed to third parties to the extent such disclosure is (i) to a Rating Agency, (ii) required in connection with the exercise of any remedy hereunder or under any related documents, instruments and agreements, or (iii) to any actual or proposed participant or assignee of all or part of its rights hereunder, or an actual or proposed liquidity or enhancement provider, in each case which has agreed in writing to be bound by the provisions of this Section, or (iv) to any Committed Purchaser; provided further, however, that the Transaction Documents may be disclosed to each of the Purchaser Agent's and the Agent's respective legal counsel and independent auditors; and provided further, however, that the Agent and each Purchaser Agent shall not have any obligation of confidentiality in respect of any information which may be generally available to the public or becomes available to the public through no fault of such Person. Section 9.11. Agreement Not to Petition. Each party hereto agrees, for the benefit of the holders of the privately or publicly placed indebtedness for borrowed money for each Conduit Purchaser, not, prior to the date which is one (1) year and one (1) day after the payment in full of all such indebtedness, to acquiesce, petition or otherwise, directly or indirectly, encourage, assist, -40- join, invoke, or cause such Conduit Purchaser to invoke, the process of any Governmental Authority for the purpose of (a) commencing or sustaining a case against such Conduit Purchaser under any federal or state bankruptcy, insolvency or similar law (including the Federal Bankruptcy Code), (b) appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator or other similar official for such Conduit Purchaser, or any substantial part of its property, or (c) ordering the winding up or liquidation of the affairs of such Conduit Purchaser. Section 9.12. Excess Funds. Other than amounts payable under Section 9.4, each Conduit Purchaser shall be required to make payment of the amounts required to be paid pursuant hereto only if such Conduit Purchaser has Excess Funds (as defined below). If such Conduit Purchaser does not have Excess Funds, the excess of the amount due hereunder (other than pursuant to Section 9.4) over the amount paid shall not constitute a "claim" (as defined in Section 101(5) of the Federal Bankruptcy Code) against such Conduit Purchaser until such time as such Conduit Purchaser has Excess Funds. If such Conduit Purchaser does not have sufficient Excess Funds to make any payment due hereunder (other than pursuant to Section 9.4), then such Conduit Purchaser may pay a lesser amount and make additional payments that in the aggregate equal the amount of deficiency as soon as possible thereafter. The term "Excess Funds" means the excess of (a) the aggregate projected value of such Conduit Purchaser's assets and other property (including cash and cash equivalents), over (b) the sum of (i) the sum of all scheduled payments of principal, interest and other amounts payable on publicly or privately placed indebtedness of such Conduit Purchaser for borrowed money, plus (ii) the sum of all other liabilities, indebtedness and other obligations of such Conduit Purchaser for borrowed money or owed to any credit or liquidity provider, together with all unpaid interest then accrued thereon, plus (iii) all taxes payable by such Conduit Purchaser to the Internal Revenue Service, plus (iv) all other indebtedness, liabilities and obligations of such Conduit Purchaser then due and payable, but the amount of any liability, indebtedness or obligation of such Conduit Purchaser shall not exceed the projected value of the assets to which recourse for such liability, indebtedness or obligation is limited. Excess Funds shall be calculated once each Business Day. Section 9.13. No Recourse. The obligations of each Conduit Purchaser, their respective management companies, their respective administrators and referral agents (each a "Program Administrator") under any Transaction Document or other document (each, a "Program Document") to which a Program Administrator is a party are solely the corporate obligations of such Program Administrator and no recourse shall be had for such obligations against any Affiliate, director, officer, member, manager, employee, attorney or agent of any Program Administrator. Section 9.14. Headings; Counterparts. Article and Section Headings in this Agreement are for reference only and shall not affect the construction of this Agreement. This Agreement may be executed by different parties on any number of counterparts, each of which shall constitute an original and all of which, taken together, shall constitute one and the same agreement. Section 9.15. Cumulative Rights and Severability. All rights and remedies of the Purchasers, the Purchaser Agents and Agent hereunder shall be cumulative and non-exclusive of any rights or remedies such Persons have under law or otherwise. Any provision hereof that is -41- prohibited or unenforceable in any jurisdiction shall, in such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof and without affecting such provision in any other jurisdiction. Section 9.16. Governing Law; Submission to Jurisdiction. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF NEW YORK. THE SELLER HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND OF ANY NEW YORK STATE COURT SITTING IN NEW YORK, NEW YORK FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF, OR RELATING TO, THE TRANSACTION DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY. The Seller hereby irrevocably waives, to the fullest extent permitted by law, any objection it may now or hereafter have to the venue of any such proceeding and any claim that any such proceeding has been brought in an inconvenient forum. Nothing in this Section 9.16 shall affect the right of the Agent, any Purchaser Agent or any Purchaser to bring any action or proceeding against the Seller or its property in the courts of other jurisdictions. Section 9.17. Waiver of Trial by Jury. To the extent permitted by applicable law, each party hereto irrevocably waives all right of trial by jury in any action, proceeding or counterclaim arising out of, or in connection with, any transaction document or any matter arising thereunder. Section 9.18. Intended Tax Characterization. It is the intention of the parties hereto that, for the purposes of all Taxes, the transactions contemplated hereby shall be treated as a loan by the Purchasers (through the Agent) to the Seller that is secured by the Receivables (the "Intended Tax Characterization"). The parties hereto agree to report and otherwise to act for the purposes of all Taxes in a manner consistent with the Intended Tax Characterization. Section 9.19. Entire Agreement. The Transaction Documents constitute the entire understanding of the parties thereto concerning the subject matter thereof. Any previous or contemporaneous agreements, whether written or oral, concerning such matters are superceded thereby. Section 9.20. Extensions of Scheduled Termination Date. Not more than 90 days, but prior to 75 days before the Scheduled Termination Date then in effect, the Seller may request that each Committed Purchaser extend its Commitment for an additional 364 days. Each Committed Purchaser shall respond to such request not later than 45 days before the then Scheduled Termination Date. If, by the date 45 days before the then Scheduled Termination Date, any Committed Purchaser (a "Non-Consenting Purchaser") has not notified the Agent it agrees to so extend its Commitment for an additional 364 day period, unless any other Committed Purchaser (including any Person who thereby becomes a Committed Purchaser) assumes the Commitment of each such Non-Consenting Lender on or before the date 45 days before the then Scheduled Termination Date and agrees to extend such Commitment for an additional 364 day period, the Scheduled Termination Date shall not be extended. If all Committed Purchasers agree to extend the Scheduled Termination Date, or if the Commitment of each Non-Consenting Purchaser is assumed by another Committed Purchaser pursuant to the -42- preceding sentence, the Scheduled Termination Date shall be extended for an additional 364 day period. Otherwise the Scheduled Termination Date shall take place as scheduled. -43- Exhibit 10-k IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their duly authorized officers as of the date hereof. LA FAYETTE ASSET SECURITIZATION LLC, CREDIT LYONNAIS, acting through its as a Conduit Purchaser New York Branch, as the Agent, a Purchaser Agent and a Committed Purchaser By: By: ----------------------------------------- ----------------------------------------- Title: Title: ---------------------------------- ---------------------------------- Address: c/o Credit Lyonnais Address: 1301 Avenue of the Americas 1301 Avenue of the Americas New York, New York 10019-6022 New York, New York 10019-6022 Attn: Ms. Konstantina Kourmpetis- Attn: Ms. Konstantina Kourmpetis- Transaction Manager/ Transaction Manager/Structured Structured Finance Finance Telephone: 212-261-7814 Telephone: 212-261-7814 Telecopy: 212-459-3258 Telecopy: 212-459-3258
Signature Page for Receivables Sale Agreement GIRO BALANCED FUNDING CORPORATION, BAYERISCHE LANDESBANK, New York Branch, as a Conduit Purchaser as a Purchaser Agent By: By: ----------------------------------------- ----------------------------------------- Title: Kevin Burns/Vice President Title: Alexander Kohnert/First VP Address: 114 West 47th Street, Suite 1715 By: New York, New York 10036 ---------------------------------------- Attention: Kevin Burns - Title: Lori-Ann Wynter/Vice President Vice President Telephone: (212)302-5151 Telecopy: (212)302-8767 Address: 560 Lexington Avenue New York, New York 10022 Attention: Asset Securitization Telephone: (212) 230-9005 Telecopy: (212) 230-9020 BAYERISCHE LANDESBANK, Cayman Islands Branch, as a Committed Purchaser By: ----------------------------------------- Title: ----------------------------------- By: ----------------------------------------- Title: ----------------------------------- Address: 560 Lexington Avenue New York, New York 10022 Attention: Corporate Lending Telephone: (212) 230-9012 Telecopy: (212) 310-9868
Signature Page for Receivables Sale Agreement AMSTERDAM FUNDING CORPORATION, ABN AMRO BANK N.V., as a Purchaser Agent as a Conduit Purchaser and a Committed Purchaser By: By: ----------------------------------------- ----------------------------------------- Title: Title: ---------------------------------- ---------------------------------- Address: Global Securitization Services, LLC By: 114 West 47th Street ----------------------------------------- New York, New York 10036 Title: Attention: Andrew Stidd ----------------------------------- Telephone: (212) 302-5151 Telecopy: (212) 302-8767 Address: Structured Finance, Asset Securitization with a copy to: 135 South LaSalle Street ABN AMRO BANK N.V. Chicago, Illinois 60674-9135 Address: Structured Finance, Attention: Purchaser Agent - Amsterdam Asset Securitization Telephone: (312) 904-2737 135 South LaSalle Street Telecopy: (312) 904-6376 Chicago, Illinois 60674-9135 Attention: Administrator- Amsterdam Telephone: (312) 904-2737 Telecopy: (312) 904-6376
Signature Page for Receivables Sale Agreement ARVINMERITOR RECEIVABLES CORPORATION, as the Seller By: ----------------------------------------- Title: --------------------------------------- Address: 2135 West Maple Road Troy, Michigan 48084 Attention: -------------------------- Telephone: -------------------------- Telecopy: -------------------------- ARVINMERITOR, INC., as the Initial Collection Agent By: ----------------------------------------- Title: --------------------------------------- Address: 2135 West Maple Road Troy, Michigan 48084 Attention: -------------------------- Telephone: -------------------------- Telecopy: -------------------------- Signature Page for Receivables Sale Agreement Exhibit 10-k SCHEDULE I DEFINITIONS The following terms have the meanings set forth, or referred to, below: "Adverse Claim" means, for any asset or property of a Person, a lien, security interest, charge, mortgage, pledge, hypothecation, assignment or encumbrance, or any other right or claim, in, of or on such asset or property in favor of any other Person, except those in favor of the Seller and the Agent and each Purchaser Agent and Purchaser Group in connection with the Transaction Documents. "Affiliate" means, for any Person, any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with such Person. For purposes of this definition, "control" means the power, directly or indirectly, to either (i) vote ten percent (10%) or more of the securities having ordinary voting power for the election of directors of a Person or (ii) cause the direction of the management and policies of a Person. "Aged Receivables Ratio" means, at any time the same is to be determined, the ratio of (i) the sum of (a) the aggregate outstanding principal balance of all Receivables that became Delinquent Receivables during the most recently completed calendar month, plus (b) the outstanding principal balance of all Receivables that became Charge-Offs during such calendar month to (ii) the amount of sales generated during the calendar month that ended four months prior to the most recently completed calendar month. "Agent" is defined in the first paragraph hereof. "Agent's Account" means the account designated to the Seller and the Purchasers by the Agent. "Aggregate Commitment" means the aggregate of all Commitments of each Purchaser Group, as such amount may be reduced pursuant to Section 1.6. "Aggregate Investment" means the sum of the Investments of all Purchasers. "Assigned Settlement" means, for each Related Committed Purchaser for a Conduit Purchaser for any Put, the product of such Related Committed Purchaser's Purchased Percentage and the amount of the Conduit Purchaser Settlement being transferred pursuant to such Put. "Bankruptcy Event" means, for any Person, that (a) such Person makes a general assignment for the benefit of creditors or any proceeding is instituted by or against such Person seeking to adjudicate it bankrupt or insolvent, or seeking the liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors and, if instituted against such Person, such proceeding remains undismissed and unstayed for a period of 30 days, or seeking the entry of an order for relief or the appointment of a receiver, trustee or other similar official for it or any substantial part of its property or such Person generally does not pay its debts as such debts become due or admits in writing its inability to pay its debts generally or (b) such Person takes any corporate action to authorize any such action. "Business Day" means any day other than (a) a Saturday, Sunday or other day on which banks in New York, New York are authorized or required to close, (b) a holiday on the Federal Reserve calendar and, solely for matters relating to a Eurodollar Tranche, (c) a day on which dealings in Dollars are not carried on in the London interbank market. "Changeover Receivable" means a Receivable generated from the sale of merchandise not manufactured by Parent or one of its Subsidiaries which merchandise has been purchased by one of the Seller Entities from one of its customers. "Charge-Off" means any Receivable that has or should have been (in accordance with the Credit and Collection Policy) (i) charged off or written off by the Seller, or (ii) reserved against as a doubtful account by the Seller. "Collection" means any amount paid, or deemed paid, on a Receivable, including from the proceeds of collateral securing such Receivables or paid by the Seller as a Deemed Collection under Section 1.5(b). "Collection Agent" is defined in Section 3.1(a). "Collection Agent Fee" is defined in Section 3.6. "Commitment" means, for each Committed Purchaser, the amount set forth on Schedule II for such Committed Purchaser or in a Transfer Supplement, and, for each Purchaser Group, the amount set forth on Schedule II for such Purchaser Group, in each case, as adjusted in accordance with Sections 1.6 and 9.8. "Commitment Percentage" means, for each Related Committed Purchaser in a Purchaser Group, such Related Committed Purchaser's Commitment divided by the total of all Commitments of all Related Committed Purchasers in such Purchaser Group. "Committed Conduit Purchaser" means each Person party to this Agreement and listed as such on Schedule II hereto and each other Person that becomes a Conduit Purchaser pursuant to a Transfer Supplement. "Committed Purchaser" means each Related Committed Purchaser for a Conduit Purchaser. "Concentration Limit" means (i) an amount not to exceed 10% of the aggregate outstanding principal balance of all Eligible Receivables for Obligors (other than Special Obligors) with unsecured debt ratings of at least "A-" and "A3" by S&P and Moody's, respectively, (ii) an amount not to exceed 5% of the aggregate outstanding principal balance of all Eligible Receivables for Obligors (other than Special Obligors) with unsecured debt ratings of -2- at least "BBB-" and "Baa3" but less than A- and A3 by S&P and Moody's, respectively, and (iii) an amount not to exceed 2.5% of the aggregate outstanding principal balance of all Eligible Receivables for Obligors (other than Special Obligors) with unsecured debt ratings of below BBB- and Baa3 by S&P and Moody's, respectively; provided, however, that if any Obligor (other than Special Obligors) is not rated by either S&P or Moody's, the applicable Concentration Limit shall be 2.5%. "Conduit Purchaser" means each Person party to this Agreement and listed as such on Schedule II hereto and each other Person that becomes a Conduit Purchaser pursuant to a Transfer Supplement. "Conduit Purchaser Investment Percentage" means a fraction, expressed as a decimal, obtained by dividing the Investment of a Conduit Purchaser by the Investment of all Purchasers. "Conduit Purchaser Settlement" means the sum of all claims and rights to payment pursuant to Section 1.5 or 1.7 or any other provision owed to a Conduit Purchaser (or owed to the Agent or Purchaser Agent or the Collection Agent for the benefit of a Conduit Purchaser) by the Seller that, if paid, would be applied to reduce Investment. "CP Dealer" means, at any time, each Person a Conduit Purchaser then engages as a placement agent or commercial paper dealer. "CP Discount" means, for any Discount Period, the amount of interest or discount accrued, during such Discount Period on all the outstanding commercial paper, or portion thereof, issued by a Conduit Purchaser to fund its Investment, including all dealer commissions and other costs of issuing commercial paper, whether any such commercial paper was issued specifically to fund such Investment or is allocated, in whole or in part, to such funding. "CP Rate" means, for any CP Tranche, a rate per annum as established pursuant to the applicable Rate Supplement. "Credit Agreement" means that certain Amended and Restated 5-Year Revolving Credit Agreement dated as of June 27, 2001, among the Parent, certain foreign subsidiaries, the lenders from time to time party thereto, Bank One, NA, as administrative agent, The Chase Manhattan Bank, as syndication agent, and Citicorp USA, Inc. and Bank of America, N.A., as documentation agents, as amended from time to time in accordance with its terms. "Credit and Collection Policy" means the Seller's credit and collection policy and practices relating to Receivables attached hereto as Exhibit G. "Credit Lyonnais" means Credit Lyonnais, acting through its New York Branch, in its individual capacity and not in its capacity as the Agent. "Days Sales Outstanding" means, at any time the same is to be determined, an amount equal to the product of (i) the number of days in the most recently completed calendar month and -3- (ii) the quotient obtained by dividing the outstanding balance of all Receivables as of the last day of such calendar month by the aggregate amount of sales generated during such month. "Deemed Collections" is defined in Section 1.5(c). "Default Ratio" means, at any time the same is to be determined, the ratio of (i) the aggregate outstanding principal balance of all Defaulted Receivables (minus Charge-Offs) on the last day of the most recently completed calendar month to (ii) the aggregate outstanding principal balance of all Receivables on the last day of such calendar month. "Defaulted Receivable" means any Receivable (a) on which any amount is unpaid more than 90 days past its original due date or (b) the Obligor on which has suffered a Bankruptcy Event. "Delinquency Ratio" means, at any time the same is to be determined, the ratio of (a) the aggregate outstanding principal balance of all Delinquent Receivables on the last day of the most recently completed calendar month to (b) the aggregate outstanding principal balance of all Receivables on the last day of such calendar month. "Delinquent Receivable" means any Receivable (other than a Defaulted Receivable), the outstanding balance on which any amount is 61 to 90 days past due. "Designated Financial Officer" means any Vice President and the Treasurer of the Seller. "Dilution" means, for any calendar month, the amount of Deemed Collections deemed to be received during such calendar month pursuant to Section 1.5(b). "Dilution Horizon Ratio" means, at any time the same is to be determined, an amount calculated by dividing (a) the amount of sales generated during the Dilution Horizon Ratio Period by (b) the Eligible Receivables Balance as of the end of the most recently completed calendar month. "Dilution Horizon Ratio Period" means, at any time the same is to be determined, (i) for the period from the date hereof through and including December 31, 2002, the two most recently completed months and (ii) at all times thereafter, the period of time designated by the Agent on or prior to December 31, 2002, at the direction of the Purchaser Agents, to the Seller and the Initial Collection Agent (after consultation thereof with each such party). "Dilution Ratio" means, at any time the same is to be determined, the ratio of (i) the total amount of decreases in outstanding principal balances of Receivables due to Dilutions during the most recently completed calendar month to (ii) the amount of sales generated during the Dilution Ratio Period. "Dilution Ratio Period" means, at any time the same is to be determined, (i) for the period from the date hereof through and including December 31, 2002, the calendar month two -4- months prior to the most recently completed calendar month and (ii) at all times thereafter, the period of time designated by the Agent on or prior to December 31, 2002, at the direction of the Purchaser Agents, to the Seller and the Initial Collection Agent (after consultation thereof with each such party). "Dilution Reserve" means, at any time the same is to be determined, the product of (i) the Dilution Reserve Percentage multiplied by (ii) the Eligible Receivables Balance as of the end of the most recently completed calendar month. "Dilution Reserve Percentage" means 17%; provided, however, that (i) while a Downgrade is in effect or (ii) during any Performance Trigger Period, the Dilution Reserve Percentage, at any time the same is to be determined, shall be a percentage equal to the higher of (I) the product of (a) the sum of (x) 2.25 times the Expected Dilution Ratio, plus (y) the Dilution Volatility Component, multiplied by (b) the Dilution Horizon Ratio and (II) 17%. "Dilution Volatility Component" means, at any time the same is to be determined, an amount (expressed as a percentage) equal to the product of (i) the difference between (a) the highest Dilution Ratio for the preceding 12 calendar months and (b) the Expected Dilution Ratio multiplied by (ii) a fraction, the numerator of which is equal to the amount calculated in (i)(a) of this definition and the denominator of which is equal to the amount calculated in (i)(b) of this definition. "Discount" means, for any Tranche Period, (a) the product of (i) the Discount Rate for such Tranche Period, (ii) the total amount of Investment allocated to such Tranche Period, and (iii) the number of days elapsed during the Tranche Period divided by (b) 360. "Discount Period" means either (A), with respect to any Settlement Date or the Termination Date, the period from and including the preceding Settlement Date (or if none, the date that the first Incremental Purchase is made hereunder) to but not including such Settlement Date or Termination Date, as applicable, or (B), with respect to Atlantic, from the first day to the last day of the Tranche Period. "Discount Rate" means, for any Tranche Period, the CP Rate, the Eurodollar Rate or the Prime Rate, as applicable, but after the occurrence of a Termination Event each such rate shall be equal to the Prime Rate plus 1.50% per annum with respect to the Investment of the Purchasers. "Discount Reserve" means, at any time the same is to be determined, the sum of (a) the product of (i) 2.25, (ii) the Prime Rate, (iii) the Eligible Receivables Balance, and (iv) the Days Sales Outstanding divided by 360 and (b) accrued and unpaid Discount at such time. "Dollar" and "$" means lawful currency of the United States of America. "Downgrade" means any day that the Parent's long-term unsecured, unsubordinated indebtedness rating by Moody's is below "Baa3" or by S&P is below "BBB-" (or Moody's or S&P has withdrawn or suspended such rating). -5- "Early Payment Fee" is defined in the applicable Rate Supplement. "Eligible Receivable" means, at any time, any Receivable: (i) the Obligor of which (a) is a resident of, or organized under the laws of, or with its chief executive office in, the USA; (b) is not an Affiliate of any of the parties hereto or any Originator; (c) is not a government or a governmental subdivision or agency; and (d) has not suffered a Bankruptcy Event; (ii) evidenced by a purchase order and a conforming invoice or a conforming notice of shipment and due and payable within 60 days after the invoice therefor; provided, however, up to 10% of the aggregate outstanding principal balance of all Eligible Receivables may be stated to be due and payable within 120 days after the invoice therefor; (iii) which is not a Defaulted Receivable, a Delinquent Receivable or a Charge-Off; (iv) which is an "account" or "chattel paper" within the meaning of Section 9-102 of the UCC of all applicable jurisdictions; (v) which is denominated and payable only in Dollars in the USA; (vi) which arises under a contract that is in full force and effect and constitutes the legal, valid and binding obligation of the related Obligor enforceable against such Obligor in accordance with its terms subject to no offset (whether or not relating to the delivered goods giving rise to the Receivable, including partial offsets), counterclaim, defense or other Adverse Claim, and is not an executory contract or unexpired lease within the meaning of Section 365 of the Bankruptcy Code; (vii) which arises under a contract that (A) contains an obligation to pay a specified sum of money, contingent only upon the sale or lease of goods or the provision of services by the Originator, (B) does not require the Obligor under such contract to consent to the transfer, sale or assignment of the rights of the related Originator under such contract, (C) does not contain a confidentiality provision that purports to restrict any Purchaser's exercise of rights under this Agreement, including, without limitation, the right to review such contract, and (D) directs that payment be made to a Lock-Box; (viii) which does not, in whole or in part, contravene any law, rule or regulation applicable thereto (including, without limitation, those relating to usury, truth in lending, fair credit billing, fair credit reporting, equal credit opportunity, fair debt collection practices and privacy); (ix) which satisfies all applicable requirements of the Credit and Collection Policy and was generated in the ordinary course of the related Originator's business from the sale of goods or provision of services to a related Obligor solely by such Originator; -6- (x) is not evidenced by any promissory note or other instrument; (xi) does not represent any amount due with respect to any sales or similar tax; (xii) is not a Changeover Receivable; (xiii) is not due from any Obligor the Defaulted Receivables of which exceed 25% of such Obligor's Receivables; and (xiv) which is not a re-billing of a previously performed and invoiced delivery of goods with a date different from the original invoice date. "Eligible Receivables Balance" means, at any time, the aggregate outstanding principal balance of all Eligible Receivables at such time, less the portion of the aggregate outstanding principal balance of (a) Eligible Receivables of any Obligor (other than a Special Obligor) at such time which exceed the Concentration Limit, and (b) Eligible Receivables of any Special Obligor which exceed the Special Limit, at such time. "Eurodollar Rate" means, for any Tranche Period for a LIBOR Tranche, a rate established pursuant to the applicable Rate Supplement. "Expected Dilution Ratio" means, at any time the same is to be determined, the 12-month rolling average of the Dilution Ratio for the 12 calendar months then most recently ended. "Face Amount" means the face amount of any Conduit Purchaser commercial paper issued on a discount basis or, if not issued on a discount basis, the principal amount of such note and interest accrued and scheduled to accrue thereon to its stated maturity. "Federal Funds Rate" means, for each Purchaser Group, for any day the greater of (i) the average rate per annum as determined by the applicable Purchaser Agent at which overnight Federal funds are offered to such Purchaser Agent for such day by major banks in the interbank market, and (ii) if Credit Lyonnais is borrowing overnight funds from a Federal Reserve Bank that day, the average rate per annum at which such overnight borrowings are made on that day. Each determination of the Federal Funds Rate by the applicable Purchaser Agent shall be conclusive and binding on the Seller except in the case of manifest error. "Fee Letter" means, for each Purchaser Group, the letter agreement, if any, between the Seller and the Purchaser Agent for the applicable Purchaser Group. "Fitch" means Fitch, Inc., and its successors in interest. "Funding Agreement" means any agreement or instrument executed by a Conduit Purchaser and executed by or in favor of any Funding Source or executed by any Funding Source at the request of a Conduit Purchaser. -7- "Funding Source" means, for a Conduit Purchaser, any insurance company, bank or other financial institution providing liquidity, back-up purchase or credit support for such Conduit Purchaser. "GAAP" means generally accepted accounting principles in the USA, applied on a consistent basis. "Governmental Authority" means any (a) Federal, state, municipal or other governmental entity, board, bureau, agency or instrumentality, (b) administrative or regulatory authority (including any central bank or similar authority) or (c) court, judicial authority or arbitrator, in each case, whether foreign or domestic. "Incremental Purchase" is defined in Section 1.1(b). "Initial Collection Agent" is defined in the first paragraph hereof. "Instructing Group" means (i) at any time there are three or more Purchaser Groups, the Purchaser Agents representing Purchaser Groups with at least 66-2/3% of the Commitments and (ii) at any time there are fewer than three Purchaser Groups, the Purchaser Agents representing Purchaser Groups with 100% of the Commitments. "Intended Tax Characterization" is defined in Section 9.18. "Interim Liquidation" means that no Reinvestment Purchases are made by any Purchaser at a time before the Termination Date, as established pursuant to Section 1.2. "Investment" means, for each Purchaser (or Purchaser Group), (a) the sum of (i) all Incremental Purchases by such Purchaser (or Purchaser Group) and (ii) the aggregate amount of any payments or exchanges made by, or on behalf of, such Purchaser (or Purchaser Group) to any other Purchaser (or Purchaser Group) to acquire Investment from such other Purchaser minus (b) all Collections, amounts received from other Purchasers and other amounts received or exchanged and, in each case, applied by the Agent or such Purchaser (or Purchaser Group) to reduce such Purchaser's (or Purchaser Group's) Investment. A Purchaser's (or Purchaser Group's) Investment shall be restored to the extent any amounts so received or exchanged and applied are rescinded or must be returned for any reason. "La Fayette" is defined in the first paragraph hereof. "Letter Agreement" means that certain Letter Agreement dated as of September 27, 2001 between ArvinMeritor, Inc. and the Originators. "Limited Guaranty" means the Limited Guaranty, dated the date hereof, by the Parent in favor of the Agent. "Liquidation Period" for any Purchaser means all times (x) during an Interim Liquidation and (y) on and after the Termination Date and, for a Conduit Purchaser only, also -8- means all times when such Conduit Purchaser is not making Reinvestment Purchases pursuant to Section 1.1(d). "Lock-Box" means each post office box or bank box listed on Exhibit D, as revised pursuant to Section 5.1(i). "Lock-Box Account" means each account maintained by the Seller at a Lock-Box Bank for the purpose of receiving or concentrating Collections. "Lock-Box Agreement" means each agreement between the Seller and/or an Originator(s) and a Lock-Box Bank concerning a Lock-Box Account. "Lock-Box Bank" means each bank listed on Exhibit D, as revised pursuant to Section 5.1(i). "Lock-Box Letter" means a letter in substantially the form of Exhibit E (or otherwise acceptable to the Agent) from the Seller to each Lock-Box Bank, acknowledged and accepted by such Lock-Box Bank and the Agent. "Loss Horizon Ratio" means, at any time the same is to be determined, the ratio of (i) the aggregate outstanding balance of Receivables generated by the Originators during the most recent four month period to (ii) the Eligible Receivables Balance as of the last day of such period. "Loss Ratio" means, at any time the same is to be determined, the highest average Aged Receivables Ratio for any consecutive three month period ended during the previous 12 months. "Loss Reserve" means, at any time the same is to be determined, the product of (i) the Eligible Receivables Balance as of the end of the most recently completed calendar month multiplied by (ii) the Loss Reserve Percentage. "Loss Reserve Percentage" means, at any time the same is to be determined, the greater of (i) 15.0% and (ii) the product of (a) 2.25, (b) the Loss Ratio and (c) the Loss Horizon Ratio. "Loss-to-Liquidation Ratio" means, at any time the same is to be determined, the ratio of (i) the outstanding balance of Receivables that become Charge-Offs during the most recently completed calendar month to (ii) the aggregate amount of Collections during such calendar month. "Matured Aggregate Investment" means, at any time, the aggregate Matured Value of all Conduit Purchasers' Investments plus the total Investments of all other Purchasers then outstanding. "Matured Value" means, of any Investment, the sum of such Investment and all unpaid Discount, fees and other amounts scheduled to become due (whether or not then due) on such -9- Investment during all Tranche Periods to which any portion of such Investment has been allocated. "Maximum Incremental Purchase Amount" means, at any time, the lesser of (a) the difference between the Aggregate Commitment and the Aggregate Investment then outstanding and (b) the difference between the Aggregate Commitment and the Matured Aggregate Investment then outstanding. "Moody's" means Moody's Investors Service, and its successors in interest. "Net Worth" means, at any time the same is to be determined, the total shareholders' equity (including capital stock, additional paid-in capital and retained earnings after deducting treasury stock) which would appear on the balance sheet of the Seller determined in accordance with GAAP. "Obligor" means, for any Receivable, each Person obligated to pay such Receivable and each guarantor of such obligation. "Originators" means Maremont Exhaust Products, Inc., a Delaware corporation, Purolator Products NA, Inc., a Delaware corporation, Gabriel Ride Control Products, Inc., a Delaware corporation, Meritor Heavy Vehicle Systems, LLC, a Delaware limited liability company, Meritor Heavy Vehicle Braking Systems (USA), Inc., a Delaware corporation, Euclid Industries, LLC, a Delaware limited liability company, ArvinMeritor OE, LLC, a Delaware limited liability company, Roll Coater, Inc., an Indiana corporation, AVM, Inc., a South Carolina corporation and each other entity which becomes an "Originator" hereunder pursuant to Section 7.3 hereof, but excluding any of the foregoing entities which is removed as an "Originator" hereunder pursuant to Section 7.3 hereof. "Outside Servicing Fee" means the fee agreed to by the Collection Agent, the Seller and the Agent. "Parent" means ArvinMeritor, Inc., an Indiana corporation. "Performance Trigger Period" shall mean the period of time commencing on the date that the Dilution Ratio exceeds 9.25% and ending on the date the Dilution Ratio is 8.0% or less for three consecutive calendar months. "Periodic Report" is defined in Section 3.3. "Person" means an individual, partnership, corporation, limited liability company, association, joint venture, Governmental Authority or other entity of any kind. "Potential Termination Event" means any Termination Event or any event or condition that with the lapse of time or giving of notice, or both, would constitute a Termination Event. -10- "Prime Rate" means, for each Purchaser Group, (A) for any period, the daily average during such period of the greater of (i) the floating commercial loan rate per annum of the applicable Purchaser Agent (which rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer by the applicable Purchaser Agent) announced from time to time as its prime rate or equivalent for Dollar loans in the USA, changing as and when said rate changes and (ii) the Federal Funds Rate plus 0.50% or (B) in reference to a Prime Tranche, the "Prime Rate" specified in the applicable Rate Supplement. "Purchase" is defined in Section 1.1(a). "Purchase Agreement" means the Amended and Restated Purchase and Sale Agreement dated as of the date hereof between the Seller and the Originators. "Purchase Amount" is defined in Section 1.1(c). "Purchase Date" is defined in Section 1.1(c). "Purchase Interest" means, for a Purchaser, the percentage ownership interest in the Receivables and Collections held by such Purchaser, calculated when and as described in Section 1.1(a); provided, however, that (except for purposes of computing a Purchase Interest or the Sold Interest in Section 1.5, 1.7 or the last sentence in Section 2.3 (a) and (b)) at any time the Sold Interest would otherwise exceed 100% each Purchaser then holding any Investment shall have its Purchase Interest reduced by multiplying such Purchase Interest by a fraction equal to 100% divided by the Sold Interest otherwise then in effect, so that the Sold Interest is thereby reduced to 100%. "Purchased Percentage" means, for any Put, for each Committed Purchaser, its Commitment Percentage or such lesser percentage as is necessary to prevent the Purchase Price of such Purchaser from exceeding its Unused Commitment. "Purchaser" means each Conduit Purchaser and the Related Committed Purchasers. "Purchaser Agent" means each Person party to this Agreement and listed as such on Schedule II hereto and each other Person who becomes a party to this Agreement as a Purchaser Agent pursuant to a Transfer Supplement. "Purchaser Group" means, for each Conduit Purchaser, such Conduit Purchaser, its Related Committed Purchasers (if any), and the Purchasers party to its Transfer Agreement. "Purchaser Reserve Percentage" means, for each Purchaser, the Reserve Percentage multiplied by a fraction, the numerator of which is such Purchaser's outstanding Investment and the denominator of which is the Aggregate Investment. "Put" is defined in Section 2.l(a). -11- "Ratable Share" means, for each Purchaser Group, such Purchaser Group's aggregate Commitments divided by the aggregate Commitments of all Purchaser Groups. "Rate Supplement" means each agreement among the Seller, the Collection Agent, a Purchaser Agent and the applicable Related Committed Purchasers designated a "Rate Supplement" for purposes of this Agreement. "Rating Agency" means, for any Conduit Purchaser, each rating agency such Conduit Purchaser chooses to rate its commercial paper notes at any time. "Ratings" means, for any Conduit Purchaser, the ratings by the Rating Agencies of the indebtedness for borrowed money of such Conduit Purchaser. "Receivable" means the obligation of an Obligor to pay for merchandise sold or services rendered by an Originator and includes the Seller's rights to payment of any interest or finance charges and in the merchandise (including returned goods) and contracts relating to such Receivable, all security interests, guaranties and property securing or supporting payment of such Receivable, all Records and all proceeds of the foregoing. During any Interim Liquidation and on and after the Termination Date, the term "Receivable" shall only include receivables existing on the date such Interim Liquidation commenced or Termination Date occurred, as applicable. Deemed Collections shall reduce the outstanding balance of Receivables hereunder, so that any Receivable that has its outstanding balance deemed collected shall cease to be a Receivable hereunder after (x) the Collection Agent receives payment of such Deemed Collections under Section 1.5(b) or (y) if such Deemed Collection is received before the Termination Date, an adjustment to the Sold Interest permitted by Section 1.5(c) is made. "Receivables Turnover Ratio" means, with respect to a calendar month, an amount, expressed in days, obtained by multiplying (a) a fraction, (i) the numerator of which is equal to the aggregate outstanding principal balance of all Receivables as of the first day of such calendar month and (ii) the denominator of which is equal to Collections during the same such calendar month; times (b) 30. "Records" means, for any Receivable, all contracts, books, records and other documents or information (including computer programs, tapes, disks, software and related property and rights) relating to such Receivable or the related Obligor. "Reinvestment Purchase" is defined in Section 1.1(b). "Related Committed Purchaser" means each Person party to this Agreement and listed as such on Schedule II hereto and each other Person that becomes a Related Committed Purchaser pursuant to a Transfer Supplement. "Related Security" means all of each Originator's rights in the merchandise (including returned goods) and contracts relating to the Receivables, all security interests, guaranties and property securing or supporting payment of the Receivables, all Records and all proceeds of the foregoing and all of the Seller's rights under the Purchase Agreement. -12- "Reserve Percentage" means, at any time, the quotient obtained by dividing (a) the Total Reserve by (b) the Eligible Receivables Balance. "Scheduled Termination Date" means September 25, 2003. "Seller" is defined in the first paragraph hereof. "Seller Account" means an account designated by the Seller to the Agent with at least ten (10) days prior notice. "Seller Entity" means the Parent and each Originator. "Seller Servicing Fee" means, for each month, the fee agreed to by the Collection Agent, the Seller and the Agent. "Servicer Reserve" means, at any time the same is to be determined, the sum of (a) the product of (i) 2.25, (ii) 0.50%, (iii) the Eligible Receivables Balance and (iv) the Days Sales Outstanding divided by 360 and (b) the accrued and unpaid Seller Servicing Fee or Outside Servicing Fee, as applicable. "Settlement Date" means the 25th day of each calendar month. "Sold Interest" is defined in Section 1.1(a). "Special Limit" means (i) an amount not to exceed 35% of the aggregate outstanding principal balance of all Eligible Receivables for Special Obligors with unsecured debt ratings of at least "A-" and "A3" by S&P and Moody's, respectively, (ii) an amount not to exceed 15% of the aggregate outstanding principal balance of all Eligible Receivables for Special Obligors with unsecured debt ratings of at least "BBB+" and "Baa1" but less than "A-" and "A3" by S&P and Moody's, respectively, (iii) an amount not to exceed 10% of the aggregate outstanding principal balance of all Eligible Receivables for Special Obligors with unsecured debt ratings of at least "BBB" and "Baa2" but less than "BBB+" and "Baa1" by S&P and Moody's, respectively, (iv) an amount not to exceed 7.5% of the aggregate outstanding principal balance of all Eligible Receivables for Special Obligors with unsecured debt ratings of at least "BBB-" and "Baa3" but less than "BBB" and "Baa2" by S&P and Moody's, respectively, and (v) an amount not to exceed 2.5% of the aggregate outstanding principal balance of all Eligible Receivables for Special Obligors with unsecured debt ratings of below "BBB-" and "Baa3" by S&P and Moody's, respectively; provided, however, that if any Special Obligor is not rated by either S&P or Moody's, the applicable Concentration Limit shall be 2.5%. "Special Obligors" means Ford Motor Company and its consolidated subsidiaries, General Motors Corporation and its consolidated subsidiaries and Daimler Chrysler Corporation and its consolidated subsidiaries. "S&P" means Standard & Poor's Ratings Services, a division of the McGraw-Hill Companies, and its successors in interest. -13- "Subordinated Note" means each revolving promissory note issued by the Seller to an Originator under the Purchase Agreement. "Subsidiary" means any Person of which at least a majority of the voting stock (or equivalent equity interests) is owned or controlled by the Parent or any Originator or by one or more other Subsidiaries of the Parent or any Originator. "Taxes" means all taxes, charges, fees, levies or other assessments (including income, gross receipts, profits, withholding, excise, property, sales, use, license, occupation and franchise taxes and including any related interest, penalties or other additions) imposed by any jurisdiction or taxing authority (whether foreign or domestic). "Termination Date" means the earliest of (a) the date of the occurrence of a Termination Event described in clause (e) of the definition of Termination Event, (b) the date designated by the Agent to the Seller at any time after the occurrence and during the continuance of any other Termination Event, (c) the Business Day designated by the Seller with no less than thirty (30) Business Days prior notice to the Agent and (d) the Scheduled Termination Date. "Termination Event" means the occurrence of any one or more of the following: (a) any representation, warranty, certification or statement made, or deemed made by the Seller, any Seller Entity or the Collection Agent in, or pursuant to, any Transaction Document proves to have been incorrect in any material respect when made or deemed made; or (b) the Collection Agent or the Seller fails to make any payment or other transfer of funds hereunder that is to be applied to (i) Aggregate Investment when due (which shall include, without limitation, any payment required to be made by the Seller pursuant to Section 1.5 hereof), (ii) Discount within five (5) days when due or (iii) any and all other amounts due hereunder within ten (10) days when due; or (c) the Seller fails to observe or perform any covenant or agreement contained in Sections 5.1(b), (g), (i), (j), (k) or (p), the Collection Agent fails to observe or perform any covenant or agreement contained in Sections 3.3, 5.2(b), (g), (i) or (j) or an Originator fails to perform any covenant or agreement in Sections 5.1(b), (g), (h), (i) or (j) of the Purchase Agreement; or (d) the Seller, any Seller Entity or the Collection Agent (or any sub-collection agent) fails to observe or perform any other term, covenant or agreement under any Transaction Document not otherwise governed by the provisions of clause (b) or (c) above, and such failure remains unremedied for ten Business Days; or (e) the Seller, the Collection Agent, any Seller Entity or any Subsidiary suffers a Bankruptcy Event; or -14- (f) the average Delinquency Ratio for the three most recently completed calendar months exceeds 5%, the average Default Ratio for the three most recently completed calendar months exceeds 7%, the average Dilution Ratio for the three most recently completed calendar months exceeds 7%, the Loss-to Liquidation Ratio exceeds 2.5% or the average Turnover Ratio for the three most recently completed calendar months exceeds 90 days; or (g) (i) the Seller, any Seller Entity or any Affiliate, directly or indirectly, disaffirms or contests the validity or enforceability of any Transaction Document or (ii) any Transaction Document fails to be the enforceable obligation of the Seller, any Seller Entity or any Affiliate party thereto; or (h) the Seller, any Seller Entity or any Subsidiary generally does not pay its debts as such debts become due or admits in writing its inability to pay its debts generally; or (i) the Parent's long-term unsecured, unsubordinated indebtedness is rated less than "BB-" by S&P or "Ba3" by Moody's (or S&P or Moody's has withdrawn or suspended such rating); or (j) the Parent shall fail to own and control, directly or indirectly, 100% of the outstanding voting stock of the Seller and each Originator. Notwithstanding the foregoing, a failure of a representation or warranty or breach of any covenant described in clause (a), (c) or (d) above shall not constitute a Termination Event if (i) the Seller has been deemed to have collected the affected Receivable pursuant to Section 1.5(b) or (ii) such failure or breach was by any Originator and the Parent shall have remedied such failure or breach pursuant to the terms of the Limited Guaranty. "Total Reserve" means an amount equal to the sum of (i) the Discount Reserve, (ii) the Dilution Reserve, (iii) the Loss Reserve and (iv) the Servicer Reserve. "Tranche" means a portion of the Investment of a Conduit Purchaser or of the Committed Purchasers allocated to a Tranche Period pursuant to Section 1.3. A Tranche is a (i) CP Tranche, (ii) LIBOR Tranche or (iii) Prime Tranche depending whether Discount accrues during its Tranche Period based on a (i) CP Rate, (ii) Eurodollar Rate or (iii) Prime Rate. "Tranche Period" means a period of days ending on a Business Day selected pursuant to Section 1.3, which (i) for a CP Tranche shall not exceed 270 days, (ii) for a LIBOR Tranche shall not exceed 180 days, and (iii) for a Prime Tranche shall not be less than 2 days and shall not exceed 30 days. "Transaction Documents" means this Agreement, the Fee Letter, the Limited Guaranty, the Purchase Agreement, the Subordinated Note(s), the Transfer Agreements, the Rate Supplements and all other documents, instruments and agreements executed or furnished in connection herewith and therewith. -15- "Transfer Agreement" means each transfer, liquidity or asset purchase agreement entered into among a Conduit Purchaser, its Purchaser Agent and its Related Committed Purchasers in connection with this Agreement. "Transfer Supplement" is defined in Section 9.8. "Turnover Ratio" means, with respect to any calendar month, an amount, expressed in days, obtained by multiplying (a) a fraction, (i) the numerator of which is equal to the aggregate outstanding balance of the Receivables on the first day of such calendar month and (ii) the denominator of which is equal to Collections on the Receivables during such calendar month multiplied by (b) 30. "UCC" means, for any state, the Uniform Commercial Code as in effect in such state. "Unused Aggregate Commitment" means, at any time, the difference between the Aggregate Commitment then in effect and the outstanding Matured Aggregate Investment. "Unused Commitment" means, for any Committed Purchaser at any time, the difference between its Commitment and its Investment then outstanding. "USA" means the United States of America (including all states and political subdivisions thereof). The foregoing definitions shall be equally applicable to both the singular and plural forms of the defined terms. Unless otherwise inconsistent with the terms of this Agreement, all accounting terms used herein shall be interpreted, and all accounting determinations hereunder shall be made, in accordance with GAAP. Amounts to be calculated hereunder shall be continuously recalculated at the time any information relevant to such calculation changes. -16- Exhibit 10-k SCHEDULE II PURCHASERS
CONDUIT PURCHASER RELATED PURCHASER AGENT COMMITMENTS OF RELATED AND RELATED COMMITTED COMMITTED PURCHASER PURCHASER Giro Balanced Funding Bayerische Landesbank, New Corporation York Branch, as Purchaser Agent Bayerische Landesbank, $75,000,000 Cayman Islands Branch, as Committed Purchaser La Fayette Asset Credit Lyonnais, acting $100,000,000 Securitization LLC through its New York Branch Amsterdam Funding ABN AMRO Bank N.V. $75,000,000 Corporation
EX-10.L 5 y66532exv10wl.txt 2ND AMENDMENT TO RESTATED PURCHASE & SALE AGR. Exhibit 10-l SECOND AMENDMENT TO AMENDED AND RESTATED PURCHASE AND SALE AGREEMENT THIS SECOND AMENDMENT TO AMENDED AND RESTATED PURCHASE AND SALE AGREEMENT, dated as of September 26, 2002 (the "Amendment"), is among GABRIEL RIDE CONTROL PRODUCTS, INC., a Delaware corporation, MAREMONT EXHAUST PRODUCTS, INC., a Delaware corporation, PUROLATOR PRODUCTS NA, INC., a Delaware corporation, MERITOR HEAVY VEHICLE SYSTEMS, LLC, a Delaware limited liability company, MERITOR HEAVY VEHICLE BRAKING SYSTEMS (USA), INC., a Delaware corporation, EUCLID INDUSTRIES, LLC, a Delaware limited liability company, ARVINMERITOR OE, LLC, a Delaware limited liability company, ROLL COATER, INC., an Indiana corporation and AVM, INC. (each an "Originator" and collectively, the "Originators"), ARVINMERITOR RECEIVABLES CORPORATION, a Delaware corporation ("Buyer") and Credit Lyonnais, acting through its New York Branch, as Agent (the "Agent"). WITNESSETH WHEREAS, the Originators (other than AVM, Inc.) and the Buyer have previously entered into that certain Amended and Restated Purchase and Sale Agreement dated as of September 27, 2001 (as amended, restated or otherwise modified from time to time, the "Agreement") pursuant to which the Originators agreed to sell to Buyer, and Buyer agreed to buy from each of the Originators, all of the Receivables, all Related Security, Lock-Box Accounts and all proceeds thereof generated by each such Originator; WHEREAS, pursuant to the Second Tier Agreement, Buyer has transferred to ABN AMRO Bank N.V., as agent for the Conduit Purchasers and the Committed Purchasers, all of Buyer's right, title and interest in and to the Agreement, including, without limitation, interests in the Receivables sold to Buyer pursuant thereto; WHEREAS, concurrently herewith the parties to the Second Tier Agreement are amending and restating such Second Tier Agreement in its entirety to provide for, among other things, the appointment of Credit Lyonnais, acting through its New York Branch, as agent for the Conduit Purchasers and Committed Purchasers thereunder; WHEREAS, the parties hereto desire to add AVM, Inc., a South Carolina corporation ("AVM") as an Originator under the Agreement effective as of September 26, 2002. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows: Section 1. Defined Terms. Unless otherwise amended by the terms of this Agreement, terms used in this Amendment shall have the meanings assigned in the Agreement. Section 2. Amendments to Agreement. (a) As contemplated by Section 8.1 of the Agreement, each of the parties hereto agrees that effective as of September 26, 2002 (the "Effective Date"), AVM agrees to sell, transfer, assign, set over and otherwise convey to Buyer, and Buyer agrees to purchase from AVM, all Receivables, all Related Security, Lock-Box Accounts and all proceeds thereof originated by AVM. (b) From and after the Effective Date, the term "Originator" shall be amended to include AVM. In addition, from and after the Effective Date, AVM agrees to be bound by all of the terms and conditions applicable to an Originator contained in the Agreement and the other Transaction Documents. (c) In connection with the execution of this Amendment, AVM and the Buyer agree to deliver each of the documents set forth in Section 7.1 of the Second Tier Agreement, to the extent that such documents are applicable. (d) In connection with the execution and delivery of this Amendment, AVM hereby makes, with respect to itself, the representations and warranties set forth in Section 4.1 of the Agreement. The state of organization of AVM is the State of South Carolina. The chief executive office of AVM is located at Highway 76 East Marion, South Carolina 29571 with a mailing address at Highway 76 East Marion, South Carolina 29571 and has not been located in any other state besides South Carolina since December 31, 1991. AVM has no trade names and has not conducted business under any other name. (e) All references in the Agreement to the Second Tier Agreement shall be deemed references to the Second Amended and Restated Receivables Sale Agreement dated as of September 26, 2002, among ArvinMeritor Receivables Corporation, as Seller, ArvinMeritor, Inc., as Initial Collection Agent, Credit Lyonnais, acting through its New York Branch, as Agent, the Purchaser Agents from time to time party thereto, the Related Committed Purchasers from time to time party thereto and the Conduit Purchasers from time to time party thereto, as the same may from time to time hereafter be amended, modified, supplemented or restated in its entirety in accordance with the terms thereof. (f) Section 8.7 of the Agreement shall be deleted in its entirety and replaced with the following: Section 8.7. Governing Law; Submission to Jurisdiction. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF NEW YORK. EACH ORIGINATOR HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK AND OF ANY NEW YORK STATE COURT SITTING IN NEW YORK, NEW YORK FOR PURPOSES OF ALL LEGAL PROCEEDINGS ARISING OUT OF, OR RELATING TO, THE TRANSACTION DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY. Each Originator hereby irrevocably waives, to the fullest extent permitted by law, -2- any objection it may now or hereafter have to the venue of any such proceeding and any claim that any such proceeding has been brought in an inconvenient forum. Nothing in this Section 8.7 shall affect the right of Buyer to bring any action or proceeding against an Originator or its property in the courts of other jurisdictions. (g) A new Section 8.12 shall be added to the Agreement and shall read as follows: "Section 8.12. Addition/Removal of Originator. Upon compliance with the terms set forth in Section 7.3(a) of the Second Tier Agreement, including the delivery of a Joinder Agreement in substantially the form attached hereto as Exhibit B, an entity may be added as an Originator under this Agreement. At such time, such entity shall be an Originator for all purposes hereunder. (b) Upon compliance with the terms set forth in Section 7.3(b) of the Second Tier Agreement, the Buyer shall no longer purchase Receivables originated by an Originator that has been removed pursuant to the terms thereof; provided, however, that in no event shall such Originator be relieved of any of its obligations under this Agreement or the other Transaction Documents with respect to any Receivables previously sold to the Buyer." (h) The Agreement is hereby amended by adding thereto a new Exhibit B in the form attached hereto as Exhibit B. Section 3. Effectiveness of Agreement. Except as expressly amended by the terms of this Amendment, all terms and conditions of the Agreement, as amended, shall remain in full force and effect. Section 4. Execution in Counterparts, Effectiveness. This Amendment may be executed by the parties hereto in several counterparts, each of which shall be executed by the parties hereto and be deemed an original and all of which shall constitute together but one and the same instrument. Section 5. Governing Law. This Agreement shall be construed in accordance with the laws of the State of New York, without reference to conflict of law principles, and the obligations, rights and remedies of the parties hereunder shall be determined in accordance with the laws of the State of New York. -3- IN WITNESS WHEREOF, the parties have caused this Amendment to be executed and delivered by their respective officers thereunto duly authorized as of the day and year first above written. GABRIEL RIDE CONTROL PRODUCTS, INC., as Originator By Name: ------------------------------- Title: ------------------------------ MAREMONT EXHAUST PRODUCTS, INC., as Originator By Name: ------------------------------- Title: ------------------------------ PUROLATOR PRODUCTS NA, INC., as Originator By Name: ------------------------------- Title: ------------------------------ MERITOR HEAVY VEHICLE SYSTEMS, LLC, as Originator By Name: ------------------------------- Title: ------------------------------ Signature Page to Second Amendment to Amended and Restated Purchase and Sale Agreement MERITOR HEAVY VEHICLE BRAKING SYSTEMS (USA), INC., as Originator By Name: ------------------------------- Title: ------------------------------ EUCLID INDUSTRIES, LLC, as Originator By Name: ------------------------------- Title: ------------------------------ ARVINMERITOR OE, LLC, as Originator By Name: ------------------------------- Title: ------------------------------ ROLL COATER, INC., as Originator By Name: ------------------------------- Title: ------------------------------ AVM, INC., as Originator By Name: ------------------------------- Title: ------------------------------ Signature Page to Second Amendment to Amended and Restated Purchase and Sale Agreement ARVINMERITOR RECEIVABLES CORPORATION, as Buyer By Name: ------------------------------- Title: ------------------------------ ARVINMERITOR, INC. By Name: ------------------------------- Title: ------------------------------ CREDIT LYONNAIS, acting through its New York Branch, as Agent By Name: ------------------------------- Title: ------------------------------ By Name: ------------------------------- Title: ------------------------------ Signature Page to Second Amendment to Amended and Restated Purchase and Sale Agreement EXHIBIT B TO AMENDED AND RESTATED PURCHASE AND SALE AGREEMENT FORM OF JOINDER AGREEMENT --------------, ----- CREDIT LYONNAIS, acting through its New York Branch, as Agent and ARVINMERITOR RECEIVABLES CORPORATION, as Buyer, party to the Amended and Restated Purchase and Sale Agreement dated as of September 27, 2001 among Buyer and Originators, as amended (the "Agreement") Ladies and Gentlemen: Reference is made to the Agreement described above. Terms not defined herein which are defined in the Agreement shall have for the purposes hereof the meaning provided therein. The undersigned, [NEW ORIGINATOR], a __________ [CORPORATION/LIMITED LIABILITY COMPANY/PARTNERSHIP], hereby elects to be an "Originator" for all purposes of the Agreement, effective from the date hereof. [NEW ORIGINATOR] agrees to sell, transfer, assign, set over and otherwise convey to Buyer all Receivables, all Related Security, Lock-Box Accounts and all proceeds thereof originated by [NEW ORIGINATOR]. [NEW ORIGINATOR] agrees to deliver each of the documents set forth in Section 7.3 of the Second Tier Agreement. In connection with the execution and delivery of this Amendment, [NEW ORIGINATOR] hereby makes, with respect to itself, the representations and warranties set forth in Section 4.1 of the Agreement. The state of organization of [NEW ORIGINATOR] is the State of ____________. The chief executive office of [NEW ORIGINATOR] is located at _________________________ with a mailing address at ____________________________________ and has not been located in any other states besides _______________ since ________________, ____. [NEW ORIGINATOR] has no trade names and has not conducted business under any other name. Without limiting the generality of the foregoing, the undersigned hereby agrees to perform all the obligations of an Originator under, and to be bound in all respects by the terms of, the Agreement and the other Transaction Documents to the same extent and with the same force and effect as if the undersigned were a direct signatory thereto. This agreement shall be construed in accordance with and governed by the laws of the State of New York. Executed as of this ___ day of _______________, ____. [NEW ORIGINATOR] By: ------------------------------------ Name: ------------------------------- Title: ------------------------------ -2- EX-12 6 y66532exv12.txt COMPUTATION OF EARNINGS Exhibit 12 ArvinMeritor, Inc. Computation of Earnings to Fixed Charges Fiscal Year Ended September 30, 2002 Earnings Available for Fixed Charges: Pre-tax income from continuing operations $235 Adjustments: Equity in earnings (losses) of affiliates 22 plus dividends from affiliates ----- 257 Add fixed charges included in earnings: Interest expense 106 Interest element of rentals 11 ----- Total 117 ----- Total earnings available for fixed charges: $374 ----- Fixed Charges: Fixed charges included in earnings $117 Capitalized interest -- ----- Total fixed charges $117 ----- Ratio of Earnings to Fixed Charges (1) 3.20 ===== - -------- 1 = "Earnings" are defined as pre-tax income from continuing operations, adjusted for equity in earnings (losses) of affiliates plus dividends from affiliates and fixed charges excluding capitalized interest. "Fixed charges" are defined as interest on borrowings (whether expensed or capitalized), the portion of rental expense applicable to interest, and amortization of debt issuance costs. EX-21 7 y66532exv21.txt LIST OF SUBSIDIARIES Exhibit 21 ARVINMERITOR, INC. LIST OF SUBSIDIARIES AS OF SEPTEMBER 30, 2002 PERCENTAGE OF VOTING SECURITIES OWNED BY ------------------- NAME AND JURISDICTION ARVINMERITOR SUBSIDIARY --------------------- ------------ ---------- Meritor Heavy Vehicle Systems, LLC (Delaware)........................... 100% ArvinMeritor OE, LLC (Delaware)......................................... 92.06% 7.94% (1) Meritor Finance Cayman Islands, Ltd. (Cayman Islands)............. 100% (2) Meritor Automotive Limited (United Kingdom)................. 100% Arvin International (UK) Limited (United Kingdom)..... 100% ArvinMeritor A&ET Limited (United Kingdom)...... 100% Meritor France (France)..................................... 100% (3) Meritor Holdings Netherlands B.V. (Netherlands)............. 100% (4) Arvin Canada Holding Limited (Ontario)................ 100% Arvin Ride Control Products, Inc. (Canada)...... 100% Meritor Automotive Canada Inc. (Canada)............... 100% (5) Meritor do Brasil Ltda. (Brazil)................ 100% (6) ArvinMeritor Canada (Ontario)................... 100% (7) ArvinMeritor GmbH (Germany)........................... 100% (8)
- -------- (1) 7.88% of the voting securities of ArvinMeritor OE, LLC are held by ArvinMeritor International Holdings, Inc. and .06% are held by ArvinMeritor LVS Espana, S.A. (2) Shares of Meritor Finance Cayman Islands, Ltd. and Meritor I Acquisition Corporation (a Delaware corporation) are stapled together and treated as units, 1% of which are owned by ArvinMeritor OE, LLC and 99% of which are owned by its subsidiary, ArvinMeritor Assembly, LLC. (3) Meritor France is owned indirectly, through several intervening subsidiaries, by Meritor Finance Cayman Islands, Ltd. (4) 1% of the voting securities of Meritor Holdings Netherlands B.V. is owned by Meritor Finance Cayman Islands, Ltd., and 99% is owned by its subsidiary Meritor Luxembourg s.a.r.l. (5) 51% of the voting securities of Meritor Automotive Canada Inc. is owned by Meritor Holdings Netherlands B.V., and 49% is owned by another subsidiary of Meritor Finance Cayman Islands, Ltd., ArvinMeritor Holdings France SNC. (6) 100% of the voting securities of Meritor do Brasil Ltda. is owned by Meritor Participacoes Ltda., a holding company which is 100% owned by ArvinMeritor Finance Canada, Inc., which in turn is owned by Meritor Automotive Canada Inc. (7) ArvinMeritor Canada is a partnership owned by Meritor Automotive Canada Inc. (29.62%) and its subsidiary, Euclid Industries Canada Ltd. (40.01%), and by Arvin Exhaust of Canada Ltd. (16%) and Arvin Ride Control Products, Inc. (14.37%). Arvin International Holland B.V. (Netherlands)........ 100% ArvinMeritor A&ET B.V. (Netherlands)............ 100% ArvinMeritor A&ET S.p.A. (Italy)................ 100% (9) Arvin Replacement Products S.A.S. (France).................. 100% (10) Arvin European Holdings (UK) Limited........................ 100% Arvin France SAS (France)................................ 100% ArvinMeritor A&ET (France)........................ 100% Arvin International (U.K.) Ltd. (United Kingdom)............ 100% Arvin Replacement Products Limited (United Kingdom)......................................... 100% Arvin International Holdings, LLC (Delaware)............................ 100% ArvinMeritor A&ET S.A. (Spain).................................... 100% A.P. Amortiguadores S.A. (Spain).................................. 75% Arvin Replacement Products s.r.l. (Italy)......................... 1% 99% Maremont Corporation (Delaware)......................................... 100% AVM, Inc. (South Carolina)........................................ 100% Maremont Exhaust Products, Inc. (Delaware)........................ 100% Gabriel Ride Control Products, Inc. (Delaware).................... 100% Purolator Products Company (Delaware)................................... 100% Purolator Products NA, Inc. (Delaware)............................ 100% Roll Coater, Inc. (Indiana)............................................. 100%
Listed above are certain consolidated subsidiaries included in the financial statements of the Company at September 30, 2002. - -------- (8) 24% of the voting securities of ArvinMeritor GmbH is owned by Meritor Holdings Netherlands B.V., 75% is owned by its indirect subsidiary, Meritor Golde GmbH & Co. KG, and 1% is owned by Meritor Heavy Vehicle Systems Limited. (9) 99% of the voting securities of ArvinMeritor A&ET S.p.A. is owned by Arvin International Holland B.V. and 1% is owned by its subsidiary, ArvinMeritor A&ET B.V. (10) Arvin Replacement Products S.A.S. is 100% owned, indirectly through several intervening subsidiaries, by Meritor Finance Cayman Islands, Ltd. EX-23.A 8 y66532exv23wa.txt CONSENT OF M LEE MURRAH ESQ EXHIBIT 23-A CONSENT OF EXPERT I consent to the reference to me under the heading "Item 3. Legal Proceedings" in the Annual Report on Form 10-K of ArvinMeritor, Inc. ("ArvinMeritor") for the fiscal year ended September 30, 2002, and to the incorporation by reference of such reference into the following Registration Statements of ArvinMeritor:
Form Registration No. Purpose - ---- ---------------- ------- S-3 333-58760 Registration of debt securities S-8 333-53396 ArvinMeritor, Inc. Savings Plan S-8 333-53498 ArvinMeritor, Inc. Hourly Employees Savings Plan S-8 333-49610 1997 Long-Term Incentives Plan S-8 333-42012 Employee Stock Benefit Plan, 1988 Stock Benefit Plan and 1998 Employee Stock Benefit Plan S-3 333-43110 Arvin Industries, Inc. Employee Savings Plan S-3 333-43112 Arvin Industries, Inc. Employee Stock Benefit Plan S-3 333-43116 Arvin Industries, Inc. 1998 Stock Benefit Plan S-3 333-43118 Arvin Industries, Inc. 1988 Stock Benefit Plan S-3 333-43146 Arvin Industries, Inc. Savings Plan
/s/ M. Lee Murrah ----------------- M. Lee Murrah Chief Intellectual Property Counsel of ArvinMeritor, Inc. Date: December 17, 2002 EX-23.B 9 y66532exv23wb.txt CONSENT OF VERNON G BAKER II ESQ EXHIBIT 23-B CONSENT OF EXPERT I consent to the reference to me under the headings "Item 1. Business - Environmental Matters" and "Item 3. Legal Proceedings" in the Annual Report on Form 10-K of ArvinMeritor, Inc. ("ArvinMeritor") for the fiscal year ended September 30, 2002, and to the incorporation by reference of such reference into the following Registration Statements of ArvinMeritor:
Form Registration No. Purpose - ---- ---------------- ------- S-3 333-58760 Registration of debt securities S-8 333-53396 ArvinMeritor, Inc. Savings Plan S-8 333-53498 ArvinMeritor, Inc. Hourly Employees Savings Plan S-8 333-49610 1997 Long-Term Incentives Plan S-8 333-42012 Employee Stock Benefit Plan, 1988 Stock Benefit Plan and 1998 Employee Stock Benefit Plan S-3 333-43110 Arvin Industries, Inc. Employee Savings Plan S-3 333-43112 Arvin Industries, Inc. Employee Stock Benefit Plan S-3 333-43116 Arvin Industries, Inc. 1998 Stock Benefit Plan S-3 333-43118 Arvin Industries, Inc. 1988 Stock Benefit Plan S-3 333-43146 Arvin Industries, Inc. Savings Plan
/s/ Vernon G. Baker, II ----------------------- Vernon G. Baker, II Senior Vice President and General Counsel of ArvinMeritor, Inc. Date: December 17, 2002 EX-23.C 10 y66532exv23wc.txt INDEPENDENT AUDITORS CONSENT EXHIBIT 23-C INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference of our report dated November 6, 2002 (December 17, 2002 as to paragraph 2 of Note 26), appearing in the Annual Report on Form 10-K of ArvinMeritor, Inc. for the fiscal year ended September 30, 2002 in the following Registration Statements of ArvinMeritor, Inc.:
Form Registration No. Purpose - ---- ---------------- ------- S-3 333-58760 Registration of debt securities S-8 333-53396 ArvinMeritor, Inc. Savings Plan S-8 333-53498 ArvinMeritor, Inc. Hourly Employees Savings Plan S-8 333-49610 1997 Long-Term Incentives Plan S-8 333-42012 Employee Stock Benefit Plan, 1988 Stock Benefit Plan and 1998 Employee Stock Benefit Plan S-3 333-43110 Arvin Industries, Inc. Employee Savings Plan S-3 333-43112 Arvin Industries, Inc. Employee Stock Benefit Plan S-3 333-43116 Arvin Industries, Inc. 1998 Stock Benefit Plan S-3 333-43118 Arvin Industries, Inc. 1988 Stock Benefit Plan S-3 333-43146 Arvin Industries, Inc. Savings Plan
DELOITTE & TOUCHE LLP Detroit, Michigan December 17, 2002 EX-24 11 y66532exv24.txt POWER OF ATTORNEY Exhibit 24 POWER OF ATTORNEY I, the undersigned Director and/or Officer of ArvinMeritor, Inc., an Indiana corporation (the "Company"), hereby constitute VERNON G. BAKER, II, and BONNIE WILKINSON, and each of them singly, my true and lawful attorneys with full power to them and each of them to sign for me, and in my name and in the capacity or capacities indicated below, the Annual Report on Form 10-K for the fiscal year ended September 29, 2002, and any amendments and supplements thereto, to be filed by the Company with the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934.
Signature Title Date --------- ----- ---- /s/ Larry D. Yost Chairman of the Board and November 22, 2002 - --------------------------- Chief Executive Officer Larry D. Yost (principal executive officer) and Director /s/ Terrence E. O'Rourke President and Chief Operating November 22, 2002 - ------------------------ Officer and Director Terrence E. O'Rourke /s/ Joseph B. Anderson, Jr. Director November 22, 2002 - --------------------------- Joseph B. Anderson, Jr. /s/ Steven C. Beering Director November 22, 2002 - --------------------------- Steven C. Beering /s/ Rhonda L. Brooks Director November 22, 2002 - --------------------------- Rhonda L. Brooks /s/ Joseph P. Flannery Director November 22, 2002 - --------------------------- Joseph P. Flannery /s/ William D. George, Jr. Director November 22, 2002 - --------------------------- William D. George, Jr. /s/ Richard W. Hanselman Director November 22, 2002 - --------------------------- Richard W. Hanselman /s/ Charles H. Harff Director November 22, 2002 - --------------------------- Charles H. Harff
/s/ Victoria B. Jackson Director November 22, 2002 - --------------------------- Victoria B. Jackson /s/ James E. Marley Director November 22, 2002 - --------------------------- James E. Marley /s/ James E. Perrella Director November 22, 2002 - --------------------------- James E. Perrella /s/ Martin D. Walker Director November 22, 2002 - --------------------------- Martin D. Walker /s/ S. Carl Soderstrom, Jr. Senior Vice President November 22, 2002 - --------------------------- and Chief Financial Officer S. Carl Soderstrom, Jr. (principal financial officer) /s/ Diane S. Bullock Vice President and Controller November 22, 2002 - --------------------------- (principal accounting officer) Diane S. Bullock
EX-99.A 12 y66532exv99wa.txt CERTIFICATION Exhibit 99-a CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 As required by 18 U.S.C. Section 1350, I, Larry D. Yost, Chairman of the Board and Chief Executive Officer of ArvinMeritor, Inc., hereby certify that: 1. The Annual Report of ArvinMeritor, Inc. on Form 10-K for the Fiscal Year Ended September 29, 2002 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, and 2. The information contained in that report fairly presents, in all material respects, the financial condition and results of operations of ArvinMeritor, Inc. /s/ Larry D. Yost - ----------------- Larry D. Yost Date: December 17, 2002 This certification accompanies the Annual Report of ArvinMeritor, Inc. on Form 10-K for the Fiscal Year ended September 29, 2002, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by ArvinMeritor, Inc. for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. EX-99.B 13 y66532exv99wb.txt CERTIFICATION Exhibit 99-b CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 As required by 18 U.S.C. Section 1350, I, S. Carl Soderstrom, Jr., Senior Vice President and Chief Financial Officer of ArvinMeritor, Inc., hereby certify that: 1. The Annual Report of ArvinMeritor, Inc. on Form 10-K for the Fiscal Year Ended September 29, 2002 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, and 2. The information contained in that report fairly presents, in all material respects, the financial condition and results of operations of ArvinMeritor, Inc. /s/ S. Carl Soderstrom, Jr. - --------------------------- S. Carl Soderstrom, Jr. Date: December 17, 2002 This certification accompanies the Annual Report of ArvinMeritor, Inc. on Form 10-K for the Fiscal Year ended September 29, 2002, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by ArvinMeritor, Inc. for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. -----END PRIVACY-ENHANCED MESSAGE-----