-----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, A51Deu597lL6gQKSbY0DmkP0uXPfkgQ3xU4KwyfxBG7SGdmzx0ED3OmmTyiM6Q8Y FEs9AxnGO6EfcCEp3mBwlw== 0000950131-98-003700.txt : 19980605 0000950131-98-003700.hdr.sgml : 19980605 ACCESSION NUMBER: 0000950131-98-003700 CONFORMED SUBMISSION TYPE: S-3/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19980604 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FEDERAL MOGUL CORP CENTRAL INDEX KEY: 0000034879 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLE PARTS & ACCESSORIES [3714] IRS NUMBER: 380533580 STATE OF INCORPORATION: MI FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-3/A SEC ACT: SEC FILE NUMBER: 333-50413 FILM NUMBER: 98642141 BUSINESS ADDRESS: STREET 1: 26555 NORTHWESTERN HGWY CITY: SOUTHFIELD STATE: MI ZIP: 48034 BUSINESS PHONE: 2483547700 S-3/A 1 AMENDMENT #2 TO FORM S-3 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 4, 1998 SUBJECT TO AMENDMENT REGISTRATION NO. 333-50413 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------------- AMENDMENT NO. 2 TO FORM S-3 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------- FEDERAL-MOGUL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) -------------- MICHIGAN 38-0533580 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 26555 NORTHWESTERN HIGHWAY SOUTHFIELD, MICHIGAN 48034 (248) 354-7700 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) EDWARD W. GRAY, JR., ESQ. FEDERAL-MOGUL CORPORATION 26555 NORTHWESTERN HIGHWAY SOUTHFIELD, MICHIGAN 48034 (248) 354-7700 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) -------------- The Commission is requested to mail signed copies of all orders, notices and communications to: LAURENT ALPERT, ESQ. THOMAS A. COLE, ESQ. CLEARY, GOTTLIEB, STEEN & HAMILTON SIDLEY & AUSTIN ONE LIBERTY PLAZA ONE FIRST NATIONAL PLAZA NEW YORK, NEW YORK 10006 CHICAGO, ILLINOIS 60603 (212) 225-2000 -------------- (312) 853-7000 APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to time after the effective date of this Registration Statement. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, please check the following box. [_] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, other than securities offered only in connection with dividend or interest reinvestment plans, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] -------------- CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION REGISTERED REGISTERED(1) PER UNIT(2)(3) PRICE(2)(3) FEE - ----------------------------------------------------------------------------------- Common Stock, without par value offered by Federal-Mogul Corporation(4)......... - ----------------------------------------------------------------------------------- Debt Securities offered by Federal-Mogul Corporation............ - ----------------------------------------------------------------------------------- Preferred Stock offered by Federal-Mogul Corporation(4)......... - ----------------------------------------------------------------------------------- Total Securities offered by Federal-Mogul Corporation............ - ----------------------------------------------------------------------------------- Common Stock, without par value offered by Selling Shareholders... - ----------------------------------------------------------------------------------- Total................... $2,500,000,000 100% $2,500,000,000 $737,500 - -----------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- - -------- (1) Such indeterminate number or amount of Common Stock, Debt Securities and Preferred Stock as may from time to time be issued at indeterminate prices. The amount registered is in United States dollars or the equivalent thereof in any other currency, currency unit or units, or composite currency or currencies. (2) The proposed maximum offering price per unit will be determined from time to time by the Registrant or the Selling Shareholders in connection with the issuance by the Registrant or the sale by the Selling Shareholders of the securities registered hereunder. (3) The proposed maximum aggregate offering price has been estimated solely for the purpose of calculating the registration fee pursuant to Rule 457 under the Securities Act of 1933. The aggregate public offering price of the Common Stock, Debt Securities and Preferred Stock offered by Federal- Mogul Corporation and the Selling Shareholders will not exceed $2.5 billion or the equivalent thereof in one or more foreign currencies, foreign currency units or composite currencies. (4) Also includes such indeterminate number of shares of Preferred Stock and Common Stock as may be issued upon conversion of or exchange for any Debt Securities or Preferred Stock that provide for conversion or exchange into other securities. No separate consideration will be received for the Preferred Stock or Common Stock issuable upon conversion of or in exchange for Debt Securities or Preferred Stock. ---------------- PURSUANT TO THE PROVISIONS OF RULE 429 UNDER THE SECURITIES ACT OF 1933, AS AMENDED, THE PROSPECTUS CONSTITUTING A PART OF THIS REGISTRATION STATEMENT ALSO RELATES TO AN ADDITIONAL $77,343,750 PRINCIPAL AMOUNT OF COMMON STOCK, DEBT SECURITIES AND PREFERRED STOCK REGISTERED BY THE REGISTRANT UNDER THE SECURITIES ACT OF 1933 IN REGISTRATION STATEMENT NO. 33-54717 AND THIS REGISTRATION STATEMENT ALSO CONSTITUTES POST-EFFECTIVE AMENDMENT NO. 1 WITH RESPECT TO SUCH REGISTRATION STATEMENT. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- EXPLANATORY NOTE The securities registered hereby may be offered from time to time by means of the base prospectus included herein and an applicable prospectus supplement. If Common Stock registered hereby is offered or sold in reliance upon the procedures contemplated by Rule 430A under the Securities Act of 1933, as amended, such Common Stock will be offered or sold by means of the base prospectus included herein and a prospectus supplement in the form included herein (including the financial statements paginated with numbers preceded by "F-" reprinted after the base prospectus in this Registration Statement). Securities registered hereby, including Common Stock, which are not offered or sold in reliance upon the procedures contemplated by Rule 430A may be offered or sold by means of the base prospectus included herein and a prospectus supplement in a form other than the form of prospectus supplement included herein. ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS + +SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY + +NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH + +OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR + +QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS SUPPLEMENT DATED MAY 14, 1998 PROSPECTUS SUPPLEMENT (TO PROSPECTUS DATED , 1998) 11,000,000 SHARES LOGO COMMON STOCK ----------- Of the 11,000,000 shares of Common Stock, without par value (the "Common Stock"), of Federal-Mogul Corporation (the "Company" or "Federal-Mogul") being offered hereby, 9,712,093 shares are being offered by Federal-Mogul and 1,287,907 shares are being offered by certain shareholders of Federal-Mogul (the "Selling Shareholders"). Federal-Mogul will not receive any of the proceeds from the sale of shares of Common Stock by the Selling Shareholders. See "Selling Shareholders" and "Underwriting." Of the 11,000,000 shares of Common Stock offered hereby, 8,800,000 are being offered initially in the United States and Canada (the "U.S. Offering") and 2,200,000 shares are being offered initially in a concurrent international offering outside the United States and Canada (the "International Offering," and together with the U.S. Offering, the "Offerings"). The public offering price and the underwriting discount per share are identical for both Offerings. See "Underwriting." The Common Stock is listed on the New York Stock Exchange, Inc. (the "NYSE") under the trading symbol "FMO." On May 12, 1998, the last reported sale price of Common Stock on the NYSE was $63 15/16 per share. See "Price Range of Common Stock and Dividends." SEE "RISK FACTORS" BEGINNING ON PAGE S-11 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PROCEEDS TO PROCEEDS TO PRICE TO UNDERWRITING FEDERAL- SELLING PUBLIC DISCOUNT(1) MOGUL(2) SHAREHOLDERS - ---------------------------------------------------------------------------------- Per Share........................ - ---------------------------------------------------------------------------------- Total(3).........................
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) Federal-Mogul and the Selling Shareholders have agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting." (2) Before deducting expenses of the Offerings payable by Federal-Mogul estimated at $2,000,000. (3) Federal-Mogul and the Selling Shareholders have granted options to the U.S. Underwriters, exercisable within 30 days of the date hereof, to purchase up to an aggregate of 1,320,000 additional shares of Common Stock and options to the International Managers, exercisable within 30 days of the date hereof, to purchase up to an aggregate of 330,000 additional shares of Common Stock, solely to cover over-allotments, if any. If such options are exercised in full, the total Price to Public, Underwriting Discounts, Proceeds to Federal-Mogul and Proceeds to Selling Shareholders will be $ , $ , $ and $ , respectively. See "Underwriting." ----------- The shares of Common Stock are being offered by the several Underwriters, subject to prior sale, when, as and if delivered to and accepted by them, subject to approval of certain legal matters by counsel to the Underwriters and to certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of Common Stock will be made in New York, New York on or about , 1998. ----------- MERRILL LYNCH & CO. BEAR, STEARNS & CO. INC. MORGAN STANLEY DEAN WITTER SALOMON SMITH BARNEY DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION SCHRODER & CO. INC. ----------- The date of this Prospectus Supplement is , 1998. [PHOTOS] CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." S-2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and the consolidated Financial Statements (as hereinafter defined) appearing elsewhere in this Prospectus Supplement and the accompanying Prospectus or incorporated herein or therein by reference. See "Presentation of Financial Information." Except as otherwise indicated, all information in this Prospectus Supplement and the accompanying Prospectus assumes no exercise of the Underwriters' over-allotment options. Prospective investors should carefully consider the matters discussed under the caption "Risk Factors." FEDERAL-MOGUL CORPORATION Federal-Mogul is a leading global manufacturer and distributor of a broad range of vehicular components for automobiles and light trucks, heavy duty trucks, farm and construction vehicles and industrial products. Such components include powertrain systems components (primarily bearings, rings and pistons), sealing systems components (dynamic seals and gaskets) and general products (primarily camshafts, friction products, sintered products and systems protection products). Federal-Mogul markets its products to many of the world's major original equipment ("OE") manufacturers. Federal-Mogul also manufactures and supplies its products and related parts to the aftermarket relating to each of these categories of equipment. Among Federal-Mogul's largest customers are Caterpillar, Chrysler, Cummins, Ford, General Motors, Mercedes-Benz, NAPA, Peugeot and Volkswagen/Audi (in alphabetical order). Founded in 1899, Federal-Mogul traditionally focused on the manufacture and distribution of engine bearings and sealing systems. From 1990 through 1996, Federal-Mogul pursued a strategy of opening retail auto stores in various domestic and international locations. These geographically-dispersed stores proved burdensome to manage and resulted in substantial operating losses. In the fourth quarter of 1996, Federal-Mogul initiated a change of management, following which the Company initiated a significant restructuring program designed to refocus the Company on its core competency of manufacturing. As part of its restructuring, Federal-Mogul closed or sold substantially all of its retail operations. Federal-Mogul also began to pursue a growth strategy of acquiring complementary manufacturing companies that enhance the Company's product base, expand its global manufacturing operations and provide opportunities to capitalize on the Company's aftermarket distribution network and technological resources. In connection with its growth strategy, on March 6, 1998 Federal-Mogul acquired T&N plc ("T&N"), a U.K. based supplier of engine and transmission products, for total consideration of approximately (Pounds)1.46 billion ($2.42 billion, converted at a blended exchange rate of 1 pound sterling to 1.6510 U.S. dollars). T&N manufactures and supplies high technology engineered automotive components and industrial materials including pistons, friction products, bearings, systems protection, camshafts and sealing products. On February 24, 1998, Federal-Mogul acquired Fel-Pro Incorporated and certain affiliated entities, which constitute the operating businesses of the Fel-Pro group of companies ("Fel-Pro"), a privately-owned automotive parts manufacturer, for total consideration of approximately $717 million. Fel-Pro is a premier gasket manufacturer for the North American aftermarket and OE heavy duty market. See "T&N and Fel-Pro Acquisitions." Federal-Mogul currently operates facilities at over 240 locations in 24 countries. On a pro forma basis adjusted for the acquisitions of T&N and Fel- Pro, Federal-Mogul's total sales for 1997 were $4.8 billion. See "Unaudited Pro Forma Financial Data." S-3 The following charts set forth Federal-Mogul's net sales by customer group, geographic region and manufacturing division as a percentage of total net sales for the year ended December 31, 1997, on a pro forma basis. [Charts setting forth net sales by customer group, geographic region and manufacturing division for the year ended December 31, 1997] BUSINESS STRATEGY The Company believes its recent restructuring program, which refocused the Company on its core competency of manufacturing, and the acquisitions of T&N and Fel-Pro, which expanded the Company's product base and geographic reach, significantly enhanced its position within the automobile, truck and other vehicular components markets. The Company believes that opportunities exist to continue its growth and further enhance its market presence through the following initiatives: . Systems Approach. The breadth of the Company's manufacturing capabilities and product offerings enable it to be one of a small number of manufacturers with the ability to seal entire engine, transmission and axle systems and to be a single source supplier of engine and sealing components. In addition, Federal-Mogul is committed to becoming a provider of complete engine and transmission modules for its OE customers. The Company believes that OE manufacturers of automobiles, trucks and other vehicles are increasingly seeking to reduce the number of suppliers from which they source parts and to develop relationships with suppliers that can offer integrated systems and modules in order to lower production costs, increase quality, provide better technology and shorten product development cycles. The T&N and Fel-Pro acquisitions, which expanded the Company's gasket, cast aluminum piston, large bearing and sealing product lines and added product lines for articulated pistons, cylinder liners and piston rings, are major steps toward Federal-Mogul's strategic goal of developing global engine and sealing systems for its OE customers. . Continue Focus on New Product Innovation. The Company's expertise in engineering and research and development has made Federal-Mogul a leader in virtually all of the product segments in which it competes. The Company utilizes the latest technologies, processes and materials to solve problems for customers and to bring new, innovative products to market. The Company has special competencies in alloy development, customized materials formulations, surface technology, advanced modeling and testing and systems engineering. These capabilities allow the Company to reduce production costs and to develop products that are more durable and exhibit better interaction with surrounding components. These innovative products better serve OE customers and aid brand development, resulting in a higher margin product mix. S-4 . Extend Global Manufacturing Reach. The Company is committed to extending its manufacturing capabilities worldwide in response to the global expansion of its OE manufacturing customers. The acquisitions of T&N and Fel-Pro have substantially increased the Company's manufacturing presence, particularly in North America and Europe. Management believes expansion of manufacturing operations to follow the expansion of OE manufacturers into Latin America, Eastern Europe and Asia provides significant growth opportunities for the Company in the future. . Pursue Strategic Acquisitions. The vehicular engine and sealing component industry is large and highly fragmented. The Company believes that as OE manufacturers continue to outsource and reduce the number of suppliers, opportunities will exist for further consolidation within this industry. The Company believes that, through its established presence in these markets and its strong relationships with OE manufacturers worldwide, the Company is in a favorable position to capitalize on future industry consolidation. The Company's management has substantial experience in completing and integrating acquisitions within the automobile parts industry and believes that this experience will help it select and pursue acquisition opportunities that can enhance the Company's product base, expand its global manufacturing operations and further capitalize on the Company's aftermarket distribution network and technological resources. . Expand Aftermarket Presence. Approximately 48% of the Company's 1997 sales, on a pro forma basis, were generated from the aftermarket. The Company believes that opportunities exist to further leverage its broad product offerings, reputation for new product innovation and presence within the OE market to increase its penetration of the worldwide aftermarket. In addition, the Company believes that its ability to sell products developed for the OE market to aftermarket customers reduces the impact of adverse changes in demand for new vehicles. . EVA Focus. In 1997, the Company adopted Economic Value Added (EVA(R)) as its primary financial measurement and incentive compensation metric. EVA is equal to net operating profits after economic taxes and a charge for capital invested in the Company, which is equal to the product of the total capital invested in the Company and the weighted average cost of capital for the Company's target blend of debt and equity. The Company's management has placed significant emphasis on improving the Company's financial performance and achieving various operating efficiencies through technical development, manufacturing, marketing and administrative rationalization in connection with this effort. The Company's EVA improved significantly in 1997 due primarily to improved operating margins (4.9% in 1996 and 7.7% in 1997) combined with $166 million of cash flow from continuing operations (net of expenditures for property, plant and equipment) in 1997. EVA is also being applied to the integration of T&N and Fel-Pro to optimize synergies and cost savings. As the Company continues to expand both its product base and its geographic scope, management will evaluate investments and acquisitions based on both EVA and strategic importance. In addition, the Company currently determines compensation for certain top managers using an EVA based system and expects to increase the number of managers participating in its EVA based compensation system to over 200 in 1999. * * * Federal-Mogul is a Michigan corporation with its principal executive offices located at 26555 Northwestern Highway, Southfield, Michigan 48034. The telephone number of those offices is (248) 354-7700. S-5 THE OFFERINGS Common Stock offered by (1): Federal-Mogul (2).......................... 9,712,093 shares Selling Shareholders (3)................... 1,287,907 shares Common Stock to be Outstanding after the Offerings (4)..................... 55,470,160 shares Use of Proceeds.............................. To prepay certain indebtedness of Federal-Mogul, which was incurred to finance the acquisitions of T&N and Fel- Pro. Federal-Mogul will not receive any of the proceeds from the sale of Common Stock offered by the Selling Shareholders. See "Use of Proceeds" and "Selling Shareholders." NYSE Symbol.................................. FMO Risk Factors................................. For a discussion of certain risks that should be considered by prospective investors before investing in the Common Stock offered hereby, see "Risk Factors."
- -------- (1) Assumes no exercise of the Underwriters' over-allotment options granted by the Company to the U.S. Underwriters for up to an additional 660,000 shares and to the International Underwriters for an additional 165,000 shares or the Underwriters' over-allotment options granted by the Selling Shareholders to the U.S. Underwriters of up to an additional 660,000 shares and to the International Underwriters of up to an additional 165,000 shares. See "Underwriters." (2) Of the 9,712,093 shares of Common Stock to be sold in the Offerings by Federal-Mogul, 7,769,674 shares are being offered initially in the United States and Canada by the U.S. Underwriters and 1,942,419 shares are being offered initially in a concurrent international offering outside the United States and Canada by the International Managers. See "Underwriting." (3) Of the 1,287,907 shares of Common Stock to be sold in the Offerings by the Selling Shareholders, 1,030,326 shares are being offered initially in the United States and Canada by the U.S. Underwriters and 257,581 shares are being offered initially in a concurrent international offering outside the United States and Canada by the International Managers. See "Underwriting." (4) Includes 5,151,628 shares issuable upon the conversion of the Series E Mandatory Exchangeable Preferred Stock ("Series E Stock") (including Series E Stock to be converted in connection with the Offerings). Does not include: (i) 1,882,383 shares issuable upon exercise of outstanding options under Federal-Mogul's various stock option and incentive stock plans as of May 12, 1998 and (ii) 826,207 additional shares reserved for issuance upon exercise of options not yet granted under those plans. S-6 SUMMARY FINANCIAL DATA The following summary historical financial information is derived from, and should be read in conjunction with, the Federal-Mogul Financial Statements (as hereinafter defined), T&N Financial Statements (as hereinafter defined) and Fel-Pro Financial Statements (as hereinafter defined), and the summary unaudited pro forma financial information is derived from, and should be read in conjunction with, the "Unaudited Pro Forma Financial Data," all of which are included elsewhere in this Prospectus Supplement. See "Presentation of Financial Information." The Federal-Mogul Audited Financial Statements (as hereinafter defined) were audited by Ernst & Young LLP. The T&N Financial Statements were audited by KPMG Audit Plc. The Fel-Pro Financial Statements were audited by Ernst & Young LLP. The Federal-Mogul Unaudited Interim Financial Statements (as hereinafter defined) are unaudited but, in the opinion of management, reflect all adjustments necessary for a fair presentation of such information. FEDERAL-MOGUL
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, (UNAUDITED) ------------------------------------- ---------------------- 1997 1996 1995 1998(1) 1997 --------- --------- --------- --------- -------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Net sales............... $ 1,806.6 $2 ,032.7 $ 1,999.8 $ 658.0 $ 485.6 Costs and expenses...... (1,703.7)(2) (2,258.0)(3) (2,000.7)(4) (650.6)(5) (461.1) Other expense........... (3.4) (3.4) (2.4) (5.8) (2.0) Income tax (expense) benefit................ (27.5) 22.4 (2.5) (8.8) (8.6) --------- --------- --------- --------- -------- Net earnings (loss) before extraordinary item................... 72.0 (206.3) (5.8) (7.2) 13.9 Extraordinary item -- loss on early retirement of debt, net of applicable income tax benefit............ (2.6) -- -- -- -- --------- --------- --------- --------- -------- Net earnings (loss)..... $ 69.4 $ (206.3) $ (5.8) $ (7.2) $ 13.9 ========= ========= ========= ========= ======== COMMON SHARE SUMMARY (DILUTED): Average shares and equivalents outstanding (in thousands)......... 41,854 34,659 34,642 40,114 37,159 Earnings (loss) per share: Before extraordinary item................. $ 1.67 $ (6.20) $ (0.42) $ (0.20) $ 0.32 Extraordinary item -- loss on early retirement of debt, net of applicable income tax benefit... (0.06) -- -- -- -- --------- --------- --------- --------- -------- Net earnings (loss) per share.................. $ 1.61 $ (6.20) $ (0.42) $ (0.20) $ 0.32 ========= ========= ========= ========= ======== Dividends declared per share.................. $ 0.48 $ 0.48 $ 0.48 $ 0.12 $ 0.12 ========= ========= ========= ========= ======== CONSOLIDATED BALANCE SHEET DATA: Total assets............ $ 1,802.1 $ 1,455.2 $ 1,701.1 $ 7,398.7 $1,419.7 Short-term debt(6)...... 28.6 280.1 111.9 837.8 258.7 Long-term debt.......... 273.1 209.6 481.5 2,273.7 206.9 Shareholder's equity.... 369.3 318.5 550.3 586.0 310.2 OTHER FINANCIAL INFORMATION: Cash provided from (used by) operating activities............. $ 215.7 $ 149.0 $ (34.7) $ 82.7 $ 28.1 Cash provided from (used by) investing activities............. (5.5) (12.5) (109.4) (2,586.5) 2.0 Cash provided from (used by) financing activities............. 298.1 (122.8) 138.5 2,063.9 (30.2) EBITDA(7)............... 194.5 97.9 163.6 82.7 46.3 Expenditures for property, plant, equipment and other long term assets....... 49.7 54.2 78.5 19.5 8.4 Depreciation and amortization expense... 52.8 63.7 61.0 29.8 14.0
- -------- (1) Reflects first time consolidation of T&N and Fel-Pro as of March 6, 1998 and February 24, 1998, respectively. (2) Includes $1.1 million for a net restructuring credit, a $2.4 million charge for an adjustment of assets held for sale to fair value and other long lived assets, a $1.6 million credit for reengineering and other related charges, and a $10.5 million net charge related to the British pound currency option. (3) Includes $57.6 million for a restructuring charge, $151.3 million for adjustment of assets held for sale to fair value and other long lived assets and $11.4 million relating to reengineering and other related charges. (4) Includes $26.9 million for restructuring charges, $51.8 million for adjustment of assets held for sale to fair value and other long lived assets and $13.9 million relating to reengineering and other related charges. S-7 (5) Includes $18.6 million for a purchased in-process research and development charge, $10.5 million for restructuring charges, $20.0 million for adjustment of assets held for sale to fair value and other long-lived assets, and a $13.3 million net gain on British pound currency option and forward contract. (6) Includes current maturities of long-term debt. (7) "EBITDA" represents the sum of income before interest expense and income taxes, plus depreciation and amortization as well as nonrecurring charges including gains on the sale of businesses, restructuring and reengineering charges, adjustments of assets held for sale to fair value and other long lived assets, the net effect of British pound currency options and forward contracts, and purchased in-process research and development charge. EBITDA should not be construed as a substitute for income from operations, net income or cash flow from operating activities, for the purpose of analyzing Federal-Mogul's operating performance, financial position and cash flows. EBITDA measures are calculated differently by other companies. As such, the EBITDA measures presented may not be comparable to other similarly titled measures of other companies. The Company has presented EBITDA because it is commonly used by investors to analyze and compare companies on the basis of operating performance and to determine a company's ability to service debt. T&N
YEAR ENDED DECEMBER 31, -------------------------------- 1997 1996 T&N HISTORICAL IN U.K. GAAP --------------- --------------- (POUNDS STERLING IN MILLIONS) CONSOLIDATED PROFIT AND LOSS ACCOUNTS DATA: Total turnover excluding associated undertakings............................. (Pounds)1,799.1 (Pounds)1,956.0 Cost of sales............................. (1,293.5) (1,418.3) Other operating expenses.................. (331.6) (370.3) Other, net................................ 11.2 (560.2)(1) Tax on profit (loss) on ordinary activities............................... (62.8) (8.0) --------------- --------------- Profit/(loss) attributable to shareholders............................. (Pounds) 122.4 (Pounds) (400.8) =============== =============== CONSOLIDATED BALANCE SHEET DATA: Total assets.............................. (Pounds)1,576.2 (Pounds)1,558.3 Borrowings due within one year............ 103.7 77.2 Borrowings due after more than one year... 285.4 260.2 Equity shareholders' funds at end of year. 191.4 118.3 YEAR ENDED DECEMBER 31, -------------------------------- 1997 1996 T&N UNAUDITED PRO FORMA IN U.S. GAAP(1)(2) --------------- --------------- (DOLLARS IN MILLIONS) STATEMENT OF OPERATIONS DATA: Net sales................................. $ 2,948.4 $ 3,055.4 Costs and expenses........................ (2,698.7) (4,058.6)(3) Income tax (expense) benefit.............. (159.3) 278.5 --------------- --------------- Net earnings (loss)....................... $ 90.4 $ (724.7) =============== =============== CONSOLIDATED BALANCE SHEET DATA: Total assets.............................. $ 3,120.1 $ 3,299.5 Short-term debt........................... 125.4 68.1 Long-term debt............................ 469.5 445.2 Shareholders' equity...................... 466.5 456.1 OTHER FINANCIAL INFORMATION: Cash flow provided from operating activities............................... 268.8 115.6 Cash flow used by investing activities.... (116.7) (211.8) Cash flow provided from (used by) financing activities..................... (125.0) 80.1 EBITDA(4)................................. 435.0 399.1 Expenditures for property, plant, equipment and other long term assets..... 170.9 179.2 Depreciation and amortization expense..... 167.6 161.9
(see footnotes on the following page) S-8 - -------- (1) The T&N historical financial statements were prepared in accordance with U.K. GAAP, which differs in certain significant respects from U.S. GAAP (see Note 29 to the T&N Financial Statements). The following table reconciles the T&N profit/(loss) attributable to shareholders as reported under U.K. GAAP to net earnings/(loss) as stated under U.S. GAAP:
1997 1996 ------------- -------------- (IN MILLIONS) Profit/(loss) attributable to shareholders as reported under U.K. GAAP--stated in pound sterling.................................... (Pounds)122.4 (Pounds)(400.8) Converted to U.S. dollars.................... $ 201.4 $ (628.4) U.S. GAAP adjustments (in U.S. dollars): Amortization of goodwill................... (11.2) (5.3) Amortization of patents.................... (2.6) (2.5) Deferred taxation--full provision.......... (67.1) 158.7 Tax effect of other U.S. GAAP reconciling items..................................... 3.0 121.8 Pension costs.............................. (11.5) (23.7) Asbestos provision discount................ (0.8) (355.9) Depreciation on fixed asset revaluations... 9.5 9.7 Carrying value of investments.............. (31.6) -- Other...................................... 2.1 2.0 Minority interests......................... (0.8) (1.1) ------------- -------------- Net earnings (loss) under U.S. GAAP.......... $ 90.4 $ (724.7) ============= ==============
(2) Operating results and balance sheet data for 1997 have been translated at a rate of 1.6453 U.S. dollars to 1 pound sterling and 1.6451 U.S. dollars to 1 pound sterling, respectively. Operating results and balance sheet data for 1996 have been translated at a rate of 1.5680 U.S. dollars to 1 pound sterling and 1.7110 U.S. dollars to 1 pound sterling, respectively. (3) Includes charge for asbestos-related costs of (Pounds)515 million under U.K. GAAP and $1.244 billion under U.S. GAAP. (4) "EBITDA" represents the sum of income before interest expense and income taxes, plus depreciation and amortization as well as nonrecurring charges including gains on the sale of businesses, the cost and gains associated with options over shares of Kolbenschmidt AG, asbestos related costs and bid costs. EBITDA should not be construed as a substitute for income from operations, net income or cash flow from operating activities, for the purpose of analyzing T&N's operating performance, financial position and cash flows. EBITDA measures are calculated differently by other companies. As such, the EBITDA measures presented may not be comparable to other similarly titled measures of other companies. The Company has presented EBITDA because it is commonly used by investors to analyze and compare companies on the basis of operating performance and to determine a company's ability to service debt. FEL-PRO
YEAR ENDED YEAR ENDED DECEMBER 28, DECEMBER 29, 1997 1996 ------------ ------------ (DOLLARS IN MILLIONS) STATEMENT OF OPERATIONS DATA: Net sales............................................ $ 489.3 $ 448.0 Costs and expenses................................... (442.3) (408.7) Income tax expense................................... (25.5) (6.9) ------- ------- Net earnings......................................... $ 21.5 $ 32.4 ======= ======= CONSOLIDATED BALANCE SHEET DATA: Total assets......................................... $ 270.1 $ 261.8 Short-term debt...................................... -- -- Long-term debt....................................... -- -- Shareholder's equity................................. 139.9 151.8 OTHER FINANCIAL INFORMATION: EBITDA(1)............................................ $ 58.4 $ 50.5 Expenditures for property, plant, equipment and other long term assets.................................... 18.3 14.1 Depreciation and amortization expense................ 11.5 11.3
- -------- (1) "EBITDA" represents the sum of income before income taxes, plus depreciation and amortization. EBITDA should not be construed as a substitute for income from operations, net income or cash flow from operating activities, for the purpose of analyzing Fel-Pro's operating performance, financial position and cash flows. EBITDA measures are calculated differently by other companies. As such, the EBITDA measures presented may not be comparable to other similarly titled measures of other companies. The Company has presented EBITDA because it is commonly used by investors to analyze and compare companies on the basis of operating performance and to determine a company's ability to service debt. S-9 SUMMARY UNAUDITED PRO FORMA FINANCIAL INFORMATION The following table sets forth certain unaudited pro forma financial data for Federal-Mogul for the year ended December 31, 1997 and for the three-month period ended March 31, 1998, which are presented to reflect the pro forma effect of the T&N and Fel-Pro acquisitions as if they had occurred at the beginning of each period presented. The unaudited pro forma balance sheet as of December 31, 1997 has been prepared to illustrate the effect of the acquisitions of T&N and Fel-Pro as if it had occurred on such date. The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the financial position or results of operations which may occur in the future or that would have occurred had the acquisitions of T&N and Fel-Pro been consummated on the dates indicated, nor are they necessarily indicative of Federal-Mogul's future results of operations or financial position. The summary unaudited pro forma financial information below should be read in conjunction with the information set forth under the caption "Unaudited Pro Forma Financial Data," the Federal- Mogul Audited Financial Statements, the T&N Financial Statements and the Fel- Pro Financial Statements included elsewhere in this Prospectus Supplement.
PRO FORMA COMBINED YEAR PRO FORMA COMBINED ENDED THREE MONTHS ENDED DECEMBER 31, 1997 MARCH 31, 1998 ----------------- ------------------ (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA: Net sales................................. $4,824.0 $1,193.6 Costs and expenses........................ 4,791.8 1,208.6 Income tax expense........................ 93.5 1.5 -------- -------- Net loss before extraordinary items and nonrecurring charges(1)(2)............... $ (61.3) $ (16.5) ======== ======== COMMON SHARE SUMMARY (DILUTED): Average shares and equivalents outstanding (in thousands)........................... 36,647 40,104 Loss per share before extraordinary item and nonrecurring charges(2)(3)........... $ (2.16) $ (0.44) BALANCE SHEET DATA: Total assets.............................. $6,885.6 $7,398.7 (4) Total debt................................ 2,606.2 3,111.5 (4) Shareholders' equity...................... 549.2 576.4 OTHER FINANCIAL INFORMATION: EBITDA(5)................................. $ 558.7 $ 108.5 Expenditures for property, plant, equipment and other long term assets..... 238.9 49.5 Depreciation and amortization expense..... 296.8 62.8
- -------- (1) As a result of the use of proceeds from the Offerings, Federal-Mogul will recognize an extraordinary loss (net of tax) of approximately $5.1 million from the early extinguishment of debt. (2) The unaudited pro forma statements of operations include only the results of ongoing operations and exclude such impacts as extraordinary items, items relating to the acquisitions and synergies and expected cost savings associated with the integration of the acquisitions. See Note m to the "Unaudited Pro Forma Financial Data" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." (3) Loss per share as calculated for the pro forma combined entity includes an increase to the net loss of $17.8 million and $1.2 million in preferred dividend requirements for the years ended December 31, 1997 and March 31, 1998, respectively. (4) Amounts represent actual balances at March 31, 1998. (5) "EBITDA" represents the sum of income before interest expense and income taxes, plus depreciation and amortization as well as nonrecurring charges including gains on the sale of businesses, restructuring and reengineering charges, adjustments of assets held for sale to fair value and other long lived assets, the net effect of British pound currency options and forward contracts, gains associated with options over shares in Kolbenschmidt AG, asbestos related costs and bid costs. EBITDA should not be construed as a substitute for income from operations, net income or cash flow operating activities, for the purpose of analyzing Federal-Mogul's operating performance, financial position and cash flows. EBITDA measures are calculated differently by other companies. As such, the EBITDA measures presented may not be comparable to other similarly titled measures of other companies. The Company has presented EBITDA because it is commonly used by investors to analyze and compare companies on the basis of operating performance and to determine a company's ability to service debt. S-10 RISK FACTORS Prospective purchasers of Common Stock offered hereby should carefully review the information contained elsewhere in this Prospectus Supplement and the accompanying Prospectus or incorporated by reference herein and therein and should particularly consider the following matters. EFFECT OF SUBSTANTIAL LEVERAGE As a result of its acquisitions of T&N and Fel-Pro, Federal-Mogul is substantially leveraged. As of March 31, 1998, Federal-Mogul had total debt of $3,111.5 million (total long-term debt of $2,273.7 million and total short- term debt of $837.8 million), $575 million in preferred securities of affiliates and shareholders' equity of $586.0 million, producing a total capitalization of $4,272.5 million, so that total debt as a percentage of total capitalization was 72.8% and total long-term debt as a percentage of total capitalization was approximately 53.2%. Federal-Mogul may also incur substantial additional indebtedness in the future, including, without limitation, in connection with any future acquisitions, although its ability to do so is restricted by the Credit Agreements (as hereinafter defined). See "Description of Certain Indebtedness." Federal-Mogul intends to use the proceeds to it of the Offerings to repay existing debt, resulting in a reduction of debt by approximately $601.9 million. See "Use of Proceeds." Federal-Mogul's leverage may have important consequences to holders of the Common Stock, including: (i) limiting Federal-Mogul's ability to obtain additional financing to fund future working capital requirements, capital expenditures, debt service requirements, acquisitions or other general corporate requirements; (ii) requiring a substantial portion of Federal- Mogul's cash flow from operations to be dedicated to payment of principal and interest on its indebtedness, thereby reducing the funds available for operations and future business opportunities; (iii) placing Federal-Mogul at a competitive disadvantage to companies with which it competes that may be less leveraged; and (iv) increasing Federal-Mogul's vulnerability to adverse economic and industry conditions. In addition, since certain of Federal- Mogul's borrowings are at variable rates of interest, Federal-Mogul will be vulnerable to increases in interest rates, which could have a material adverse effect on Federal-Mogul's results of operations, liquidity and financial condition. Federal-Mogul's ability to make scheduled payments of the principal of, to pay interest on or to refinance its indebtedness depends on its future performance, which to a certain extent is subject to economic, financial, competitive and other factors beyond its control. There can be no assurance that Federal-Mogul's business will continue to generate cash flow from operations in the future sufficient to service its debt and make necessary capital expenditures. If unable to generate such cash flow, Federal-Mogul may be required to adopt one or more alternatives, such as reducing or delaying planned expansion, selling assets, restructuring debt or obtaining additional equity capital. There can be no assurance that any of these strategies could be effected on satisfactory terms or without substantial additional expense for Federal-Mogul. These and other factors could have a material adverse effect on the results of operations, liquidity and financial condition of Federal-Mogul and on the marketability, price and future value of the Common Stock. The Credit Agreements impose financial and other restrictions on Federal- Mogul, including limitations on the incurrence of debt and on Federal-Mogul's ability to dispose of assets. The Credit Agreements also require Federal-Mogul to make periodic payments in respect of interest and outstanding principal, including from material disposals, "excess cash flow" and the proceeds of certain issuances of capital stock or indebtedness, and to maintain compliance with certain financial ratios and minimum net worth tests. See "Description of Certain Indebtedness." There can be no assurance that these requirements will be met in the future. Failure to achieve compliance would result in a default under the Credit Agreements and could lead to acceleration of the related debt and the acceleration of debt under other instruments evidencing indebtedness that contain cross-acceleration or cross-default provisions. In such a case, there can be no assurance that Federal-Mogul would be able to refinance or otherwise repay such indebtedness. The information set forth under the caption "Unaudited Pro Forma Financial Data" has been based on certain assumptions as to the estimated proceeds of the divestitures of the T&N Bearings Business (as hereinafter defined). Such proceeds will be used to reduce Federal-Mogul's indebtedness. There can be no assurance that the actual proceeds received from the divestitures will fall within the range utilized in making the pro forma calculations. S-11 INTEGRATION OF THE BUSINESSES OF T&N AND FEL-PRO The acquisitions of T&N and Fel-Pro substantially increased the size and complexity of Federal-Mogul's operations and have created the need for Federal-Mogul to integrate three businesses that have previously operated independently. There can be no assurance that Federal-Mogul will not encounter difficulties in integrating T&N's and Fel-Pro's operations with its own or that the expected benefits will be realized from such integration. Any material delays or unexpected costs incurred in connection with such integration could have a material adverse effect on Federal-Mogul and its results of operations, liquidity and financial condition. Furthermore, there can be no assurance that the operations, management and personnel of Federal- Mogul, T&N and Fel-Pro will be compatible. Among the factors considered by Federal-Mogul in connection with the acquisitions of T&N and Fel-Pro were the opportunities for synergies expected to be achieved. However, there can be no assurance that Federal-Mogul will achieve the desired levels of synergies when anticipated or at all. Failure to achieve the desired levels of synergies could have a material adverse effect on the business, results of operations, liquidity and financial condition of Federal-Mogul. In addition, Federal-Mogul has announced that it intends, in connection with its targeted synergies, to incur restructuring charges and related costs of $205 million, which is moderately less than the annual level of synergy benefits anticipated in the year 2000. See "T&N and Fel-Pro Acquisitions." No assurance can be given that such costs will not be substantially greater than this amount or that achieving such synergies will be possible without additional cost or charges to earnings in future periods. Any such charges could have a material adverse effect on the business, results of operations, liquidity and financial condition of Federal-Mogul. In connection with securing regulatory approvals for the acquisition of T&N, Federal-Mogul agreed with the U.S. Federal Trade Commission (the "FTC") to divest T&N's thinwall and dry bearings (polymer bearings) operations (the "T&N Bearings Business"). See "Business--Reorganization" and "Unaudited Pro Forma Financial Data." The purchaser of the T&N Bearings Business will become a direct competitor of Federal-Mogul. T&N'S ASBESTOS LIABILITY T&N and certain of its subsidiaries are among many defendants named in a large number of court actions brought in the United States, and a smaller number of claims brought in the United Kingdom, relating to alleged asbestos- related diseases resulting from exposure to asbestos or products containing asbestos. T&N is also one of many defendants named in a small number of U.S. property damage claims. T&N has incurred significant charges to income in connection with settling claims and the establishment of reserves for asbestos liabilities and has obtained insurance coverage for certain asbestos liabilities. See "Business--Legal Proceedings," "Management's Discussion and Analysis of Financial Condition and Results of Operations--Federal-Mogul-- Three Months Ended March 31, 1998 Compared with Three Months Ended March 31, 1997--Asbestos Liability and Legal Proceedings" and "--T&N--Asbestos." No assurance can be given that T&N will not be subject to material additional liabilities and significant additional litigation relating to asbestos that would result in significant additional charges not covered by reserves or insurance. Any such liabilities or litigation could have a material adverse effect on Federal-Mogul's results of operations, business, liquidity and financial condition. ACQUISITION STRATEGY One of Federal-Mogul's principal business strategies is to expand its core competencies in manufacturing and distribution through acquisitions of companies that Federal-Mogul identifies as complementary to its existing businesses and capable of achieving satisfactory rates of return. Federal- Mogul is usually engaged in various stages of evaluation of potential acquisition candidates. Currently Federal-Mogul is in the preliminary stages of pursuing one or more potential acquisitions, at least one of which would be material if consummated. Any such acquisition would be paid for through the incurrence of a significant amount of additional debt, the issuance of a significant amount of capital stock or both. If Federal-Mogul determines that any one or more of these potential acquisitions or other transactions would meet its criteria and may be accomplished on appropriate terms, it expects to act to attempt to consummate them as quickly as possible. There can be no assurance that any of the discussions in which Federal-Mogul is currently engaged will result in the completion of any acquisitions, that S-12 Federal-Mogul will in the future succeed in locating or acquiring appropriate companies on attractive terms or that Federal-Mogul will be successful in integrating acquired companies or realizing desired benefits of such acquisitions. Federal-Mogul believes that successful implementation of this strategy will require significant capital expenditures which it might not be able to fund from its cash from operations. Therefore, Federal-Mogul may be required to borrow money or otherwise obtain financing for future acquisitions. Increased leverage of Federal-Mogul may have important consequences to holders of the Common Stock. See "--Effect of Substantial Leverage." If Federal-Mogul is unable to procure suitable financing, it may be unable to complete desired acquisitions. CYCLICAL NATURE OF AUTOMOTIVE INDUSTRY Federal-Mogul's principal operations are directly related to domestic and foreign automotive vehicle production. Automobile sales and production are cyclical and can be affected by the strength of a country's general economy. In addition, automobile production and sales can be affected by labor relations issues, regulatory requirements, trade agreements and other factors. A decline in automotive sales and production would likely affect not only sales to OE customers but also sales to aftermarket customers and could result in a decline in Federal-Mogul's results of operations or a deterioration in Federal-Mogul's financial condition. If demand changes and Federal-Mogul fails to respond accordingly, its results of operations could be adversely affected in any given quarter. In addition, technical improvements in automotive component designs may adversely affect aftermarket demand. INTERNATIONAL OPERATIONS Federal-Mogul has manufacturing and distribution facilities located in many countries, principally in North America, Europe and Latin America. The acquisition of T&N significantly increased the portion of Federal-Mogul's business located outside the United States. International operations are subject to certain risks inherent in doing business abroad, including exposure to local economic conditions, expropriation and nationalization, currency exchange rate fluctuations and currency controls, and export and import restrictions. The likelihood of such occurrences and their potential effect on Federal-Mogul vary from country to country and are unpredictable. FOREIGN CURRENCY TRANSLATION AND TRANSACTION RISK The financial condition and results of operations of certain Federal-Mogul operating entities are reported in various foreign currencies (principally pounds sterling, German marks, and to a lesser extent South African rand and French francs, among others) and then translated into U.S. dollars at the applicable exchange rate for inclusion in Federal-Mogul's financial statements. As a result, the appreciation of the dollar against these foreign currencies will have a negative impact on the reported sales and operating margin of T&N and other subsidiaries, as consolidated into Federal-Mogul (and conversely, the depreciation of the dollar against these foreign currencies will have a positive impact). See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Federal-Mogul--Year Ended December 31, 1997 Compared with Year Ended December 31, 1996 and Year Ended December 31, 1996 Compared with Year Ended December 31, 1995--Foreign Currency and Commodity Contracts." In addition, Federal-Mogul incurs currency transaction risk whenever it or one of its foreign subsidiaries enters into either a purchase or sales transaction using a different currency than the relevant entity's functional currency. Currency transaction risk is reduced by matching revenues and costs with the same currency. Given the volatility of currency exchange rates, there can be no assurance that Federal-Mogul will be able to effectively manage its currency transaction risks or that any volatility in currency exchange rates will not have a material adverse effect on Federal-Mogul's financial condition or results of operations. COMPETITION The global vehicular parts business is highly competitive. Federal-Mogul competes with many of its customers that produce their own components as well as with independent manufacturers and distributors of components in the United States and abroad. Certain of the Company's competitors have significantly greater financial and other resources than the Company. The inability of the Company to successfully respond to changing competitive conditions could adversely affect demand for the Company's products. S-13 FORWARD-LOOKING STATEMENTS Certain statements contained or incorporated in this Prospectus Supplement and the accompanying Prospectus which are not statements of historical fact constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Act"). Such statements are made in good faith by Federal-Mogul pursuant to the "safe harbor" provisions of the Act. Forward-looking statements include financial projections and estimates and statements regarding plans, objectives and expectations of Federal-Mogul and its management, including, without limitation, plans to integrate the businesses of T&N and Fel-Pro into Federal-Mogul, plans to address computer software issues related to the approach of the year 2000, estimated proceeds of planned dispositions and the effects of such dispositions on Federal- Mogul's balance sheet and statement of operations, and the scope and effect of T&N's asbestos liability. Such matters are discussed under the captions "Risk Factors," "T&N and Fel-Pro Acquisitions," "Business," "Summary Unaudited Pro Forma Financial Information," "Unaudited Pro Forma Financial Data" and elsewhere in this Prospectus Supplement, the accompanying Prospectus or in the information incorporated by reference herein or therein. Forward-looking statements may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Federal-Mogul to differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Such risks, uncertainties and other factors include, without limitation, those relating to the combination of Federal- Mogul's business with those of T&N and Fel-Pro and the anticipated synergies and operating efficiencies and restructuring charges in connection therewith, conditions in the automotive components industry, certain global and regional economic conditions and other factors detailed herein and from time to time in the documents incorporated by reference herein. Moreover, Federal-Mogul's plans, objectives and intentions are subject to change based on these and other factors (some of which are beyond Federal-Mogul's control). Some of the factors that may cause such material differences are set forth herein under the caption "Risk Factors." S-14 USE OF PROCEEDS The net proceeds to Federal-Mogul from the sale of the 9,712,093 shares of Common Stock offered by Federal-Mogul hereby are estimated to be $601.9 million, assuming a public offering price of $63 15/16 per share, after deducting the estimated underwriting discounts and offering expenses, estimated at $19.1 million. Federal-Mogul intends (i) to apply net proceeds to it of the Offerings to prepay the entire outstanding $500 million principal amount of the Senior Subordinated Loans (as hereinafter defined), and (ii) to apply any remaining balance of the net proceeds to repay a portion of the Interim Loans (as hereinafter defined), the outstanding principal amount of which was $925 million at May 12, 1998. However, if the net proceeds to Federal-Mogul of the Offerings are less than $500 million, the proceeds will be applied solely to prepay the Interim Loans. The Senior Subordinated Loans currently bear interest at a floating rate which is the offering rate of The Chase Manhattan Bank, N.A. ("Chase") in the London interbank eurodollar market for U.S. dollar deposits, plus an initial margin of 4.5% (which will increase to 5.5% on September 12, 1998 and to 6.0% on December 12, 1998). The Interim Loans bear interest at a floating rate based upon either, at Federal-Mogul's option, (i) the higher of the prime rate of Chase and 0.5% in excess of the overnight federal funds rate, plus a margin of 1.0% or (ii) the average of the offering rates of banks in the London interbank eurodollar market for U.S. dollar deposits plus a margin of 2.0%. The Senior Subordinated Loans are scheduled to mature on March 12, 1999. If such loans have not been repaid on or prior to such date, they will be converted to loans maturing on March 12, 2008 and bearing interest at variable rates but in no event less than 0.5% above the rate in effect on March 12, 1999. The Interim Loans are scheduled to mature on September 12, 1999. Amounts borrowed under the Senior Subordinated Loans and the Interim Loans were used as part of the financing of the acquisition of T&N and the refinancing of the acquisition of Fel-Pro. See "T&N and Fel-Pro Acquisitions--Financing of the Acquisitions" and "Description of Certain Indebtedness." Federal-Mogul will not receive any proceeds from the sale of shares of Common Stock by the Selling Shareholders. EXCHANGE RATES The following table sets forth, for the periods and dates indicated, certain information concerning the noon buying rate in New York City for cable transfers in pounds sterling, as certified for customs purposes by the Federal Reserve Bank of New York (the "Noon Buying Rate") for pounds sterling expressed in U.S. dollars per (Pounds)1.00. On May 12, 1998, the Noon Buying Rate was (Pounds)1.00=$1.6347.
CALENDAR PERIOD HIGH LOW AVERAGE(1) PERIOD END - --------------- ------ ------ ---------- ---------- 1998, through May 12........................ $1.691 $1.611 $1.657 $1.635 1997........................................ $ 1.71 $ 1.49 $ 1.60 $ 1.64 1996........................................ $ 1.62 $ 1.50 $ 1.57 $ 1.53 1995........................................ $ 1.64 $ 1.46 $ 1.57 $ 1.62 1994........................................ $ 1.59 $ 1.46 $ 1.50 $ 1.49 1993........................................ $ 2.00 $ 1.42 $ 1.68 $ 1.51
- -------- (1)The average of the Noon Buying Rates on the last business day of each month during the relevant period. S-15 T&N AND FEL-PRO ACQUISITIONS As part of its strategy to expand its core competencies in manufacturing and distribution, Federal-Mogul acquired T&N and Fel-Pro, two other significant automotive parts manufacturers and distributors, in March and February 1998, respectively. THE T&N ACQUISITION On March 6, 1998, Federal-Mogul acquired T&N for total consideration of approximately (Pounds)1.46 billion ($2.42 billion, converted at a blended exchange rate of 1 pound sterling to 1.6510 U.S. dollars). T&N, headquartered in Manchester, England, manufactures and supplies high technology engineered automotive components and industrial materials. In 1997, T&N had sales of approximately (Pounds)1.80 billion ($2.96 billion) with about 80% of such sales relating to the world automotive industry. At the time of its acquisition, T&N's major product lines consisted of piston products, bearings, friction products, composites and camshafts (incorporating sintered products) and sealing products and it was active in both the original equipment and the aftermarket markets. T&N operated in approximately 200 locations in 24 countries, employed over 28,000 people worldwide and served customers in more than 150 countries. T&N's assets included technical centers in the U.K. and Germany and North America. In connection with securing regulatory approvals for the acquisition of T&N, Federal-Mogul agreed with the FTC to divest the T&N Bearings Business. See "Business--Reorganization" and "Unaudited Pro Forma Financial Data." The T&N Bearings Business accounted for approximately $393.1 million of T&N's 1997 revenues and employed approximately 4,000 people. THE FEL-PRO ACQUISITION On February 24, 1998, Federal-Mogul acquired Fel-Pro, a group of privately- owned automotive parts manufacturers headquartered in Skokie, Illinois. The total consideration paid for Fel-Pro was approximately $717 million, which included 1,030,325.6 shares of Federal-Mogul Series E Mandatory Exchangeable Preferred Stock with an imputed value of $225 million and approximately $492 million in cash. Fel-Pro is a leading gaskets manufacturer for the North American aftermarket and OE heavy duty market. In 1997, Fel-Pro had sales of approximately $500 million. At the time of its acquisition, Fel-Pro's primary product lines consisted of gaskets, heavy duty diesel engine products, diesel products, high performance gaskets and other equipment and chemical products. Fel-Pro's gasket sales for 1997 were approximately $350 million and included a full range of automotive, heavy duty, marine and performance gaskets. Fel-Pro had more than 2,700 employees in 16 locations. Its gasket facilities are located in Illinois, Michigan, Canada and Mexico. Federal-Mogul is in the process of reselling Fel-Pro's chemical manufacturing operations (representing approximately $32.8 million of Fel-Pro's 1997 net sales and $2.6 million of Fel-Pro's 1997 net income). Excluding intercompany items, net assets of Fel- Pro Chemical were $12.2 million as of December 31, 1997. STRATEGIC RATIONALE FOR THE ACQUISITIONS The principal benefits to Federal-Mogul from the acquisitions of T&N and Fel-Pro are as follows: . Establishing Federal-Mogul as a highly competitive first tier worldwide automotive supplier. . Expanding Federal-Mogul's manufactured product portfolio to offer complete systems and modules. . Enhancing Federal-Mogul's position as a global supplier of engine and transmission parts. . Reinforcing Federal-Mogul's ability to provide high quality service to both its original equipment and aftermarket customers. . Extending Federal-Mogul's international presence and accelerating its worldwide aftermarket growth. S-16 Federal-Mogul expects significant synergies and operating efficiencies to be achieved as a result of the acquisitions of T&N and Fel-Pro. Federal-Mogul has announced that it intends, in connection with its targeted synergies, to incur restructuring charges and related costs of $205 million, which is moderately less than the annual level of synergy benefits anticipated in the year 2000. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." FINANCING OF THE ACQUISITIONS The acquisition of T&N was funded primarily through a $2.75 billion floating rate Senior Credit Agreement (as hereinafter defined) (consisting of a $2.35 billion term loan facility and a $400 million revolving loan facility) and a $500 million floating rate Senior Subordinated Credit Agreement (as hereinafter defined). The senior term loan facility was reduced to $2.275 billion effective as of March 11, 1998. The entire amount of the senior term loan facility, as well as the entire amount of the senior subordinated credit facility, have been drawn down. These credit facilities also refinanced Federal-Mogul's $350 million indebtedness under a revolving credit facility (which had been used to finance the acquisition of Fel-Pro) and $150 million of other indebtedness incurred in the acquisition of Fel-Pro. It is anticipated that the net proceeds to Federal-Mogul from the Offerings will be used to prepay the entire outstanding principal amount of the Senior Subordinated Loans ($500 million), with the balance of the net proceeds used to repay a portion of the Interim Loans (the outstanding principal balance of which is $925 million at May 12, 1998). See "Use of Proceeds" and "Description of Certain Indebtedness." Additional funds for the acquisition of T&N were obtained through the sale in December 1997 of 11,500,000 7% Trust Convertible Preferred Securities (generating gross proceeds of $575 million) by Federal-Mogul Financing Trust, a subsidiary of Federal-Mogul which invested the net proceeds of that offering in 7% Convertible Junior Subordinated Debentures of Federal-Mogul. See "Description of Capital Stock--Trust Preferred Securities." Federal-Mogul also issued 1,030,325.6 shares of Series E Mandatory Exchangeable Preferred Stock, with an imputed value of $225 million, as partial consideration for the acquisition of Fel-Pro. See "Description of Capital Stock--Series E Mandatory Exchangeable Preferred Stock." S-17 PRICE RANGE OF COMMON STOCK AND DIVIDENDS Federal-Mogul Common Stock is listed on the NYSE under the symbol "FMO." The following table sets forth the reported high and low sale prices per share for the Common Stock on the New York Stock Exchange Composite Tape and the cash dividends declared on the Common Stock for such periods:
PRICE RANGE ------------------- DIVIDENDS PER HIGH LOW COMMON SHARE --------- --------- ------------- 1996 First Quarter............................... $20 7/8 $17 3/8 $.12 Second Quarter.............................. 19 7/8 17 7/8 .12 Third Quarter............................... 22 1/2 16 1/4 .12 Fourth Quarter.............................. 24 1/2 20 3/8 .12 1997 First Quarter............................... 26 3/4 21 5/8 .12 Second Quarter.............................. 35 3/8 24 1/2 .12 Third Quarter............................... 39 15/16 32 3/4 .12 Fourth Quarter.............................. 47 5/8 36 3/4 .12 1998 First Quarter............................... 54 3/8 39 .12 Second Quarter (through May 12, 1998)....... 66 7/8 53 15/16 .0025(1)
- -------- (1) Declared but not yet paid. On May 12, 1998, the reported last sale price of the Common Stock on the NYSE was $63 15/16 per share. On that date, there were approximately 9,100 shareholders of record of Common Stock. Dividends on the Common Stock of Federal-Mogul are payable at the discretion of Federal-Mogul's Board of Directors out of funds legally available therefor. The Board of Directors has declared a cash dividend payable in the second quarter of 1998 in the amount of one-quarter cent per share of Common Stock. The record date for this dividend will be May 29, 1998, and thus Common Stock sold in the Offerings will not entitle holders to receive such dividend. Management presently intends to retain future earnings for working capital, in accordance with Federal-Mogul's growth strategy, and therefore anticipates paying dividends at a comparable level in the foreseeable future. In addition, the Credit Agreements contain certain limits upon dividends. See "Description of Certain Indebtedness." S-18 CAPITALIZATION The following table sets forth the consolidated capitalization of Federal- Mogul at March 31, 1998, and as adjusted to reflect the Offerings by Federal- Mogul.
MARCH 31, 1998 ------------------ AS ACTUAL ADJUSTED -------- -------- (DOLLARS IN MILLIONS) Short-term debt: Subordinated notes........................................ $ 500.0 $ -- Other short-term debt(1).................................. 337.8 337.8 -------- -------- Total short-term debt................................... 837.8 337.8 -------- -------- Long-term debt: Revolving credit facility................................. $ 55.0 $ 55.0 Medium-term notes......................................... 125.0 125.0 Senior notes.............................................. 125.0 125.0 ESOP obligation........................................... 15.2 15.2 Senior loans.............................................. 1,879.7 1,777.8 Other..................................................... 73.8 73.8 -------- -------- Total long-term debt(2)................................. 2,273.7 2,171.8 Minority interest-preferred securities of affiliate(3)...... 575.0 575.0 Shareholders' equity: Series C ESOP Convertible Preferred Stock................. 48.1 48.1 Series E Mandatory Exchangeable Preferred Stock........... 225.0 168.1 Common stock.............................................. 202.4 202.5 Additional paid-in capital................................ 327.3 986.0 Accumulated deficit(4)(5)................................. (130.8) (130.8) Unearned ESOP compensation................................ (21.7) (21.7) Accumulated other comprehensive income.................... (61.5) (61.5) Other..................................................... (2.8) (2.8) -------- -------- Total shareholders' equity.............................. 586.0 1,187.9 -------- -------- Total capitalization........................................ $4,272.5 $4,272.5 ======== ========
- -------- (1) Other short-term debt includes current maturities of long-term debt. (2) Less current maturities included in short-term debt. (3) This consists of Federal-Mogul-obligated 7% Trust Convertible Preferred Securities of Federal-Mogul Financing Trust. Substantially all of the assets of Federal-Mogul Financing Trust consist of the 7% Convertible Junior Subordinated Debentures of Federal-Mogul. (4) Does not include an extraordinary loss (net of tax) of approximately $19 million resulting from a contractual penalty incurred in April 1998 in connection with the prepayment of T&N private placement debt. (5) Excludes the extraordinary loss (net of tax) from the early retirement of debt of approximately $5.1 million resulting from the use of proceeds of the Offerings. S-19 UNAUDITED PRO FORMA FINANCIAL DATA Federal-Mogul completed its cash offer to acquire T&N on March 6, 1998. The acquisition has been accounted for using the purchase method of accounting. The total consideration paid of approximately (Pounds)1.46 billion ($2.42 billion, converted at a blended exchange rate of 1 pound sterling to 1.6510 U.S. dollars) was funded primarily through a $2.75 billion floating rate Senior Credit Agreement (consisting of a $2.35 billion (reduced to $2.275 billion effective as of March 11, 1998) term loan facility, $1.8 billion of which was drawn down, and a $400 million revolving loan facility) and a $500 million floating rate Senior Subordinated Credit Agreement (the full amount of which was drawn down), each from a syndicate led by Chase. These credit facilities also refinanced the borrowings used to finance the cash portion of the purchase price for Fel-Pro. Additional funds for the acquisition of T&N were obtained through the December 1997 sale of 7% Trust Convertible Preferred Securities (generating gross proceeds of $575 million) by Federal-Mogul Financing Trust, a subsidiary of the Company. The Company intends to put into place a permanent capital structure with an appropriate combination of debt and equity which will partially replace the Senior Credit Agreement and Senior Subordinated Credit Agreement debt. Federal-Mogul completed the acquisition of Fel-Pro, for approximately $717 million, on February 24, 1998. The acquisition has been accounted for using the purchase method of accounting. The purchase price consists of 1,030,325.6 shares of newly issued Series E Stock (exchangeable into 5,151,628 shares of Common Stock) with an imputed value of $225 million and $492 million in cash. The cash was provided through an existing revolving credit facility provided by a syndicate led by Chase and three short-term loans, each in the amount of $50 million, from Chase, ABN Amro Bank NV and First Chicago NBD Bank, respectively. The estimated cost of the acquisitions of Fel-Pro and T&N are computed as follows:
FEL- PRO T&N ------ -------- (DOLLARS IN MILLIONS) Cash................................................. $491.8 $2,434.2 Series E Mandatory Exchangeable Preferred Stock...... 225.0 -- Expected proceeds from exercisable options........... -- (52.6) Direct transaction costs............................. .9 29.3 ------ -------- Estimated acquisition cost........................... $717.7 $2,410.9 ====== ========
The pro forma preliminary allocations of the purchase price of the acquisitions of Fel-Pro and T&N are expected to be as follows:
FEL- PRO T&N ------ -------- (DOLLARS IN MILLIONS) Current assets..................................... $173.1 $1,087.6 Liabilities assumed(1)............................. (133.1) (3,143.9) Property, plant and equipment...................... 110.2 1,055.4 Identifiable intangible assets..................... 16.7 315.7 Other noncurrent assets............................ 31.4 525.9 Purchased research and development................. -- 18.6 Goodwill........................................... 519.4 1,990.7 Estimated fair value of T&N Bearings Business (see below)............................................ -- 560.9 ------ -------- Total.......................................... $717.7 $2,410.9 ====== ========
- -------- (1) Includes an increase of $329 million to adjust the acquired asbestos liability to estimated fair value and an increase of $124 million to adjust the acquired income tax liability in relation to the anticipated gain on the sale of the T&N Bearings Business. S-20 In connection with securing regulatory approvals for the acquisition of T&N, Federal-Mogul executed an Agreement Containing Consent Order with the FTC on February 27, 1998. Pursuant to this agreement Federal-Mogul must divest the T&N Bearings Business within six months after the FTC declares the consent order final and must provide for independent management of the T&N Bearings Business pending such divestiture. The assets to be divested consist principally of T&N's thinwall and dry bearings (polymer bearings) operations. The agreement stipulates that the T&N Bearings Business is to be maintained as a viable, independent competitor of Federal-Mogul and that Federal-Mogul shall not attempt to direct the activities of, or exercise control over, the T&N Bearings Business or have contact with the T&N Bearings Business outside of normal business activities. Federal-Mogul has separately identified the estimated effect of the divestiture of the T&N Bearings Business in the unaudited pro forma statement of operations and balance sheet. The estimated net cash flows from operations of the T&N Bearings Business from March 6, 1998 to the date of sale, the interest expense on debt incurred during this period and the proceeds from the sale will be accounted for as adjustments to the purchase price of T&N. Proceeds are estimated to be between $500 and $650 million, calculated using multiples of earnings similar to recent automotive industry transactions. An amount within the low end of this range has been used in the pro forma financial information. There can be no assurance that the actual proceeds received from the disposition will fall within the estimated range. The unaudited pro forma statement of operations for the year ended December 31, 1997, has been prepared to illustrate the effect of the acquisitions of T&N and Fel-Pro as if they had occurred on January 1, 1997. The unaudited pro forma statement of operations includes only the results of ongoing operations and excludes such impacts as extraordinary items, items relating to the acquisitions and synergies and expected cost savings associated with the integration of the acquisitions. The unaudited pro forma balance sheet as of December 31, 1997, has been prepared to illustrate the effect of the acquisitions of T&N and Fel-Pro as if they had occurred on that date. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview." The unaudited pro forma financial information gives effect to the acquisition transactions using the purchase method of accounting. The pro forma adjustments are described in the accompanying notes to the unaudited pro forma financial information and are based upon preliminary available information and upon certain assumptions made by management of Federal-Mogul. Accordingly, the pro forma adjustments reflected in the unaudited pro forma financial information are preliminary and subject to revision. Such revision could be material. The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the financial position or results of operations which may occur in the future or that would have occurred had the acquisitions of T&N and Fel-Pro been consummated on the dates indicated, nor are they necessarily indicative of Federal-Mogul's future results of operations or financial position. The unaudited pro forma financial information should be read in conjunction with the audited consolidated financial statements of Federal-Mogul, as well as the audited financial statements of the acquired companies. S-21 UNAUDITED PRO FORMA STATEMENT OF OPERATIONS (YEAR ENDED DECEMBER 31, 1997)
FEDERAL- DISPOSITION OF T&N FEL-PRO MOGUL T&N FEL-PRO T&N BEARINGS PRO FORMA PRO FORMA PRO FORMA HISTORICAL HISTORICAL HISTORICAL BUSINESS ADJUSTMENTS ADJUSTMENTS COMBINED ---------- ---------- ---------- -------------- ----------- ----------- --------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Sales................... $1,806.6 $2,948.4 $489.3 $(393.1)(a) $ (15.3)(b) $(11.9)(i) $4,824.0 Cost of products sold... 1,381.8 2,187.6 268.5 (295.4)(a) (0.9)(c) (6.9)(j) 3,534.7 -------- -------- ------ ------- ------- ------ -------- Gross margin............ 424.8 760.8 220.8 (97.7) (14.4) (5.0) 1,289.3 Selling general and administrative expenses............... 286.2 500.3 173.8 (46.1)(a) 58.9 (d) 13.0 (k) 986.1 Restructuring charges (credits).............. (1.1) -- -- -- -- -- (1.1) Reengineering and other related charges (benefits)............. (1.6) -- -- -- -- -- (1.6) Adjustment of assets held for sale to fair value.................. 2.4 -- -- -- -- -- 2.4 Interest expense........ 32.0 60.5 -- (16.9)(a) 148.5 (e) 38.2 (l) 262.3 Interest income......... (7.1) (17.9) -- 2.3 (a) 13.7 (f) -- (9.0) International currency exchange losses........ 0.6 4.4 -- (0.3)(a) -- -- 4.7 British pound currency option, net............ 10.5 -- -- -- -- -- 10.5 Gain on sale of Kolbenschmidt AG share purchase options....... -- (21.7) -- -- -- -- (21.7) Other (income) expense, net.................... 3.4 (14.5) -- (1.3)(a) 36.9 (g) -- 24.5 -------- -------- ------ ------- ------- ------ -------- Earnings before income taxes, extraordinary item and nonrecurring charges.............. 99.5 249.7 47.0 (35.4) (272.4) (56.2) 32.2 Income tax expense (benefit).............. 27.5 159.3 25.5 (9.4)(a) (85.2)(h) (24.2)(m) 93.5 -------- -------- ------ ------- ------- ------ -------- Net earnings (loss) before extraordinary item and nonrecurring charges.............. $ 72.0 $ 90.4 $ 21.5 $ (26.0) $(187.2) $(32.0) $ (61.3) ======== ======== ====== ======= ======= ====== ======== Earnings (loss) per com- mon share: Basic................. $ 1.81 $ (2.16) Diluted............... $ 1.67 $ (2.16) Weighted average shares outstanding (thou- sands): Basic................. 36,647 36,647 ======== ======== Diluted............... 41,854 36,647 ======== ========
NOTES TO THE UNAUDITED PRO FORMA STATEMENT OF OPERATIONS (DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED) RELATING TO THE DIVESTITURE OF THE T&N BEARINGS BUSINESS: (a) To eliminate the historical statement of operations of the T&N Bearings Business. RELATING TO THE PURCHASE OF T&N: (b) To eliminate intercompany sales between Federal-Mogul and T&N. (c) To reflect the net effect of the following adjustments: Increase in depreciation expense relating to the adjustment of property, plant and equipment acquired to estimated fair value (to be depreciated over an average period of 14 years)........... $ 5.4 Elimination of intercompany cost of products sold between Federal- Mogul and T&N.................................................... (15.3) Elimination of profit in ending inventory on intercompany sales between Federal-Mogul and T&N.................................... 0.8 Increase in pension expense--elimination of amortization of de- ferred gain...................................................... 8.7 Decrease in postretirement benefits expense--elimination of amortization of deferred loss.................................... (0.5) ----- $(0.9) =====
S-22 (d) To reflect the net effect of the following adjustments: Amortization of additional goodwill resulting from the purchase of T&N (to be amortized over a period of 40 years)............. $ 43.0 Amortization of other identifiable intangible assets acquired to estimated fair value (to be amortized over periods from 10 to 24 years)...................................................... 15.9 ------- $ 58.9 ======= (e) To reflect the net effect of the following adjustments: Increase in interest expense relating to the net debt incurred for the net purchase of T&N (see unaudited pro forma balance sheet footnote 1).............................................. $ 148.2 Reduction in historical interest expense of T&N relating to the elimination of historical outstanding debt..................... (23.4) Amortization of debt issuance costs (to be amortized over a period of 12 to 96 months)..................................... 23.7 ------- $ 148.5 ======= (f) To reflect the net effect of the following adjustments: Reduction in interest income as a result of the use of existing cash balances of Federal-Mogul to finance a portion of the T&N transaction.................................................... $ 2.2 Reduction in interest income as a result of the use of existing cash balances of T&N........................................... 11.5 ------- $ 13.7 ======= (g) To record an additional eleven months of minority interest-preferred securities of affiliates expense. (h) To record the income tax effects of the statement of operations adjustments. RELATING TO THE PURCHASE OF FEL-PRO: (i) To eliminate intercompany sales between Federal-Mogul and Fel-Pro (j) To reflect the net effect of the following adjustments: Increase in depreciation expense relating to the adjustment of property, plant and equipment acquired to estimated fair value (to be depreciated over an average period of 10 years)......... $ 3.0 Elimination of intercompany cost of products sold between Federal-Mogul and Fel-Pro...................................... (11.9) Elimination of profit in ending inventory on intercompany sales between Federal-Mogul and Fel-Pro........................................................ 0.6 Increase in postretirement benefits expense--elimination of amortization of deferred loss.................................. 1.4 ------- $ (6.9) ======= (k) To record the amortization of goodwill resulting from the purchase of Fel- Pro (to be amortized over a period of 40 years) (l) To record interest expense relating to the debt incurred for the purchase of Fel-Pro (m) To record the income tax effects of the statement of operations adjustments The unaudited pro forma statement of operations discloses the income (loss) from continuing operations before nonrecurring charges directly attributable to the transactions. The following nonrecurring charges were not considered in the unaudited pro forma statement of operations: Penalty for early retirement of private placement debt of T&N. $ 25.0 Estimated purchased research and development costs............ 18.6 Adjustment of inventory to estimated fair value............... 11.0 ------- $ 54.6 ======= Net earnings before extraordinary item and non-recurring charges...................................................... $ (61.3) Less: Series C preferred dividend requirement................. (2.4) Less: Series D preferred dividend requirement................. (3.1) Less: Series E preferred dividend requirement................. (12.3) ------- Net earnings available to common shareholders before extraordinary item and non-recurring charges................... $ (79.1) ======= Weighted average common shares outstanding...................... 36,647 ======= Loss per share--basic and diluted............................... $ (2.16) =======
Loss per share as calculated for the pro forma combined entity: S-23 UNAUDITED PRO FORMA BALANCE SHEET (DECEMBER 31, 1997)
DISPOSITION FEDERAL- OF T&N FEL-PRO MOGUL T&N FEL-PRO T&N BEARINGS PRO FORMA PRO FORMA PRO FORMA HISTORICAL HISTORICAL HISTORICAL BUSINESS ADJUSTMENTS ADJUSTMENTS COMBINED ---------- ---------- ---------- ------------ ----------- ----------- --------- Cash and equivalents.... $ 541.4 $ 319.2 $ -- $ (38.0)(28) $ (765.3)(1) $ (0.9)(15) $ 56.4 Accounts receivable..... 158.9 458.8 83.4 (49.4)(28) (2.6)(2) (4.2)(16) 645.0 Investment in accounts receivable securitization......... 48.7 -- -- -- -- -- 48.7 Inventories............. 277.0 365.1 61.0 (42.3)(28) 10.2 (3) 23.4 (17) 694.4 Prepaid expenses and income tax benefits.... 113.2 58.2 4.7 (5.8)(28) 10.7 (4) 2.2 (18) 183.1 -------- -------- ------ -------- -------- ------ -------- Total current assets............. 1,139.2 1,201.3 149.1 (135.5) (747.0) 20.5 1,627.6 Property, plant and equipment.............. 313.9 1,089.5 80.6 (109.4)(28) 75.4 (5) 29.6 (19) 1,479.6 Goodwill................ 143.8 342.2 -- (66.8)(28) 1,715.0 (6) 519.4 (20) 2,653.6 Other intangible assets. 48.4 17.9 16.7 -- 297.8 (7) -- 380.8 Business investments and other assets........... 156.8 469.2 23.7 (74.9)(28) 161.5 (8) 7.7 (21) 744.0 -------- -------- ------ -------- -------- ------ -------- Total assets........ $1,802.1 $3,120.1 $270.1 $ (386.6) $1,502.7 $577.2 $6,885.6 ======== ======== ====== ======== ======== ====== ======== Short-term debt......... $ 28.6 $ 125.4 $ -- $ (0.5)(28) $ -- $ -- $ 153.5 Accounts payable........ 102.3 326.3 22.7 (38.5)(28) (2.6)(2) (2.0)(22) 408.2 Accrued compensation.... 36.8 57.6 24.1 (10.9)(28) -- -- 107.6 Accrued customer incentives............. 22.4 -- 10.5 -- -- -- 32.9 Restructuring reserves.. 31.5 -- -- -- 150.0 (9) 15.0 (23) 196.5 Current portion of asbestos liability..... -- 101.3 -- -- -- -- 101.3 Other accrued liabilities............ 108.0 305.3 19.4 (22.0)(28) -- -- 410.7 -------- -------- ------ -------- -------- ------ -------- Total current liabilities........ 329.6 915.9 76.7 (71.9) 147.4 13.0 1,410.7 Long-term debt.......... 273.1 469.5 -- (2.1)(28) 1,220.4 (1) 491.8 (15) 2,452.7 Postemployment benefits. 190.9 223.7 46.8 (12.3)(28) 6.4 (10) (18.0)(24) 437.5 Noncurrent portion of asbestos liability..... -- 948.7 -- 329.0 (11) -- 1,277.7 Other accrued liabilities............ 64.2 53.8 6.6 (43.5)(28) 53.7 (12) 6.0 (25) 140.8 -------- -------- ------ -------- -------- ------ -------- Total liabilities... 857.8 2,611.6 130.1 (129.8) 1,756.9 492.8 5,719.4 Minority interest- preferred securities of affiliates............. 575.0 -- -- -- -- -- 575.0 Minority interest, other.................. -- 42.0 -- -- -- -- 42.0 Series C ESOP preferred stock.................. 49.0 -- -- -- -- -- 49.0 Series E preferred stock.................. -- -- -- 225.0 (26) 225.0 Common stock............ 201.0 361.1 -- -- (361.1)(13) -- 201.0 Additional paid-in capital................ 332.6 4.4 -- -- (4.4)(13) -- 332.6 Retained earnings (Accumulated deficit), currency translation and other.............. (191.5) 101.0 140.0 (256.8)(28) 111.3 (14) (140.6)(27) (236.6) Unearned ESOP compensation........... (21.8) -- -- -- -- -- (21.8) -------- -------- ------ -------- -------- ------ -------- Total equity........ 369.3 466.5 140.0 (256.8) (254.2) 84.4 549.2 -------- -------- ------ -------- -------- ------ -------- $1,802.1 $3,120.1 $270.1 $ (386.6) $1,502.7 $577.2 $6,885.6 ======== ======== ====== ======== ======== ====== ========
See accompanying notes to Unaudited Pro Forma Balance Sheet. S-24 NOTES TO THE UNAUDITED PRO FORMA BALANCE SHEET (DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED) RELATING TO THE PURCHASE OF T&N: (1) To reflect the net effect of the following adjustments:
CASH DEBT -------- -------- Proceeds from the issuance of debt................... $2,300.0 $2,300.0 Acquisition of T&N shares............................ (2,434.2) -- Payoff of existing T&N debt.......................... (469.5) (469.5) Cash used from T&N asbestos fund to pay down debt.... (130.0) (130.0) Proceeds from the exercise of T&N stock options at close............................................... 52.6 -- Estimated proceeds from sale of the T&N Bearings Business............................................ 560.9 -- Pay down debt and other liabilities using proceeds from sale of the T&N Bearings Business.............. (560.9) (436.6) Proceeds from sale of Kolbenschmidt AG share purchase options............................................. 43.5 -- Pay down debt using proceeds from sale of Kolbenschmidt AG share purchase options............. (43.5) (43.5) Debt issuance costs.................................. (32.2) Other fees........................................... (27.0) Penalty for early retirement of private placement debt of T&N......................................... (25.0) -------- -------- $ (765.3) $1,220.4 ======== ========
(2) To eliminate intercompany accounts receivable and accounts payable between Federal-Mogul and T&N (3) To reflect the net effect of the following adjustments: Adjustment of inventories acquired to estimated fair value......... $11.0 Elimination of intercompany profit in ending inventory............. (0.8) ----- $10.2 =====
(4) To record the current deferred income tax effects of the balance sheet adjustments (5) To adjust property, plant and equipment acquired to estimated fair value (6) To record estimated acquired goodwill as the excess of the preliminary purchase price paid and estimated costs incurred relating to the acquisition over the estimated fair value of identifiable net assets acquired (7) To adjust other identifiable intangible assets acquired to estimated fair value (8) To reflect the net effect of the following adjustments: Adjustment of pension assets acquired to estimated fair value.... $131.6 Debt issuance costs.............................................. 32.2 Other............................................................ (2.3) ------ $161.5 ======
(9) To provide for estimated severance and exit costs relating to T&N (10) To adjust postemployment benefit liabilities acquired to estimated fair value (11) To record estimated fair value of the acquired asbestos liability (12) To reflect the net effect of the following adjustments: Estimated fair value of reserves for returns, allowances and environmental..................................................... $41.3 Adjustment of the noncurrent deferred income tax asset for pro forma balance sheet adjustments................................... 12.4 ----- $53.7 =====
(13) To eliminate the historical common stock and additional paid in capital of T&N (14) To reflect the net effect of the following adjustments: Elimination of historical retained earnings of T&N, net of the T&N Bearings Business........................................... $155.6 Penalty for early retirement of private placement debt of T&N.... (25.0) Estimated purchased research and development costs............... (18.6) Elimination of the profit in ending inventory on intercompany sales between Federal-Mogul and T&N............................. (0.7) ------ $111.3 ======
S-25 RELATING TO THE PURCHASE OF FEL-PRO: (15) To reflect the net effect of the following adjustments:
CASH DEBT ------ ------ Proceeds from the issuance of debt........................ $491.8 $491.8 Acquisition of Fel-Pro.................................... (491.8) -- Other fees................................................ (.9) -- ------ ------ $ (.9) $491.8 ====== ======
(16) To reflect the net effect of the following adjustments: Elimination of intercompany accounts receivable.................... $(2.0) Increase in allowance for doubtful accounts........................ (2.2) ----- $(4.2) =====
(17) To reflect the net effect of the following adjustments: Adjustment of inventories acquired to estimated fair value......... $24.0 Elimination of intercompany profit in ending inventory............. (0.6) ----- $23.4 =====
(18) To record the current deferred income tax effects of the balance sheet adjustments (19) To adjust property, plant and equipment acquired to estimated fair value (20) To record estimated acquired goodwill as the excess of the preliminary purchase price paid and estimated costs incurred relating to the acquisition over the estimated fair value of identifiable net assets acquired (21) To record the noncurrent deferred income tax effects of the balance sheet adjustments (22) To eliminate intercompany accounts payable between Federal-Mogul and Fel- Pro (23) To provide for estimated severance and exit costs relating to Fel-Pro (24) To adjust postemployment benefits acquired to estimated fair value (25) To record the estimated fair value reserves for returns, allowances and environmental (26) To record the issuance of Series E Mandatory Exchangeable Preferred Stock, exchangeable into Common Stock, to the former owners of Fel-Pro (27) To reflect the net effect of the following adjustments: Elimination of the historical equity of Fel-Pro................. $(140.0) Elimination of intercompany profit in ending inventory.......... (.6) ------- $(140.6) =======
RELATING TO THE DIVESTITURE OF THE T&N BEARINGS BUSINESS: (28) To eliminate the historical balance sheet of the T&N Bearings Business. The estimated effects of the sale of the T&N Bearings Business are located in the T&N pro forma adjustments. S-26 SELECTED CONSOLIDATED FINANCIAL DATA--FEDERAL-MOGUL The following selected historical consolidated financial information of Federal-Mogul with respect to each year in the three-year period ended December 31, 1997 is derived from the Federal-Mogul Audited Financial Statements. Such consolidated financial statements have been audited by Ernst & Young LLP, independent certified public accountants. The unaudited financial information for the three-month periods ended March 31, 1998 and 1997 have been derived from the Federal-Mogul Unaudited Financial Statements. The Federal-Mogul Unaudited Financial Statements are unaudited, but in the opinion of management, reflect all adjustments necessary for a fair presentation of such information. The selected consolidated financial information provided below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations--Federal-Mogul" and the consolidated financial statements of Federal-Mogul and the notes thereto included elsewhere in this Prospectus Supplement.
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, (UNAUDITED) ---------------------------- ------------------- 1997 1996 1995 1998(1) 1997 -------- -------- -------- --------- -------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Net sales............... $1,806.6 $2,032.7 $1,999.8 $ 658.0 $ 485.6 Costs of products sold.. 1,381.8 1,660.5 1,602.2 496.7 373.5 -------- -------- -------- --------- -------- Gross margin............ 424.8 372.2 397.6 161.3 112.1 Selling, general and administrative expenses............... (286.2) (333.8) (299.3) (108.2) (78.4) Purchased in-process research and development charge..... -- -- -- (18.6) -- Gain on sales of businesses............. -- -- 24.0 -- -- Restructuring (charges) credits................ 1.1 (57.6) (26.9) (10.5) -- Reengineering and other related (charges) credits................ 1.6 (11.4) (13.9) -- -- Adjustment of assets held for sale to fair value and other long lived assets................. (2.4) (151.3) (51.8) (20.0) -- Interest expense........ (32.0) (42.6) (37.3) (15.5) (9.8) Interest income......... 7.1 2.9 9.6 6.7 0.7 International currency exchange losses........ (0.6) (3.7) (2.9) (1.1) (0.1) British pound currency option and foreign contract, net.......... (10.5) -- -- 13.3 -- Other expense, net...... (3.4) (3.4) (2.4) (5.8) (2.0) -------- -------- -------- --------- -------- Earnings (Loss) before income taxes and extraordinary item................ 99.5 (228.7) (3.3) 1.6 22.5 Income tax expense (benefit).............. 27.5 (22.4) 2.5 8.8 8.6 -------- -------- -------- --------- -------- Net Earnings (Loss) before extraordinary item................ 72.0 (206.3) (5.8) (7.2) 13.9 ======== ======== ======== ========= ======== Extraordinary item--loss on early retirement of debt, net of applicable income tax benefit..... (2.6) -- -- -- -- -------- -------- -------- --------- -------- Net Earnings (Loss).. 69.4 (206.3) (5.8) (7.2) 13.9 Preferred dividends..... 5.5 8.7 8.9 0.8 2.1 -------- -------- -------- --------- -------- Net Earnings (Loss) Available to Common Shareholders........ $ 63.9 $ (215.0) $ (14.7) $ (8.0) $ 11.8 ======== ======== ======== ========= ======== Dividends declared per share.................. $ 0.48 $ 0.48 $ 0.48 $ 0.12 $ 0.12 ======== ======== ======== ========= ======== COMMON SHARE SUMMARY (DILUTED): Income (loss) before extraordinary item..... $ 1.67 $ (6.20) $ (.42) $ (.20) $ .32 Extraordinary item...... (0.6) -- -- -- -- -------- -------- -------- --------- -------- Net Earnings (Loss) Per Common Share.... $ 1.61 $ (6.20) $ (.42) $ (.20) $ .32 ======== ======== ======== ========= ======== CONSOLIDATED BALANCE SHEET DATA: Total assets............ $1,802.1 $1,455.2 $1,701.1 $ 7,398.7 $1,419.7 Short-term debt (2)..... 28.6 280.1 111.9 837.8 258.7 Long-term debt.......... 273.1 209.6 481.5 2,273.7 206.9 Shareholders' equity.... 369.3 318.5 550.3 586.0 310.2 OTHER FINANCIAL INFORMATION: Cash provided from (used by) operating activities............. $ 215.7 $ 149.0 $ (34.7) $ 82.7 $ 28.1 Cash provided from (used by) investing activities............. (5.5) (12.5) (109.4) (2,586.5) 2.0 Cash provided from (used by) financing activities............. 298.1 (122.8) 138.5 2,063.9 (30.2) EBITDA(3)............... 194.5 97.9 163.6 82.7 46.3 Expenditures for property, plant, equipment and other long term assets....... 49.7 54.2 78.5 19.5 8.4 Depreciation and amortization expense... 52.8 63.7 61.0 29.8 14.0
- ------- (1) Reflects first time consolidation of T&N and Fel-Pro as of March 6, 1998 and February 24, 1998, respectively. (2) Includes current maturities of long-term debt. (3) "EBITDA" represents the sum of income before interest expense and income taxes, plus depreciation and amortization as well as nonrecurring charges including gains on the sale of businesses, restructuring and reengineering charges, adjustments of assets held for sale to fair value and other long lived assets, the net effect of British pound currency options and forward contract, and purchased in-process research and development charge. EBITDA should not be construed as a substitute for income from operations, net income or cash flow from operating activities, for the purpose of analyzing Federal-Mogul's operating performance, financial position and cash flows. EBITDA measures are calculated differently by other companies. As such, the EBITDA measures presented may not be comparable to other similarly titled measures of other companies. The Company has presented EBITDA because it is commonly used by investors to analyze and compare companies on the basis of operating performance and to determine a company's ability to service debt. S-27 SELECTED CONSOLIDATED FINANCIAL DATA--T&N The following selected historical consolidated financial information of T&N with respect to each year in the two-year period ended December 31, 1997 is derived from the T&N Financial Statements. The T&N Financial Statements have been audited by KPMG Audit Plc, independent certified public accountants, and are stated in accordance with U.K. GAAP. The selected consolidated financial information provided below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations--T&N" and the T&N Financial Statements included elsewhere in this Prospectus Supplement.
YEAR ENDED DECEMBER 31, -------------------------------- 1997 1996 T&N HISTORICAL IN U.K. GAAP --------------- --------------- (POUNDS STERLING IN MILLIONS) CONSOLIDATED PROFIT AND LOSS ACCOUNTS DATA: Total turnover excluding associated undertakings............................. (Pounds)1,799.1 (Pounds)1,956.0 Cost of sales............................. (1,293.5) (1,418.3) Other operating expenses.................. (331.6) (370.3) Other, net................................ 11.2 (560.2)(1) Tax on profit (loss) on ordinary activities............................... (62.8) (8.0) --------------- --------------- Profit/(loss) attributable to shareholders............................. (Pounds) 122.4 (Pounds) (400.8) =============== =============== CONSOLIDATED BALANCE SHEET DATA: Total assets.............................. (Pounds)1,576.2 (Pounds)1,558.3 Borrowings due within one year............ 103.7 77.2 Borrowings due after more than one year... 285.4 260.2 Equity shareholders' funds at end of year. 191.4 118.3 YEAR ENDED DECEMBER 31, -------------------------------- 1997 1996 T&N PRO FORMA IN U.S. GAAP(2)(3) --------------- --------------- (DOLLARS IN MILLIONS) STATEMENT OF OPERATIONS DATA: Net sales................................. $ 2,948.4 $ 3,055.4 Costs and expenses........................ (2,698.7) (4,058.6)(1) Income tax (expense) benefit.............. (159.3) 278.5 --------------- --------------- Net earnings (loss)....................... $ 90.4 $ (724.7) =============== =============== CONSOLIDATED BALANCE SHEET DATA: Total assets.............................. $ 3,120.1 $ 3,299.5 Short-term debt........................... 125.4 68.1 Long-term debt............................ 469.5 445.2 Shareholders' equity...................... 466.5 456.1 OTHER FINANCIAL INFORMATION: Cash flow provided from (used by) operating activities..................... $ 268.8 $ 115.6 Cash flow provided from (used by) investing activities..................... (116.7) (211.8) Cash flow provided from (used by) financing activities..................... (125.0) 80.1 EBITDA(4)................................. 435.0 399.1 Expenditures for property, plant, equipment and other long term assets..... 170.9 179.2 Depreciation and amortization expense..... 167.6 161.9
S-28 - -------- (1) Includes charge for asbestos related costs of (Pounds)515 million under U.K. GAAP and $1.244 billion under U.S. GAAP. (2) The T&N historical financial statements were prepared in accordance with U.K. GAAP, which differs in certain significant respects from U.S. GAAP (see Note 29 to the T&N Financial Statements). The following table reconciles the T&N profit/loss attributable to shareholders as reported under U.K. GAAP to net earnings/loss as stated under U.S. GAAP:
1997 1996 ------------- -------------- (IN MILLIONS) Profit/(loss) attributable to shareholders as reported under U.K. GAAP--stated in pound sterling............................. (Pounds)122.4 (Pounds)(400.8) Converted to U.S. dollars................... $ 201.4 $ (628.4) U.S. GAAP adjustments (in U.S. dollars): Amortization of goodwill................... (11.2) (5.3) Amortization--of patents................... (2.6) (2.5) Deferred taxation--full provision.......... (67.1) 158.7 Tax effect of other U.S. GAAP reconciling items..................................... 3.0 121.8 Pension costs.............................. (11.5) (23.7) Asbestos provision discount................ (0.8) (355.9) Depreciation on fixed asset revaluations... 9.5 9.7 Carrying value of investments.............. (31.6) -- Other...................................... 2.1 2.0 Minority interests......................... (0.8) (1.1) ------------- -------------- Net earnings (loss)......................... $ 90.4 $ (724.7) ============= ==============
(3) Operating results and balance sheet data for 1997 have been translated at a rate of 1.6453 U.S. dollars to 1 pound sterling, and 1.6451 U.S. dollars to 1 pound sterling, respectively. Operating results and balance sheet data for 1996 have been translated at a rate of 1.5680 U.S. dollars to 1 pound sterling and 1.1710 U.S. dollars to 1 pound sterling, respectively. (4) "EBITDA" represents the sum of income before interest expense and income taxes, plus depreciation and amortization as well as nonrecurring charges including gains on the sale of businesses, the cost and gains associated with options over shares of Kolbenschmidt AG, asbestos related costs and bid costs. EBITDA should not be construed as a substitute for income from operations, net income or cash flow operating activities, for the purpose of analyzing T&N's operating performance, financial position and cash flows. EBITDA measures are calculated differently by other companies. As such, the EBITDA measures presented may not be comparable to other similarly titled measures of other companies. The Company has presented EBITDA because it is commonly used by investors to analyze and compare companies on the basis of operating performance and to determine a company's ability to service debt. S-29 SELECTED CONSOLIDATED FINANCIAL DATA--FEL-PRO The following selected historical consolidated financial information of Fel- Pro with respect to the years ended December 28, 1997 and December 29, 1996 is derived from the Fel-Pro Financial Statements. The Fel-Pro Financial Statements have been audited by Ernst & Young LLP, independent certified public accountants. The selected consolidated financial information provided below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations--Fel-Pro" and the Fel-Pro Financial Statements included elsewhere in this Prospectus Supplement.
YEAR ENDED YEAR ENDED DECEMBER 28, DECEMBER 29, 1997 1996 ------------ ------------ (DOLLARS IN MILLIONS) STATEMENT OF OPERATIONS DATA: Net sales............................................ $ 489.3 $ 448.0 Costs and expenses................................... (442.3) (408.7) Income tax (expense) benefit......................... (25.5) (6.9) ------- ------- Net earnings......................................... $ 21.5 $ 32.4 ======= ======= CONSOLIDATED BALANCE SHEET DATA: Total assets......................................... $ 270.1 $ 261.8 Short-term debt...................................... -- -- Long-term debt....................................... -- -- Shareholder's equity................................. 139.9 151.8 OTHER FINANCIAL INFORMATION: EBITDA(1)............................................ $ 58.4 $ 50.5 Expenditures for property, plant, equipment and other long term assets.................................... 18.3 14.1 Depreciation and amortization expense................ 11.5 11.3
- -------- (1) "EBITDA" represents the sum of income before income taxes, plus depreciation and amortization. EBITDA should not be construed as a substitute for income from operations, net income or cash flow from operating activities, for the purpose of analyzing Fel-Pro's operating performance, financial position and cash flows. EBITDA measures are calculated differently by other companies. As such, the EBITDA measures presented may not be comparable to other similarly titled measures of other companies. The Company has presented EBITDA because it is commonly used by investors to analyze and compare companies on the basis of operating performance and to determine a company's ability to service debt. S-30 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Federal-Mogul is a leading global manufacturer and distributor of a broad range of vehicular components for automobiles and light trucks, heavy duty trucks, farm and construction vehicles and industrial products. The Company's principal customers include many of the world's major original equipment manufacturers of such vehicles and industrial products. The Company also manufactures and supplies its products and related parts to the aftermarket. The Company, which had traditionally focused on the manufacture and distribution of engine bearings and sealing systems, in 1990 began to add retail auto stores in various domestic and international locations. These geographically-dispersed stores proved burdensome to manage and resulted in substantial operating losses. In the fourth quarter of 1996, Federal-Mogul underwent a change of management, following which the Company initiated a significant restructuring program designed to refocus the Company on its core competency of manufacturing. As part of such restructuring, Federal-Mogul took the following actions: (i) closed international aftermarket distribution centers in Malaysia and Singapore; (ii) divested 72 international retail aftermarket operations and sold or restructured 25 wholesale aftermarket operations; (iii) closed its Leiters Ford, Indiana manufacturing facility and consolidated its lighting products operations in Juarez, Mexico; (iv) consolidated certain of its North American warehouse facilities; (v) consolidated its customer support functions previously housed in Phoenix, Arizona into the Company's Southfield headquarters; (vi) consolidated its European aftermarket management functions in Geneva, Switzerland into the Wiesbaden, Germany manufacturing headquarters; and (vii) streamlined certain of its administrative and operational staff functions worldwide. In addition, by the end of the first quarter of 1998, the Company expects to have successfully exited all of its retail businesses, except for Puerto Rico where the Company continues to seek a buyer. In connection with the restructuring, Federal-Mogul also began to pursue a growth strategy of acquiring complementary manufacturing companies that enhance Federal-Mogul's product base, expand its global manufacturing operations and provide opportunities to capitalize on Federal-Mogul's aftermarket distribution network and technological resources. On March 6, 1998, Federal-Mogul completed its cash offer to acquire all outstanding common stock of T&N for 260 pence per share. On February 24, 1998, Federal-Mogul acquired all the equity interests of Fel-Pro. See "T&N and Fel- Pro Acquisitions." The Company also acquired Bimet S.A. ("Bimet") during the first quarter of 1998 and increased its ownership in Federal-Mogul/Bruss Sealing Systems ("Summerton") and KFM Bearing Co., Ltd. ("KFM"), as well as divesting its minority interest in G. Bruss GmbH & Co. KG ("Bruss"). See notes 2 and 7 to the "Federal-Mogul Unaudited Interim Financial Statements." The consolidated statement of operations for the three months ended March 31, 1998 includes the operating results of T&N and Fel-Pro from their respective acquisition dates. Operating results for the T&N Bearings Business and Fel-Pro chemical business (which includes amortization expense for goodwill allocated to the businesses and interest expense relating to the holding costs of the businesses) have been excluded from the condensed consolidated statement of operations for the three months ended March 31, 1998. S-31 FEDERAL-MOGUL THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THREE MONTHS ENDED MARCH 31, 1997 THE FOLLOWING IS BASED ON TEXT INCLUDED IN FEDERAL-MOGUL'S QUARTERLY REPORT ON FORM 10-Q FILED IN RESPECT OF THE THREE-MONTH PERIOD ENDED MARCH 31, 1998 AND SPEAKS AS OF THAT DATE. RESULTS OF OPERATIONS Following the acquisitions of T&N and Fel-Pro, Federal-Mogul's integrated operations are being reorganized to realize synergies and effectively coordinate operations. Operations will be conducted through three manufacturing operating units corresponding to major product areas: Powertrain Systems, Sealing Systems and General Products. The major product categories in Powertrain Systems include engine bearings and piston products. Sealing Systems includes dynamic seals and gaskets. General Products include camshafts, friction products, sintered products, systems protection products and a number of smaller product lines. The Worldwide Aftermarket organization is responsible for the Company's global aftermarket sales, marketing and distribution. Net Sales Sales for the first quarter of 1998 were $658.0 million compared to $485.6 million in the same 1997 quarter. The 35.5% increase in net sales is primarily attributable to the acquisitions of T&N and Fel-Pro, the results of which were included from their respective dates of acquisition. Excluding the impact of T&N and Fel-Pro acquisitions and the impact of previously divested retail aftermarket businesses, net sales decreased 2.3%. Powertrain Systems sales were $279.0 million for the first quarter of 1998 compared to $209.2 million for the same 1997 quarter. Approximately $84 million of the 33.4% increase related to sales of T&N. Excluding the acquisition of T&N and powertrain products previously sold through the divested retail aftermarket businesses, sales were relatively flat compared to 1997. Sealing Systems sales were $163.3 million in the first quarter of 1998 compared to $83.8 million in the first quarter of 1997. Approximately $20 million of the 94.9% increase related to sales of T&N and approximately $52 million related to sales of Fel-Pro. Excluding the acquisitions of T&N and Fel-Pro and sealing products previously sold through the divested retail aftermarket businesses, sales increased 9.7% due to strong heavy duty and industrial sales. General Products sales were $215.7 million in the first quarter of 1998 compared to $192.6 million in 1997. Approximately $69 million of the 12.0% increase related to sales of T&N. Excluding the acquisitions of T&N and general products previously sold through the divested retail aftermarket businesses, sales decreased 10.2% primarily due to continuing softness in the North American aftermarket business. Cost of Products Sold Cost of products sold as a percent of net sales decreased to 75.5% for the first quarter of 1998 from 76.9% for the same 1997 quarter. Excluding the effect of a $10.9 million charge in the first quarter of 1998 associated with the purchase accounting write-up of acquired inventory to fair value and the subsequent sale of this inventory at the higher cost, as well as a $3.5 million write-down of inventory associated with the Puerto Rico retail aftermarket to be divested, cost of products sold as a percent of sales decreased to 73.3%. Management attributes this decrease to productivity improvements, cost controls, streamlined operations, the divestiture of underperforming assets and the acquisitions previously discussed. Selling, General and Administrative Expenses Selling, general and administrative ("SG&A") expenses as a percent of net sales increased to 14.9% for the first quarter of 1998 compared to 15.6% for the first quarter of 1997. The decrease is primarily attributable to the benefits of prior restructuring actions and the divestiture of retail aftermarket businesses, slightly offset by a $1.1 million charge related to Year 2000 costs. S-32 Amortization Expense Amortization expense in the first quarter of 1998 was $10.1 million compared to $2.5 million for the first quarter of 1997. The increase in amortization expense was attributable to the expense related to the increase in goodwill and other intangible assets associated with the T&N and Fel-Pro acquisitions. Purchased In-Process Research and Development Charge The Company recognized an $18.6 million charge in the first quarter of 1998 associated with the estimated fair value of in-process research and development costs allocated in purchase accounting to a portion of the total consideration paid. Restructuring Charges During the first quarter of 1998, the Company recognized a $10.5 million restructuring charge related to operations in place prior to the acquisitions of T&N and Fel-Pro. The restructuring charge included $10.2 million and $0.3 million for severance and exit costs, respectively. Employee severance costs result from planned terminations in various business operations of the Company. The severance costs were based on the estimated levels that will be paid to the affected employees pursuant to the Company's workforce reduction policies and certain foreign governmental regulations. The Company anticipates that the actions related to the first quarter 1998 restructuring plan will be completed primarily within one year. Rationalization of Acquired Businesses In connection with the previously discussed acquisitions, the Company recognized approximately $151 million in reserves related to the rationalization and integration of acquired businesses. The rationalization reserves provide for approximately $125 million and $26 million in severance and exit costs, respectively. The components of the integration plan include: closure of four manufacturing facilities worldwide; relocation of highly manual manufacturing product lines to lower cost regions or more suitable locations; consolidation of overlapping manufacturing, technical and sales facilities and joint ventures; closure of two aftermarket central warehouses and five in-country warehouses; consolidation of aftermarket marketing and customer support functions; and streamlining of administrative, sales, marketing and product engineering staffs worldwide. An anticipated result of the integration plan and the restructuring will be a reduction of approximately 4,200 full-time employees. In addition to the $10.5 restructuring charge and the $151 million rationalization reserve, the Company expects to incur additional expenses of approximately $43 million necessary to complete the integration of the acquired companies. The anticipated annual synergy associated with the restructuring, rationalization and integration is expected to be moderately in excess of these costs in the year 2000. Adjustment of Assets Held for Sale to Fair Value In addition to the T&N Bearings Business and chemical businesses held for sale, during the first quarter of 1998 the Company decided to sell its subsidiary, Bertolotti Pietro e Figli, S.r.l. ("Bertolotti"), conducting aftermarket operations in Italy. The carrying value of Bertolotti's assets have been reduced to its fair value based on estimates of selling values less costs to sell, calculated using multiples of earnings similar to recent automotive industry transactions in Italy. The Company recognized a $20.0 million first quarter charge primarily associated with the write-down of Bertolotti's assets to the estimated fair value. The Company expects to complete the sale of Bertolotti within one year. As part of its 1996 restructuring plan, the Company continued to close or sell certain retail aftermarket operations during the first quarter of 1998. As of March 31, 1998, retail aftermarket operations that continue to be held for sale include those in Puerto Rico. Net cash proceeds received for those retail aftermarket locations sold in the first quarter approximated $2 million. No gain or loss was recognized on the dispositions of those retail aftermarket locations, as the related assets had been previously adjusted to fair value. S-33 Interest Expense Interest expense in the first quarter of 1998 was $15.5 million compared to $9.8 million for the first quarter of 1997. The increase in interest expense is attributable to the interest expense related to the financing of the T&N and Fel-Pro acquisitions slightly offset by reduced preacquisition debt levels as compared to the first quarter of 1997. Net Gain on British Pound Currency Option and Forward Contract In the fourth quarter of 1997, in anticipation of the then pending T&N acquisition, the Company purchased a British pound currency option for $28.1 million with a notional amount of $2.5 billion. In January 1998, the Company settled the option and recognized a loss of $17.3 million. Also in January 1998, in anticipation of the then pending T&N acquisition, the Company entered into a forward contract to purchase (Pounds)1.5 billion for a notional amount of approximately $2.45 billion. As a result of favorable exchange fluctuations in the British pound/U.S. dollar exchange rate experienced during the contract period, the Company recognized a $30.6 million gain. The Company entered into the above transactions to effectively serve as economic hedges for the purchase of T&N. Such transactions, however, do not qualify for "hedge accounting" under U.S. GAAP, and therefore the loss on the British pound currency option and the gain on the British pound forward contract are reflected in the statement of operations caption "Net gain on British pound currency option and forward contract." Income Tax Expense During the first quarter of 1998, the Company recognized charges for adjustment of assets held for sale to fair value and purchased research and development and recognized a net gain on the British pound currency option and forward contract. These transactions resulted in a pre-tax net charge of $25.3 million. The net income tax benefit related to these transactions totaled $2.1 million. Pro Forma Results The following unaudited pro forma financial information for the three months ended March 31, 1998 and 1997 assume the T&N and Fel-Pro acquisitions occurred as of the beginning of the respective periods, after giving effect to certain adjustments, including the amortization of intangible assets, interest expense on acquisition debt, divestitures of the T&N Bearings Business and Fel-Pro chemical business and income tax effects. The pro forma results (in millions of dollars, except per share data) have been prepared for comparative purposes only and are not necessarily indicative of the results of operations which may occur in the future or that would have occurred had the acquisitions of T&N and Fel-Pro been consummated on the dates indicated, nor are they necessarily indicative of the Company's future results of operations.
UNAUDITED PRO FORMA FINANCIAL INFORMATION THREE MONTHS ENDED MARCH 31, ------------------ 1998 1997 -------- -------- Net sales............................................ $1,193.6 $1,247.9 Net loss............................................. $ (16.5) $ (7.0) Loss per share....................................... $ (0.44) $ (0.28) Loss per share assuming dilution..................... $ (0.44) $ (0.28)
The unaudited pro forma financial information for the three months ended March 31, 1998 include charges for adjustment of assets held for sale to fair value, restructuring, the effect of the previously described purchase accounting write-up of acquired inventory to fair value and writedown of inventory associated with the Puerto Rico retail aftermarket business to be divested, and certain other charges. Also included in the 1998 unaudited S-34 pro forma financial information were the recognized net gain on the British pound currency option and forward contract and the gain on the Bruss divestiture. The net after tax effect of these transactions was a charge of approximately $19 million ($0.48 per diluted share). The $18.6 million charge for purchased in-process research and development has been excluded from the 1998 unaudited pro forma financial information. LIQUIDITY AND CAPITAL RESOURCES Cash Flow Provided from Operating Activities Cash flow provided from operating activities was $82.7 million for the first quarter of 1998. Cash flow was generated primarily from a decrease in inventories of $36.8 million and net earnings adjusted for the non-cash charges of depreciation and amortization, purchased in-process research and development, restructuring and adjustment of assets held for sale to fair value. Partially offsetting these items was an increase in accounts receivable of $57.1 million. Cash Flow used by Investing Activities Cash flow used by investing activities was $2,586.5 million and was primarily related to the acquisitions of T&N, Fel-Pro, Bimet and the increase in ownership of Summerton and KFM partially reduced by the sale of the Company's interest in Bruss. Partially offsetting the acquisitions, the Company received proceeds from the sale of options which were acquired with the acquisition of T&N. In addition, capital expenditures of $19.5 million were made for property, plant and equipment to implement process improvements, information technology and new product introductions. Capital expenditures are anticipated to be approximately $235 million in 1998, primarily for enhanced manufacturing capabilities and process improvements. Cash Flow Provided from Financing Activities Cash flow provided from financing activities was $2,063.9 million for the first quarter of 1998 primarily from the increase in debt related to the acquisitions of T&N and Fel-Pro detailed below, partially offset by the related debt issuance fees of $33.3 million. In connection with the Company's effort to put into place a permanent capital structure with an appropriate combination of debt and equity to partially replace the Senior Credit Agreement and Senior Subordinated Credit Agreement debt, the Company on April 17, 1998 filed a registration statement with the Securities and Exchange Commission for the offering from time to time of up to an aggregate $2.5 billion of debt or equity securities (including shares of Common Stock registered for the account of the Selling Shareholders). In addition to the Offerings, the Company is also evaluating the possibility of issuing debt securities pursuant to such registration statement, all or a significant portion of the net proceeds of which the Company would use to refinance certain additional indebtedness of the Company. There can be no assurance that any such offering of equity or debt securities will be consummated. The accelerated payment, if any, of certain portions of the Senior Credit Agreement and Senior Subordinated Credit Agreement debt would result in a significant extraordinary charge due to the write-off of the issuance costs associated with the early retirement of debt. The total unamortized issuance costs related to the Senior Credit Agreement and Senior Subordinated Credit Agreement were approximately $56 million at March 31, 1998. In connection with the Fel-Pro acquisition the Company paid approximately $492 million cash which was provided through an existing revolving credit facility and three short-term loans and issued 1,030,325.6 shares of Federal- Mogul Series E Stock with an imputed value of $225 million. The shares of Series E Stock are exchangeable into shares of Common Stock at a rate of five shares of Common Stock per share of Series E Stock and pay dividends of $.12 per quarter per common stock equivalent. The Series E Stock are required to be exchanged no later than February 24, 1999, subject to certain conditions. S-35 The Company believes that cash flow from operations, together with borrowings available under the Company's revolving credit facility, will continue to be sufficient to meet its ongoing working capital requirements. Foreign Currency and Commodity Contracts The financial condition and results of operations of certain of the Company's operating entities are reported in various foreign currencies (principally pounds sterling, German marks, and to a lesser extent South African rand and French francs, among others) and then translated into U.S. dollars at the applicable exchange rate for inclusion in the Company's financial statements. As a result, the appreciation of the dollar against these foreign currencies will have a negative impact on the reported sales and operating margin of T&N and other subsidiaries as consolidated into the Company. Conversely, the depreciation of the dollar against these foreign currencies will have a positive impact. In addition, the Company incurs currency transaction risk whenever it or one of its foreign subsidiaries enters into either a purchase or sales transaction using a different currency than the relevant entity's functional currency. Currency transaction risk is reduced by matching revenues and costs with the same currency. Given the volatility of currency exchange rates, there can be no assurance that the Company will be able to effectively manage its currency transaction risks or that any volatility in currency exchange rates will not have a material adverse effect on the Company's financial condition or results of operations. ASBESTOS LIABILITY AND LEGAL PROCEEDINGS T&N Asbestos As of March 31, 1998, the Company has provided $1.351 billion as its estimate for future costs related to resolving asbestos claims. In the United States, T&N plc and two of T&N plc's U.S. subsidiaries are among many defendants named in numerous court actions alleging personal injury resulting from exposure to asbestos or asbestos-containing products. T&N is also subject to asbestos-disease litigation, to a lesser extent, in the United Kingdom and to property damage litigation based upon asbestos in the United States. Because of the slow onset of asbestos-related diseases, management anticipates that similar claims will be made in the future. It is not known how many such claims may be made nor the expenditure which may arise therefrom. T&N has appointed the Center for Claims Resolution ("CCR") as its exclusive representative in relation to all asbestos-related personal injury claims made against the T&N Companies in the United States. Prior to its acquisition, T&N secured a 500 million pounds sterling (approximately $838 million at the March 31, 1998 exchange rate of 1 pound sterling to 1.6758 U.S. dollars) layer of insurance which will be triggered should the aggregate number of claims notified after June 30, 1996, where the exposure occurred prior to that date, exceed 690 million pounds sterling (approximately $1,156 million at the March 31, 1998 exchange rate). At March 31, 1998 the Company has recorded reserves for incurred but not reported claims up to the insurance level, which is 690 million pounds sterling. While management believes that estimated reserves, which have not been reduced by any potential insurance proceeds, are appropriate for anticipated losses arising from T&N's asbestos related claims, no assurance can be given that T&N will not be subject to material additional liabilities and significant additional litigation relating to asbestos. Any such liabilities or litigation could have a material adverse effect on the Company's results of operations, business, liquidity and financial condition. Federal-Mogul and Fel-Pro Asbestos Federal-Mogul Corporation also is one of a large number of defendants in a number of lawsuits brought by claimants alleging injury due to exposure to asbestos. In addition, Fel-Pro has been named as a defendant in approximately 18,000 product liability cases involving asbestos, primarily involving gasket or packing products S-36 sold to ship owners. The Company is defending all such claims vigorously and believes that it and Fel-Pro have substantial defenses to liability and adequate insurance coverage for defense and indemnity costs (though Fel-Pro has agreed with its insurers to pay 20% of defense costs, in exchange for the right to a significant role in decisions regarding litigation). While the outcome of litigation can't be predicted with certainty, management believes that asbestos claims pending against Federal-Mogul Corporation and Fel-Pro as of March 31, 1998 will not have a material effect on the Company's financial position. No related reserves, or payments, have been provided, or paid to date, related to asbestos claims pending against Federal-Mogul Corporation and Fel-Pro. Other The Company is involved in various other legal actions and claims, directly and through its subsidiaries (including T&N and Fel-Pro). After taking into consideration legal counsel's evaluation of such actions, management is of the opinion that its outcomes are not reasonably likely to have a material adverse affect on the Company's financial position, operating results, or cash flows. OTHER MATTERS New Dividend Policy Dividends on the Common Stock of the Company are payable at the discretion of the Company's Board of Directors. Historically, quarterly dividends had been 12 cents per share. The Board of Directors has recently reduced the quarterly dividend and has declared a cash dividend payable in the second quarter of 1998 in the amount of one-quarter cent per share of Common Stock. The Company, consistent with its growth strategy, presently intends to retain future earnings in the business and therefore anticipates paying dividends at a comparable level in the foreseeable future. Effect of Accounting Pronouncements In 1997, the Financial Accounting Standards Board issued Statement No. 130 ("SFAS No. 130") "Reporting Comprehensive Income." SFAS No. 130 establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The Company adopted Statement 130 as of January 1, 1998. The adoption of this statement had no impact on Federal Mogul's net earnings (loss) or shareholders' equity. SFAS No. 130 requires foreign currency translation adjustments and unrealized gains or losses on investments and derivative instruments to be included in other comprehensive income. Prior to the adoption of SFAS No. 130 these items were reported as a component of shareholders' equity. Total comprehensive income (loss), net of the related estimated tax, was $(4.6) million and $5.3 million for the three months ended March 31, 1998 and 1997, respectively. Subsequent Event In April 1998, the Company retired $251 million in private placement debt assumed in connection with the acquisition of T&N. The early retirement of the debt required a make whole payment of approximately $27 million, which will be recognized as an extraordinary loss in the second quarter of 1998 of approximately $19 million, net of the related tax benefit. S-37 YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996 AND YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995 THE FOLLOWING IS BASED ON TEXT INCLUDED IN FEDERAL-MOGUL'S ANNUAL REPORT ON FORM 10-K FILED IN RESPECT OF THE YEAR ENDED DECEMBER 31, 1997 AND SPEAKS AS OF THAT DATE. RESULTS OF OPERATIONS Net Sales Consolidated net sales decreased 11.1% in 1997, primarily due to the divestiture of certain international retail and wholesale operations, the sale of the heavy wall bearings operations in Brazil and Germany, the sale of the United States ball bearing business and continued softness in the North American aftermarket business. These decreases were partially offset by certain volume increases primarily in the original equipment business. Original equipment and aftermarket sales were:
1997 1996 1995 -------- -------- -------- (DOLLARS IN MILLIONS) Original Equipment: Americas........................................... $ 451.4 $ 449.1 $ 465.4 International...................................... 170.3 219.5 222.7 Aftermarket: United States and Canada........................... 699.1 759.8 780.8 International...................................... 485.8 604.3 530.9 -------- -------- -------- Total sales...................................... $1,806.6 $2,032.7 $1,999.8 ======== ======== ========
Original equipment business sales in the Americas were flat in 1997 as compared to 1996. However, excluding the effect of the Company's divestitures of its electrical products business in September 1996 and its United States ball bearing operations in November 1996, net sales increased 15.7% in 1997 compared to 1996. Management attributes this increase primarily to strong 1997 sales in its sealing products division. Sales decreased in 1996 as compared to 1995 due to the sale of the Precision Forged Products Division in April 1995 and the 1996 sales of the electrical products business and the United States ball bearings manufacturing operations, offset slightly by the acquisition of Seal Technology Systems Limited in September 1995. Excluding the effect of these acquisitions and divestitures, sales increased 2.7% in 1996. International original equipment business sales decreased in 1997 as compared to 1996 due to the effects of exchange rate fluctuations and the divestiture of the heavy wall bearing operations in Germany and Brazil completed on January 2, 1997. Excluding the effects of exchange rate fluctuations and the divestiture, sales increased 11.7%. Management attributes this increase to strong customer demand for sputter bearings and Glycodur material products. In 1996, sales decreased as compared to 1995 due to the Company's decision to exit some conventional engine bearing business that did not meet appropriate profitability levels. North American aftermarket sales decreased in 1997 as compared to 1996 due to continued weak sales in engine products. Sales decreased in 1996 as compared to 1995 primarily due to the elimination of special extended payment terms. International aftermarket business sales in 1997 as compared to 1996 decreased primarily due to the effects of foreign exchange fluctuations and the 1997 divestitures of operations in Turkey, Australia, South Africa and Chile. Excluding the effects of exchange and 1997 divestitures, sales were essentially flat. In 1996, sales increased as compared to 1995 due to the full year impact of the acquisitions of Bertolotti in June 1995 and Centropiezas in September 1995, and to a lesser extent, volume and pricing increases in Mexico, increased sales volume in Australia and new local operations in Brazil. These increases were partially offset by $21 million resulting from the devaluation of the South African rand and a decrease in Venezuela due to a recession. S-38 Original equipment sales as a percentage of total sales of the Company increased to 34.4% in 1997 from 32.8% in 1996, with a corresponding decrease in aftermarket sales. This shift in 1997 reflects the Company's pursuit and implementation of its strategy to focus on manufacturing and distribution, as demonstrated by the previously discussed 1997 divestitures and planned acquisitions. Previously, as the Company was implementing its retail growth strategy, original equipment sales as a percentage of total sales of the Company decreased to 32.8% in 1996 from 34.4% in 1995, with a corresponding increase in aftermarket sales. Cost of Products Sold Cost of products sold as a percent of net sales decreased to 76.5% in 1997 compared to 81.7% for 1996. The decrease is primarily due to the 1997 divestitures of less profitable operations and productivity improvements in the North American aftermarket and the Americas original equipment business. In addition, a portion of the 1997 decrease is attributable to 1996 third and fourth quarter charges incurred of $8 million for customer incentive programs and $13 million for excess and obsolete inventory. See "--Changes in Accounting Estimates." Cost of products sold as a percent of net sales increased to 81.7% in 1996 compared to 80.2% in 1995. The increase is primarily attributable to 1996 third and fourth quarter charges incurred of $8 million for customer incentive programs and $13 million for excess and obsolete inventory. See "--Changes in Accounting Estimates." Selling, General and Administrative Expenses SG&A expenses as a percent of net sales decreased to 15.8% for 1997 compared to 16.4% for 1996. In contrast, SG&A expenses as a percent of net sales increased to 16.4% for 1996 compared to 15.0% for 1995. The 1997 decrease and 1996 increase in SG&A as a percent of net sales is primarily attributable to bad debt expense, customer incentive programs and environmental and legal matters (see "--Changes in Accounting Estimates" of $3 million for bad debt expense, $8 million for customer incentive programs and $9 million for environmental and legal matters) incurred in the third and fourth quarters of 1996. In addition, the 1996 increase was partially due to higher SG&A costs in the international aftermarket business. Changes in Accounting Estimates In 1996, the Company made certain changes in accounting estimates totaling $51 million in the third and fourth quarters attributable to 1996 events and new information becoming available. The changes in accounting estimates included the following: Customer Incentive Programs: The increase in the provision for customer incentive programs of $18 million resulted from contractual changes implemented primarily in the third and fourth quarters of 1996 with certain customers, new sales programs, additional customer participation in these programs and current experience with these programs. Excess and Obsolete Inventory: Business volume growth remained below expectations in 1996, principally in the third and fourth quarters, causing a build up of certain inventories beyond anticipated demand. In addition, the Company's strategic initiative to focus on its manufacturing business and divest its retail and certain aftermarket businesses and the sale of the U.S. ball bearings operations in the fourth quarter adversely affected the utility of the North American aftermarket business inventory. As a result, the Company recorded an additional $13 million provision for excess and obsolete inventory. Bad Debts: The increase in the bad debt provision of $3 million was principally attributable to the deterioration of account balances of numerous low volume customers and termination of business with certain North American aftermarket customers during 1996. Environmental and Legal Matters: The environmental and legal provision was increased by $9 million due to the completion of environmental studies and related analyses, new issues arising and changes in the status of other legal matters. S-39 Other: The remaining $8 million of changes in accounting estimates is comprised of $1 million for changes in the workers' compensation reserve based on worsening experience in outstanding claims in certain older policy years, $3 million for interest capitalization, $2 million to adjust estimates of inventoriable costs and $2 million for other items. Sales of Businesses During 1997, the Company received $73.6 million in net cash proceeds from the sale of its aftermarket operations in South Africa, Australia and Chile, and its heavy wall bearing operations in Germany and Brazil. During 1996, the Company received $42.0 million in net cash proceeds from the sale of its United States ball bearings and electrical products manufacturing operations. Except for the sale of the electrical products manufacturing operations, sales of businesses in 1997 and 1996 relate to assets previously adjusted to fair value. See "--Adjustment of Assets Held for Sale to Fair Value and Other Long Lived Assets." Accordingly, no gain or loss was recognized on the date of sale related to these transactions. In addition, no gain or loss was recognized related to the sale of the electrical products manufacturing operations. During 1995, the Company sold its equity interest in Westwind Air Bearings, Limited, recognizing a pretax gain of $16.2 million and its Precision Forged Products Division for a pretax gain of $7.8 million. Restructuring Charges Primarily as a result of the amendments to the 1996 restructuring plan, described previously in this section, the Company's 1997 operating results were increased by $23.1 million for the reversal of previously recognized 1996 and 1995 restructuring charges. Offsetting this reversal is a $22.0 million charge for new 1997 restructuring programs. The net impact on 1997 operations, as a result of the restructuring activities, was a credit of $1.1 million. The 1997 charge includes $3.1 million for exiting certain European aftermarket product lines and the related employment reductions, $6.8 million for termination of certain European administrative and support personnel, $7.5 million for additional exit and severance costs related to the Puerto Rican retail operations, $2.6 million for consolidation and reconfiguration of the North American aftermarket service branch network and $2.0 million for other actions. The Company anticipates that the actions related to the 1997 restructuring plan will be complete by the end of 1998, and that most of the severance and exit costs will be paid in 1998. In the fourth quarter of 1996, the Company recognized a restructuring charge of $57.6 million for costs associated with employee severance, exit and consolidation costs for 132 international retail operations and 30 wholesale aftermarket operations, rationalization of European manufacturing operations, consolidation of lighting products, consolidation or closure of certain North American warehouse facilities, consolidation of customer support functions in the United States and streamlining of administrative and operational staff functions worldwide. The charge consists of $22.7 million for the sale of 132 international retail aftermarket and 30 wholesale aftermarket operations, $14.7 million for corporate employee severance costs, $7.7 million for the rationalization of European manufacturing operations, $5.3 million for consolidation or closure of certain North American warehouse facilities, $2.8 million for consolidation of customer support functions in the United States, $2.5 million for closure of the Leiters Ford facility and $1.9 million for other miscellaneous actions, including the consolidation of the European aftermarket management function into the European manufacturing headquarters. The Company's 1997 progress and actual implementation of the 1996 restructuring plan resulted in 1997 operating results being increased by $20.8 million for severance and $1.4 million of exit and consolidation costs being reversed. The Company expects to pay out most of the remaining 1996 severance and exit costs in 1998. Results of operations in the second and fourth quarters of 1995 include restructuring charges of $6.1 million and $20.8 million, respectively. These charges were comprised of $20.1 million for employee severance and $6.8 S-40 million for exit costs and consolidation of certain facilities. The workforce reductions and consolidation of facilities were completed as of December 31, 1996. Operating results for 1997 were increased by $0.9 million relating to 1995 exit costs being reversed. The Company expects to pay out the remaining 1995 exit costs in 1998. Reengineering and Other Related Charges Operating results for 1997 include a credit of $1.6 million relating to 1996 reengineering and other related charges being reversed. In 1996, the Company initiated an extensive effort to strategically review its businesses and focus on its competencies manufacturing, engineering and distribution. As a result of this process, the Company recognized a charge of $11.4 million for professional fees and personnel costs related to the strategic review of the Company and changes in management and related costs. In 1995, the Company recognized a charge of $13.9 million for reengineering and other costs. These costs included $7.0 million for professional fees and personnel costs, and $6.9 million primarily for certain other non-recurring costs relating to brand consolidation at the customer level of the Company's Federal-Mogul(R), TRW(R) and Sealed Power(R) branded engine parts. Adjustment of Assets Held for Sale to Fair Value and Other Long Lived Assets The Company continually reviews all components of its businesses for possible improvement of future profitability through acquisition, divestiture, reengineering or restructuring. The Company also continually reviews and updates its impairment reserves related to the divestiture of its remaining international retail aftermarket operations and adjusts the reserve components to approximate their net fair value. In the fourth quarter of 1997, the Company recognized a charge of $2.4 million to write-down certain long lived assets to fair value. As of December 31, 1997, assets held for sale primarily include retail aftermarket operations in Puerto Rico, Ecuador, Venezuela and Panama. By the end of the first quarter of 1998, the Company expects to have successfully exited all of its retail aftermarket businesses, except for Puerto Rico where the Company continues to seek a buyer. During 1996, management designed a restructuring plan to aggressively improve the Company's cost structure, streamline operations and divest the Company of underperforming assets. As part of this plan, the Company decided to sell 132 international retail aftermarket operations, sell or restructure 30 wholesale aftermarket operations and consolidate a North American manufacturing operation. The carrying value of assets held for sale was reduced to fair value based on estimates of selling values less costs to sell. Selling values used to determine the fair value of assets held for sale were determined using market prices (i.e., valuation multiples) of comparable companies from other 1996 transactions. The resulting adjustment of $148.5 million to reduce assets held for sale to fair value was recorded in the fourth quarter of 1996. As previously described in this section, the Company made significant progress related to the implementation of the 1996 restructuring plan. Also in 1996, based upon the final sale, the Company recognized an additional writedown of $2.8 million to the net asset value of the United States ball bearings operations. In 1995, the Company decided to sell the ball bearings operations and reduced the carrying value by $17.0 million to record assets held for sale at fair value. In 1995, the Company also decided to sell its heavy wall bearing operations in Germany and Brazil. The Company estimated the fair value of the businesses held for sale based on discussions with prospective buyers, adjusted for selling costs. The Company reduced its carrying value by $17 million to record assets held for sale at fair value. The heavy wall bearing operations were sold in January 1997 for net proceeds of $8.9 million, which approximated the carrying value of the assets at December 31, 1996. In addition, in 1995, the Company reduced the carrying value of certain other impaired long-lived assets by $17.8 million to record them at fair value. No further fair value adjustments were recorded for these assets in 1996 or 1997. S-41 Net sales for all assets held for sale and adjusted to fair value approximated $114 million, $335 million, and $322 million in 1997, 1996 and 1995, respectively. Net sales for the remaining retail aftermarket operations held for sale at December 31, 1997 approximated $44 million, $48 million and $22 million in 1997, 1996 and 1995, respectively. Interest Expense Interest expense decreased $10.6 million in 1997 to $32.0 million. The decrease was primarily due to a $188 million reduction of debt which resulted from improvements in working capital and the sale of the South African and Australian businesses. Although the Company decreased its debt by $104 million from 1995 to 1996, interest expense increased $5.3 million in 1996 primarily due to a higher average debt level than in 1995. Excluding the U.S. and European revolving credit facilities, which were classified as short-term debt during 1996 and as long-term debt during 1995, the weighted average interest rate for short-term debt increased to 10.9% for 1996 from 9.5% for 1995. The interest rate on the U.S. and European revolving credit facilities at December 31, 1996 and 1995 was 6.1% and 6.2%, respectively. Income Taxes At December 31, 1997, the Company had deferred tax assets, net of a $44.4 million valuation allowance, of $140.5 million and deferred tax liabilities of $75.9 million. The net deferred tax asset of $64.6 million included the tax benefits of $58.2 million related to the Company's postretirement benefit obligation at December 31, 1997. The Company expects to realize the benefits associated with this obligation over a period of 35 to 40 years. The difference between the 1997 effective income tax rate and the statutory tax rate is principally due to utilization of losses on foreign investment and an income tax benefit related to the sales of the South African and Australian businesses (refer also to Note 16 of the Consolidated Financial Statements). LIQUIDITY AND CAPITAL RESOURCES Cash flow from operations of $215.7 million in 1997 increased significantly during 1997 primarily due to increased earnings. The Company also reduced inventory from operations by $59.9 million in 1997. Inventory reductions in the North American aftermarket business were primarily responsible for the decrease. The decrease in North America aftermarket inventory is attributable to reduced lead times while still maintaining availability of products and modifying safety stock levels. Cash flow used by investing activities of $5.5 million in 1997 include $28.1 million for the British pound currency option, described later in this section, and $2.4 million for other professional fees paid in anticipation of the T&N acquisition. In addition, cash flows used by investing activities include the receipt of $73.6 million in net proceeds from the 1997 divestitures. Cash flow from 1997 financing activities were $298.1 million, an increase of $420.9 million from 1996. The following events were primarily responsible for the net increase for 1997: Issuance of Preferred Securities of Affiliate: In December 1997, the Company's financing trust completed a $575 million private issuance of 11,500,000 shares of 7% Trust Convertible Preferred Securities. The convertible preferred securities are redeemable at the Company's option, in whole or in part, on or after December 6, 2000. All outstanding convertible securities are required to be redeemed no later than December 1, 2027. Issuance of Senior Notes: In April 1997, the Company issued a fully subscribed $125 million debt offering of ten year 8.8% senior notes. Proceeds from the offering were used to reduce the Company's short-term debt and the early extinguishment of the private placement debt. S-42 Extinguishment of Private Placement Debt: In the second quarter of 1997, the Company retired $64.7 million in private placement debt. The early retirement of this debt eliminated high coupon debt and potentially restrictive covenants giving the Company greater financial flexibility in the future. In addition, the early retirement of this debt involved a make whole payment that resulted in a $4.1 million pretax ($2.6 million after tax) extraordinary loss. Accounts Receivable Securitization: During 1997, the Company replaced an existing accounts receivable securitization program with a new program which provides up to $100 million of financing. On an ongoing basis, the Company sells certain accounts receivable to a subsidiary of the Company, which then sells such receivables, without recourse, to a master trust. Amounts sold under this arrangement were $63.2 million as of December 31, 1997, and have been excluded from the balance sheet. During 1997, cash payments totaling $31.8 million were made to the master trust related to the Company's accounts receivable securitization. These cash payments effectively increased the Company's investment in the accounts receivable securitization. Multicurrency Revolver: In June 1997, the Company entered into a new $350 million multicurrency revolving credit facility with a consortium of international banks which matures in June 2002. The multicurrency revolving credit facility replaced the existing U.S. and European revolving credit facilities. The multicurrency revolving credit facility contains restrictive covenants that, among other matters, require the Company to maintain certain financial ratios. As of December 31, 1997, there were no borrowings outstanding against the multicurrency revolving credit facility. In December 1997, the Company entered into a $3.25 billion committed bank facility with a reputable financial institution related to the T&N acquisition. The facility provides for up to $2.75 billion of senior debt and up to $500 million of subordinated debt. Because this facility was contingent upon the acquisition of T&N, no amounts were outstanding as of December 31, 1997. Certain fees relating to this facility have been incurred and paid as of December 31, 1997. The Company believes that cash flow from operations will continue to be sufficient to meet its ongoing working capital requirements. ENVIRONMENTAL MATTERS The Company is a party to lawsuits filed in various jurisdictions alleging claims pursuant to the Comprehensive Environmental Response Compensation and Liability Act of 1980 ("CERCLA") or other state or federal environmental laws. In addition, the Company has been notified by the Environmental Protection Agency and various state agencies that it may be a potentially responsible party ("PRP") for the cost of cleaning up certain other hazardous waste storage or disposal facilities pursuant to CERCLA and other federal and state environmental laws. PRP designation requires the funding of site investigations and subsequent remedial activities. Although these laws could impose joint and several liability upon each party at any site, the potential exposure is expected to be limited because at all sites other companies, generally including many large, solvent public companies, have been named as PRPs. In addition, the Company has identified certain present and former properties at which it may be responsible for cleaning up environmental contamination. The Company is actively seeking to resolve these matters. Although difficult to quantify based on the complexity of the issues, the Company has accrued the estimated cost associated with such matters based upon current available information from site investigations and consultants. The environmental and legal reserve was approximately $11 million at December 31, 1997 and $12 million at December 31, 1996. Management believes that such accruals will be adequate to cover the Company's estimated liability for its exposure in respect of such matters. FOREIGN CURRENCY AND COMMODITY CONTRACTS In connection with the T&N acquisition, the Company purchased for $28.1 million a foreign currency option with a notional amount of $2.5 billion to cap the effect of potential unfavorable fluctuations in the British pound/U.S. dollar exchange rate. The cost of the option and its change in fair value has been reflected in the results of operations in the fourth quarter of 1997. At December 31, 1997 the Company has recognized a net loss on this transaction of $10.5 million. S-43 The Company is subject to exposure to market risks from changes in foreign exchange rates and raw material price fluctuations, derivative financial instruments are utilized by the Company to reduce those risks. Except for the British pound currency option discussed above, the Company does not hold or issue derivative financial instruments for trading purposes. Other than the British pound currency option discussed above, the Company does not have foreign exchange forward or currency option contracts outstanding at December 31, 1997. In the first quarter of 1998, the Company settled the British pound currency option, resulting in a pretax loss of $17.3 million. Also in the first quarter of 1998, the Company entered into a forward contract to purchase 1.5 billion British pounds for a notional amount approximating $2.45 billion. The forward contract expires in the first quarter of 1998. OTHER MATTERS Conversion of Series D Convertible Exchangeable Preferred Stock In August 1997, the Company announced a call for the redemption of all its outstanding $3.875 Series D Convertible Exchangeable Preferred Stock. These preferred shareholders elected to convert each preferred share into 2.778 shares of Common Stock. The Company issued 4.4 million shares of Common Stock in exchange for all of the outstanding Series D convertible exchangeable preferred stock. Year 2000 Costs The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. The Company has established a team that has completed an awareness program and assessment project to address the Year 2000 issue. In addition, the Board of Directors has received status reports related to the Company's progress in addressing the Year 2000 issue. The Company has determined that it will be required to modify or replace portions of its software so that its computer systems will properly utilize dates beyond December 31, 1999. The Company has initiated remediation, and is implementing the action plan to address the Year 2000 issue. The Company presently believes that with modifications to existing software and conversions to new software, the Year 2000 issue can be mitigated. However, if such modifications and conversions are not made, or are not completed timely, the Year 2000 issue could have a material impact on the operations of the Company. The Company has initiated formal communications with a substantial majority of its significant suppliers and large customers to determine their plans to address the Year 2000 issue. While the Company expects a successful resolution of all issues, there can be no guarantee that the systems of other companies on which the Company's systems rely will be converted in a timely manner, or that a failure to convert by a supplier or customer, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company. The Company has determined it has no exposure to contingencies related to the Year 2000 issue for the products it has sold. The Company has contracts in place with external resources and has allocated internal resources to reprogram or replace, and test the software for Year 2000 modifications. The Company plans to complete the Year 2000 project within one year. The total cost of the Year 2000 project is estimated to be $17 million and is being funded through operating cash flows. Of the total project cost, approximately $11 million is attributable to the purchase of new software which will be capitalized. The remaining $6 million represents maintenance and repair of existing systems and will be expensed as incurred. The Company expects a substantial majority of the costs will be incurred in 1998, and any remaining costs incurred in 1999 are expected to be immaterial. As of December 31, 1997, the Company had incurred and expensed approximately $0.7 million related to the completed awareness program and assessment project and the implementation of their remediation plan. The costs of the project and the date which the Company plans to complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events S-44 including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those plans. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes and similar uncertainties. As a result of the Company's due diligence related to the T&N acquisition and the Fel-Pro acquisition, the Company expects costs to address the Year 2000 issue for Fel-Pro to be immaterial, and T&N costs for repair and maintenance of existing systems are expected to approximate $8 million. Divestiture of Minority Interest In February 1998, the Company announced the divestiture of its minority interest in G. Bruss GmBH & Co. KG, a German manufacturer of seals and gaskets. As part of the divestiture agreement, the Company increased their ownership to 100% in the Summerton, South Carolina gasket business. The Company also received cash and recognized a gain as a result of these transactions. The gain recognized is not expected to be significant to 1998 first quarter operating results. Customer Reorganization On February 2, 1998, APS Holding Corporation ("APS"), filed for reorganization protection under Chapter 11 of the United States Bankruptcy Code. As of the date of the Chapter 11 filing, the Company's total receivables with APS approximated $10 million. APS has received a capital line of credit from a reputable financial institution and is continuing business operations. The Company continues to do business with APS on a cash in advance basis. Although difficult to quantify based upon the uncertainty of the financial condition of APS, the Company believes that net uncollectible receivables, if any, from APS will be immaterial. In addition, APS is a customer of Fel-Pro. The Company believes that the allowance established by Fel-Pro prior to the acquisition of Fel-Pro related to receivables from APS is adequate to cover any uncollectible amounts. Effect of Accounting Pronouncements In 1997, the Financial Accounting Standards Board issued Statement No. 130, Reporting Comprehensive Income. This Statement establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Statement 130 is effective for fiscal years beginning after December 15, 1997. Beginning in 1998, the Company will provide the information relating to comprehensive income to conform to the Statement 130 requirements. Also in 1997, the Financial Accounting Standards Board issued Statement No. 131, Disclosures about Segments of an Enterprise and Related Information. The statement supersedes Financial Accounting Standards Board Statement No. 14 and establishes standards for the way public business enterprises report selected information about operating segments in annual reports and interim financial reports issued to shareholders. Statement 131 is effective for fiscal years beginning after December 15, 1997. For the year ended 1998, the Company will provide financial and descriptive information about its reportable operating segments to conform to the Statement 131 requirements. Management plans to report the requirements of Statement 131 for the following operating segments: Sealing Systems, Powertrain Systems and General Products. S-45 T&N YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996 AND YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995 On March 6, 1998, Federal-Mogul completed its cash offer to acquire all outstanding common stock of T&N for 260 pence per share. Total consideration paid was (Pounds)1.4636 billion ($2.4164 billion, converted at a blended exchange rate of 1 pound sterling to 1.6510 U.S. dollars). In connection with securing regulatory approvals for the acquisition of T&N, Federal Mogul agreed subsequently to divest certain assets, consisting principally of T&N's thinwall and dry bearings (polymer bearings) operations. See "Business-- Reorganization." These assets are a subset of the operations T&N included in its bearings product group and the discussion below of such product group does not, therefore, directly correspond to the assets to be divested (which are referred to elsewhere in this Prospectus Supplement as the "T&N Bearings Business"). The following discussion is based upon the T&N Financial Statements included elsewhere in this Prospectus Supplement, which have been prepared in conformance with U.K. GAAP. U.K. GAAP differ in certain significant respects from U.S. GAAP. The significant differences between U.S. GAAP and U.K. GAAP as they relate to T&N are summarized in Note 29 to the T&N Financial Statements. RESULTS OF OPERATIONS Turnover (Net Sales) T&N's consolidated turnover excluding associated undertakings (hereinafter referred to as net sales) decreased by 8.0% in 1997. The 1997 decrease was primarily due to the effects of adverse foreign exchange fluctuations, 1997 divestitures and the full year impact of 1996 divestitures. These decreases were partially offset by the 1997 acquisition of Metal Leve, Inc., which expanded T&N's product offerings in piston-related products, and certain volume improvements for continuing businesses. Excluding 1997 acquisitions (which added (Pounds)30 million to 1997 net sales) and the impact of divestitures, 1997 net sales decreased 4.4% as compared to 1996. The primary source of the foreign exchange fluctuation impact on T&N in 1997 was the continued appreciation of the pound sterling in relation to other European currencies (and, to a lesser extent, the U.S. dollar) through the year. This appreciation resulted in an adverse currency translation effect upon overseas earnings and erosion of margins on exports billed in foreign currency. These effects were partially offset by reduced expense for materials imported into the U.K. Excluding the effects of (Pounds)153 million in adverse foreign currency fluctuations and acquisitions, net sales from continuing operations increased by approximately 4.0%. Net sales by market were:
1997 1996 1995 --------------- --------------- --------------- (POUNDS STERLING IN MILLIONS) Light vehicle original equipment............... (Pounds) 731.2 (Pounds) 772.9 (Pounds) 756.6 Automotive aftermarket... 497.1 529.4 480.1 Industrial and heavy duty original equipment...... 570.8 653.7 854.8 --------------- --------------- --------------- (Pounds)1,799.1 (Pounds)1,956.0 (Pounds)2,091.5 =============== =============== ===============
Net sales by product group (as these were configured prior to Federal- Mogul's acquisition of T&N) were:
1997 1996 1995 --------------- --------------- --------------- (POUNDS STERLING IN MILLIONS) Bearings................. (Pounds) 329.6 (Pounds) 333.1 (Pounds) 342.5 Sealing products......... 195.1 216.0 227.0 Friction products........ 293.9 309.5 319.0 Piston products.......... 572.8 574.7 559.6 Composites and camshafts. 372.9 381.1 328.9 --------------- --------------- --------------- Continuing operations.... 1,764.3 1,814.4 1,777.0 Discontinued operations.. 34.8 141.6 314.5 --------------- --------------- --------------- (Pounds)1,799.1 (Pounds)1,956.0 (Pounds)2,091.5 =============== =============== ===============
S-46 Decreases in sealing products net sales were primarily attributable to German and French businesses. Piston products net sales, which declined by 0.3% in 1997 as compared with 1996, were affected by the acquisition of Metal Leve, Inc. (excluding that acquisition, piston products net sales from continuing operations decreased 5.2%). During 1997, 1996 and 1995, T&N divested certain non-core businesses with net sales of (Pounds)34.8 million, (Pounds)141.6 million and (Pounds)314.5 million. These divestitures included the disposition of T&N's entire construction materials and engineering products business. Net sales for businesses divested by product group were:
DISCONTINUED OPERATIONS ---------------------------------------- 1997 1996 1995 ------------ ------------- ------------- (POUNDS STERLING IN MILLIONS) Sealing products................ (Pounds)12.1 (Pounds) 49.8 (Pounds) 49.6 Friction products............... 12.5 18.6 10.9 Composites and camshafts........ 10.2 18.9 170.8 Construction materials and engineering.................... -- 54.3 83.2 ------------ ------------- ------------- (Pounds)34.8 (Pounds)141.6 (Pounds)314.5 ============ ============= =============
Cost of Sales Cost of sales as a percentage of net sales was 71.8%, 72.5% and 72.1% for 1997, 1996 and 1995, respectively. The 1997 acquisition and 1997 and 1996 divestitures had an immaterial impact on cost of sales as a percentage of net sales. Excluding the impact of 1995 divestitures, cost of sales as a percentage of net sales was 71.3% in 1995. Federal-Mogul Bid Related Costs T&N incurred (Pounds)10 million of costs in 1997 related to the acquisition bid by Federal-Mogul. These fees were primarily for professional services provided with respect to the offer to purchase the entire outstanding share capital of T&N. Other Operating Expenses Significant components of other operating expenses were:
1997 1996 1995 ------------- ------------- ------------- (POUNDS STERLING IN MILLIONS) Selling and distribution costs........................ (Pounds)148.8 (Pounds)168.6 (Pounds)173.5 Administrative expenses....... 130.7 148.7 144.0 Research & development........ 52.1 53.0 52.2 ------------- ------------- ------------- (Pounds)331.6 (Pounds)370.3 (Pounds)369.7 ============= ============= =============
Selling and distribution costs as a percentage of net sales were 8.3%, 8.6% and 8.3% for 1997, 1996 and 1995, respectively. Administrative expenses as a percentage of net sales were 7.3%, 7.6% and 6.9% for 1997, 1996 and 1995, respectively. The 1997 acquisition and 1997, 1996 and 1995 divestitures impact on selling and distribution costs as a percentage of net sales and administrative expenses as a percentage of net sales were immaterial. Research and development costs as a percentage of net sales were 2.9%, 2.7% and 2.5% for 1997, 1996 and 1995, respectively, and reflect T&N's continuing commitment to investment in innovation and technology. S-47 ASBESTOS In the U.S., T&N plc and two of its U.S. subsidiaries (the "T&N Companies") are among many defendants named in numerous court actions alleging personal injury resulting from exposure to asbestos or asbestos-containing products. T&N plc is also, to a lesser extent, subject to asbestos-disease litigation in the U.K. and to property damage litigation in the U.S. Because of the slow onset of asbestos-related diseases, management anticipates that similar claims will be made in the future. It is not known how many such claims may be made nor the expenditure which may arise therefrom. See "Risk Factors--T&N's Asbestos Liability." In 1996, T&N secured a (Pounds)500 million layer of insurance which will be triggered should the aggregate cost to resolve claims notified after June 30, 1996, where the exposure occurred prior to that date (incurred but not reported, or "IBNR," claims), exceed (Pounds)690 million. For additional information regarding asbestos-related liabilities and reserves, see the Pro Forma Financial Statements and Notes 19 and 28 to the T&N Financial Statements. Asbestos Charges Recognized in 1996 and 1997 T&N recognized a charge to establish provisions for IBNR claims for the year ended December 31, 1996 in the amount of (Pounds)323 million ((Pounds)550 million on an undiscounted basis); T&N also recognized a second charge in the amount of (Pounds)50 million related to the risk that U.S. courts would reject a class action settlement to which the T&N Companies were party (in Georgine et al v. Amchem et al). This settlement was ultimately rejected by the U.S. Supreme Court in 1997 and some increase in new IBNR claims filed has resulted. T&N also recognized a (Pounds)50 million charge in 1996 for claims notified and outstanding as of June 30, 1996. In addition, T&N recorded the (Pounds)92 million cost of the (Pounds)500 million layer of insurance in 1996, and the premium was paid in 1997. T&N recognized no additional provisions relating to asbestos in 1997. Asbestos-Related Payments in 1996 and 1997 T&N paid (Pounds)149.4 million for asbestos-related claims, including the (Pounds)92 million insurance premium, during 1997 and (Pounds)64.8 million in 1996. RELEASE OF PROVISION/(PROVISION AGAINST) FIXED ASSET INVESTMENTS: KOLBENSCHMIDT COSTS In March 1995, T&N entered into option arrangements for 1,345,452 shares of Kolbenschmidt AG ("KS"), which represented approximately 49% of the outstanding share capital of KS. In 1995, T&N recognized a charge of (Pounds)19.5 million related to the creation of provisions relating to the reduction of the value of fixed asset investments (the Kolbenschmidt options). In 1996, KS issued nine shares for each share already outstanding such that the option arrangements increased to 13,454,520 shares. In December 1996, options over 6,727,260 shares expired and T&N recognized a (Pounds)23.4 million related charge. In 1997, Commerzbank subsequently sold the KS shares and, subject to the option arrangement, T&N received part of the proceeds and recognized a gain of (Pounds)13.2 million, accordingly. In addition, T&N received an offer to purchase its remaining interest in KS, and, as a result, T&N recognized in 1997 an additional (Pounds)19.2 million gain (the sale of such remaining interest occurred in March 1998). (See Note 4 to the T&N Financial Statements.) NET INTEREST PAYABLE AND SIMILAR CHARGES - GROUP Net interest payable and similar charges - group (hereinafter referred to as interest expense or interest income) was (Pounds)28.4 million in 1997 as compared to (Pounds)26.8 million in 1996. S-48 Gross interest expense was (Pounds)39.3 million in 1997 as compared to (Pounds)32.5 million in 1996. The 1997 increase of (Pounds)6.8 million in gross interest expense is primarily attributable to higher interest rates, partially offset by lower average borrowings arising from continued improvements in working capital. In addition, 1997 gross interest expense includes (Pounds)2.5 million for the amortization of T&N's discounted asbestos provision. Gross interest income was (Pounds)10.9 million in 1997 as compared to (Pounds)5.7 million in 1996. The 1997 increase was primarily attributable to earnings on funds reserved for asbestos liabilities. Net interest expense in 1996 decreased (Pounds)9.0 million as compared to 1995. The 1996 decrease was primarily due to lower debt levels and interest rates as compared with 1995. TAX ON PROFIT/(LOSS) ON ORDINARY ACTIVITIES (INCOME TAXES) Income tax expense was (Pounds)62.8 million in 1997 resulting in an effective tax rate of 33.0% compared with the statutory U.K. corporation tax of 31.5%. The difference between the effective tax rate and U.K. corporation rate is attributable to a number of factors, none of which are material. LIQUIDITY AND CAPITAL RESOURCES Cash flows from operating activities (including asbestos) were (Pounds)111.4 million in 1997 as compared to (Pounds)215.7 million in 1996. The 1997 decrease is primarily attributable to the strong sales performance and the increase in orders for 1998 shipment in the fourth quarter of 1997 which limited T&N's ability to reduce debtors (accounts receivable) and stocks (inventory) as compared to the 1996 reductions. Capital expenditures in 1997 were (Pounds)103.9 million compared to (Pounds)114.3 million in 1996. The 1997 decrease is primarily attributable to the disposal of certain businesses and foreign currency fluctuations. Proceeds from business disposals were (Pounds)75.7 million in 1997 compared to (Pounds)74.8 million in 1996. T&N paid (Pounds)32.6 million in 1997 for the acquisition of businesses. The most significant acquisition in 1997 was that of Metal Leve, Inc., a manufacturer of articulated pistons based in the United States. LEGAL MATTERS In addition to the asbestos litigation, T&N is engaged in various actions arising in the ordinary course of its business. Management is of the opinion that the outcome of these matters will not have a material adverse effect on T&N's financial condition. FOREIGN CURRENCY AND COMMODITY CONTRACTS T&N was subject to exposure to market risks from changes in foreign exchange rates and raw material price fluctuations. Derivative financial instruments were utilized by T&N to reduce those risks. T&N does not hold or issue derivative financial instruments for trading purposes. OTHER MATTERS - YEAR 2000 COSTS T&N has established a Year 2000 steering group to coordinate and address the Year 2000 issue. Awareness and assessment stages have been completed. T&N is currently implementing its action plan with a target completion date of September 1998. Total costs for repair and maintenance of existing systems are expected to approximate (Pounds)5 million ($8 million). S-49 FEL-PRO YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996 AND YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995 On January 9, 1998, Fel-Pro's owners signed an agreement to sell the Fel-Pro group, consisting of Fel-Pro Inc., certain operating businesses and holding companies affiliated with Fel-Pro Inc. and certain real estate owned by Fel- Pro Inc. or its affiliates to Federal-Mogul. The transaction closed on February 24, 1998, at which time Federal-Mogul acquired all equity interests in the specified Fel-Pro entities for approximately $717 million, which included 1,030,325.6 shares of Series E Stock (as hereinafter defined) with an imputed value of $225 million and approximately $492 million in cash. Federal- Mogul is in the process of reselling the chemical manufacturing operations acquired with Fel-Pro (representing approximately $32.8 million of Fel-Pro's 1997 net sales and $2.6 million of Fel-Pro's 1997 net income). RESULTS OF OPERATIONS Net Sales Fel-Pro's consolidated net sales increased 9.2% in 1997 as compared to 1996, primarily due to volume increases from new and existing customers in the aftermarket business. Consolidated net sales increased 15.5% in 1996 as compared to 1995 primarily due to volume increases from new and existing customers in the aftermarket business, as well as the acquisition of TCI, a high performance transmission and torque converter manufacturer in December of 1995 and the acquisition of Korody-Colyer ("KC") in October of 1995 for $12.3 million and $7.1 million, respectively. Excluding the effect of the acquisitions of TCI and KC, Fel-Pro's net sales increased 6.4% in 1995. Original equipment and aftermarket sales of Fel-Pro were:
1997 1996 1995 ------ ------ ------ (DOLLARS IN MILLIONS) Original Equipment: Americas................................................. $ 94.6 $ 88.4 $ 85.8 Aftermarket: United States and Canada................................. 299.8 282.9 246.4 International............................................ 94.9 76.6 55.5 ------ ------ ------ Total sales............................................ $489.3 $447.9 $387.7 ====== ====== ======
Original equipment sales increased 7.0% in 1997 as compared to 1996 due to volume increases of gaskets for the heavy duty market partially offset by volume decreases in the automotive market related to the end of certain products' life cycles. Fel-Pro's original equipment sales increased 3.0% in 1996 as compared to 1995. Aftermarket sales in the United States and Canada increased 6.0% in 1997 as compared to 1996 primarily due to new customer business. Sales increased 14.8% in 1996 as compared to 1995 due to the following: (i) volume increases from new and existing customers; (ii) the December 1995 acquisition of TCI; and (iii) the full year impact of the October 1995 acquisition of KC. Excluding the effect of the 1995 acquisitions, Fel-Pro's aftermarket sales in the United States and Canada increased 7.8% in 1996. International aftermarket sales increased 23.9% in 1997 as compared to 1996 primarily due to volume increases in heavy duty diesel engine parts. International aftermarket sales increased 38.0% in 1996 as compared to 1995 primarily due to volume increases in heavy duty engine parts which included the full year impact of the October 1995 KC acquisition. Excluding the effect of the acquisition, international aftermarket sales increased 22.7% in 1996. Cost of Goods Sold Cost of goods sold as a percent of net sales was flat in 1997 at 54.8% as compared to 1996. Cost of goods sold as a percent of net sales decreased to 54.8% in 1996 compared to 56.0% in 1995. The decrease is primarily attributable to cost reductions and productivity improvement efforts. S-50 Operating Expenses Operating expenses as a percentage of net sales decreased to 35.5% in 1997 compared to 36.4% in 1996. The 1997 decrease is primarily attributable to Fel- Pro's increases in sales volume exceeding the corresponding increase in variable operating expenses. Operating expenses as a percentage of net sales were relatively flat in 1996 as compared to 1995. Income Taxes Fel-Pro's $15.7 million deferred tax assets at December 29, 1996 were written off in 1997 due to the conversion from C corporation status to Subchapter S corporation status of its principal operating company effective 1997. The difference between Fel-Pro's effective income tax rate and the statutory tax rate is also due to the conversion of Fel-Pro's principal operating company from C corporation status to Subchapter S corporation status in 1997. In 1997, upon conversion of the principal operating company (Felt Products Mfg. Co. and subsidiaries) to Subchapter S corporation status and in addition to writing off the deferred tax assets, Fel-Pro recognized $7.4 million of expense associated with LIFO recapture taxes. LIQUIDITY AND CAPITAL RESOURCES Cash flow from operations of $51.7 million in 1997 increased significantly during 1997 primarily due to the write-off of $16.8 million in deferred taxes and an $11.3 million improvement in accounts receivable over the prior year. Cash flow used by investing activities of $18.5 million in 1997 include $3.5 million for the September purchase of certain operating assets of Biwax Corporation. Capital expenditures were $18.3 million in 1997, primarily for enhanced manufacturing capabilities and process improvements. Partially offsetting these outflows were $3.9 million related to proceeds from available for sale marketable securities. Cash flows used by 1997 financing activities were $33.2 million, a decrease of $32.7 million from 1996. The 1997 decrease was primarily due to lower amounts provided to fund Fel-Pro's affiliates. LEGAL MATTERS Fel-Pro is engaged in various legal actions arising in the ordinary course of its business. Management, after taking into consideration legal counsel's evaluation of such actions, is of the opinion that it has adequate legal defenses or insurance coverage and that the outcome of these matters will not have a material adverse effect on Fel-Pro's financial position. OTHER MATTERS Year 2000 Costs Fel-Pro is presently implementing an enterprise resource planning system using Oracle software. This system is expected to be Year 2000 compliant. This project was undertaken in late 1996 recognizing that information will be a key driver for growth in the 21st century and that business needs are changing. The system solution provides the ability to handle multiple product lines, currencies, businesses, and locations. The existing mainframe systems lack functionality and flexibility in addition to being incompatible with the Year 2000. The total project is expected to be completed by February 1999. The expected cost related to Fel-Pro's Year 2000 project is immaterial. Customer Bankruptcy Reorganization On February 2, 1998, APS filed for reorganization protection under Chapter 11 of the United States Bankruptcy Code. Fel-Pro believes that the allowance established related to receivables from APS is adequate to cover any uncollectible amounts. S-51 DESCRIPTION OF CERTAIN INDEBTEDNESS In connection with the acquisitions of T&N and Fel-Pro, Federal-Mogul entered into a $2.75 billion floating rate senior credit agreement (the "Senior Credit Agreement") (consisting of a $2.35 billion term loan facility, which was reduced to $2.275 billion effective as of March 11, 1998 and a $400 million revolving loan facility) and a $500 million floating rate senior subordinated credit agreement (the "Senior Subordinated Credit Agreement" and, together with the Senior Credit Agreement, the "Credit Agreements"), each with Chase as agent and as lender. The entire amount of the senior term loan facility, as well as the entire amount of senior subordinated credit facility have been drawn down. It is anticipated that the net proceeds to Federal-Mogul from the Offerings will be used to prepay the entire outstanding principal amount of the Senior Subordinated Loans, with the balance of the net proceeds used to repay a portion of the Interim Loans. The Credit Agreements have been syndicated to other lenders. These credit facilities have replaced a revolving credit facility that provided for loans in an amount of up to $350 million outstanding at any time and refinanced the outstanding balance under such facility ($350 million, which was used to finance the acquisition of Fel-Pro) and other indebtedness incurred in the acquisition of Fel-Pro in the amount of $150 million. See "T&N and Fel-Pro Acquisitions--Financing of the Acquisitions." The Company intends to put into place a permanent capital structure with an appropriate combination of debt and equity which will partially replace the Senior Credit Agreement and Senior Subordinated Credit Agreement debt. The Senior Credit Facility Under the Senior Credit Agreement, Federal-Mogul (i) has borrowed $2.275 billion in term loans (the "Term Loans") to (a) finance the acquisition of T&N, (b) refinance existing indebtedness of T&N, (c) pay fees and expenses incurred in connection with the acquisition of T&N and the Credit Agreements and (d) refinance indebtedness incurred in the acquisition of Fel-Pro and (ii) may borrow up to $400 million outstanding at any time in revolving credit loans (the "Revolving Credit Loans") to be used (a) to pay fees and expenses incurred under the Senior Credit Agreement and (b) for working capital and other general corporate purposes. The Term Loans are divided into three tranches: (i) interim loans (the "Interim Loans") in the aggregate amount of $925 million maturing September 12, 1999, (ii) Tranche A loans (the "Tranche A Loans") in the aggregate amount of $600 million maturing on December 31, 2003, which are to be repaid in 20 quarterly installments commencing March 31, 1999, the amount of each quarterly installment being $19 million in 1999 and 2000, $30 million in 2001 and $41 million in 2002 and 2003; and (iii) Tranche B loans (the "Tranche B Loans") in the aggregate amount of $750 million maturing on December 31, 2005, which are to be repaid in 28 quarterly installments commencing March 31, 1999, the amount of each quarterly installment being $1.25 million during the period from 1999 to 2003, inclusive, $75 million in 2004 and $106.25 million in 2005. Revolving Credit Loans are to be available for a period of six years commencing on March 12, 1998 (the "Closing Date"). Up to $120 million of Revolving Credit Loans may be borrowed in currencies other than U.S. dollars. Indebtedness under the Senior Credit Agreement bears interest at a floating rate based upon, at Federal-Mogul's option, either (i) the higher of the prime rate of Chase and 0.5% in excess of the overnight federal funds rate ("Base Rate"), plus (in each case) a margin of 0.5% for Revolving Credit Loans, 1.0% for the Interim Loans and Tranche A Loans and 1.25% for Tranche B Loans, or (ii) the average of the offering rates of banks in the London interbank eurodollar market for U.S. dollar deposits ("Eurodollar Rate") plus a margin of 1.5% for Revolving Credit Loans, 2.0% for the Interim Loans and Tranche A Loans and 2.25% for Tranche B Loans. After repayment of the Interim Loans the applicable margins will depend upon Federal-Mogul's consolidated leverage ratio: (i) in the case of Base Rate loans the applicable margin will vary between 0% and 0.5% for Revolving Credit Loans, 0.0% and 1.0% for Tranche A Loans and 0.5% and 1.25% for Tranche B Loans, and (ii) in the case of Eurodollar Rate loans the applicable margin will vary between 0.75% and 1.5% for Revolving Credit Loans, 1.0% and 2% for Tranche A Loans and 1.5% and 2.25% for Tranche B Loans. Federal-Mogul's obligations under the Senior Credit Agreement are secured by a lien on all inventory and accounts receivable of Federal-Mogul and its U.S. subsidiaries, other than certain accounts receivable subject to S-52 an existing securitization program. Federal-Mogul, its U.S. subsidiaries and certain of its foreign subsidiaries have also pledged 100% (or, in the case of the stock of certain foreign subsidiaries, 65%) of the capital stock of their subsidiaries and certain intercompany loans to secure Term Loans and Revolving Credit Loans. Part of such collateral also secures certain existing public debt of Federal-Mogul, and all such collateral will be released when Federal- Mogul has obtained investment grade ratings for its debt or met a certain leverage ratio. In addition, Federal-Mogul, its U.S. subsidiaries and certain of its foreign subsidiaries have guaranteed the Term Loans and Revolving Credit Loans. The Senior Subordinated Credit Facility Under the Senior Subordinated Credit Agreement, Federal-Mogul has borrowed $500 million (the "Senior Subordinated Loans") (i) to finance the acquisition of T&N, (ii) to pay fees and expenses in connection with the acquisition of T&N and the financing thereof and (iii) to refinance indebtedness incurred in the acquisition of Fel-Pro. The Senior Subordinated Loans were disbursed on the Closing Date and are subordinated to the loans under the Senior Credit Agreement and other senior indebtedness of Federal-Mogul. The Senior Subordinated Loans will mature on March 12, 1999, the first anniversary of the Closing Date (the "Initial Maturity Date"). If such loans have not been repaid on the Initial Maturity Date, they will be converted into term loans maturing on the tenth anniversary of the Closing Date. After the Initial Maturity Date, the lenders under the Senior Subordinated Credit Agreement, at their option, may elect to receive Exchange Notes (as defined in the Senior Subordinated Credit Agreement) equal to 100% of the aggregate principal amount of the loans for which they are exchanged. The Exchange Notes will be issued pursuant to an indenture and will grant the holders of the exchange notes certain limited additional rights to be set forth in the indenture. Indebtedness under the Senior Subordinated Credit Agreement bears interest at a floating rate which is the offering rate of Chase in the London interbank eurodollar market for U.S. dollar deposits plus an initial margin of 4.5%. This margin is to increase to 5.5% six months after the Closing Date and to 6% nine months after the Closing Date. If the loans have not been repaid on or prior to the Initial Maturity Date, the applicable interest rate thereafter is to be the highest of (i) 0.5% in excess of the interest rate borne by the loans immediately prior to the Initial Maturity Date, (ii) 6.5% in excess of the treasury rate (the rate borne by direct obligations of the United States maturing on the tenth anniversary of the Closing Date) or (iii) 3% in excess of the CSI high yield index rate (as published in the Chase Securities Incorporated High Yield Research Weekly Update Report), plus (in each case) an additional margin of 0% for the first three months commencing on the Initial Maturity Date and increasing by 5% at the beginning of each subsequent three month period. In no event may the interest rate exceed 16% per annum and to the extent the interest rate exceeds 14% per annum, Federal-Mogul may, at its option, pay such excess interest by adding such excess interest to the principal amount of loans outstanding. The Senior Subordinated Loans have the benefit of guarantees, on a subordinated basis, by the guarantors of the loans under the Senior Credit Agreement. Certain Covenants The Credit Agreements contain certain covenants that restrict or limit Federal-Mogul from taking various actions, including, subject to specified exceptions, (i) the granting of additional liens, (ii) the incurrence of additional indebtedness, (iii) the granting of additional guarantees, (iv) mergers, acquisitions and other fundamental corporate changes, (v) the sale of assets, (vi) the payment of dividends and other restricted payments, (vii) the making of investments, (viii) optional prepayments of certain debt and the modification of debt instruments, (ix) entering into sale and leaseback transactions, (x) the imposition of restrictions on any subsidiary's ability to make payments, loans or advances to Federal-Mogul, (xi) entering into a new debt agreement with more restrictive covenants and (xii) transactions with affiliates. The Senior Credit Agreement also contains certain financial covenants that require Federal-Mogul to meet and maintain certain financial tests and minimum ratios, including a minimum cash flow coverage ratio, a minimum consolidated leverage ratio and a minimum consolidated net worth test. After payment of the Interim Loans Federal-Mogul may elect to have a different set of covenants apply to the Senior Credit Agreement, which will require lower leverage but otherwise will be less restrictive. The Subordinated Credit Agreement restricts in certain circumstances and, prior to S-53 payment of the Interim Loans and the election by Federal-Mogul of alternative covenants, the Senior Credit Agreement prohibits, payment of dividends on Federal-Mogul Common Stock in excess of the current rate of $0.12 per quarter. Repayments and Refinancing The Credit Agreements require mandatory repayments with some or all of the net proceeds received upon the occurrence of certain events, including issuances by Federal-Mogul of capital stock, the incurrence by Federal-Mogul of certain debt and certain sales of assets. The Senior Credit Agreement also requires mandatory prepayment from "excess cash flow." The "asset sale" and "excess cash flow" (each as defined in the Credit Agreements) prepayment requirements in the Senior Credit Agreement cease to be applicable when certain leverage tests are met. Pursuant to these requirements it is anticipated that the net proceeds of the Offerings will be used to prepay the entire outstanding principal amount of the Senior Subordinated Loans ($500 million), with the balance of the net proceeds used to repay a portion of the Interim Loans (the outstanding principal balance of which is $925 million), though if the proceeds to Federal-Mogul of the Offerings are less than $500 million, the proceeds will be applied solely to prepay the Interim Loans. Thereafter (subject to certain exceptions) the net proceeds of any equity offering or incurrence of indebtedness by Federal-Mogul shall be used to prepay Term Loans, provided that (i) if the Senior Subordinated Loans are not prepaid by the Offerings, proceeds of any subsequent equity offering completed by July 12, 1998, which, together with the proceeds of the Offerings and the proceeds of other equity offerings, if any, completed by July 12, 1998 exceed $500 million, may be used to prepay the Senior Subordinated Loans, with any balance being applied to prepay the Term Loans, (ii) proceeds of certain subordinated debt offerings may be used to prepay the Senior Subordinated Loans, if not prepaid by the Offerings, and (iii) after payment of the Interim Loans and the Senior Subordinated Loans, the proceeds of further issuances of equity or subordinated debt need not be applied to prepay the Term Loans. Federal-Mogul has the option to prepay without premium at any time the Term Loans and the Revolving Credit Loans and (subject to certain requirements involving prior repayment of the Term Loans and Revolving Credit Loans) the Senior Subordinated Loans. In the event that the Senior Subordinated Loans are exchanged for Exchange Notes which are then sold, it is contemplated that the holders of such Exchange Notes will have the option to fix the interest rates thereon at the rate in effect at the time of such sale and, if such option is exercised, that the Exchange Notes will be non-callable for a period of time and will be callable thereafter at a premium. Federal-Mogul anticipates prepaying a portion of the balance of the Interim Loans remaining after the Offerings with asset sales proceeds and refinancing the Senior Subordinated Loans, if outstanding after the Offerings, and the balance of the Interim Loans through further equity or debt offerings. Events of Default The Credit Agreements contain customary events of default, including nonpayment of principal, interest or fees, violation of covenants, inaccuracy of representations or warranties in any material respect, cross acceleration and cross default to certain other indebtedness, bankruptcy, noncompliance with certain provisions of ERISA, material judgments, failure of the collateral documents or subordination provisions, and change of control. The occurrence of any of such events could result in acceleration of Federal- Mogul's obligations under the Credit Agreements and foreclosure on collateral securing the Term Loans and Revolving Credit Loans. Fees Federal-Mogul has paid a facility fee on the used and unused portion of each lender's commitment to make Revolving Credit Loans at the rate of 0.5% per annum prior to repayment of the Interim Loans and at the rate of 0.25% to 0.5% per annum thereafter, depending on Federal-Mogul's leverage ratio. In addition, Federal-Mogul has paid customary fees to Chase on the Closing Date and reimbursed customary expenses in connection with the Senior Credit Agreement and the Senior Subordinated Credit Agreement. S-54 BUSINESS For purposes of this section of the Prospectus Supplement ("Business"), references to "Federal-Mogul" or the "Company" include operations acquired in the acquisitions of T&N and Fel-Pro and statistics have been prepared on a pro forma basis, giving effect to the acquisitions of T&N and Fel-Pro and the disposition of the T&N Bearings Business as if they had occurred on January 1, 1997, unless otherwise noted. See "Unaudited Pro Forma Financial Data." OVERVIEW Federal-Mogul is a leading global manufacturer and distributor of a broad range of vehicular components for automobiles and light trucks, heavy duty trucks, farm and construction vehicles and industrial products. Such components include powertrain systems components (primarily bearings, rings and pistons), sealing systems components (dynamic seals and gaskets) and general products (primarily camshafts, friction products, sintered products and systems protection products). Federal-Mogul markets its products to many of the world's major OE manufacturers. Federal-Mogul also manufactures and supplies its products and related parts to the aftermarket relating to each of these categories of equipment. Founded in 1899, Federal-Mogul traditionally focused on the manufacture and distribution of engine bearings and sealing systems. From 1990 through 1996, Federal-Mogul pursued a strategy of opening retail auto stores in various domestic and international locations. These geographically-dispersed stores proved burdensome to manage and resulted in substantial operating losses. In the fourth quarter of 1996, Federal-Mogul underwent a change of management, following which the Company initiated a significant restructuring program designed to refocus the Company on its core competency of manufacturing. As part of such restructuring, Federal-Mogul took the following actions: (i) closed international aftermarket distribution centers in Malaysia and Singapore; (ii) divested 72 international retail aftermarket operations and sold or restructured 25 wholesale aftermarket operations; (iii) closed its Leiters Ford, Indiana manufacturing facility and consolidated its lighting products operations in Juarez, Mexico; (iv) consolidated certain of its North American warehouse facilities; (v) consolidated its customer support functions previously housed in Phoenix, Arizona into the Company's Southfield headquarters; (vi) consolidated its European aftermarket management functions in Geneva, Switzerland into the Wiesbaden, Germany manufacturing headquarters; and (vii) streamlined certain of its administrative and operational staff functions worldwide. In addition, by the end of the first quarter of 1998, the Company expects to have successfully exited all of its retail businesses, except for Puerto Rico where the Company continues to seek a buyer. Federal- Mogul also began to pursue a growth strategy of acquiring complementary manufacturing companies that enhance the Company's product base, expand its global manufacturing operations and provide opportunities to capitalize on the Company's aftermarket distribution network and technological resources. In connection with its growth strategy, on March 6, 1998 Federal-Mogul acquired T&N, a U.K. based supplier of engine and transmission products, for total consideration of approximately (Pounds)1.46 billion ($2.42 billion (converted at a blended exchange rate of 1 pound sterling to 1.6510 U.S. dollars). T&N manufactures and supplies high technology engineered automotive components and industrial materials including pistons, friction products, bearings, systems protection, camshafts and sealing products. On February 24, 1998, Federal-Mogul acquired Fel-Pro, a privately-owned automotive parts manufacturer, for total consideration of approximately $717 million. Fel-Pro is a premier gasket manufacturer for the North American aftermarket and OE heavy duty market. See "T&N and Fel-Pro Acquisitions." Federal-Mogul currently operates facilities at over 240 locations in 24 countries. On a pro forma basis (giving effect to the acquisitions of T&N and Fel-Pro and the disposition of the T&N Bearings Business as if they had occurred on January 1, 1997), Federal-Mogul's total sales for 1997 were $4.8 billion. S-55 The following charts set forth Federal-Mogul's net sales by customer group, geographic region and manufacturing division as a percentage of total net sales for the year ended December 31, 1997, on a pro forma basis. Charts setting forth net sales by customer group, geographic region and manufacturing division for the year ended December 31, 1997 Among Federal-Mogul's largest customers are Caterpillar, Chrysler, Cummins, Ford, General Motors, Mercedes-Benz, NAPA, Peugeot and Volkswagen/Audi (in alphabetical order). BUSINESS STRATEGY The Company believes its recent restructuring program, which refocused the Company on its core competency of manufacturing, and the acquisitions of T&N and Fel-Pro, which expanded the Company's product base and geographic reach, significantly enhanced its position within the automobile, truck and other vehicular components markets. The Company believes that opportunities exist to continue its growth and further enhance its market presence through the following initiatives: Systems Approach The breadth of the Company's manufacturing capabilities and product offerings enable it to be one of a small number of manufacturers with the ability to seal entire engine, transmission and axle systems and to be a single source supplier of engine and sealing components. In addition, Federal- Mogul is committed to becoming a provider of a complete engine and transmission modules for its OE customers. The Company believes that OE manufacturers of automobiles, trucks and other vehicles are increasingly seeking to reduce the number of suppliers from which they source parts and to develop relationships with suppliers that can offer integrated systems and modules in order to lower production costs, increase quality, provide better technology and shorten product development cycles. The T&N and Fel-Pro acquisitions, which expanded the Company's gasket, cast aluminum piston, large bearing and sealing product lines and added product lines for articulated pistons, cylinder liners and piston rings, are major steps toward Federal- Mogul's strategic goal of developing global engine and sealing systems for its OE customers. Continue Focus on New Product Innovation The Company's expertise in engineering and research and development has made Federal-Mogul a leader in virtually all of the products segments in which it competes. The Company utilizes the latest technologies, processes and materials to solve problems for customers and to bring new, innovative products to market. The Company has special competencies in alloy development, customized materials formulations, surface technology, advanced modeling and testing and systems engineering. These capabilities allow the Company to reduce production costs and to develop products that are more durable and exhibit better interaction with surrounding components. These innovative products better serve OE customers and aid brand development, resulting in a higher margin product mix. S-56 Extend Global Manufacturing Reach The Company is committed to extending its manufacturing capabilities worldwide in response to the global expansion of its OE manufacturing customers. The acquisition of T&N and Fel-Pro have substantially increased the Company's manufacturing presence, particularly in North America and Europe. Management believes expansion of manufacturing operations to follow the expansion of OE manufacturers into Latin America, Eastern Europe and Asia provides significant growth opportunities for the Company in the future. Pursue Strategic Acquisitions The vehicular engine and sealing component industry is large and highly fragmented. The Company believes that as OE manufacturers continue to outsource and reduce the number of suppliers, opportunities will exist for further consolidation within industry. The Company believes that, through its established presence in these markets and its strong relationships with OE manufacturers worldwide, the Company is in a favorable position to capitalize on future industry consolidation. The Company's management has substantial experience in completing and integrating acquisitions within the automobile parts industry and believes that this experience will help it select and pursue acquisition opportunities that can enhance the Company's product base, expand its global manufacturing operations and further capitalize on the Company's aftermarket distribution network and technological resources. Expand Aftermarket Presence Approximately 48% of the Company's 1997 sales, on a pro forma basis, were generated from the aftermarket. The Company believes that opportunities exist to further leverage its broad product offerings, reputation for new product innovation and presence within the OE market to increase its penetration of the worldwide aftermarket. In addition, the Company believes that its ability to sell products developed for the OE market to aftermarket customers reduces the impact of adverse changes in demand for new vehicles. EVA Focus In 1997, the Company adopted Economic Value Added (EVA(R)) as its primary financial measurement and incentive compensation metric. EVA is equal to net operating profits after economic taxes and a charge for capital invested in the Company, which is equal to the product of the total capital invested in the Company and the weighted average cost of capital for the Company's target blend of debt and equity. The Company's management has placed significant emphasis on improving the Company's financial performance and achieving various operating efficiencies through technical development, manufacturing, marketing and administrative rationalization in connection with this effort. The Company's EVA improved significantly in 1997 due primarily to improved operating margins (4.9% in 1996 and 7.7% in 1997) combined with $166 million of cash flow from continuing operations (net of expenditures for property, plant and equipment) in 1997. EVA is also being applied to the integration of T&N and Fel-Pro to optimize synergies and cost savings. As the Company continues to expand both its product base and its geographic scope, management will evaluate investments and acquisitions based on both EVA and strategic importance. In addition, the Company currently determines compensation for certain top managers using an EVA based system and expects to increase the number of managers participating in its EVA based compensation system to over 200 in 1999. REORGANIZATION Following the acquisitions of T&N and Fel-Pro, Federal-Mogul's integrated operations are being reorganized to realize synergies and effectively coordinate operations. Operations will be conducted through three manufacturing operating units corresponding to major product areas: Powertrain Systems, Sealing Systems and General Products. The major product categories in Powertrain Systems include engine bearings and piston products. Sealing Systems includes dynamic seals and gaskets. General Products include camshafts, friction products, sintered products, systems protection products and a number of smaller product lines. The Worldwide Aftermarket organization is responsible for Federal-Mogul's global aftermarket sales, marketing and distribution. S-57 The components of Federal-Mogul's plan for integrating operations acquired with T&N and Fel-Pro include: closure of four manufacturing facilities worldwide; relocation of highly manual manufacturing product lines to lower cost regions or more suitable locations; consolidation of overlapping manufacturing, technical and sales facilities and joint ventures; closure of two aftermarket central warehouses and five in-country warehouses; consolidation of aftermarket marketing and customer support functions; and streamlining of administrative, sales, marketing and product engineering staffs worldwide. An anticipated result of the integration plan and the restructuring is a reduction of approximately 4,200 employees. In connection with securing regulatory approvals for the acquisition of T&N, Federal-Mogul executed an Agreement Containing Consent Order with the FTC on February 27, 1998. Pursuant to this agreement Federal-Mogul must divest the T&N Bearings Business, consisting principally of T&N's thinwall and dry bearings (polymer bearings) operations, within six months after the FTC declares the consent order final and must provide for independent management of those assets pending such divestiture. The agreement stipulates that the T&N Bearings Business is to be maintained as a viable, independent competitor of Federal-Mogul and that Federal-Mogul shall not attempt to direct the activities of, or exercise control over, the T&N Bearings Business or have contact with the T&N Bearings Business outside of normal business activities. The T&N Bearings Business accounted for approximately $393.1 million of T&N's 1997 revenues and employed approximately 4,000 people. Certain pro forma information related to the disposition of the T&N Bearings Business is set forth under the caption "Unaudited Pro Forma Financial Data." In addition, T&N's North American aftermarket business is being held separately (on an interim basis) as an independent business pursuant to the Agreement Containing Consent Order. MANUFACTURING DIVISIONS Federal-Mogul has three manufacturing divisions as follows:
% OF MANUFACTURING 1997 DIVISION PRODUCT SALES BRAND NAMES APPLICATION Powertrain Engine Bearings, Bushings, Washers Federal-Mogul(R), Glyco(R), automotive, light truck, Systems and Large Bearings 40.0% AE Goetze(R) and Sterling(R) heavy duty, industrial, ($1.9 billion of Pistons and Piston Pins 33.0% marine, agricultural, consolidated Rings and Liners 27.0% power generation and sales ------ small air-cooled engine in 1997) 100.0% Sealing Systems Dynamic Seals 30.0% National(R), Mather(R), STS(R), automotive, light truck, ($1.1 billion of Gaskets 70.0% Redi-Seal(R), Redi-Sleeve(R), heavy duty truck, consolidated ------ Unipiston(R), Engine Seal(R), Fel- agricultural, off-highway, sales in 1997) Pro(R), Payen(R) and McCord(R) marine, railroad, high performance and industrial 100.0% General Products Camshafts 13.0% Weyburn-Bartel(R), Weyburn- vehicular and industrial ($1.2 billion of Friction Products 42.0% Lydmet(R), Brico(R), Sintertech(R), consolidated Sintered Products 17.0% Bentley-Harris(R), Silverton(R), sales in Systems Protection Products 9.0% FHE(R), Connoisseur Auto 1997)(1) Other General Products 19.0% Air Conditioning(R), Carter(R) ------ and Signal-Stat(R) 100.0%
- ------- (1) Excluding $600 million of sourced aftermarket product. POWERTRAIN SYSTEMS Federal-Mogul's Powertrain Systems products are used in automotive, light truck, heavy duty, industrial, marine, agricultural, power generation and small air-cooled engine applications. The Powertrain Systems (not including the T&N Bearings Business to be divested) accounted for $1.9 billion of Federal-Mogul's 1997 pro forma consolidated sales, of which 41% were in North America, 52% were in Europe and 7% were in the rest of the world. In 1997, S-58 Powertrain Systems unit's five largest customers by sales volume were Caterpillar, Cummins, Ford, General Motors and Volkswagen/Audi (in alphabetical order). Approximately 68% of the sales in 1997 for Powertrain Systems were to OE customers while 32% were to aftermarket customers. Federal-Mogul's Powertrain Systems operations combine large bearings and piston products operations acquired in the T&N acquisition with pre-existing powertrain assets of Federal-Mogul, primarily bearings operations. The addition of T&N greatly expanded Federal-Mogul's presence in cast aluminum pistons and large bearings as well as adding four additional product lines, articulated pistons, piston rings, cylinder liners and piston pins. The Company's Powertrain Systems maintains 57 manufacturing locations in 16 countries. (T&N's other Powertrain Systems operations--thinwall bearings and dry bearings--are to be divested for regulatory reasons and are held separately, in the interim, see "--Reorganization.") Engine Bearings, Bushings, Washers and Large Bearings. Engine bearings, bushings, washers and large bearings accounted for approximately 40% of the sales for Powertrain Systems. Federal-Mogul manufactures thin wall engine bearings, bushings and washers for original equipment and aftermarket sales. These products include bimetallic and trimetallic journal bearings (main, connecting rod, thrust and tilting pad), bimetallic and trimetallic bushings and washers, valve plates, labyrinth seals, dry bearings and sputter bearings. Federal-Mogul's large bearings products--heavy wall bearings, rotating plant bearings and structural products--are sold only to OE customers. Engine bearings, bushings, washers and large bearings are sold under the brand names Federal-Mogul(R) and Glyco(R). Pistons and Piston Pins. Pistons and piston pins accounted for approximately 33% of the sales for Powertrain Systems. Federal-Mogul designs and manufactures cast aluminum pistons for all gasoline and diesel engine applications, articulated aluminum body/steel crown pistons for heavy duty diesel applications, piston rings for all classes of internal combustion engines, cylinder liners in cast iron for new generation aluminum block engines and piston pins from steel. The addition of T&N has significantly expanded the technology, scope and range of pistons offered by Federal-Mogul, most notably in the OE market. The T&N acquisition has also added piston rings and a wide range of high strength steel piston pins (also known as wrist pins or gudgeon pins) to the Federal-Mogul product line. Pistons and piston rings are sold under the brand names AE Goetze(R) and Sterling(R). Rings and Liners. Rings and liners accounted for approximately 27% of the sales for Powertrain Systems. Federal-Mogul manufactures a wide range of cast iron or steel rings, plasma, chrome and CKS coatings and wet, dry and cast liners. Federal-Mogul now designs and manufactures a wide range of cast iron and steel piston rings. With the addition of T&N and Fel-Pro, Federal-Mogul added cylinder liners to its product line. Rings and liners are marketed under the brand name AE Goetze(R). SEALING SYSTEMS Federal-Mogul's Sealing Systems products are used in automotive, light truck, heavy duty diesel, agricultural, off-highway, marine, railroad, high performance and industrial applications. Sealing Systems accounted for $1.1 billion of Federal-Mogul's 1997 consolidated sales, of which 66% were in North America, 23% were in Europe and 11% were in the rest of the world. In 1997, this division's five largest customers by sales volume were Chrysler, Cummins, Fiat, Ford and General Motors (in alphabetical order). Approximately 47% of the sales in 1997 for Sealing Systems division were to OE customers while 53% were to aftermarket customers. Federal-Mogul's Sealing Systems operations combine the gaskets operations acquired in the T&N and Fel-Pro acquisitions with the pre-existing Federal- Mogul dynamic seals business. The acquisitions of T&N and Fel-Pro have made Federal-Mogul one of a select number of manufacturers with the ability to seal entire engines, transmission and axle systems. The Company's Sealing Systems maintains 23 manufacturing locations in 12 countries. S-59 Dynamic Seals. Dynamic seals accounted for approximately 30% of the sales for Sealing Systems division. Federal-Mogul manufactures a line of dynamic seals consisting of oil seals (for engine, transmissions and axles), crankshaft seal carrier assemblies, valve stem seals, air conditioning compressor seals, bonded pistons for transmissions, 24-hour made-to-order oil seals, wear sleeves for shaft sealing surface repair and truck hub seals. These products are marketed under the brand names National(R), Mather(R), STS(R), Redi-Seal(R), Redi-Sleeve(R) and Unipiston(R). Gaskets. Gaskets accounted for approximately 70% of the sales for Sealing Systems. Federal-Mogul utilizes a wide range of material technologies to manufacture a full range of gasket types, including cylinder head gaskets in multi-layer steel, graphite, edge molded metal plate and other composites, valve and rocker cover gaskets, intake and exhaust manifold gaskets and miscellaneous gaskets in steel, composite, elastomeric and spiral wound. Federal-Mogul also offers a complete line of repair kits for professional installers under the brand name of Fel-Pro(R). Federal-Mogul established a strong presence in the heavy duty OE market for gaskets (including, primarily, gaskets for light and heavy duty diesel engines) through its acquisition of Fel-Pro. While Fel-Pro's market share of automotive OE gaskets was more limited, T&N's Sealing Products division has a stronger presence in the automotive OE market, adding balance to Federal-Mogul's overall OE gasket activities. GENERAL PRODUCTS Federal-Mogul's General Products includes four primary product lines, which were primarily acquired with T&N: camshafts, friction products, sintered products and systems protection products. In addition, General Products includes a number of smaller product lines, some of which (fuel systems components and lighting products) pre-date the acquisition of T&N and others of which (heat transfer products and textiles) were acquired with T&N. Products Federal-Mogul sources from other manufacturers, which are not related to Powertrain Systems and Sealing Systems, are included in General Products and distributed by Worldwide Aftermarkets. Products manufactured by Federal-Mogul's General Products accounted for $1.2 billion of Federal-Mogul's 1997 consolidated sales (excluding $600 million of sourced aftermarket product). Approximately 34% of the unit's manufactured sales were in North America, 57% were in Europe and 9% were in the rest of the world. In 1997, General Products' five largest customers by sales volume were Ford, General Motors, LucasVarity, Peugeot and Renault (in alphabetical order). Approximately 64% of the sales in 1997 for General Products of products it manufactures were to OE customers while 36% were to aftermarket customers. The Company's General Products maintains 53 manufacturing locations in 17 countries. Camshafts. Camshafts accounted for approximately 13% of Federal-Mogul manufactured products sales for General Products. Federal-Mogul casts, machines and assembles camshafts primarily for the automotive market. These products are marketed under the brand names Weyburn-Bartel(R) and Weyburn- Lydmet(R). Friction Products. Friction products accounted for approximately 42% of Federal-Mogul manufactured products sales for General Products. Federal-Mogul manufactures disc brake pads, drum brakes and brake linings for the automotive and commercial vehicle sector. These products are marketed under the brand name Ferodo(R) and are sold primarily in Europe. Sintered Products. Sintered products accounted for approximately 17% of Federal-Mogul manufactured products sales for General Products. Federal-Mogul utilizes advanced powder metallurgy techniques for the manufacture of a wide range of automotive components including valve guides, valve seat inserts, ABS sensor rings and other transmission components, together with engine components, principally pulleys, gears and sprockets. These products are marketed under the brand names Brico(R) and Sintertech(R), solely to OE customers. Systems Protection Products. Systems protection products accounted for approximately 9% of Federal-Mogul manufactured products sales for General Products. Federal-Mogul manufactures a wide variety of S-60 products used for automotive under body and under hood protection from heat, noise, abrasion and stone impingement. Most of these products are based on braided, knitted and non-woven fabrics. Products based on the same technologies are sold in the electrical, white goods and aerospace industries. These products are marketed under the brand name Bentley-Harris(R), solely to OE customers, and are sold primarily in North America. Other General Products. Other general products--primarily consisting of heat transfer products, fuel system components and lighting products--accounted for approximately 19% of Federal-Mogul manufactured products sales for General Products. Federal-Mogul is in the process of reselling the chemical manufacturing operations acquired with Fel-Pro (representing approximately $32.8 million of Fel-Pro's 1997 net sales and $2.6 million of Fel-Pro's 1997 net income). The primary components of other general products are: . heat transfer products (engine cooling radiators in both aluminum and copper brass construction and heater, ventilator and air conditioning units for automotive in-cab use) manufactured in South Africa for sale in the South African market and for global export under the brand names Silverton(R), FHE(R) and Connoisseur Auto Air Conditioning(R); . fuel system components (a full line of fuel pumps including mechanical fuel pumps, diesel lift pumps, electric fuel pumps, electric fuel modules and hanger assemblies) marketed in North America, under the brand name Carter(R); and . lighting products (clearance marker lamps, front, side and rear signal lamps, stop, tail and turn lights, emergency lighting, turn signal switches, auxiliary lighting and back-up lamps) marketed under the brand name Signal-Stat(R). WORLDWIDE AFTERMARKET Federal-Mogul's North American distribution centers in Jacksonville, Alabama, LaGrange, Indiana, and Maysville, Kentucky (the "Distribution Centers"), served as the core of Federal-Mogul's domestic aftermarket distribution network prior to the acquisitions of T&N and Fel-Pro. Products are shipped from these Distribution Centers to service centers in the United States and Canada. For Latin American sales, products are shipped through a facility in Weston, Florida to two international regional distribution centers and 15 Latin American branches. For European sales, products are shipped through Federal-Mogul's facility in Kontich, Belgium. T&N and Fel-Pro each brought with them developed aftermarket operations duplicating, in part, Federal-Mogul's existing capabilities. T&N was, at the time of its acquisition, the world's largest supplier of engine parts to the independent aftermarket, as measured by revenues (with approximately 80% of the parts distributed having been produced by T&N). Fel-Pro also brought significant aftermarket penetration with it, built on the substantial brand loyalty its gasket lines have acquired through a history of technological innovations, merchandising and marketing, which have differentiated them in the market, particularly among professional installers. Management thus believes that aftermarket distribution provides significant opportunities for realization of synergies. T&N's aftermarket distribution system at the time of the acquisition included 36 major distribution centers and sales offices utilizing over 1,600 employees worldwide to distribute over 200,000 component parts of 5,000 engine models via its AE and Goetze marketing networks. The Company's Worldwide Aftermarket includes 119 distribution facilities in 19 countries. Fel-Pro's domestic aftermarket business, focused primarily on gaskets, primarily distributed from a state-of- the-art facility inside its Skokie, Illinois plant, using a highly automated, virtually paperless process. CUSTOMERS Among Federal-Mogul's largest customers are Caterpillar, Chrysler, Cummins, Ford, General Motors, Mercedes-Benz, NAPA, Peugeot and Volkswagen/Audi (in alphabetical order). Original Equipment. Federal-Mogul's OE customers consist primarily of automotive and heavy duty vehicle customers, as well as farm and industrial equipment manufacturers, agricultural, off-highway, marine, railroad, high performance and industrial applications. Federal-Mogul has well-established relationships with substantially S-61 all major North American and European automotive OE manufacturers, some pre- existing and others resulting from the acquisitions of T&N and Fel-Pro. Management believes there are additional system opportunities with OE manufacturers in the Asia-Pacific and Latin American regions. In addition, management believes that the acquisitions of T&N and Fel-Pro have positioned Federal-Mogul to take advantage of developing OE customer demand for single supplier systems and modules in the future, particularly in light of Federal- Mogul's global reach and capabilities. See "--Strategy." Aftermarket. Federal-Mogul's domestic and international customers include independent warehouse distributors who redistribute products to local parts suppliers called "jobbers," industrial bearing distributors, distributors of heavy duty vehicular parts, engine rebuilders and retail parts stores. The breadth of Federal-Mogul's product lines, together with the strength of its brand names and sales force, are central to Federal-Mogul's aftermarket operations. RESEARCH AND DEVELOPMENT Federal-Mogul maintains technical centers in Europe and North America to develop and provide advanced materials, products and manufacturing processes for all of its manufacturing units, including facilities acquired with T&N and Fel-Pro. Federal-Mogul's expertise in engineering, research and development ensures that the latest technologies, processes and materials are considered in solving problems for customers and bringing new, innovative product to market. Federal-Mogul provides its customers with real-time engineering capabilities and design development in their home countries. In recognition of the importance of technology throughout its operations, following the acquisitions, Federal-Mogul created the post of Vice President--Technology to coordinate technological activities throughout its operations. The acquisitions of T&N and Fel-Pro provided Federal-Mogul with substantial additional technological expertise. In particular, the newly acquired technical centers in the United Kingdom and the United States bring a new depth of capability in materials development, surface engineering, computational analysis, engine testing and systems engineering. Recent achievements of these centers include development of advanced piston alloys, novel bearing coatings, brake pads for motor sport applications, engine structure modelling to predict gasket performance and test techniques for measurement of bore distortion in running engines. The Fel-Pro acquisition brought substantial research operations focusing on gaskets and their manufacture, including complete material, application design and process development capabilities and a dedicated design/engineering staff of over 100 employees. Recent technology innovations pioneered by Fel-Pro include PermaDry Plus(R), multi-layered steel head gaskets, noise and vibration dampening devices and rubber edge molded gaskets. In the past, Fel- Pro has introduced several product innovations including Fel-Coprene(R), Print-O-Seal(R) and Perma-Torque Blue(R), which have become market standards in the gasket aftermarket. Technological activities are conducted at facilities Federal-Mogul acquired from T&N including, in particular, its central technical center at Cawston, England, its facility at Burscheid, Germany and its technical center at Plymouth, Michigan, and at Fel-Pro's facilities in Skokie, Illinois, as well as at Federal-Mogul's major pre-existing technological centers, in Ann Arbor, Michigan, Logansport, Indiana, Malden, Missouri, and Wiesbaden, Germany. Each of Federal-Mogul's operating units is engaged in various engineering, research and development efforts working side by side with customers to develop custom solutions unique to their needs. Total expenditures for research and development activities, on a pro forma basis, were approximately $102.8 million in 1997, $101.6 million in 1996 and $99.8 million in 1995. SUPPLIERS Federal-Mogul sells its manufactured parts as well as parts manufactured by other manufacturers to the aftermarket. In 1997, only one outside supplier of Federal-Mogul provided products that accounted for more than 5% of Federal- Mogul's net sales. This supplier provided products accounting for significantly less than 10% of Federal-Mogul's net sales, pursuant to a long- term contract. S-62 Federal-Mogul does not normally experience supply shortages of raw materials. Certain of Federal-Mogul's relationships with its long-term suppliers are contractual. In connection with the acquisition of the automotive aftermarket business of TRW, Inc. ("TRW") in 1992, Federal-Mogul and TRW entered into a Supply Agreement for an initial term of 15 years (the "Supply Period"), pursuant to which TRW agreed to supply Federal-Mogul with parts manufactured by TRW and distributed by Federal-Mogul. During the first five years of the Supply Period (the "Exclusive Period"), Federal-Mogul is an exclusive distributor of such TRW parts and thereafter will be a nonexclusive distributor for the remaining term of the Supply Agreement, subject to certain exceptions. Thereafter, both the Exclusive Period and the Supply Period are automatically renewable for one-year periods and are terminable upon one year's notice by either party. LEGAL PROCEEDINGS T&N Asbestos In the United States, Federal-Mogul's subsidiary T&N plc and two of T&N plc's U.S. subsidiaries ("the T&N Companies") are among many defendants named in numerous court actions alleging personal injury resulting from exposure to asbestos or asbestos-containing products. T&N plc is also subject to asbestos- disease litigation, to a lesser extent, in the UK and to property damage litigation based upon asbestos in the United States. Because of the slow onset of asbestos-related diseases, management anticipates that similar claims will be made in the future. It is not known how many such claims may be made nor the expenditure which may arise therefrom. T&N has appointed the Center for Claims Resolution ("CCR") as its exclusive representative in relation to all asbestos-related personal injury claims made against the T&N Companies in the United States. As of March 31, 1998, the Company has provided $1.351 billion as its estimate for future costs to resolve asbestos claims. Prior to its acquisition by Federal-Mogul, T&N secured, by payment of a premium of (Pounds)92 million, a (Pounds)500 million layer of insurance cover which will be triggered should the aggregate number of claims notified after June 30, 1996, where the exposure occurred prior to that date ("IBNR claims"), exceed (Pounds)690 million. At March 31, 1998, Federal-Mogul has recorded reserves for IBNR claims up to the insurance level, which is (Pounds)690 million. For discussion of asbestos-related liabilities and reserves, see Notes 19 and 28 to the T&N Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations--T&N--Asbestos." While management believes that estimated reserves, which have not been reduced by any potential insurance proceeds, coupled with T&N's asbestos- related claims insurance policy, are appropriate for anticipated losses arising from T&N's asbestos related claims, no assurance can be given that T&N will not be subject to material additional liabilities and significant additional litigation relating to asbestos. Any such liabilities or litigation could have a material adverse effect on Federal-Mogul's results of operations, business, liquidity and financial condition. See "Risk Factors--T&N's Asbestos Liability." Federal-Mogul and Fel-Pro Asbestos Federal-Mogul also is one of a large number of defendants in a number of lawsuits brought by claimants alleging injury due to exposure to asbestos. In addition, Fel-Pro has been named as a defendant in approximately 18,000 product liability cases involving asbestos, primarily involving gasket or packing products sold to ship owners. Federal-Mogul is defending all such claims vigorously and believes that it and Fel-Pro have substantial defenses to liability and adequate insurance coverage for defense costs (though Fel-Pro has agreed with its insurers to pay approximately 20% of defense costs, in exchange for the right to a significant role in decisions regarding the litigation). While the outcome of litigation cannot be predicted with certainty, after consulting with S-63 the office of Federal-Mogul's general counsel, management believes that asbestos claims pending against Federal-Mogul and Fel-Pro as of March 31, 1998 will not have a material effect on Federal-Mogul's financial position. Other Federal-Mogul is involved in various other legal actions and claims, directly and through its subsidiaries (including T&N and Fel-Pro). After taking into consideration legal counsel's evaluation of such actions, management is of the opinion that their outcomes are not reasonably likely to have a material adverse effect on Federal-Mogul's financial position operating results or cash flow. For information respecting lawsuits concerning environmental matters to which Federal-Mogul is a party, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Federal-Mogul--Environmental Matters." EMPLOYEE RELATIONS On March 31, 1998, Federal-Mogul had approximately 45,000 full-time employees (including the T&N Bearings Business), of whom approximately 17,500 were employed in the United States. Approximately 13,700 of these employees work for operations predating the acquisitions of T&N and Fel-Pro, approximately 28,600 work for operations acquired with T&N and approximately 2,700 work for operations acquired with Fel-Pro. An anticipated result of the integration plan and restructuring relating to the acquisitions of T&N and Fel-Pro is a reduction of approximately 4,200 employees. Approximately 45% of Federal-Mogul's United States employees are represented by six unions. Approximately 50% of Federal-Mogul's foreign employees are represented by various unions. Each of Federal-Mogul's unionized manufacturing facilities has its own contract with its own expiration date and, as a result, no contract expiration date affects more than one facility. Federal-Mogul believes its labor relations to be good. ENVIRONMENTAL REGULATIONS Federal-Mogul's operations, in common with those of industry generally, are subject to numerous existing and proposed laws and governmental regulations designed to protect the environment, particularly regarding plant wastes and emissions and solid waste disposal. Capital expenditures for property, plant and equipment for environment control activities did not have a material impact on Federal-Mogul's financial position or results of operations in 1997 and are not expected to have a material impact on Federal-Mogul's financial position or results of operations in 1998 or 1999. BACKLOG The majority of Federal-Mogul's products are not on a backlog status. They are produced from readily available materials and have a relatively short manufacturing cycle. For products supplied by outside suppliers, Federal-Mogul generally purchases products from more than one source. Federal-Mogul expects to be capable of handling the anticipated 1998 sales volumes. PATENTS AND LICENSES Federal-Mogul is committed to protecting its technology investments and market share through an active and growing international patent portfolio. Federal-Mogul's patent portfolio is composed of a large number of foreign and U.S. patents and pending patent applications which relate to a wide variety of products and processes. In the aggregate, Federal-Mogul's international patent portfolio is of material importance to its business; however, Federal-Mogul does not consider any international patent or group of international patents relating to a particular product or process to be of material importance when judged from the standpoint of the business as a whole. S-64 COMPETITION The global vehicular parts business is highly competitive. Federal-Mogul competes with many of its customers that produce their own components as well as with independent manufacturers and distributors of component parts in the United States and abroad. In general, competition for such sales is based on price, product quality, customer service and the breadth of products offered by a given supplier. Federal-Mogul has attempted to meet these competitive challenges through more efficiently integrating its manufacturing and distribution operations, expanding its product coverage within its core businesses, and expanding its worldwide distribution network. PROPERTIES Federal-Mogul conducts its business from its World Headquarters complex in Southfield, Michigan, which is leased pursuant to a sale/leaseback arrangement. At March 31, 1998, Federal-Mogul had over 120 manufacturing facilities with in excess of 16 million square feet (approximately 80% of which were owned and 20% were leased) and over 100 aftermarket facilities with in excess of 3.5 million square feet (approximately 10% of which were owned and 90% were leased). Over half of the manufacturing facilities (by square footage) were in Europe and approximately one third were in North America. Over 85% of aftermarket facilities (by square footage) were in North America, with a strong majority of the remainder in Europe. Federal-Mogul also had other facilities (primarily research and office only sites) accounting for approximately 800,000 square feet. All owned and leased properties are well maintained and equipped for the purposes for which they are used. Federal-Mogul believes that its facilities are suitable and adequate for the operations involved. In the case of leased properties, Federal-Mogul believes that the leases could be renewed or comparable facilities could be obtained without materially affecting operations. S-65 MANAGEMENT The following tables set forth the name, age and position of the executive officers and the directors, respectively of Federal-Mogul.
EXECUTIVE OFFICER AGE POSITION ----------------- --- -------- Chairman, Chief Executive Officer and Richard A. Snell........... 56 President Executive Vice President--Powertrain Alan C. Johnson............ 49 Systems Executive Vice President--Worldwide Paul R. Lederer............ 58 Aftermarket Executive Vice President and Chief Thomas W. Ryan............. 50 Financial Officer Wilhelm A. Schmelzer....... 57 Executive Vice President--Sealing Systems Frank Tomes................ 55 Executive Vice President--General Products Senior Vice President, General Counsel and Edward W. Gray, Jr......... 51 Secretary Alan R. Begg............... 43 Vice President--Technology David A. Bozynski.......... 43 Vice President and Treasurer Charles B. Grant........... 53 Vice President--Corporate Development Richard P. Randazzo........ 54 Vice President--Human Resources Kenneth P. Slaby........... 46 Vice President and Controller James J. Zamoyski.......... 51 Vice President--Strategic Planning DIRECTOR AGE -------- --- Richard A. Snell........... 56 John J. Fannon............. 64 Roderick M. Hills.......... 67 Paul S. Lewis.............. 61 Antonio Madero............. 60 Robert S. Miller........... 56 John C. Pope............... 49 H. Michael Sekyra.......... 56 Sir Geoffrey Whalen........ 62
Mr. Snell has served as Chairman of the Board, Chief Executive Officer and President and a director of Federal-Mogul since November 1996. He also serves as Chairman of the Executive and Finance Committee and as a member of the Pension Committee. Mr. Snell was previously employed by Tenneco, Inc., from November 1987 to November 1996, most recently having served as President and Chief Executive Officer of Tenneco Automotive from September 1993 until he was employed by Federal-Mogul. Mr. Snell is also a member of the Board of Directors of Schneider National, Inc. Mr. Begg has served as Vice President--Technology since February 1998. Prior to this position, Mr. Begg served as Managing Director of T&N Technology and was a member of the T&N Management Committee from 1993 to February 1998, General Manager, Sales Director and Business Manager at BP Metal Composites from 1991 to 1993, and Senior Research Scientist and Project Leader for advance engineering materials development at BP Research Center from 1983 to 1988. Mr. Bozynski has served as Vice President and Treasurer since May 1996. Prior thereto, Mr. Bozynski was employed by Unisys Corporation as Vice President and Assistant Treasurer from October 1994 to April 1996, Vice President--Line of Business Finance from April 1993 to September 1993, and Vice President--Corporate Business Analysis from March 1992 to April 1993. S-66 Mr. Fannon has served as a director of Federal-Mogul since 1986. He is Chairman of the Compensation Committee and a member of the Pension and the Nominating Committees. Mr. Fannon retired in 1997 as Vice Chairman of Simpson Paper Company, a privately held global forest products company with annual sales exceeding $1 billion, a position that he held since 1993. From 1980 until 1993, Mr. Fannon served as President of Simpson Paper. Previously, he was Vice President of Marketing for Simpson Paper. He also serves as a director of Simpson Paper and Seton Medical Center. Mr. Grant has served as Vice President--Corporate Development since December 1992. Prior to this position, Mr. Grant served as Vice President and Controller of Federal-Mogul from May 1988 to December 1992, Vice President of Finance, Vice President--Controller and Controller of the Fastening Systems Group of Huck Manufacturing, and Audit Manager at Ernst & Young. Mr. Gray has served as Senior Vice President, General Counsel and Secretary since March 1998. Prior to this position, Mr. Gray was the managing partner for the Washington D.C. office of Fitch, Even, Tabin, and Flannery from April 1994 to 1998, a founding partner of Gray, Blount & Associates, LLP from 1993 to 1998 and at R.R. Donnelley & Sons Company from 1986 to May 1993, where his most recent position was Vice President--Information Services. Mr. Hills has served as director of Federal-Mogul since 1977. He is Chairman of the Nominating Committee and a member of the Audit, Executive and Finance, and Pension Committees. In January 1987, Mr. Hills was named Managing Director-Chairman of The Manchester Group Ltd., and has continued to manage that business, which is now conducted under the name of Hills Enterprises, Ltd. From May 1989 until June 1995, he also served successively as a partner of and/or a consultant to the law firms of Donovan Leisure Rogovin Huge & Schiller, Shea & Gould, and Mudge Rose Guthrie Alexander & Ferndon. Mr. Hills is a member of the Board of Directors of Waste Management, Inc. and Oak Industries, Inc. Mr. Johnson has served as Executive Vice President--Powertrain Systems since February 1998. Mr. Johnson has been with Federal-Mogul since 1970, serving as Executive Vice President responsible for Federal-Mogul's Worldwide manufacturing and international aftermarket operations from January 1997 to February 1998, President--Operations from January 1995 to January 1997, Vice President and President--Powertrain Operations--Americas from 1993 to January 1995 and Vice President and General Manager--Oil Seal Operations from 1992. Mr. Lewis has served as director of Federal-Mogul since May 1998. Mr. Lewis joined Tate & Lyle plc as Group Finance Director in June 1988 and became Deputy Chairman of the Group in March 1993. He served on the Executive Committee and various other board and committees with the Group. He joined the Board of Dairy Crest Group as a non-executive Director in August 1993. On December 1, 1995 Mr. Lewis joined the Board of T&N plc as a non-executive Director. Mr. Lewis served on the Listing Policy Committee of the London Stock Exchange until 1996 and is a Governor of Stratford School, East London and a member of the Finance Committee of London First. Mr. Lederer has served as Executive Vice President--Worldwide Aftermarket since February 1998. Prior to this position, Mr. Lederer was President and Chief Operating Officer of Fel-Pro, Incorporated. Prior to joining Fel-Pro, he was a consultant to several automotive parts companies while serving on the Board of Directors of Ozark/O'Reilly Automotive, Fullerton Metals and Trans- Pro Corporation. Mr. Lederer has also served as Executive Vice President of Stant, Chairman and Chief Executive of Epicor Industries, Incorporated, President--Automotive Group, Group Vice President--Operations and General Manager-Edelmann Durson at Parker Hanifin, and Executive Vice President of E. Edelmann & Company. Mr. Madero has served as director of Federal-Mogul since February 1994. He is a member of the Audit, Nominating and Compensation Committees. Mr. Madero founded SANLUIS Corporacion S. A. de C.V. S-67 ("Sanluis") and has served as its Chairman of the Board and Chief Executive Officer since 1979. Sanluis is a Mexican holding company with interests in gold, silver, mining and auto parts. Mr. Madero is also a member of the Boards of Directors of Cydsa S.A., of Cydsa, S.A. de C.V., Grupo Embotelladoras Unidas, S.A. de C.V., Alfa, S.A. de C.V., Grupo Industrial Saltillo, S.A. de C.V., Fondo Opcion, S.A. de C.V., Grupo Industrial Durango, S.A. de C.V., G. Accion S.A., Grupo Financier Banamex Accival S.A., Seguros Comercial America, S.A., Grupo Posadas, S.A. de C.V., Banca Quadrum, S.A. de C.V., Banca Chase (Mexico) S.A., Deere and Company and a member of the International Advisory Committee of The Chase Manhattan Bank. Mr. Miller has served as a Director of Federal-Mogul since 1993. He is the Chairman of the Pension Committee and a member of the Audit and Nominating Committees. From September until November 1996 he served as Acting Chief Executive Officer of Federal-Mogul. Mr. Miller is Chairman of the Board and Chief Executive Officer of Waste Management, Inc. Since 1993, Mr. Miller has served as Vice President and Treasurer, and as a director, of Moore Mill and Lumber Company, a privately held timber business in Oregon. In April 1995, he was named Chairman of the Board of Directors of Morrison Knudsen Corporation, a position he held until September 1996, when he became its Vice Chairman of the Board. In addition to Waste Management and Morrison Knudsen, Mr. Miller also serves as a member of the Board of Directors of Fluke Corporation, Pope & Talbot, Inc. and Symantec Corp. Mr. Pope has served as a director of Federal-Mogul since 1987. He is Chairman of the Audit Committee and a member of the Compensation, Executive and Finance, and Nominating Committees. Mr. Pope was President, Chief Operating Officer and Director of UAL Corporation and United Air Lines from May 1992 until July 1994. Mr. Pope was named Chairman of the Board of MotivePower Industries, Inc. in 1995. Mr. Pope is a member of the Board of Directors of Dollar Thrifty Automotive Group, Inc., Lamalie Associates, Inc., Medaphis Corporation, MotivePower Industries, Inc., Wallace Computer Services, Inc. and Waste Management, Inc. Mr. Randazzo has served as Vice President--Human Resources since January 1997. Prior thereto, Mr. Randazzo served as Senior Vice President--Human Resources of Nextel Communications, Inc. from December 1994 to December 1996, Senior Vice President--Human Resources--Americas Region of Asea Brown Boveri, Inc. from December 1990 to December 1994, and various positions at Xerox Corporation, including Vice President of Human Resources and the U.S. Marketing Group. Mr. Ryan has served as Executive Vice President since March 1998 and as Chief Financial Officer since February 1997. Mr. Ryan joined Federal-Mogul in February 1997 as Senior Vice President and Chief Financial Officer. Mr. Ryan was Chief Financial Officer of Tenneco Automotive, a division of Tenneco, Inc. from January 1995 to February 1997, and Vice President, Treasurer and Controller of A.O. Smith Corporation from March 1985 to January 1995. Mr. Schmelzer has served as Executive Vice President--Sealing Systems since February 1998. Since joining Federal-Mogul in 1969, Mr. Schmelzer has served as Vice President and Group Executive--Engine and Transmission Products from April 1995 to February 1998, Vice President and Group Executive--Engine and Transmission Products Europe from January 1992 to April 1995, General Manager--Engine and Transmission Products--Americas from 1989 to 1991 and General Manager of Manufacturing Operations in Spain and Mexico from 1987 to 1989. Mr. Schmelzer represents Federal-Mogul as Chairman of Supervisory Boards at Federal-Mogul S.A., France and Federal-Mogul S.p.A., Italy. He has been an Advisory Board member of Arkwright International Ltd. since May 1995. Dr. Sekyra has served as a director of Federal-Mogul since 1991. He is a member of the Compensation, Nominating, and Pension Committees. Dr. Sekyra, a native of Austria, is Chairman and Chief Executive Officer of C.H. CHEM, a.s., the largest chemical company in the Czech Republic. He is also Chairman of Bohler Uddeholm, one of the world's leading companies in tool and speed steel. Dr. Sekyra holds a number of board positions in banking and industrial enterprises. S-68 Mr. Slaby has served as Vice President and Controller since April 1996. Prior thereto, Mr. Slaby held various positions at General Electric Company for 23 years, including Manager--Financial Operation for the global silicones business from November 1990 to April 1996, Manager--Financial Operation with GE Aircraft Electronics from March 1987 to November 1990, and Manager Finance Section at GE Aircraft Electronics Systems Department from July 1985 to March 1987. Mr. Tomes has served as Executive Vice President--General Products since February 1998. Prior to this position, Mr. Tomes served as Chief Executive-- Composites and Camshafts Group of T&N plc from January 1996 to February 1998. Prior to that he was Chief Executive of T&N's Industrial Products and Materials Group. Sir Geoffrey Whalen has served as director of Federal-Mogul since May 1998. Between 1984 and 1995, Sir Whalen was Managing Director, and from 1990 Deputy Chairman of Peugeot Talbot Motor Company plc. in the United Kingdom (now known as Peugeot). In January 1995, he retired from full-time employment with Peugeot. Sir Geoffrey Whalen is currently a director of Peugeot Motor Company plc; Conventry Building Society; Hills Precision Components Ltd.; Camden Motors Ltd.; Caradon plc, and Hall Engineering Holdings plc. Sir Geoffrey Whalen has also been active in the Society of Motor Manufacturers & Traders, the Trade Association representing vehicle and component makers in the United Kingdom where he was President 1988-1990 and 1993-1994 and is currently Deputy President. Mr. Zamoyski has served as Vice President--Strategic Planning since June 1997. Prior to this position, Mr. Zamoyski served as Vice President and General Manager from April 1995 to June 1997, Worldwide Aftermarket Operation--International from November 1993 to April 1996, and General Manager, Worldwide Aftermarket--Distribution and Logistics from August 1991 to November 1993. S-69 PRINCIPAL SHAREHOLDERS The following table sets forth certain information concerning the beneficial ownership of Common Stock held by shareholders known by the Company (based on filings with the Securities and Exchange Commission) to beneficially own in excess of five percent of the outstanding Common Stock as of April 15, 1998. In accordance with regulations promulgated by the Securities and Exchange Commission, the table reflects for each beneficial owner the conversion of convertible securities (convertible within 60 days after April 15, 1998) owned by such beneficial owners, but, in determining the percentage ownership of such person, does not assume the conversion of convertible securities owned by any other person.
SHARES BENEFICIALLY OWNED PRIOR NAME AND TO THE OFFERINGS ADDRESS ---------------------------------- OF BENEFICIAL NUMBER OF HOLDER SHARES PERCENT(1) ------------- ----------------- ---------------- Janus Capital Corporation 100 Fillmore Street Denver, CO 80206......................... 6,500,000 16.21% The Capital Group Companies, Inc. 333 South Hope Street Los Angeles, CA 90071.................... 4,143,000 10.33% Merrill Lynch Asset Management 800 Scudders Mill Road Plainsboro, NJ 08536..................... 2,945,200 7.34% Fidelity Management & Research 82 Devonshire Street Boston, MA 02109......................... 2,100,000 5.24%
- -------- (1) Percentages are calculated based on outstanding shares of Common Stock as of April 15, 1998, of 40,579,372 shares and assume conversion of Federal- Mogul's Series C Stock and Series E Stock. S-70 SELLING SHAREHOLDERS The following table sets forth certain information concerning the beneficial ownership of Common Stock held by the Selling Shareholders, as of May 12, 1998 and as adjusted to give effect to the Offerings and reflect the sale in the Offerings of an aggregate of 1,287,907 shares of Common Stock. None of the Selling Shareholders currently holds, and after the Offerings none of the Selling Shareholders is expected to hold, greater than 1% of the shares of the Company's outstanding Common Stock.
NUMBER OF NUMBER OF SHARES BENEFICIALLY NUMBER OF SHARES BENEFICIALLY OWNED PRIOR TO SHARES BEING OWNED AFTER NAME THE OFFERINGS(1) OFFERED THE OFFERINGS(1) ---- ------------------- ------------ ------------------- Robert J. Morris Revocable Trust UAD 2/16/83........ 69,075 57,746 11,329 Ellen J. Morris........... 97,353 58,678 38,675 Bruce E. Morris........... 113,287 58,678 56,609 Richard A. Morris......... 85,927 58,678 27,249 Elliot Lehman Trust 5/87.. 57,930 57,930 0 Frances M. Lehman Trust 5/87..................... 99,372 99,372 0 E. Lehman 15 Year Income Trust.................... 3,178 3,178 0 F. Lehman 15 Year Income Trust.................... 4,104 4,104 0 Kenneth A. Lehman 1996 E. Family Trust 6/96........ 3,213 3,213 0 Kenneth A. Lehman 1996 F. Family Trust 6/96........ 3,213 3,213 0 Paul Lehman 1996 E. Family Trust 6/96............... 3,213 3,213 0 Paul Lehman 1996 F. Family Trust 6/96............... 3,213 3,213 0 Kay L. Schlozman 1996 E. Family Trust 6/96........ 3,213 3,213 0 Kay L. Schlozman 1996 F. Family Trust 6/96........ 3,213 3,213 0 Kenneth A. Lehman......... 106,407 26,601 79,806 Lucy G. Lehman............ 11,405 11,405 0 Paul A. Lehman............ 98,514 71,091 27,423 Ronna Stamm............... 5,973 5,973 0 Kay Schlozman Children's Trust 12/82.............. 7,690 7,690 0 Schlozman Family Gift Trust 9/85............... 14,456 14,456 0 Kay L. Schlozman 1997 Children's Trust 11/97... 3,845 3,845 0 Betsy G. Lehman Irrevocable Trust #1 12/83.................... 6,867 6,867 0 K. Lehman Children's Trust 12/82 FBO Betsy.......... 20,602 1,333 19,269 K. Lehman Children's Trust 9/85 FBO Betsy........... 4,819 4,819 0 Amy G. Lehman Irrevocable Trust #1 12/83........... 6,867 6,867 0 K. Lehman Children's Trust 12/82 FBO Amy............ 20,602 1,334 19,269 K. Lehman Children's Trust 9/85 FBO Amy............. 4,819 4,819 0 Peter G. Lehman Irrevocable Trust #1 12/83.................... 6,867 6,867 0 K. Lehman Children's Trust 12/82 FBO Peter.......... 20,602 1,334 19,268 K. Lehman Children's Trust 9/85 FBO Peter........... 4,819 4,819 0 Daniel A. Schlozman Trust #1 12/81................. 61,265 22,576 38,689 Daniel A. Schlozman Trust #2 12/81................. 61,264 22,575 38,689 Schlozman 1994 Gift Trust for Julia................ 5,922 5,922 0 Sylvia M. Radov........... 134,413 17,572 116,841 Lewis C. Weinberg Irrevocable Trust 8/76... 54,994 5,617 49,377 Sylvia 1996 Gift Trust for Barbara.................. 2,216 2,216 0 Sylvia 1996 Gift Trust for David.................... 2,216 2,216 0 Sylvia 1996 Gift Trust for Daniel................... 2,216 2,216 0 DAW Family Trust 9/85..... 45,382 21,325 24,057 Daniel C. Weinberg Revocable Trust 7/97..... 72,382 39,218 33,164 Carol Jung................ 35,685 6,016 29,669
S-71
NUMBER OF NUMBER OF SHARES BENEFICIALLY NUMBER SHARES BENEFICIALLY OWNED PRIOR TO SHARES BEING OWNED AFTER NAME THE OFFERINGS(1) OFFERED THE OFFERINGS(1) ---- ------------------- ------------ ------------------- Kessler 1996 Gift for David.................... 1,323 1,323 0 Kessler 1996 Gift Trust for Daniel............... 1,438 1,438 0 DCW Family Trust 9/85..... 123,028 33,000 90,028 Lewis Weinberg Grandchildrens Gift Trust 12/82--Keith............. 11,788 11,788 0 Keith A. Kessler.......... 23,921 7,536 16,385 Lewis Weinberg Grandchildrens Gift Trust 12/82--Arthur............ 11,788 11,788 0 Arthur J. Kessler......... 33,025 7,536 25,489 Lewis Weinberg Grandchildrens Gift Trust 12/82--Eric.............. 11,788 11,788 0 Eric J. Kessler Irrevocable Trust 12/77.. 33,025 7,536 25,489 Lewis Weinberg Grandchildrens Gift Trust 12/82--Mindy............. 29,872 10,000 19,872 SMR-DAW Childrens Gift Trust for Mindy 12/82.... 6,319 6,319 0 Lewis Weinberg Grandchildrens Gift Trust 12/82--Brian............. 29,872 10,000 19,872 SMR-DAW Childrens Gift Trust for Brian 12/82.... 6,319 6,319 0 Sylvia MGP Trust for Daniel 06/96............. 97,893 16,000 81,893 Weinberg 1992 Gift Trust for Barbara ............. 41,954 41,954 0 Weinberg 1992 Gift Trust for David ............... 41,954 41,954 0 Weinberg 1992 Gift Trust for Daniel............... 41,954 8,000 33,954 Sylvia 1992 Gift Trust for Barbara.................. 102,185 27,884 74,301 Sylvia 1992 Gift Trust for David.................... 102,185 30,923 71,262 Sylvia 1992 Gift Trust for Daniel................... 102,185 25,000 77,185 H & M Realty Corporation.. 216,584 216,584 0 McCormick Investments, Inc. .................... 81 81 0 McCormick Investments, LP. 7,926 7,926 0
- -------- (1) Assumes conversion of the Series E Stock. The 1,287,907 shares of Common Stock that may be offered and sold by the Selling Shareholders will be acquired by such Selling Shareholders through conversion of Series E Stock received as part of the consideration received by them in the Federal-Mogul acquisition of Fel-Pro. Pursuant to the Registration Rights Agreement among Federal-Mogul and the Selling Shareholders. Federal- Mogul shall bear all expenses incident to Federal-Mogul's performance of or compliance with the Registration Rights Agreement, except that the Selling Shareholders will pay all underwriting discounts and commissions relating to their shares of Common Stock, brokerage fees, transfer taxes, and the fees and expenses of any counsel, accountants or other representatives retained by the Selling Shareholders, if any. The Selling Shareholders will be indemnified by Federal-Mogul against certain liabilities, including certain liabilities under the Securities Act, or will be entitled to contribution in connection therewith. S-72 DESCRIPTION OF CAPITAL STOCK The following statements are summaries of certain provisions of Federal- Mogul's Restated Articles of Incorporation (the "Articles of Incorporation") and Bylaws and of the Rights Agreement, dated as of November 3, 1988, as amended, between Federal-Mogul and The Bank of New York, as Rights Agent (the "Rights Agreement"). Such summaries do not purport to be complete and are subject to, and are qualified in their entirety by reference to, all of the provisions of the Restated Articles of Incorporation, the Bylaws and the Rights Agreement, including definitions therein of certain terms. AUTHORIZED CAPITAL STOCK Federal-Mogul's authorized capital stock consists of 5,000,000 shares of preferred stock, which is issuable in series, and 260,000,000 shares of Common Stock. At May 12, 1998, Federal-Mogul had outstanding 762,939 shares of Series C ESOP Convertible Preferred Stock and 40,606,439 shares of Common Stock. At May 12, 1998, of 1,500,000 shares of Common Stock authorized in 1984 under Federal-Mogul's incentive stock plans, no shares remained issuable; of 2,300,000 shares authorized in 1989, an aggregate of 357,548 shares remained issuable; and of 1,300,000 shares authorized in 1997, an aggregate of 468,659 shares remained issuable. See "--Incentive Stock Plans." COMMON STOCK The holders of Common Stock are entitled to receive such dividends as may be declared from time to time by the Board of Directors out of funds legally available therefor. The holders of Common Stock are entitled to one vote per share on all matters submitted to a vote of shareholders and do not have cumulative voting rights. Holders of Common Stock are entitled to receive, upon any liquidation of Federal-Mogul, all remaining assets available for distribution to shareholders after satisfaction of Federal-Mogul's liabilities and the preferential rights of any preferred stock that may then be issued and outstanding. The outstanding shares of Common Stock are, and the Shares offered hereby will be, fully paid and nonassessable. The Common Stock is listed on the NYSE. The holders of Common Stock have no preemptive, conversion or redemption rights. The registrar and transfer agent for the Common Stock is The Bank of New York. PREFERRED SHARE PURCHASE RIGHTS In 1988, Federal-Mogul's Board of Directors authorized the distribution of one Preferred Share Purchase Right (a "Right") for each outstanding share of Common Stock. Each Right entitles the holder thereof to buy one-half of one one-hundredth of a share of Series B Junior Participating Preferred Stock at a price of $70.00. The Rights are governed by the Rights Agreement. As distributed, the Rights trade together with the Common Stock. They may be exercised or traded separately only after the earlier to occur of: (i) 10 days following a public announcement that a person or group of persons has obtained the right to acquire 10% or more of the outstanding Common Stock (20% in the case of certain institutional investors), or (ii) 10 business days (or such later date as may be determined by action of the Board of Directors) following the commencement or announcement of an intent to make a tender offer or exchange offer which would result in beneficial ownership by a person or group of persons of 10% or more of the outstanding Common Stock. If the acquiring person or group of persons acquires 10% or more of the Common Stock, each Right (other than those held by the acquirer) will entitle its holder to purchase, at the Right's exercise price, shares of Common Stock having a market value of twice the Right's exercise price. Additionally, if Federal- Mogul is acquired in a merger or other business combination, each Right (other than those held by the surviving or acquiring company) will entitle its holder to purchase, at the Right's exercise price, shares of the acquiring company's stock (or Common Stock of Federal-Mogul if it is the surviving corporation) having a market value of twice the Right's exercise price. S-73 Rights may be redeemed at the option of the Board of Directors for $0.005 per Right at any time before a person or group or persons acquires 10% or more of Federal-Mogul's Common Stock. The Board may amend the Rights at any time without shareholder approval. The Rights will expire by their terms on November 14, 1998. The Rights have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group that attempts to acquire Federal- Mogul in a manner that causes the Rights to become exercisable. Federal-Mogul believes, however, that the Rights would neither affect any prospective offeror willing to negotiate with the Board of Directors of Federal-Mogul nor interfere with any merger or other business combination approved by the Board of Directors. SERIES C ESOP CONVERTIBLE PREFERRED STOCK In February, 1989, Federal-Mogul established an Employee Stock Ownership Plan (the "ESOP") and issued 1,000,000 shares of Series C ESOP Convertible Preferred Stock ("Series C Stock") to the ESOP, of which 762,939 shares were outstanding at March 31, 1998. Such shares bear a dividend of $4.78125 per share per annum, subject to certain adjustments. The share of Series C ESOP Convertible Preferred Stock are convertible into shares of Common Stock at a rate of two shares of Common Stock per share, subject to adjustment. The Series C Stock may be issued only to a trustee acting on behalf of an employee stock ownership plan or other employee benefit plan of Federal-Mogul and will be automatically converted into shares of Common Stock in the event of any transfer to a person other than such trustee. Such Series C Stock shares provide for a liquidation preference of $63.75 per share plus accrued and unpaid dividends. The Series C Stock is redeemable, in whole or in part, at the option of Federal-Mogul at a redemption price per share currently equal to 100.75% of the liquidation preference, declining to 100% of the liquidation preference on and after January 1, 1999, plus, in each case, accrued and unpaid dividends. Holders of the Series C Stock have full voting rights and generally vote together with the Common Stock as one class, each share of the Series C Stock having such number of votes as equals the number of shares of Common Stock into which such share could be converted on the record date for determining the shareholders entitled to vote, or currently two votes per share; the shares of the Series C Stock are entitled to vote separately on certain matters. The shares of the Series C Stock are not subject to any sinking fund provisions and have no preemptive rights. The shares of the Series C Stock rank senior to Common Stock as to the payment of dividends and distribution of assets on liquidation, dissolution and winding up of Federal- Mogul. In the event that Federal-Mogul is unable to pay dividends on the Series C Stock, Federal-Mogul is required, pursuant to the terms of the ESOP, to make a contribution to the ESOP to satisfy the then current debt service requirements of the ESOP Note (which obligation is fully reflected in long-term debt on Federal-Mogul's balance sheet). See "Capitalization." SERIES E MANDATORY EXCHANGEABLE PREFERRED STOCK On February 24, 1998, Federal-Mogul issued 1,030,325.6 shares of Series E Stock to holders of equity interests in the Fel-Pro entities as partial compensation for the acquisition thereof. All of the shares of Series E Stock were outstanding as of May 12, 1998. Federal-Mogul and the holders thereof have contractually agreed that 257,581.4 shares of Series E Stock will be converted at the time of the offering and the resulting Common Stock will be included in the Offerings, resulting in a reduction in the number of Series E Stock outstanding to 772,774.2 shares. See "Underwriting." The shares of Series E Stock are mandatorily exchangeable into shares of Common Stock at a rate of five shares of Common Stock for each share of Series E Stock (representing an aggregate of 5,151,628 shares of Common Stock), subject to adjustment, upon the earlier of (i) the fifteenth day after holders of two-thirds of the outstanding Series E Stock have requested such exchange, (ii) the effective date of a registration statement filed at the request of holders of a majority of the Series E Stock pursuant to the registration rights agreement Federal-Mogul executed for the benefit of holders of Series E Stock and (iii) February 24, 1999. S-74 Shares of Series E Stock bear a fully cumulative dividend of $2.40 per share per annum, payable quarterly in arrears, subject to increase to $14.35 per share per annum if shares of Series E Stock remain outstanding after February 24, 1999, increasing by $2.05 each month thereafter to $26.65 per share per annum as of August 24, 1999, subject to certain adjustments. The first scheduled quarterly dividend, due March 31, 1998, was paid to the holders of Series E Stock. Holders of the Series E Stock have no voting rights through February 24, 1999, after which they have full voting rights and generally vote together with the Common Stock as one class, each share of the Series E Stock having such number of votes as equals the number of shares of Common Stock into which such share could be converted on the record date for determining the shareholders entitled to vote, currently five votes per share. The shares of the Series E Stock are not subject to any sinking fund or redemptive provisions and have no preemptive rights. The shares of the Series E Stock rank senior to Common Stock as to the payment of dividends and in parity to Common Stock as to distribution of assets on liquidation, dissolution and winding up of Federal-Mogul. The holders of a majority of the Common Shares into which the Series E Stock is convertible or has been converted may, upon no more than three occasions, request registration of all or part of such shares of Common Stock at any time after January 1, 1999, provided that the Restated Articles of Incorporation have been amended to authorize additional shares of Common Stock for issuance. Such rights terminate at any point at which there are fewer than 3,000,000 shares of Common Stock eligible for such registration and such shares may be sold without restriction pursuant to Rule 144(k) under the Securities Act of 1933. The holders initiating the demand registration may elect whether the offering of the relevant shares upon registration shall be in the form of a firm commitment underwritten offering or otherwise (subject to certain restrictions, such as a determination by the underwriter of an offering that inclusion of the requested shares would adversely affect the marketability of the Common Stock). CERTAIN PROVISIONS The Articles of Incorporation and Bylaws of Federal-Mogul and the Rights Agreement contain provisions, summarized below, that could have the effect of delaying, deterring or preventing a change of control of Federal-Mogul. This summary does not purport to be complete and is subject to, and qualified in its entirety by, the provisions of the Restated Articles of Incorporation and Bylaws and the Rights Agreement. FEDERAL-MOGUL'S ARTICLES OF INCORPORATION Federal-Mogul's Articles of Incorporation provide that the approval of a business combination (as hereinafter defined) requires (in addition to any other vote that may be required) the affirmative vote of at least a majority of the outstanding shares of preferred stock entitled to vote thereon and Common Stock, voting as a single class. In addition, (a) where the Articles of Incorporation require the approval of the holder of the preferred stock or one or more series thereof considered as a separate class, such business combination shall also require the affirmative vote of at least a majority of the outstanding shares of the preferred stock of such series thereof considered as a separate class that are not owned by an Interested Shareholder (as hereinafter defined) and (b) where applicable law requires that a transaction be approved by any class or series of Federal-Mogul's stock or any combination thereof considered as a single class, such transaction shall also require the affirmative vote of at least a majority of the shares of each such class or series or combination considered as a single class that are not owned by the Interested Shareholder. The voting requirements set forth in the previous paragraph shall not apply to any business combination if (a) Federal-Mogul's Board of Directors includes at least one member who was a duly elected and acting member of the Board of Directors (each being a "Disinterested Director") prior to the time the Interested Shareholder involved became an Interested Shareholder and such business combination has been approved by a majority of the Disinterested Directors and by a majority of the entire Board of Directors, (b) the aggregate amount of the cash and the fair market value of consideration other than cash to be received per share by holders S-75 of Common Stock in such business combination shall be at least equal to the Specified Price (as hereinafter defined) or (c) such business combination has been unanimously approved by the Board of Directors and the Board has, in the faithful exercise of its fiduciary duties to the holders of Common Stock, unanimously and expressly determined that the aggregate amount of the cash and the fair market value of the consideration other than cash to be received per share by holders of Common Stock in such business combination, although less than the Specified Price, is nonetheless fair to all holders of Common Stock. As used above: "business combination" means (a) any merger or consolidation of Federal- Mogul and any subsidiary with or into any Interested Shareholder or any corporation which after such merger or consolidation would be an affiliate of an Interested Shareholder, (b) any sale lease exchange, mortgage, pledge, transfer or other disposition to any Interested Shareholder or its affiliate of assets of Federal-Mogul or any subsidiary having a fair market value of $1 million or more (except in the ordinary course of business and on an arm's-length basis), (c) the issuance or transfer by Federal-Mogul or any subsidiary (in one transaction or a series of related transactions) of any securities of Federal-Mogul or a subsidiary to any Interested Shareholder or its affiliate for cash, securities or property having a fair market value of $1 million or more, (d) the adoption of any plan or proposal for the liquidation or dissolution of Federal-Mogul as a result of which any Interested Shareholder or its affiliate would receive any assets of Federal-Mogul other than cash or (e) any reclassification of securities (including any reverse stock split) or recapitalization of Federal-Mogul or merger or consolidation of Federal-Mogul with any subsidiary or any similar transaction (whether or not with an Interested Shareholder) which has the effect, directly or indirectly, of increasing the proportion of outstanding shares of any equity security of Federal-Mogul or a subsidiary directly owned by an Interested Shareholder or its affiliate. "Interested Shareholder" means a person who on the record date for determining the shareholders entitled to vote on a business combination is (a) the beneficial owner of 10% or more of the outstanding shares of Common Stock, (b) an affiliate of Federal-Mogul and within two years prior to such record date beneficially owned 10% or more of the then outstanding shares of Common Stock or (c) an assignee or other successor to any shares of capital stock of Federal-Mogul which were within two years prior thereto beneficially owned by an Interested Shareholder and such assignment or succession shall have occurred in one or more transactions not involving a public offering. "Specified Price" means the highest of (a) the highest per share price paid or agreed to be paid by such Interested Shareholder to acquire beneficial ownership of any shares of Common Stock within the two-year period prior to the consummation of the business combination; (b) the per share book value of the Common Stock at the end of the fiscal month immediately preceding the consummation of such business combination; and (c) if the Common Stock of the Interested Shareholder is publicly traded, the price per share equal to the earnings per share of Common Stock for the four full consecutive fiscal quarters immediately preceding the record date for solicitation of votes on such business combination (or, if votes are not solicited on such business combination, immediately preceding the consummation of such business combination) multiplied by the ratio (if any) of the highest published sale price of the Interested Shareholder's common stock during its four fiscal quarters immediately preceding such date, to the earnings per share of common stock of the Interested Shareholder for such four fiscal quarters. FEDERAL-MOGUL'S BYLAWS Federal-Mogul's Bylaws contain provisions that govern nominations of directors by shareholders and presentation of business by shareholders for consideration at the annual meeting of shareholders. Generally, a shareholder must give notice of such nomination or business within 60 to 90 days prior to such meeting, giving specified information as to the shareholder and as to the person nominated and the business proposed to be brought before the meeting. S-76 INCENTIVE STOCK PLANS Federal-Mogul's shareholders adopted Stock Option Plans in 1976 and 1984 and a Performance Incentive Stock Plan in 1989, and the holders of Common Stock and Series C Stock adopted a Long Term Incentive Plan in 1997. These plans provide generally for granting options to purchase shares of the Common Stock. Restricted shares may be awarded under the 1989 Plan and entitle employees to all the rights of Common Stock shareholders, subject to certain transfer restrictions or forfeitures. Options entitle employees to purchase shares at an exercise price not less than 100% of the fair market value of the shares on the grant date. The 1989 Performance Incentive Stock Plan and the 1997 Long Term Incentive Plan additionally provide for the granting of performance unit awards ("PUA's") to eligible employees. These awards may be granted in the form of Common Stock or units, the value of which are based on the market value of the Common Stock. PUA's must relate to certain performance criteria established by the Compensation Committee of the Board of Directors and are awarded on terms and conditions fixed by the Committee on the date of grant. At April 29, 1998, 91,500 PUA's had been granted. TRUST PREFERRED SECURITIES In December 1997, Federal-Mogul's wholly-owned financing trust ("Affiliate") completed a $575 million private issue of 11.5 million shares of 7.0% Trust Convertible Preferred Securities ("TCP Securities") with a liquidation value of $50 per convertible security. The net proceeds from the TCP Securities were used to purchase an equal amount of 7.0% Convertible Junior Subordinate Debentures ("Debentures") of Federal-Mogul. The TCP Securities represent an undivided interest in the Affiliate's assets, with a liquidation preference of $50 per security. Distribution on the TCP Securities are cumulative and will be paid quarterly in arrears at an annual rate of 7.0%, and are included in the consolidated statement of operations as a component of Other Expense, Net. The Company has the option to defer payment of the distributions for an extension period of up to 20 consecutive quarters. The TCP Securities are convertible, at the option of the holder, into Federal-Mogul Common Stock at an initial conversion rate of .9709 shares of Common Stock per TCP Security (an aggregate of 11,165,049 shares of Common Stock), subject to adjustment in certain circumstances. The TCP Securities and the Debentures will be redeemable, at the option of Federal-Mogul, on or after December 6, 2000 at a Redemption Price, expressed as a percentage of principal which is added to accrued and unpaid interest. The Redemption Price range is from 104.9% on December 6, 2000 to 100.0% after December 1, 2007. All outstanding TCP Securities and Debentures are required to be redeemed by December 1, 2027. At May 12, 1998, 11,500,000 Convertible Preferred Securities were outstanding. S-77 CERTAIN UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS The following is a general discussion of certain United States federal income and estate tax consequences of the ownership and disposition of Common Stock by a person that, for United States federal income tax purposes, is a nonresident alien individual or foreign corporation (a "non-U.S. holder"). The discussion does not consider specific facts and circumstances that may be relevant to a particular non-U.S. holder's tax position. Accordingly, each non-U.S. holder is urged to consult its own tax advisor with respect to the United States tax consequences of the ownership and disposition of Common Stock, as well as any tax consequences that may arise under the laws of any state, municipality, foreign country or other taxing jurisdiction. DIVIDENDS Dividends paid to a non-U.S. holder of Common Stock ordinarily will be subject to withholding of United States federal income tax at a 30 percent rate, or at a lower rate under an applicable income tax treaty that provides for a reduced rate of withholding. However, if the dividends are effectively connected with the conduct by the holder of a trade or business within the United States, then the dividends will be exempt from the withholding tax described above and instead will be subject to United States federal income tax on a net income basis. GAIN ON DISPOSITION OF COMMON STOCK A non-U.S. holder generally will not be subject to United States federal income tax in respect of gain realized on a disposition of Common Stock, provided that (a) the gain is not effectively connected with a trade or business conducted by the non-U.S. holder in the United States and (b) in the case of a non-U.S. holder who is an individual and who holds the Common Stock as a capital asset, such holder is present in the United States for less than 183 days in the taxable year of the sale and other conditions are met and (c) the Company is not nor has been a "United States real property holding corporation" within the meaning of Section 897(c)(2) of the Code at any time within the shorter of the five-year period ending on the date of disposition or the non-U.S. holder's holding period and certain other conditions are met. The Company does not believe that it is, or is likely to become, a "United States real property holding corporation." FEDERAL ESTATE TAXES Common Stock owned or treated as being owned by a non-U.S. holder at the time of death will be included in such holder's gross estate for United States federal estate tax purposes, unless an applicable estate tax treaty provides otherwise. U.S. INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX U.S. information reporting requirements and backup withholding tax will not apply to dividends paid on Common Stock to a non-U.S. holder at an address outside the United States, except that with respect to payments made after December 31, 1999, a non-U.S. holder will be entitled to such an exemption only if it provides a Form W-8 (or satisfies certain documentary evidence requirements for establishing that it is a non-United States person) or otherwise establishes an exemption. As a general matter, information reporting and backup withholding also will not apply to a payment of the proceeds of a sale of Common Stock effected outside the United States by a foreign office of a foreign broker. However, information reporting requirements (but not backup withholding) will apply to a payment of the proceeds of a sale of Common Stock effected outside the United States by a foreign office of a broker if the broker (i) is a U.S. person, (ii) derives 50 percent or more of its gross income for certain periods from the conduct of a trade or business in the United States, (iii) is a "controlled foreign corporation" as to the United States or (iv) with respect to payments made after December 31, 1999, a foreign partnership that, at any time during its taxable year is 50% or more (by income or capital interest) owned by U.S. persons or is engaged in the conduct of a U.S. trade or business, unless the broker has documentary evidence in its records that the holder is a non-U.S. holder and certain conditions are met, or the holder otherwise establishes an exemption. Payment by a United States office of a broker of the proceeds of a sale of Common Stock will be subject to both backup withholding and information reporting unless the holder certifies its non-United States status under penalties of perjury or otherwise establishes an exemption. S-78 UNDERWRITING Subject to the terms and conditions set forth in the United States Purchase Agreement (the "U.S. Purchase Agreement") among Federal-Mogul, the Selling Shareholders and each of the Underwriters named below (the "U.S. Underwriters"), and concurrently with the sale of 2,200,000 shares of Common Stock to the International Managers (as hereinafter defined), Federal-Mogul and the Selling Shareholders severally have agreed to sell to each of the U.S. Underwriters, and each of the U.S. Underwriters severally has agreed to purchase, the aggregate number of shares of Common Stock set forth opposite its name below:
NUMBER U.S. UNDERWRITERS OF SHARES ----------------- --------- Merrill Lynch, Pierce, Fenner & Smith Incorporated.......................................... Bear, Stearns & Co. Inc. ...................................... Morgan Stanley & Co. Incorporated ............................. Smith Barney Inc. ............................................. Donaldson, Lufkin & Jenrette Securities Corporation............ --------- Total..................................................... 8,800,000 =========
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Bear, Stearns & Co. Inc., Morgan Stanley & Co. Incorporated, Smith Barney Inc., Donaldson, Lufkin & Jenrette Securities Corporation, and Schroder & Co. Inc. are acting as representatives (the "U.S. Representatives") of the U.S. Underwriters. Federal-Mogul and the Selling Shareholders have also entered into an International Purchase Agreement (the "International Purchase Agreement" and, together with the U.S. Purchase Agreement, the "Purchase Agreements") with certain underwriters outside the United States and Canada (the "International Managers" and, together with the U.S. Underwriters, the "Underwriters"). Subject to the terms and conditions set forth in the International Purchase Agreement, and concurrently with the sale of 8,800,000 shares of Common Stock to the U.S. Underwriters pursuant to the U.S. Purchase Agreement, Federal- Mogul and the Selling Shareholders severally have agreed to sell to the International Managers, and the International Managers severally have agreed to purchase, an aggregate of 2,200,000 shares of Common Stock. The offering price per share and the total underwriting discount per share are identical under the U.S. Purchase Agreement and the International Purchase Agreement. In each Purchase Agreement, the several U.S. Underwriters and the several International Managers, respectively, have agreed, subject to the terms and conditions set forth in such Purchase Agreement, to purchase all of the shares of Common Stock being sold pursuant to such Purchase Agreement if any of such shares of S-79 Common Stock being sold pursuant to such Purchase Agreement are purchased. Under certain circumstances, the commitments of non-defaulting U.S. Underwriters or International Managers (as the case may be) may be increased. The sale of Common Stock to the U.S. Underwriters is conditioned upon the sale of shares of Common Stock to the International Managers, and vice versa. The U.S. Underwriters and the International Managers have entered into an intersyndicate agreement (the "Intersyndicate Agreement") that provides for the coordination of their activities. Pursuant to the Intersyndicate Agreement, the Underwriters are permitted to sell shares of Common Stock to each other for purposes of resale at the public offering price set forth on the cover page of this Prospectus Supplement, less an amount not greater than the selling concession. Under the terms of the Intersyndicate Agreement, the U.S. Underwriters and any dealer to whom they sell shares of Common Stock will not offer to sell or sell shares of Common Stock to persons who are non-U.S. or non-Canadian persons or to persons they believe intend to resell to persons who are non-U.S. or non-Canadian persons, and the International Managers and any dealer to whom they sell shares of Common Stock will not offer to sell or sell shares of Common Stock to U.S. persons or Canadian persons or to persons they believe intend to resell to U.S. persons or Canadian persons, except, in each case, for transactions pursuant to the Intersyndicate Agreement. The U.S. Underwriters have advised Federal-Mogul and the Selling Shareholders that the U.S. Underwriters propose initially to offer the shares of Common Stock to the public at the public offering price set forth on the cover page of this Prospectus Supplement and to certain dealers at such price less a concession not in excess of $ per share of Common Stock. The U.S. Underwriters may allow, and such dealers may reallow, a discount not in excess of $ per share of Common Stock on sales to certain other dealers. After the public offering, the public offering price, concession and discount may be changed. Federal-Mogul and the Selling Shareholders have granted options to the U.S. Underwriters, exercisable during the 30-day period after the date of this Prospectus Supplement, to purchase up to an additional 660,000 shares and 660,000 shares, respectively, of Common Stock at the public offering price set forth on the cover page hereof, less the underwriting discount. The U.S. Underwriters may exercise this option only to cover over-allotments, if any, made on the sale of shares of Common Stock offered hereby. To the extent that the U.S. Underwriters exercise this option, each U.S. Underwriter will be obligated, subject to certain conditions, to purchase approximately the number of additional shares of Common Stock proportionate to such U.S. Underwriters' initial amount reflected in the foregoing table. Federal-Mogul and the Selling Shareholders have also granted options to the International Managers, exercisable during the 30-day period after the date of this Prospectus Supplement, to purchase up to an additional 165,000 shares and 165,000 shares, respectively, of Common Stock to cover over-allotments, if any, on terms similar to those granted to the U.S. Underwriters. Federal-Mogul, certain of its executive officers and the Selling Shareholders have agreed that, except under certain circumstances (including issuances of securities in connection with acquisitions), they will not, directly or indirectly, for a period of 90 days following the date of the Prospectus Supplement, except with the prior consent of Merrill Lynch, on behalf of the Underwriters, sell, offer to sell, grant any option for the sale of, or otherwise dispose of, any Common Stock, except that Federal-Mogul may issue Common Stock or options for shares of Common Stock issued pursuant to or sold in connection with any employee benefit plan. Until the distribution of the Common Stock is completed, rules of the Commission may limit the ability of the U.S. Underwriters and certain selling group members to bid for and purchase the Common Stock. As an exception to these rules, the U.S. Underwriters are permitted to engage in certain transactions that stabilize the price of the Common Stock. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Common Stock. If the U.S. Underwriters create a short position in the Common Stock in connection with the Offerings (i.e., if they sell more shares of Common Stock than are set forth on the cover page of this Prospectus Supplement), the U.S. Underwriters may reduce that short position by purchasing Common Stock in the open market. The U.S. Underwriters may also elect to reduce any short position through the exercise of all or part of the over- S-80 allotment option described above. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. Neither Federal-Mogul nor the U.S. Underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Common Stock. In addition, neither Federal-Mogul nor the Underwriters make any representation that the Underwriters will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. Federal-Mogul and the Selling Shareholders have agreed to indemnify the U.S. Underwriters and the International Managers, Federal-Mogul has agreed to indemnify certain Selling Shareholders, and such Selling Shareholders have agreed to indemnify Federal-Mogul, in each case against certain liabilities, including liabilities under the Securities Act. S-81 PRESENTATION OF FINANCIAL INFORMATION All references herein to "U.S. dollar," "dollar" or "$" are to the lawful currency of the United States of America, and all references herein to "pounds," "pounds sterling," "(Pounds)," "pence" or "p" are to the lawful currency of the United Kingdom. T&N, a subsidiary of Federal-Mogul, has published its consolidated financial statements in pounds sterling. Solely for the convenience of the reader, this Prospectus Supplement and the accompanying Prospectus contain translations of certain amounts in pounds sterling into U.S. dollars at specified rates. No representation is made that the pounds sterling amounts actually represent such U.S. dollar amounts or could be converted into U.S. dollars at those or any other rates. For informational purposes only, the Noon Buying Rate on May 12, 1998 was $1.6347 = (Pounds)1.00. See "Exchange Rates" for historical information regarding the Noon Buying Rate. Federal-Mogul acquired T&N on March 6, 1998 and acquired Fel-Pro on February 24, 1998. See "T&N and Fel-Pro Acquisitions." The financial information relating to Federal-Mogul set forth in this Prospectus Supplement and the accompanying Prospectus (i) to the extent it relates to the years ended December 31, 1995, 1996 and 1997, or is stated at those dates, has been derived from Federal-Mogul's audited consolidated financial statements of and for the years ended December 31, 1995, 1996 and 1997 included in Federal- Mogul's Annual Report on Form 10-K and included elsewhere in this Prospectus Supplement (the "Federal-Mogul Audited Financial Statements") and (ii) to the extent it relates to the three-month periods ended March 31, 1997 and 1998, or is stated at those dates, has been derived from Federal-Mogul's unaudited interim consolidated financial statements of and for the three-month periods ended March 31, 1997 and 1998 (which includes the results of operations and cash flows of T&N and Fel-Pro from March 6, 1998 and February 24, 1998, respectively) included in Federal-Mogul's Quarterly Report on Form 10-Q and included elsewhere in this Prospectus Supplement (the "Federal-Mogul Unaudited Interim Financial Statements" and, together with the Federal-Mogul Audited Financial Statements, the "Federal-Mogul Financial Statements"). The financial information relating to T&N for the years ended December 31, 1996 and 1997 set forth in this Prospectus Supplement and the accompanying Prospectus has been derived from the audited consolidated financial statements of T&N included elsewhere in this Prospectus Supplement (the "T&N Financial Statements") and the financial information relating to Fel-Pro set forth in this Prospectus Supplement and the accompanying Prospectus has been derived from the audited consolidated financial statements of Fel-Pro for the years ended December 28, 1997 and December 29, 1996 included elsewhere in this Prospectus Supplement (the "Fel-Pro Financial Statements" and, together with the Federal-Mogul Financial Statements and the T&N Financial Statements, the "Financial Statements"). The T&N Financial Statements have been prepared in accordance with generally accepted accounting principles in the United Kingdom ("U.K. GAAP"), which differ in certain significant respects from generally accepted accounting principles in the United States ("U.S. GAAP"). The significant differences between U.S. GAAP and U.K. GAAP as they relate to T&N are summarized in Note 29 to the T&N Financial Statements. LEGAL MATTERS The validity of the Common Stock being offered hereby will be passed upon for Federal-Mogul by David M. Sherbin, Esq., Associate General Counsel of Federal-Mogul. Mr. Sherbin owns and holds options to purchase approximately 1,550 shares of Common Stock of Federal-Mogul. Certain legal matters in connection with the Offerings will be passed upon for Federal-Mogul by Cleary, Gottlieb, Steen & Hamilton, New York, New York, and for the Underwriters by Sidley & Austin, Chicago, Illinois and Sachnoff & Weaver Ltd., Chicago, Illinois. EXPERTS The Federal-Mogul Audited Financial Statements contained herein have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon included therein and contained herein. Such consolidated financial statements and schedules audited by Ernst & Young LLP are contained herein in reliance on such reports given upon the authority of such firm as experts in accounting and auditing. The Fel-Pro Financial Statements contained herein have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon included therein and contained herein. Such financial statements audited by Ernst & Young LLP are contained herein in reliance on such report given upon the authority of such firm as experts in accounting and auditing. The T&N Financial Statements contained herein have been audited by KPMG Audit Plc, independent auditors, as set forth in their reports thereon included therein and contained herein. Such consolidated financial statements audited by KPMG Audit Plc are included herein in reliance on their report given on their authority as experts in accounting and auditing. S-82 PROSPECTUS $2,500,000,000 FEDERAL MOGUL CORPORATION DEBT SECURITIES, PREFERRED STOCK AND COMMON STOCK Federal-Mogul Corporation, a Michigan corporation ("Federal-Mogul" or the "Company"), may offer and sell from time to time, in one or more series, (i) its debt securities, consisting of debentures, notes and/or other evidences of indebtedness representing unsecured obligations of Federal-Mogul (the "Debt Securities"), (ii) shares of its preferred stock, no par value per share ("Preferred Stock"), and (iii) shares of its common stock, without par value ("Common Stock"). The Selling Shareholders (as defined herein) may offer and sell Common Stock as provided for in an accompanying supplement to this Prospectus. See "Plan of Distribution." Debt Securities, Preferred Stock and Common Stock are herein collectively referred to as the "Securities." Certain specific terms of the particular Securities in respect of which this Prospectus is being delivered will be set forth in an accompanying supplement to this Prospectus (the "Prospectus Supplement"), which will describe, without limitation and where applicable, the following: (i) in the case of Debt Securities, the specific designation, aggregate principal amount, ranking as senior or subordinated Debt Securities, denomination, maturity, premium, if any, interest rate (which may be fixed or variable), method of calculating interest, if any, place or places where principal of, premium, if any, and interest, if any, on such Debt Securities will be payable, the currencies or currency units in which principal of, premium, if any, and interest, if any, on such Debt Securities will be payable, any terms of redemption or conversion, any sinking fund provisions, the purchase price, any listing on a securities exchange, any right of Federal-Mogul to defer payment of interest on the Debt Securities and the maximum length of such deferral period and other special terms; (ii) in the case of Preferred Stock, the specific designation and liquidation preference per share and number of shares offered, the purchase price, dividend rate (which may be fixed or variable), method of calculating payment of dividends, if any, place or places where dividends on such Preferred Stock will be payable, any terms of redemption, dates on which dividends shall be payable and dates from which dividends shall accrue, any listing on a securities exchange, voting and other rights, including conversion or exchange rights, if any, and other special terms; and (iii) in the case of Common Stock, the number of shares offered, the initial offering price, market price and dividend information. The offering price to the public of the Securities will be limited to U.S. $2,500,000,000 in the aggregate (or its equivalent (based on the applicable exchange rate at the time of issue), if Securities are offered for consideration denominated in one or more foreign currencies or currency units as shall be designated by Federal-Mogul). The Debt Securities may be denominated in United States dollars or, at the option of Federal-Mogul if so specified in the applicable Prospectus Supplement, in one or more foreign currencies or currency units. The Debt Securities may be issued in registered form or bearer form, or both. If so specified in the applicable Prospectus Supplement, Securities of one or more classes or series may be issued in whole or in part in the form of one or more temporary or permanent global securities. The Common Stock is listed on the New York Stock Exchange under the trading symbol "FMO." The Securities may be sold to or through underwriters, through dealers or agents or directly to purchasers. See "Plan of Distribution." The names of any underwriters, dealers or agents involved in the sale of the Securities in respect of which this Prospectus is being delivered and any applicable fee, commission or discount arrangements with them will be set forth in a Prospectus Supplement. See "Plan of Distribution" for possible indemnification arrangements for dealers, underwriters and agents. The Selling Shareholders will receive the net proceeds from the sale of shares of Common Stock by the Selling Shareholders and will pay all underwriting discounts, selling commissions and transfer taxes, if any, applicable to any such sale. Federal-Mogul is responsible for payment of all other expenses incident to the registration of the shares of Common Stock. The Selling Shareholders and any broker-dealers, agents or underwriters that participate in the distribution of the Common Stock sold by the Selling Shareholders may be deemed "underwriters" within the meaning of the Securities Act, and any commission received by them and any profit on the resale of the shares of Common Stock purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. See "Plan of Distribution" for a description of certain indemnification arrangements. This Prospectus may not be used to consummate sales of Securities unless accompanied by a Prospectus Supplement. -------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. The date of this Prospectus is , 1998. AVAILABLE INFORMATION Federal-Mogul is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith, files reports, proxy statements and other information with the Securities and Exchange Commission (the "Commission"). The Registration Statement on Form S-3 (together with all amendments and exhibits thereto, the "Registration Statement") under the Securities Act of which this Prospectus forms a part, as well as such reports, proxy statements and other information filed by Federal-Mogul with the Commission, can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices in Chicago, Citicorp Center, Suite 1400, 500 West Madison Street, Chicago, Illinois 60661-2511, and in New York, 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of such material can be obtained by mail from the Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates and such material is contained on the worldwide web site maintained by the Commission at http://www.sec.gov. Reports, proxy statements and other information concerning Federal-Mogul can be inspected at the offices of the New York Stock Exchange, Inc. (the "NYSE"), 20 Broad Street, New York, New York 10005. Federal-Mogul has filed the Registration Statement with the Commission in Washington, D.C. with respect to the Securities offered hereby. This Prospectus constitutes a part of the Registration Statement and does not contain all the information set forth therein, certain portions of which have been omitted as permitted by the rules and regulations of the Commission. Any statements contained herein concerning the provisions of any contract or other document are not necessarily complete and, in each instance, reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement or otherwise filed with the Commission. Each such statement is qualified in its entirety by such reference. For further information regarding Federal-Mogul and the securities offered hereby, reference is made to the Registration Statement and to the exhibits thereto. 2 THE COMPANY Federal-Mogul is a leading global manufacturer and distributor of a broad range of vehicular components for automobiles and light trucks, heavy duty trucks, farm and construction vehicles and industrial products. Such components include powertrain systems components (primarily bearings, rings and pistons), sealing system components (dynamic seals and gaskets) and general products (primarily friction products, sintered products, camshafts and systems protection products). Federal-Mogul markets its products to many of the world's major original equipment ("OE") manufacturers. Federal-Mogul also manufactures and supplies its products and related parts to the aftermarket relating to each of these categories of equipment. Founded in 1899, Federal-Mogul traditionally focused on the manufacture and distribution of engine bearings and sealing systems. From 1990 through 1996, Federal-Mogul pursued a strategy of opening retail auto stores in various domestic and international locations. These geographically-dispersed stores proved burdensome to manage and resulted in substantial operating losses. In the fourth quarter of 1996, Federal-Mogul initiated a change of management, following which the Company initiated a significant restructuring program designed to refocus the Company on its core competency of manufacturing. As part of its restructuring, Federal-Mogul closed or sold substantially all of its retail operations. Federal-Mogul also began to pursue a growth strategy of acquiring complementary manufacturing companies that enhance the Company's product base, expand its global manufacturing operations and provide opportunities to capitalize on the Company's aftermarket distribution network and technological resources. In connection with its growth strategy, on March 6, 1998 Federal-Mogul acquired T&N plc ("T&N"), a U.K. based supplier of engine and transmission products, for total consideration of approximately (Pounds)1.46 billion ($2.42 billion, converted at a blended exchange rate of 1.6510 U.S. dollars to 1 pound sterling). T&N manufactures and supplies high technology engineered automotive components and industrial materials including pistons, friction products, bearings, systems protection, camshafts and sealing products. On February 24, 1998, Federal-Mogul acquired Fel-Pro, Incorporated and certain affiliated entities ("Fel-Pro"), a privately-owned automotive parts manufacturer, for total consideration of approximately $717 million. Fel-Pro is a premier gasket manufacturer for the North American aftermarket and OE heavy duty market. Federal-Mogul operates facilities at over 240 manufacturing locations in 24 countries. On a pro forma basis (giving effect to the acquisitions of T&N and Fel-Pro and the disposition of T&N thinwall and drywall and dry bearings (polymer bearings) operations ("T&N Bearings Business") as if they had occurred on January 1, 1997), Federal-Mogul's total sales for 1997 were $4.8 billion. Federal-Mogul is a Michigan corporation with its principal executive offices located at 26555 Northwestern Highway, Southfield, Michigan 48034. The telephone number of those offices is (248) 354-7700. 3 RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS The following table sets forth Federal-Mogul's ratios of earnings to fixed charges and earnings to combined fixed charges and preferred stock dividends for each year in the five-year period ended December 31, 1997 and the three- month period ended March 31, 1998.
YEAR ENDED DECEMBER 31, THREE MONTHS -------------------------------- ENDED MARCH 31, 1998 1997 1996 1995 1994 1993 -------------------- ---- ---- ---- ---- ---- Ratio of Earnings to Fixed Charges(1): 1.1x 3.3x N/A(2) N/A(3) 4.3x 2.7x
YEAR ENDED DECEMBER 31, THREE MONTHS -------------------------------- ENDED MARCH 31, 1998 1997 1996 1995 1994 1993 -------------------- ---- ---- ---- ---- ---- Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends(1): 1.1x 2.9x N/A(2) N/A(3) 3.1x 2.2x
- -------- (1) Federal-Mogul guarantees the debt of the Federal-Mogul Employee Stock Ownership Plan ("ESOP"); the fixed charges of the ESOP are not included in the above calculations. (2) Not applicable as 1996 earnings were inadequate to cover fixed charges by $173.0 million. (3) Not applicable as 1995 earnings were inadequate to cover fixed charges by $53.4 million. The ratio of earnings to fixed charges has been computed by dividing earnings by fixed charges. The ratio of earnings to combined fixed charges and preferred stock dividends has been computed by dividing earnings by the sum of fixed charges and preferred stock dividend requirements. Earnings consist of income before income taxes plus fixed charges excluding capitalized interest. Fixed charges consist of interest on all indebtedness, amortization of debt issuance costs and the portion of rental expense representative of interest. USE OF PROCEEDS Unless otherwise indicated in the accompanying Prospectus Supplement, the net proceeds received by Federal-Mogul from the sale of the Securities offered hereby are expected to be used for general corporate purposes. Any specific allocation of the proceeds to a particular purpose that has been made at the date of any Prospectus Supplement will be described therein. Federal-Mogul will not receive any proceeds from the sale of shares of Common Stock by any Selling Shareholder. DESCRIPTION OF DEBT SECURITIES The Debt Securities offered hereby, consisting of notes, debentures and other evidences of indebtedness, are to be issued in one or more series constituting either senior Debt Securities ("Senior Debt Securities") or subordinated Debt Securities ("Subordinated Debt Securities"). Unless otherwise specified in the applicable Prospectus Supplement, the Debt Securities will be issued pursuant to indentures described below (as applicable, the "Senior Indenture" or the "Subordinated Indenture," each, an "Indenture" and, together, the "Indentures"), in each case between Federal- Mogul and the trustee identified therein (the "Trustee"), the forms of which have been filed as exhibits to the Registration Statement of which this Prospectus forms a part. Except for the subordination provisions of the Subordinated Indenture, for which there are no counterparts in the Senior Indenture, the provisions of the Subordinated Indenture are substantially identical in substance to the provisions of the Senior Indenture that bear the same section numbers. 4 The statements herein relating to the Debt Securities and the following summaries of certain general provisions of the Indentures do not purport to be complete and are subject to, and are qualified in their entirety by reference to, all the provisions of the Indentures (as they may be amended or supplemented from time to time), including the definitions therein of certain terms capitalized in this Prospectus. All article and section references appearing herein are to articles and sections of the applicable Indenture and whenever particular Sections or defined terms of the Indentures (as they may be amended or supplemented from time to time) are referred to herein or in a Prospectus Supplement, such Sections or defined terms are incorporated herein or therein by reference. GENERAL The Debt Securities will be unsecured obligations of Federal-Mogul. The Indentures do not limit the aggregate amount of Debt Securities which may be issued thereunder, nor do they limit the incurrence or issuance of other secured or unsecured debt of Federal-Mogul. The Debt Securities issued under the Senior Indenture will be unsecured and will rank pari passu with all other unsecured and unsubordinated obligations of Federal-Mogul. The Debt Securities issued under the Subordinated Indenture will be subordinate and junior in right of payment, to the extent and in the manner set forth in the Subordinated Indenture, to all Senior Indebtedness of Federal-Mogul. See "-- Subordination under the Subordinated Indenture." Reference is made to the applicable Prospectus Supplement which will accompany this Prospectus for a description of the specific series of Debt Securities being offered thereby, including, but not limited to, the following: (1) the title of such Debt Securities, including whether the Debt Securities are Senior Debt Securities or Subordinated Debt Securities and whether such Debt Securities will be issued under the Senior Indenture, the Subordinated Indenture or other indenture set forth in the Prospectus Supplement; (2) any limit upon the aggregate principal amount of such Debt Securities; (3) the date or dates on which the principal of and premium, if any, on such Debt Securities is payable or the method of determining such date or dates; (4) the rate or rates (which may be fixed or variable) at which such Debt Securities will bear interest, if any, or the method of calculating such rate or rates of interest, the date or dates from such interest will accrue or the method by which such date or dates will be determined, the date or dates on which interest, if any, will be payable and the record date or dates therefor; (5) the place or places where principal of, premium, if any, and interest, if any, on such Debt Securities will be payable; (6) the right, if any, of Federal-Mogul to defer payment of interest on Debt Securities and the maximum length of any such deferral period; (7) the period or periods within which, the price or prices at which, the currency or currencies (including currency unit or units) in which, and the other terms and conditions upon which, such Debt Securities may be redeemed or otherwise purchased, in whole or in part, at the option of Federal-Mogul; (8) the obligation, if any, and the limitations, if any, on Federal-Mogul to redeem or purchase such Debt Securities pursuant to any sinking fund or analogous provisions or upon the happening of a specified event or at the option of a Holder thereof or at Federal-Mogul's option or otherwise, or to apply any purchases of such Debt Securities to any such redemption, and, if any, the period or periods within which, the price or prices at which, the application of purchases to redemptions, and the other terms and conditions upon which such Debt Securities shall be redeemed or purchased, in whole or in part; (9) the denominations in which such Debt Securities are authorized to be issued; (10) the currency or currencies (including currency unit or units) in which principal of, premium, if any, and interest, if any, on such Debt Securities will be payable, or in which such Debt Securities will be denominated and whether Federal-Mogul or the holders of any such Debt Securities may elect to receive payments in respect of such Debt Securities in a currency or currency unit other than that in which such Debt Securities are stated to be payable; (11) if other than the principal amount thereof, the portion of the principal amount of such Debt Securities which will be payable upon declaration of the acceleration of the maturity thereof or the method by which such portion shall be determined; (12) the person to whom any interest on any such Debt Security shall be payable if other than the person in whose name such Debt Security is registered on the applicable record date; (13) any addition to, or modification or deletion of, any Event of Default or any covenant of Federal- Mogul specified in the Indenture with respect to such Debt Securities; (14) the 5 application, if any, of such means of defeasance or covenant defeasance as may be specified for such Debt Securities; (15) whether such Debt Securities are to be issued in whole or in part in the form of one or more temporary or permanent global securities and, if so, the identity of the depositary for such global security or securities; (16) whether the Debt Securities of the series are convertible into Common Stock or Preferred Stock, and, if so, the class or series of capital stock of Federal-Mogul into which such Debt Securities are convertible and the terms and conditions upon which such conversion will be effected; and (17) any other special terms pertaining to such Debt Securities. Unless otherwise specified in the applicable Prospectus Supplement, the Debt Securities will not be listed on any securities exchange. (Section 3.1.) Unless otherwise specified in the applicable Prospectus Supplement, Debt Securities will be issued in fully-registered form without coupons. Where Debt Securities of any series are issued in bearer form, the special restrictions and considerations, including special offering restrictions and special United States Federal income tax considerations, applicable to any such Debt Securities and to payment on and transfer and exchange of such Debt Securities will be described in the applicable Prospectus Supplement. Bearer Debt Securities will be transferable by delivery. (Section 3.5.) Debt Securities may be sold at a substantial discount below their stated principal amount, bearing no interest or interest at a rate which at the time of issuance is below market rates. Certain United States Federal income tax consequences and special considerations applicable to any such Debt Securities, or to Debt Securities issued at par that are treated as having been issued at a discount, will be described in the applicable Prospectus Supplement. If the purchase price of any of the Debt Securities is payable in one or more foreign currencies or currency units or if any Debt Securities are denominated in one or more foreign currencies or currency units or if the principal of, premium, if any, or interest, if any, on any Debt Securities is payable in one or more foreign currencies or currency units, or by reference to commodity prices, equity indices or other factors, the restrictions, elections, certain United States Federal income tax considerations, specific terms and other information with respect to such issue of Debt Securities and such foreign currency or currency units or commodity prices, equity indices or other factors will be set forth in the applicable Prospectus Supplement. In general, holders of such series of Debt Securities may receive a principal amount on any principal payment date, or a payment of premium, if any, on any premium payment date or a payment of interest on any interest payment date, that is greater than or less than the amount of principal, premium, if any, or interest, if any, otherwise payable on such dates, depending on the value on such dates of the applicable currency, commodity, equity index or other factor. PAYMENT, REGISTRATION, TRANSFER AND EXCHANGE Unless otherwise provided in the applicable Prospectus Supplement, payments in respect of the Debt Securities will be made in the designated currency at the office or agency of Federal-Mogul maintained for that purpose as Federal- Mogul may designate from time to time, except that, at the option of Federal- Mogul, interest payments, if any, on Debt Securities in registered form may be made (i) by check mailed to the address of the person entitled thereto as specified in the Register or (ii) at Federal-Mogul's expense, by wire transfer to an account maintained by the person entitled thereto as specified in the Register. (Sections 3.7(a) and 9.2.) Unless otherwise indicated in the applicable Prospectus Supplement, payment of any installment of interest on Debt Securities in registered form will be made to the person in whose name such Debt Security is registered at the close of business on the regular record date for such interest. (Section 3.7(a).) Payment in respect of Debt Securities in bearer form will be made in the currency and in the manner designated in the Prospectus Supplement, subject to any applicable laws and regulations, at such paying agencies outside the United States as Federal-Mogul may appoint from time to time. The paying agents outside the United States initially appointed by Federal-Mogul for a series of Debt Securities will be named in the Prospectus Supplement. Federal- Mogul may at any time designate additional paying agents or rescind the designation of any paying agents, except that, if Debt Securities of a series are issuable as Registered Securities, Federal-Mogul 6 will be required to maintain at least one paying agent in each Place of Payment for such series and, if Debt Securities of a series are issuable as Bearer Securities, Federal-Mogul will be required to maintain a paying agent in a Place of Payment outside the United States where Debt Securities of such series and any coupons appertaining thereto may be presented and surrendered for payment. (Section 9.2.) Unless otherwise provided in the applicable Prospectus Supplement, Debt Securities in registered form will be transferable or exchangeable at the agency of Federal-Mogul maintained for such purpose as designated by Federal- Mogul from time to time. (Sections 3.5 and 9.2.) Debt Securities may be transferred or exchanged without service charge, other than any tax or other governmental charge imposed in connection therewith. (Section 3.5.) GLOBAL DEBT SECURITIES Unless otherwise specified in the applicable Prospectus Supplement, the Debt Securities of a series may be issued in whole or in part in the form of one or more fully registered global securities (a "Registered Global Security") that will be deposited with a depositary (the "Depositary") or with a nominee for the Depositary identified in the applicable Prospectus Supplement. In such a case, one or more Registered Global Securities will be issued in a denomination or aggregate denominations equal to the portion of the aggregate principal amount of outstanding Debt Securities of the series to be represented by such Registered Global Security or Securities. (Section 3.3.) Unless and until it is exchanged in whole or in part for Debt Securities in definitive certificated form, a Registered Global Security may not be transferred except as a whole by the Depositary for such Registered Global Security to a nominee of such Depositary or by a nominee of such Depositary to such Depositary or another nominee of such Depositary or by such Depositary or any such nominee to a successor Depositary for such series or a nominee of such successor Depositary and except in the circumstances described in the applicable Prospectus Supplement. (Section 3.5.) The specific terms of the depositary arrangement with respect to any portion of a series of Debt Securities to be represented by a Registered Global Security will be described in the applicable Prospectus Supplement. Unless otherwise specified in the applicable Prospectus Supplement, Federal-Mogul expects that the following provisions will apply to such depositary arrangements. Ownership of beneficial interests in a Registered Global Security will be limited to participants or persons that may hold interests through participants (as such term is defined below). Upon the issuance of any Registered Global Security, and the deposit of such Registered Global Security with or on behalf of the Depositary for such Registered Global Security, the Depositary will credit, on its book-entry registration and transfer system, the respective principal amounts of the Debt Securities represented by such Registered Global Security to the accounts of institutions ("participants") that have accounts with the Depositary or its nominee. The accounts to be credited will be designated by the underwriters or agents engaging in the distribution of such Debt Securities or by Federal-Mogul, if such Debt Securities are offered and sold directly by Federal-Mogul. Ownership of beneficial interests by participants in such Registered Global Security will be shown on, and the transfer of such beneficial interests will be effected only through, records maintained by the Depositary for such Registered Global Security or by its nominee. Ownership of beneficial interests in such Registered Global Security by persons that hold through participants will be shown on, and the transfer of such beneficial interests within such participants will be effected only through, records maintained by such participants. The laws of some jurisdictions require that certain purchasers of securities take physical delivery of such securities in certificated form. The foregoing limitations and such laws may impair the ability to transfer beneficial interests in such Registered Global Security. So long as the Depositary for a Registered Global Security, or its nominee, is the registered owner of such Registered Global Security, such Depositary or such nominee, as the case may be, will be considered the sole owner or holder of the Debt Securities represented by such Registered Global Security for all purposes under the applicable Indenture. Unless otherwise specified in the applicable Prospectus Supplement and except as specified below, owners of beneficial interests in such Registered Global Security will not be entitled to have Debt 7 Securities of the series represented by such Registered Global Security registered in their names, will not receive or be entitled to receive physical delivery of Debt Securities of such series in certificated form and will not be considered the holders thereof for any purposes under the relevant Indenture. (Section 3.8.) Accordingly, each person owning a beneficial interest in such Registered Global Security must rely on the procedures of the Depositary and, if such person is not a participant, on the procedures of the participant through which such person owns its interest, to exercise any rights of a holder under the relevant Indenture. The Depositary may grant proxies and otherwise authorize participants to give or take any request, demand, authorization, direction, notice, consent, waiver or other action which a holder is entitled to give or take under the relevant Indenture. Federal-Mogul understands that, under existing industry practices, if Federal- Mogul requests any action of holders or if any owner of a beneficial interest in such Registered Global Security desires to give any notice or take any action which a holder is entitled to give or take under the relevant Indenture, the Depositary would authorize the participants to give such notice or take such action, and such participants would authorize beneficial owners owning through such participants to give such notice or take such action or would otherwise act upon the instructions of beneficial owners owning through them. Unless otherwise specified in the applicable Prospectus Supplement, payments with respect to principal, premium, if any, and interest, if any, on Debt Securities represented by a Registered Global Security registered in the name of a Depositary or its nominee will be made to such Depositary or its nominee, as the case may be, as the registered owner of such Registered Global Security. (Section 3.8.) Federal-Mogul expects that the Depositary for any Debt Securities represented by a Registered Global Security, upon receipt of any payment of principal, premium or interest, will immediately credit participants' accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of such Registered Global Security as shown on the records of such Depositary. Federal-Mogul also expects that payments by participants to owners of beneficial interests in such Registered Global Security held through such participants will be governed by standing instructions and customary practices, as is now the case with the securities held for the accounts of customers registered in "street names," and will be the responsibility of such participants. None of Federal-Mogul, the respective Trustees or any agent of Federal-Mogul or the respective Trustees shall have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests of a Registered Global Security, or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. (Section 3.8.) Unless otherwise specified in the applicable Prospectus Supplement, if the Depositary for any Debt Securities represented by a Registered Global Security is at any time unwilling or unable to continue as Depositary or ceases to be a clearing agency registered under the Exchange Act and any other applicable statute or regulation and a duly registered successor Depositary is not appointed by Federal-Mogul within 90 days, Federal-Mogul will issue such Debt Securities in definitive certificated form in exchange for such Registered Global Security. In addition, Federal-Mogul may at any time in its sole discretion determine not to have any of the Debt Securities of a series represented by one or more Registered Global Securities and, in such event, will issue Debt Securities of such series in definitive certificated form in exchange for all of the Registered Global Security or Securities representing such Debt Securities. (Section 3.5.) The Debt Securities of a series may also be issued in whole or in part in the form of one or more bearer global securities (a "Bearer Global Security") that will be deposited with a depositary, or with a nominee for such depositary, identified in the applicable Prospectus Supplement. Any such Bearer Global Security may be issued in temporary or permanent form. (Section 3.4.) The specific terms and procedures, including the specific terms of the depositary arrangement, with respect to any portion of a series of Debt Securities to be represented by one or more Bearer Global Securities will be described in the applicable Prospectus Supplement. CONSOLIDATION, MERGER OR SALE BY FEDERAL-MOGUL Unless otherwise specified in the applicable Prospectus Supplement, Federal- Mogul shall not consolidate with or merge into any other corporation or transfer or lease all or substantially all of its assets, unless: (i) the 8 corporation formed by such consolidation or into which Federal-Mogul is merged or the corporation which acquires its assets is organized in the United States; (ii) the corporation formed by such consolidation or into which Federal-Mogul is merged or which acquires Federal-Mogul's assets expressly assumes all of the obligations of Federal-Mogul under each Indenture; (iii) immediately after giving effect to such transaction, no Default (as hereinafter defined) or Event of Default exists; and (iv) if, as a result of such transaction, properties or assets of Federal-Mogul would become subject to an encumbrance which would not be permitted by the terms of any series of Debt Securities, Federal-Mogul or the successor corporation, as the case may be, shall take such steps as are necessary to secure such Debt Securities equally and ratably with all indebtedness secured thereunder. Upon any such consolidation, merger or sale, the successor corporation formed by such consolidation, or into which Federal-Mogul is merged or to which such sale is made, shall succeed to, and be substituted for Federal-Mogul under each Indenture. (Section 7.1.) EVENTS OF DEFAULT, NOTICE AND CERTAIN RIGHTS ON DEFAULT Each Indenture provides that, if an Event of Default specified therein occurs with respect to the Debt Securities of any series and is continuing, the Trustee for such series or the holders of at least 25% in aggregate principal amount of all of the outstanding Debt Securities of that series, by written notice to Federal-Mogul (and to the Trustee for such series, if notice is given by such holders of Debt Securities), may declare the principal of (or, if the Debt Securities of that series are Original Issue Discount Securities or Indexed Securities, such portion of the original principal amount specified in the Prospectus Supplement) and accrued interest, if any, on all the Debt Securities of that series to be due and payable (provided, with respect to any Debt Securities issued under the Subordinated Indenture, that the payment of principal, premium, if any, and interest, if any, on such Debt Securities shall remain subordinated to the extent provided in Article 12 of the Subordinated Indenture). (Section 5.2.) Unless otherwise specified in the applicable Prospectus Supplement, Events of Default with respect to Debt Securities of any series are defined in each Indenture as being: (a) default for 30 days in payment of any interest on any Debt Security of that series or any coupon appertaining thereto or any additional amount payable with respect to Debt Securities of such series as specified in the applicable Prospectus Supplement when due and payable; (b) default in payment of principal, or premium, if any, at maturity or on redemption or otherwise, or in the making of a mandatory sinking fund payment of any Debt Securities of that series when due; (c) default for 60 days after notice to Federal-Mogul by the Trustee for such series, or to Federal-Mogul and the Trustee for such series by the holders of at least 25% in aggregate principal amount of the Debt Securities of such series then outstanding, in the performance of any covenant with respect to the Debt Securities of that series; (d) with respect to the Senior Indenture, default with respect to other indebtedness of Federal-Mogul for borrowed money in an aggregate principal amount of at least $25 million, which default shall constitute a failure to pay any portion of the principal when due and payable after the expiration of an applicable grace period with respect thereto or shall result in an acceleration thereof and such acceleration is not rescinded or annulled or such debt shall not be paid in full within 30 days after the written notice thereof to Federal-Mogul by the Trustee or to Federal-Mogul and the Trustee by the holders of 25% in aggregate principal amount of the Debt Securities of such series then outstanding, provided that such Event of Default will be remedied, cured or waived if such default under such other agreement is remedied, cured or waived; and (e) certain events of bankruptcy, insolvency or reorganization of Federal-Mogul. (Section 5.1.) The definition of "Event of Default" in each Indenture specifically excludes a default under a secured debt under which the obligee has recourse (exclusive of recourse for ancillary matters such as environmental indemnities, misapplication of funds, costs of enforcement, etc.) only to the collateral pledged for repayment, and where the fair market value of such collateral does not exceed two percent of Total Assets (as defined in the Indenture) at the time of the default. Events of Default with respect to a specified series of Debt Securities may be added to the Indenture and, if so added, will be described in the applicable Prospectus Supplement. (Sections 3.1 and 5.1(7).) Each Indenture provides that the Trustee will, if it is known to a Responsible Officer of the Trustee, within 90 days after the occurrence of a Default with respect to the Debt Securities of any series, give to the holders of the Debt Securities of that series notice of all Defaults known to it unless such Default shall have been cured or 9 waived; provided, that except in the case of a Default in payment on the Debt Securities of that series, the Trustee may withhold the notice if and so long as the board of directors, the executive committee or a committee of its Responsible Officers in good faith determines that withholding such notice is in the interests of the holders of the Debt Securities of that series. (Section 6.6.) "Default" means any event which is, or after notice or passage of time or both, would be, an Event of Default. (Section 1.1.) Each Indenture provides that the holders of a majority in aggregate principal amount of the Debt Securities of each series affected (with each such series voting as a class) may, subject to certain limited conditions, direct the time, method and place of conducting any proceeding for any remedy available to the Trustee for such series, or exercising any trust or power conferred on such Trustee. (Section 5.8.) Each Indenture includes a covenant that Federal-Mogul will file annually with the Trustee a certificate as to Federal-Mogul's compliance with all conditions and covenants of such Indenture. (Section 9.6.) The holders of a majority in aggregate principal amount of any series of Debt Securities then outstanding by notice to the Trustee for such series may waive, on behalf of the holders of all Debt Securities of such series, any past Default or Event of Default with respect to that series and its consequences except a Default or Event of Default in the payment of the principal of, premium, if any, or interest, if any, on any Debt Security of such series, or except in respect of an Event of Default resulting from the breach of a covenant or provision of either Indenture which, pursuant to the applicable Indenture, cannot be amended or modified without the consent of the holders of each outstanding Debt Security of such series affected. (Section 5.7.) OPTION TO DEFER INTEREST PAYMENTS If provided in the applicable Prospectus Supplement, Federal-Mogul shall have the right at any time and from time to time during the term of the series of Debt Securities to defer the payment of interest for such number of consecutive interest payment periods as may be specified in the applicable Prospectus Supplement (each, an "Extension Period"), subject to the terms, conditions and covenants, if any, specified in such Prospectus Supplement, provided that such Extension Period may not extend beyond the stated maturity of the Debt Securities. Certain material United States Federal income tax consequences and special considerations applicable to any such Debt Securities will be described in the applicable Prospectus Supplement. Unless otherwise specified in the applicable Prospectus Supplement, at the end of such Extension Period, Federal-Mogul shall pay all interest then accrued and unpaid together with interest thereon compounded semiannually at the rate specified for the Debt Securities to the extent permitted by applicable law ("Compound Interest"); provided, that during any such Extension Period, (a) Federal-Mogul shall not declare or pay dividends on, make distributions with respect to, or redeem, purchase, acquire or make a liquidation payment with respect to, any of its capital stock (other than (i) purchases or acquisitions of capital stock of Federal-Mogul in connection with the satisfaction by Federal-Mogul of its obligations under any employee or agent benefit plans or the satisfaction by Federal-Mogul of its obligations pursuant to any contract or security outstanding on the date of such event requiring Federal-Mogul to purchase capital stock of Federal-Mogul, (ii) as a result of a reclassification of Federal-Mogul's capital stock or the exchange or conversion of one class or series of Federal-Mogul's capital stock for another class or series of Federal-Mogul's capital stock, (iii) the purchase of fractional interests in shares of Federal-Mogul's capital stock pursuant to the conversion of exchange provisions of such capital stock or the security being conversed or exchanged, (iv) dividends or distributions in capital stock of Federal-Mogul (or rights to acquire capital stock) or repurchases or redemptions of capital stock solely from the issuance or exchange of capital stock or (v) redemptions or repurchases of any rights outstanding under a shareholder rights plan), (b) Federal-Mogul shall not make any payment of interest, principal or premium, if any, on or repay, repurchase or redeem any debt securities issued by Federal-Mogul that rank junior to the Debt Securities, and (c) Federal-Mogul shall not make any guarantee payments with respect to the foregoing. Prior to the termination of any such Extension Period, Federal-Mogul may further defer payments of interest by extending the interest payment period; provided, however, that, such Extension Period, including all such previous and further extensions, may not extend beyond the maturity of the Debt Securities. Upon the termination of any Extension Period and the payment of all amounts then due, Federal-Mogul may commence a new 10 Extension Period, subject to the terms set forth in this section. No interest during an Extension Period, except at the end thereof, shall be due and payable, but Federal-Mogul may prepay at any time all or any portion of the interest accrued during an Extension Period. Federal-Mogul has no present intention of exercising its right to defer payments of interest by extending the interest payment period on the Debt Securities. Federal-Mogul shall give the holders of the Debt Securities notice of its selection of such Extension Period ten Business Days prior to the earlier of (i) the Interest Payment Date or (ii) the date upon which Federal-Mogul is required to give notice to the New York Stock Exchange (or other applicable self-regulatory organization) or to holders of the Debt Securities of the record or payment date of such related interest payment. MODIFICATION OF THE INDENTURES Unless otherwise specified in the applicable Prospectus Supplement, each Indenture contains provisions permitting Federal-Mogul and the Trustee to enter into one or more supplemental indentures without the consent of the holders of any of the Debt Securities in order (i) to evidence the succession of another corporation to Federal-Mogul and the assumption of the covenants and obligations of Federal-Mogul by a successor to Federal-Mogul; (ii) to add to the covenants of Federal-Mogul or to surrender any right or power of Federal-Mogul; (iii) to add additional Events of Default with respect to any series of Debt Securities; (iv) to add or change any provisions to such extent as necessary to facilitate the issuance of Debt Securities in bearer form or to facilitate the issuance of Debt Securities in global form; (v) to add, change or eliminate any provision affecting only Debt Securities not yet issued; (vi) to secure the Debt Securities; (vii) to establish the form or terms of Debt Securities; (viii) to evidence and provide for successor Trustees; (ix) if allowed without penalty under applicable laws and regulations, to permit payment in respect of Debt Securities in bearer form in the United States; (x) to correct any defect or supplement any inconsistent provisions or to make any other provisions with respect to matters or questions arising under such Indenture, provided that such action does not adversely affect the interests of the holders of Debt Securities of any series; or (xi) to cure any ambiguity or correct any mistake. The Subordinated Indenture also permits Federal-Mogul and the Trustee thereunder to enter into such supplemental indentures to modify the subordination provisions contained in the Subordinated Debenture except in a manner adverse to any outstanding Debt Securities. (Section 8.1.) Unless otherwise specified in the applicable Prospectus Supplement, each Indenture also contains provisions permitting Federal-Mogul and the Trustee, with the consent of the holders of a majority in aggregate principal amount of the outstanding Debt Securities affected by such supplemental indenture (with the Debt Securities of each series voting as a class), to execute supplemental indentures adding any provisions to or changing or eliminating any of the provisions of such Indenture or any supplemental indenture or modifying the rights of the holders of Debt Securities of such series, except that, without the consent of the holder of each Debt Security so affected, no such supplemental indenture may: (i) change the time for payment of principal or premium, if any, or interest, if any, on any Debt Security; (ii) reduce the principal of, or the rate of interest, or premium, if any, on any Debt Security, or change the manner in which the amount of any of the foregoing is determined; (iii) reduce the amount of premium, if any, payable upon the redemption of any Debt Security; (iv) reduce the amount of principal payable upon acceleration of the maturity of any Original Issue Discount Security or Indexed Security; (v) impair the right to institute suit for the enforcement of any payment on or with respect to any Debt Security; (vi) reduce the percentage in principal amount of the outstanding Debt Securities affected thereby, the consent of whose holders is required for modification or amendment of such Indenture or for waiver of compliance with certain provisions of the Indenture or for waiver of certain defaults; (viii) change the obligation of Federal-Mogul to maintain an office or agency in the places and for the purposes specified in such Indenture; (ix) modify the provisions relating to the subordination of outstanding Debt Securities of any series in a manner adverse to the holders thereof; or (x) modify the provisions relating to waiver of certain defaults or any of the foregoing provisions. (Section 8.2.) SUBORDINATION UNDER THE SUBORDINATED INDENTURE The Subordinated Indenture provides that any Subordinated Debt Securities issued thereunder are subordinate and junior in right of payment to all Senior Indebtedness to the extent provided in the Subordinated Indenture. (Section 12.1 of the Subordinated Indenture.) The Subordinated Indenture defines the term "Senior 11 Indebtedness" as: (i) all indebtedness of Federal-Mogul, whether outstanding on the date of the Subordinated Indenture or thereafter created, incurred or assumed, that is for money borrowed, or evidenced by a note or similar instrument given in connection with the acquisition of any business, properties or assets, including securities; (ii) any indebtedness of others of the kinds described in the preceding clause (i) for the payment of which Federal-Mogul is responsible or liable as guarantor or otherwise; and (iii) amendments, renewals, extensions and refundings of any such indebtedness. The Senior Indebtedness shall continue to be Senior Indebtedness and entitled to the benefits of the subordination provisions irrespective of any amendment, modification or waiver of any term of the Senior Indebtedness or extension or renewal of the Senior Indebtedness. Senior Indebtedness does not include (A) any indebtedness of Federal-Mogul to any of its subsidiaries, (B) indebtedness incurred for the purchase of goods or materials or for services obtained in the ordinary course of business, and (C) any indebtedness which by its terms is expressly made pari passu with or subordinated to the Subordinated Debt Securities. (Section 12.2 of the Subordinated Indenture.) If (i) Federal-Mogul defaults in the payment of any principal, or premium, if any, or interest, if any, on any Senior Indebtedness when the same becomes due and payable, whether at maturity or at a date fixed for prepayment or declaration or otherwise or (ii) an event of default occurs with respect to any Senior Indebtedness permitting the holders thereof to accelerate the maturity thereof and written notice of such event of default (requesting that payments on Subordinated Debt Securities cease) is given to Federal-Mogul by the holders of Senior Indebtedness, then unless and until such default in payment or event of default shall have been cured or waived or shall have ceased to exist, no direct or indirect payment (in cash, property or securities, by set-off or otherwise) shall be made or agreed to be made on account of the Subordinated Debt Securities or interest thereon or in respect of any repayment, redemption, retirement, purchase or other acquisition of Subordinated Debt Securities. (Section 12.4 of the Subordinated Indenture.) In the event of (i) any insolvency, bankruptcy, receivership, liquidation, reorganization, readjustment, composition or other similar proceeding relating to Federal-Mogul, its creditors or its property, (ii) any proceeding for the liquidation, dissolution or other winding-up of Federal-Mogul, voluntary or involuntary, whether or not involving insolvency or bankruptcy proceedings, (iii) any assignment by Federal-Mogul for the benefit of creditors, or (iv) any other marshalling of the assets of Federal-Mogul, all Senior Indebtedness (including, without limitation, interest accruing after the commencement of any such proceeding, assignment or marshalling of assets) shall first be paid in full before any payment or distribution, whether in cash, securities or other property, shall be made by Federal-Mogul on account of Subordinated Debt Securities. In any such event, any payment or distribution, whether in cash, securities or other property (other than securities of Federal-Mogul or any other corporation provided for by a plan of reorganization or readjustment, the payment of which is subordinate, at least to the extent provided in the subordination provisions of the Subordinated Indenture with respect to the indebtedness evidenced by Subordinated Debt Securities, to the payment of all Senior Indebtedness at the time outstanding and to any securities issued in respect thereof under any such plan of reorganization or readjustment), which would otherwise (but for the subordination provisions) be payable or deliverable in respect of Subordinated Debt Securities (including any such payment or distribution which may be payable or deliverable by reason of the payment of any other indebtedness of Federal-Mogul being subordinated to the payment of Subordinated Debt Securities) shall be paid or delivered directly to the holders of Senior Indebtedness, or to their representative or trustee, in accordance with the priorities then existing among such holders until all Senior Indebtedness shall have been paid in full. (Section 12.3 of the Subordinated Indenture.) No present or future holder of any Senior Indebtedness shall be prejudiced in the right to enforce subordination of the indebtedness evidenced by Subordinated Debt Securities by any act or failure to act on the part of Federal-Mogul. (Section 12.9 of the Subordinated Indenture.) Senior Indebtedness shall not be deemed to have been paid in full unless the holders thereof shall have received cash, securities or other property equal to the amount of such Senior Indebtedness then outstanding. After all Senior Indebtedness has been paid in full and until the Subordinated Debt Securities are paid in full, the holders of Subordinated Debt Securities shall be subrogated to the rights of the holders of Senior Indebtedness to receive distributions applicable to the Senior Indebtedness to the extent that distributions otherwise payable to the holders of Subordinated Debt Securities have been applied to the payment of Senior Indebtedness, and such 12 payments or distributions received by any holder of Subordinated Debt Securities, by reason of such subrogation, of cash, securities or other property which otherwise would be paid or distributed to the holders of Senior Indebtedness, shall, as between Federal-Mogul and its creditors other than the holders of Senior Indebtedness, on the one hand, and the holders of Subordinated Debt Securities, on the other, be deemed to be a payment by Federal-Mogul on account of Senior Indebtedness, and not on account of Subordinated Debt Securities. (Section 12.7 of the Subordinated Indenture.) The Subordinated Indenture provides that the foregoing subordination provisions, insofar as they relate to any particular issue of Subordinated Debt Securities, may be changed prior to such issuance. Any such change would be described in the applicable Prospectus Supplement relating to such Subordinated Debt Securities. DEFEASANCE AND COVENANT DEFEASANCE If indicated in the applicable Prospectus Supplement, Federal-Mogul may elect either (i) to defease and be discharged from any and all obligations with respect to the Debt Securities of or within any series (except as otherwise provided in the relevant Indenture) ("defeasance") or (ii) to be released from its obligations with respect to certain covenants applicable to the Debt Securities of or within any series ("covenant defeasance"), upon the deposit with the relevant Trustee (or other qualifying trustee), in trust for such purpose, of money and/or Government Obligations which through the payment of principal and interest in accordance with their terms will provide money in an amount sufficient, without reinvestment, to pay the principal of and any premium or interest on such Debt Securities to Maturity or redemption, as the case may be, and any mandatory sinking fund or analogous payments thereon. As a condition to defeasance or covenant defeasance, Federal-Mogul must deliver to the Trustee an Opinion of Counsel to the effect that the Holders of such Debt Securities will not recognize income, gain or loss for United States Federal income tax purposes as a result of such defeasance or covenant defeasance and will be subject to United States Federal income tax on the same amounts and in the same manner and at the same times as would have been the case if such deposit, defeasance and discharge had not occurred. Such Opinion of Counsel, in the case of defeasance under clause (i) above, must refer to and be based upon a ruling of the Internal Revenue Service or a change in applicable Federal income tax law occurring after the date of the relevant Indenture. (Article 4.) If indicated in the applicable Prospectus Supplement, in addition to obligations of the United States or an agency or instrumentality thereof, Government Obligations may include obligations of the government or an agency or instrumentality of the government issuing the currency or currency unit in which Debt Securities of such series are payable. (Section 3.1.) In addition, with respect to the Subordinated Indenture, in order to be discharged, no event or condition shall exist that, pursuant to certain provisions described under "--Subordination under the Subordinated Indenture" above, would prevent Federal-Mogul from making payments of principal of (and premium, if any) and interest, if any, on Subordinated Debt Securities at the date of the irrevocable deposit referred to above. (Section 4.6(i) of the Subordinated Indenture.) Federal-Mogul may exercise its defeasance option with respect to such Debt Securities notwithstanding its prior exercise of its covenant defeasance option. If Federal-Mogul exercises its defeasance option, payment of such Debt Securities may not be accelerated because of an Event of Default. (Section 4.4.) If Federal-Mogul exercises its covenant defeasance option, payment of such Debt Securities may not be accelerated by reason of a Default or an Event of Default with respect to the covenants to which such covenant defeasance is applicable. However, if such acceleration were to occur by reason of another Event of Default, the realizable value at the acceleration date of the money and Government Obligations in the defeasance trust could be less than the principal and interest then due on such Debt Securities, in that the required deposit in the defeasance trust is based upon scheduled cash flow rather than market value, which will vary depending upon interest rates and other factors. THE TRUSTEES Unless otherwise specified in the applicable Prospectus Supplement, The Bank of New York will be the Trustee under the Senior Indenture and under the Subordinated Indenture. Federal-Mogul may also maintain banking and other commercial relationships with each of the Trustees and their affiliates in the ordinary course of business. 13 DESCRIPTION OF PREFERRED STOCK AND COMMON STOCK In general, the classes of authorized capital stock are afforded preferences with respect to dividends and liquidation rights in the order listed above. The Board of Directors of Federal-Mogul is empowered, without approval of the shareholders, to cause the Preferred Stock to be issued in one or more series, with the numbers of shares of each series and the rights, preferences and limitations of each series to be determined by it including, without limitation, the dividend rights, conversion rights, redemption rights and liquidation preferences, if any, of any wholly unissued series of Preferred Stock (or of the entire class of Preferred Stock if none of such shares have been issued), the number of shares constituting each such series and the terms and conditions of the issue thereof. The descriptions set forth below do not purport to be complete and are qualified in their entirety by reference to the Restated Articles of Incorporation. The Prospectus Supplement relating to an offering of Common Stock will describe terms relevant thereto, including the number of shares offered, the initial offering price, market price and dividend information. PREFERRED STOCK The applicable Prospectus Supplement will describe the following terms of any Preferred Stock in respect of which this Prospectus is being delivered (to the extent applicable to such Preferred Stock): (i) the specific designation, number of shares, seniority and purchase price; (ii) any liquidation preference per share; (iii) any date of maturity; (iv) any redemption, repayment or sinking fund provisions; (v) any dividend rate or rates (which may be fixed or variable) and the dates on which any such dividends will be payable and the dates from which such dividends shall accrue (or the method by which such rates or dates will be determined); (vi) any voting rights; (vii) if other than the currency of the United States of America, the currency or currencies, including composite currencies, in which such Preferred Stock is denominated and/or in which payments will or may be payable; (viii) the method by which amounts in respect of such Preferred Stock may be calculated and any commodities, currencies or indices, or value, rate or price, relevant to such calculation; (ix) whether the Preferred Stock is convertible or exchangeable and, if so, the securities or rights into which such Preferred Stock is convertible or exchangeable (which may include other Preferred Stock, Debt Securities, Common Stock or other securities or rights of Federal-Mogul (including rights to receive payment in cash or securities based on the value, rate or price of one or more specified commodities, currencies or indices) or a combination of the foregoing), and the terms and conditions upon which such conversions or exchanges will be effected, including the initial conversion or exchange prices or rates, the conversion or exchange period and any other related provisions; (x) the place or places where dividends and other payments on the Preferred Stock will be payable; and (xi) any additional dividend, liquidation, redemption and other rights, preferences, privileges, limitations and restrictions. All shares of Preferred Stock offered hereby, or issuable upon conversion, exchange or exercise of Securities, will, when issued, be fully paid and non- assessable. COMMON STOCK The holders of Common Stock are entitled to receive such dividends as may be declared from time to time by the Board of Directors out of funds legally available therefor. The holders of Common Stock are entitled to one vote per share on all matters submitted to a vote of shareholders and do not have cumulative voting rights. Holders of Common Stock are entitled to receive, upon any liquidation of Federal-Mogul, all remaining assets available for distribution to shareholders after satisfaction of Federal-Mogul's liabilities and the preferential rights of any preferred stock that may then be issued and outstanding. All shares of Common Stock offered hereby, or issuable upon conversion, exchange or exercise of Securities, will, when issued, be fully paid and non-assessable. The Common Stock is listed on the NYSE. The holders of Common Stock have no preemptive, conversion or redemption rights. The registrar and transfer agent for the Common Stock is The Bank of New York. 14 CERTAIN PROVISIONS The Restated Articles of Incorporation and Bylaws of Federal-Mogul and the Rights Agreement contain provisions, summarized below, that could have the effect of delaying, deterring or preventing a change of control of Federal- Mogul. This summary does not purport to be complete and is subject to, and qualified in its entirety by, the provisions of the Restated Articles of Incorporation and Bylaws and the Rights Agreement. Federal-Mogul's Articles of Incorporation Federal-Mogul's Restated Articles of Incorporation provide that the approval of a business combination (as hereinafter defined) requires (in addition to any other vote that may be required) the affirmative vote of at least a majority of the outstanding shares of preferred stock entitled to vote thereon and Common Stock, voting as a single class. In addition, (a) where the Restated Articles of Incorporation require the approval of the holder of the preferred stock or one or more series thereof considered as a separate class, such business combination shall also require the affirmative vote of at least a majority of the outstanding shares of the preferred stock of such series thereof considered as a separate class that are not owned by an Interested Shareholder (as hereinafter defined) and (b) where applicable law requires that a transaction be approved by any class or series of Federal-Mogul's stock or any combination thereof considered as a single class, such transaction shall also require the affirmative vote of at least a majority of the shares of each such class or series or combination considered as a single class that are not owned by the Interested Shareholder. The voting requirements set forth in the previous paragraph shall not apply to any business combination if (a) Federal-Mogul's Board of Directors includes at least one member who was a duly elected and acting member of the Board of Directors (each being a "Disinterested Director") prior to the time the Interested Shareholder involved became an Interested Shareholder and such business combination has been approved by a majority of the Disinterested Directors and by a majority of the entire Board of Directors, (b) the aggregate amount of the cash and the fair market value of consideration other than cash to be received per share by holders of Common Stock in such business combination shall be at least equal to the Specified Price (as hereinafter defined) or (c) such business combination has been unanimously approved by the Board of Directors and the Board has, in the faithful exercise of its fiduciary duties to the holders of Common Stock, unanimously and expressly determined that the aggregate amount of the cash and the fair market value of the consideration other than cash to be received per share by holders of Common Stock in such business combination, although less than the Specified Price, is nonetheless fair to all holders of Common Stock. As used above: "business combination" means (a) any merger or consolidation of Federal- Mogul and any subsidiary with or into any Interested Shareholder or any corporation which after such merger or consolidation would be an affiliate of an Interested Shareholder, (b) any sale lease exchange, mortgage, pledge, transfer or other disposition to any Interested Shareholder or its affiliate of assets of Federal-Mogul or any subsidiary having a fair market value of $1 million or more (except in the ordinary course of business and on an arm's-length basis), (c) the issuance or transfer by Federal-Mogul or any subsidiary (in one transaction or a series of related transactions) of any securities of Federal-Mogul or a subsidiary to any Interested Shareholder or its affiliate for cash, securities or property having a fair market value of $1 million or more, (d) the adoption of any plan or proposal for the liquidation or dissolution of Federal-Mogul as a result of which any Interested Shareholder or its affiliate would receive any assets of Federal-Mogul other than cash or (e) any reclassification of securities (including any reverse stock split) or recapitalization of Federal-Mogul or merger or consolidation of Federal-Mogul with any subsidiary or any similar transaction (whether or not with an Interested Shareholder) which has the effect, directly or indirectly, of increasing the proportion of outstanding shares of any equity security of Federal-Mogul or a subsidiary directly owned by an Interested Shareholder or its affiliate. "Interested Shareholder" means a person who on the record date for determining the shareholders entitled to vote on a business combination is (a) the beneficial owner of 10% or more of the outstanding shares of Common Stock, (b) an affiliate of Federal-Mogul and within two years prior to such record date 15 beneficially owned 10% or more of the then outstanding shares of Common Stock or (c) an assignee or other successor to any shares of capital stock of Federal-Mogul which were within two years prior thereto beneficially owned by an Interested Shareholder and such assignment or succession shall have occurred in one or more transactions not involving a public offering. "Specified Price" means the highest of (a) the highest per share price paid or agreed to be paid by such Interested Shareholder to acquire beneficial ownership of any shares of Common Stock within the two-year period prior to the consummation of the business combination; (b) the per share book value of the Common Stock at the end of the fiscal month immediately preceding the consummation of such business combination; and (c) if the Common Stock of the Interested Shareholder is publicly traded, the price per share equal to the earnings per share of Common Stock for the four full consecutive fiscal quarters immediately preceding the record date for solicitation of votes on such business combination (or, if votes are not solicited on such business combination, immediately preceding the consummation of such business combination) multiplied by the ratio (if any) of the highest published sale price of the Interested Shareholder's common stock during its four fiscal quarters immediately preceding such date, to the earnings per share of common stock of the Interested Shareholder for such four fiscal quarters. Federal-Mogul's Bylaws Federal-Mogul's Bylaws contain provisions that govern nominations of directors by shareholders and presentation of business by shareholders for consideration at the annual meeting of shareholders. Generally, a shareholder must give notice of such nomination or business within 60 to 90 days prior to such meeting, giving specified information as to the shareholder and as to the person nominated and the business proposed to be brought before the meeting. Preferred Share Purchase Rights In 1988, Federal-Mogul's Board of Directors authorized the distribution of one Preferred Share Purchase Right (a "Right") for each outstanding share of Common Stock. Each Right entitles the holder thereof to buy one-half of one one-hundredth of a share of Series B Junior Participating Preferred Stock at a price of $70.00. The Rights are governed by the Rights Agreement. As distributed, the Rights trade together with the Common Stock. They may be exercised or traded separately only after the earlier to occur of: (i) 10 days following a public announcement that a person or group of persons has obtained the right to acquire 10% or more of the outstanding Common Stock (20% in the case of certain institutional investors), or (ii) 10 business days (or such later date as may be determined by action of the Board of Directors) following the commencement or announcement of an intent to make a tender offer or exchange offer which would result in beneficial ownership by a person or group of persons of 10% or more of the outstanding Common Stock. If the acquiring person or group of persons acquires 10% or more of the Common Stock, each Right (other than those held by the acquirer) will entitle its holder to purchase, at the Right's exercise price, shares of Common Stock having a market value of twice the Right's exercise price. Additionally, if Federal- Mogul is acquired in a merger or other business combination, each Right (other than those held by the surviving or acquiring company) will entitle its holder to purchase, at the Right's exercise price, shares of the acquiring company's stock (or Common Stock of Federal-Mogul if it is the surviving corporation) having a market value of twice the Right's exercise price. Rights may be redeemed at the option of the Board of Directors for $0.005 per Right at any time before a person or group or persons acquires 10% or more of Federal-Mogul's Common Stock. The Board may amend the Rights at any time without shareholder approval. The Rights will expire by their terms on November 14, 1998. The Rights have certain anti-takeover effects. The Rights will cause substantial dilution to a person or group that attempts to acquire Federal- Mogul in a manner that causes the Rights to become exercisable. Federal-Mogul believes, however, that the Rights would neither affect any prospective offeror willing to negotiate with the Board of Directors of Federal-Mogul nor interfere with any merger or other business combination approved by the Board of Directors. 16 SELLING SHAREHOLDERS The following table sets forth certain information concerning the beneficial ownership of Common Stock held by the Selling Shareholders, as of May 12, 1998. As of such date, none of the Selling Shareholders holds greater than 1% of the shares of the Company's outstanding Common Stock.
NUMBER OF SHARES BENEFICIALLY OWNED AS OF NAME MAY 12, 1998(1) ---- ------------------- Robert J. Morris Revocable Trust UAD 2/16/83................ 69,075 Ellen J. Morris............................................. 97,353 Bruce E. Morris............................................. 113,287 Richard A. Morris........................................... 85,927 Elliot Lehman Trust 5/87.................................... 57,930 Frances M. Lehman Trust 5/87................................ 99,372 E. Lehman 15 Year Income Trust.............................. 3,178 F. Lehman 15 Year Income Trust.............................. 4,104 Kenneth A. Lehman 1996 E. Family Trust 6/96................. 3,213 Kenneth A. Lehman 1996 F. Family Trust 6/96................. 3,213 Paul Lehman 1996 E. Family Trust 6/96....................... 3,213 Paul Lehman 1996 F. Family Trust 6/96....................... 3,213 Kay L. Schlozman 1996 E. Family Trust 6/96.................. 3,213 Kay L. Schlozman 1996 F. Family Trust 6/96.................. 3,213 Kenneth A. Lehman........................................... 106,407 Lucy G. Lehman.............................................. 11,405 Paul A. Lehman.............................................. 98,514 Ronna Stamm................................................. 5,973 Kay Schlozman Children's Trust 12/82........................ 7,690 Schlozman Family Gift Trust 9/85............................ 14,456 Kay L. Schlozman 1997 Children's Trust 11/97................ 3,845 Betsy G. Lehman Irrevocable Trust #1 12/83.................. 6,867 K. Lehman Children's Trust 12/82 FBO Betsy.................. 20,602 K. Lehman Children's Trust 9/85 FBO Betsy................... 4,819 Amy G. Lehman Irrevocable Trust #1 12/83.................... 6,867 K. Lehman Children's Trust 12/82 FBO Amy.................... 20,602 K. Lehman Children's Trust 9/85 FBO Amy..................... 4,819 Peter G. Lehman Irrevocable Trust #1 12/83.................. 6,867 K. Lehman Children's Trust 12/82 FBO Peter.................. 20,602 K. Lehman Children's Trust 9/85 FBO Peter................... 4,819 Daniel A. Schlozman Trust #1 12/81.......................... 61,265 Daniel A. Schlozman Trust #2 12/81.......................... 61,264 Schlozman 1994 Gift Trust for Julia......................... 5,922 Sylvia M. Radov............................................. 134,413 Lewis C. Weinberg Irrevocable Trust 8/76.................... 54,994 Sylvia 1996 Gift Trust for Barbara.......................... 2,216 Sylvia 1996 Gift Trust for David............................ 2,216 Sylvia 1996 Gift Trust for Daniel........................... 2,216 DAW Family Trust 9/85....................................... 45,382 Daniel C. Weinberg Revocable Trust 7/97..................... 72,382 Carol Jung.................................................. 35,685 Kessler 1996 Gift for David................................. 1,323
17
NUMBER OF SHARES BENEFICIALLY OWNED AS OF NAME MAY 12, 1998(1) ---- ------------------- Kessler 1996 Gift Trust for Daniel.......................... 1,438 DCW Family Trust 9/85....................................... 123,028 Lewis Weinberg Grandchildrens Gift Trust 12/82--Keith....... 11,788 Keith A. Kessler............................................ 23,921 Lewis Weinberg Grandchildrens Gift Trust 12/82--Arthur...... 11,788 Arthur J. Kessler........................................... 33,025 Lewis Weinberg Grandchildrens Gift Trust 12/82--Eric........ 11,788 Eric J. Kessler Irrevocable Trust 12/77..................... 33,025 Lewis Weinberg Grandchildrens Gift Trust 12/82--Mindy....... 29,872 SMR-DAW Childrens Gift Trust for Mindy 12/82................ 6,319 Lewis Weinberg Grandchildrens Gift Trust 12/82--Brian....... 29,872 SMR-DAW Childrens Gift Trust for Brian 12/82................ 6,319 Sylvia MGP Trust for Daniel 06/96........................... 97,893 Weinberg 1992 Gift Trust for Barbara........................ 41,954 Weinberg 1992 Gift Trust for David.......................... 41,954 Weinberg 1992 Gift Trust for Daniel......................... 41,954 Sylvia 1992 Gift Trust for Barbara.......................... 102,185 Sylvia 1992 Gift Trust for David............................ 102,185 Sylvia 1992 Gift Trust for Daniel........................... 102,185 H&M Realty Corporation...................................... 216,584 McCormick Investments, Inc.................................. 81 McCormick Investments, LP................................... 7,926
- -------- (1) Assumes conversion of Series E Stock. The Selling Shareholders may from time to time offer and sell pursuant to this Prospectus and a Prospectus Supplement providing therefor, shares of Common Stock held by such Selling Shareholders. The shares of Common Stock that may be offered and sold by the Selling Shareholders will be acquired by such Selling Shareholders through conversion of Series E Stock received as part of the consideration received by them in the Federal-Mogul acquisition of Fel-Pro. Pursuant to the Registration Rights Agreement among Federal-Mogul and the Selling Shareholders. Federal-Mogul shall bear all expenses incident to Federal-Mogul's performance of or compliance with the Registration Rights Agreement, except that the Selling Shareholders will pay all underwriting discounts and commissions relating to their shares of Common Stock, brokerage fees, transfer taxes, and the fees and expenses of any counsel, accountants or other representatives retained by the Selling Shareholders, if any. The Selling Shareholders will be indemnified by Federal-Mogul against certain liabilities, including certain liabilities under the Securities Act, or will be entitled to contribution in connection therewith. 18 PLAN OF DISTRIBUTION Federal-Mogul may sell any of the Securities being offered hereby in any one or more of the following ways from time to time: (i) through agents; (ii) to or through underwriters; (iii) through dealers; or (iv) directly to purchasers. The Prospectus Supplement with respect to the Securities will set forth the terms of the offering of the Securities, including the name or names of any underwriters, dealers or agents; the purchase price of the Securities and the proceeds to Federal-Mogul from such sale; any underwriting discounts and commissions or agency fees and other items constituting underwriters' or agents' compensation; any initial public offering price and any discounts or concessions allowed or reallowed or paid to dealers and any securities exchange on which such Securities may be listed. Any initial public offering price, discounts or concessions allowed or reallowed or paid to dealers may be changed from time to time. The distribution of the Securities may be effected from time to time in one or more transactions at a fixed price or prices, which may be changed, at market prices prevailing at the time of sale, at prices related to such prevailing market prices or at negotiated prices. Offers to purchase Securities may be solicited by agents designated by Federal-Mogul from time to time. Any such agent involved in the offer or sale of the Securities in respect of which this Prospectus is delivered will be named, and any commissions payable by Federal-Mogul to such agent will be set forth, in the applicable Prospectus Supplement. Unless otherwise indicated in such Prospectus Supplement, any such agent will be acting on a reasonable best efforts basis for the period of its appointment. Any such agent may be deemed to be an underwriter, as that term is defined in the Securities Act of 1933, of the Securities so offered and sold. If Securities are sold by means of an underwritten offering, Federal-Mogul will execute an underwriting agreement with an underwriter or underwriters at the time an agreement for such sale is reached, and the names of the specific managing underwriter or underwriters, as well as any other underwriters, and the terms of the transaction, including commissions, discounts and any other compensation of the underwriters and dealers, if any, will be set forth in the Prospectus Supplement which will be used by the underwriters to make resales of the Securities in respect of which this Prospectus is delivered to the public. If underwriters are utilized in the sale of the Securities in respect of which this Prospectus is delivered, the Securities will be acquired by the underwriters for their own account and may be resold from time to time in one or more transactions, including negotiated transactions, at fixed public offering prices or at varying prices determined by the underwriter at the time of sale. Securities may be offered to the public either through underwriting syndicates represented by managing underwriters or directly by the managing underwriters. If any underwriter or underwriters are utilized in the sale of the Securities, unless otherwise indicated in the Prospectus Supplement, the underwriting agreement will provide that the obligations of the underwriters are subject to certain conditions precedent and that the underwriters with respect to a sale of Securities will be obligated to purchase all such Securities of a series if any are purchased. If a dealer is utilized in the sales of the Securities in respect of which this Prospectus is delivered, Federal-Mogul will sell such Securities to the dealer as principal. The dealer may then resell such Securities to the public at varying prices to be determined by such dealer at the time of resale. Any such dealer may be deemed to be an underwriter, as such term is defined in the Securities Act, of the Securities so offered and sold. The name of the dealer and the terms of the transaction will be set forth in the Prospectus Supplement relating thereto. Offers to purchase Securities may be solicited directly by Federal-Mogul and the sale thereof may be made by Federal-Mogul directly to institutional investors or others, who may be deemed to be underwriters within the meaning of the Securities Act with respect to any resale thereof. The terms of any such sales will be described in the Prospectus Supplement relating thereto. Agents, underwriters and dealers may be entitled under relevant agreements to indemnification or contribution by Federal-Mogul against certain liabilities, including liabilities under the Securities Act. 19 Agents, underwriters and dealers may be customers of, engage in transactions with, or perform services for, Federal-Mogul and its subsidiaries in the ordinary course of business. Securities may also be offered and sold, if so indicated in the applicable Prospectus Supplement, in connection with a remarketing upon their purchase, in accordance with a redemption or repayment pursuant to their terms, or otherwise, by one or more firms ("remarketing firms"), acting as principals for their own accounts or as agents for Federal-Mogul. Any remarketing firm will be identified and the terms of its agreement, if any, with its compensation will be described in the applicable Prospectus Supplement. Remarketing firms may be deemed to be underwriters, as such term is defined in the Securities Act, in connection with the Securities remarketed thereby. Remarketing firms may be entitled under agreements which may be entered into with Federal-Mogul to indemnification or contribution by Federal-Mogul against certain civil liabilities, including liabilities under the Securities Act, and may be customers of, engage in transactions with or perform services for Federal-Mogul and its subsidiaries in the ordinary course of business. If so indicated in the applicable Prospectus Supplement, Federal-Mogul may authorize agents, underwriters or dealers to solicit offers by certain types of institutions to purchase Securities from Federal-Mogul at the public offering prices set forth in the applicable Prospectus Supplement pursuant to delayed delivery contracts ("Contracts") providing for payment and delivery on a specified date or dates in the future. A commission indicated in the applicable Prospectus Supplement will be paid to underwriters, dealers and agents soliciting purchases of Securities pursuant to Contracts accepted by Federal-Mogul. The Selling Shareholders have informed the Company that, unless otherwise specified in a Prospectus Supplement, they intend to dispose of their shares of Common Stock offered hereby (the "Shares") through underwriters and that they will execute an underwriting agreement with an underwriter or underwriters at the time an agreement for such sale is reached. The names of the specific managing underwriter or underwriters, as well as any other underwriters, and the terms of the transaction, including commissions, discounts and any other compensation of the underwriters and dealers, if any, will be set forth in the Prospectus Supplement which will be used by the underwriters to make resales of the Shares in respect of which this Prospectus is delivered to the public. The Shares will be acquired by the underwriters for their own account and may be resold from time to time in one or more transactions, including negotiated transactions, at fixed public offering prices or at varying prices determined by the underwriter at the time of sale. Shares may be offered to the public either through underwriting syndicates represented by managing underwriters or directly by the managing underwriters. Unless otherwise indicated in the Prospectus Supplement, the underwriting agreement will provide that the obligations of the underwriters are subject to certain conditions precedent and that the underwriters with respect to a sale of Shares will be obligated to purchase all such Shares if any are purchased. INCORPORATION OF CERTAIN INFORMATION BY REFERENCE Federal-Mogul has filed with the Commission, pursuant to Section 13 of the Exchange Act: 1. Federal-Mogul's Annual Report on Form 10-K for the year ended December 31, 1997; 2. Federal-Mogul's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998; 3. Federal-Mogul's Current Reports on Form 8-K filed on January 13, 1998, March 11, 1998, March 23, 1998, April 7, 1998, April 17, 1998 and May 14, 1998; and 4. Federal-Mogul's Proxy Statement for the 1998 Annual Shareholders' Meeting, filed on April 21, 1998. All documents filed by Federal-Mogul with the Commission pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act after the date of this Prospectus and prior to the termination of the offering made hereby shall be deemed to be incorporated by reference into this Prospectus and made a part hereof from the date of filing of such documents, except that the information required by Item 402 (i), (k) and (l) of Regulation S-K under the Securities Act and included in any such document is not incorporated herein. Any statement contained 20 in this Prospectus or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained herein or therein or in a subsequently filed document, that also is or is deemed to be incorporated by reference herein or therein, modifies or supersedes such statement. Any statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Prospectus. THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (NOT INCLUDING EXHIBITS TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE IN SUCH DOCUMENTS) ARE AVAILABLE WITHOUT CHARGE UPON WRITTEN OR ORAL REQUEST DIRECTED TO: EDWARD W. GRAY, JR., ESQ., SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY, FEDERAL-MOGUL CORPORATION, 26555 NORTHWESTERN HIGHWAY, SOUTHFIELD, MICHIGAN 48034 (TELEPHONE: (248) 354-7700). LEGAL MATTERS Unless otherwise indicated in the applicable Prospectus Supplement, the validity of Securities being offered hereby will be passed upon for Federal- Mogul by David M. Sherbin, Esq., Associate General Counsel of Federal-Mogul. Mr. Sherbin owns and holds options to purchase approximately 1,550 shares of Common Stock of Federal-Mogul. EXPERTS The consolidated financial statements and schedules of Federal-Mogul as of December 31, 1997 and for each of the three years in the period ended December 31, 1997 incorporated by reference herein have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon included therein and incorporated herein by reference. Such consolidated financial statements and schedules audited by Ernst & Young LLP are incorporated herein by reference in reliance on such reports given upon the authority of such firm as experts in accounting and auditing. The consolidated financial statements of T&N as of December 31, 1997 and for each of the three years in the period ended December 31, 1997 incorporated by reference herein have been audited by KPMG Audit Plc, independent auditors, as set forth in their reports thereon included therein and incorporated herein by reference. Such consolidated financial statements audited by KPMG Audit Plc are incorporated herein by reference in reliance on their report given on their authority as experts in accounting and auditing. The financial statements of Fel-Pro as of December 28, 1997 and December 29, 1996 for each of the three years in the period ended December 28, 1997 incorporated by reference herein have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon included therein and incorporated by reference herein. Such financial statements audited by Ernst & Young LLP are incorporated herein by reference in reliance on such report given upon the authority of such firm as experts in accounting and auditing. 21 INDEX TO FINANCIAL STATEMENTS
PAGE ---- Federal-Mogul Financial Statements: Unaudited Consolidated Statements of Operations for the Three-Month Periods Ended March 31, 1998 and 1997.......................................................... F-2 Consolidated Balance Sheets at March 31, 1998 (Unaudited) and December 31, 1997............................................................... F-3 Unaudited Consolidated Statements of Cash Flows for the Three-Month Periods Ended March 31, 1998 and 1997.......................................................... F-4 Notes to Unaudited Consolidated Financial Statements.................... F-5 Report of Independent Auditors.......................................... F-13 Consolidated Statements of Operations for the Years Ended December 31, 1997, 1996 and 1995.................................................... F-14 Consolidated Balance Sheets at December 31, 1997 and 1996............... F-15 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995.................................................... F-16 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1997, 1996 and 1995.......................................................... F-17 Notes to Consolidated Financial Statements.............................. F-18 T&N Financial Statements: Independent Auditor's Report............................................ F-41 Consolidated Profit and Loss Accounts for the Years Ended December 31, 1997, 1996 and 1995.................................................... F-42 Consolidated Balance Sheets at December 31, 1997 and 1996............... F-43 Consolidated Cash Flow Statements for the Years Ended December 31, 1997, 1996 and 1995.......................................................... F-44 Reconciliations of Movements in Shareholders' Funds for the Years Ended December 31, 1997, 1996 and 1995.......................................................... F-48 Notes to Consolidated Financial Statements.............................. F-49 Fel-Pro Financial Statements: Report of Independent Auditors.......................................... F-85 Consolidated Statements of Operations for the Years Ended December 28, 1997, December 29, 1996 and December 31, 1995.......................... F-86 Consolidated Balance Sheets at December 28, 1997 and December 29, 1996.. F-87 Consolidated Statements of Cash Flows for the Years Ended December 28, 1997, December 29, 1996 and December 31, 1995.......................... F-88 Notes to Consolidated Financial Statements.............................. F-89
F-1 CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
THREE MONTHS ENDED MARCH 31 -------------------- 1998 1997 --------- --------- (MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNT) Net sales................................................ $ 658.0 $ 485.6 Cost of products sold.................................... 496.7 373.5 --------- --------- Gross margin........................................... 161.3 112.1 Selling, general and administrative expenses............. (98.1) (75.9) Amortization............................................. (10.1) (2.5) Purchased in-process research and development charge..... (18.6) -- Restructuring charges.................................... (10.5) -- Adjustment of assets held for sale to fair value......... (20.0) -- Interest expense......................................... (15.5) (9.8) Interest income.......................................... 6.7 0.7 International currency exchange losses................... (1.1) (0.1) Net gain on British pound currency option and forward contract................................................ 13.3 -- Other expense, net....................................... (5.8) (2.0) --------- --------- Earnings Before Income Taxes........................... 1.6 22.5 Income tax expense....................................... 8.8 8.6 --------- --------- Net Earnings (Loss).................................. (7.2) 13.9 Preferred stock dividends, net of related tax benefits... 0.8 2.1 --------- --------- Net Earnings (Loss) Available for Common Shareholders........................................ $ (8.0) $ 11.8 ========= ========= Earnings Per Common Share................................ Net earnings (loss).................................... $ (.20) $ .34 ========= ========= Net earnings (loss) assuming dilution.................. $ (.20) $ .32 ========= =========
See accompanying Notes to Unaudited Consolidated Financial Statements. F-2 CONSOLIDATED BALANCE SHEETS AT MARCH 31, 1998 AND DECEMBER 31, 1997
UNAUDITED MARCH 31 DECEMBER 31 1998 1997 --------- ----------- (MILLIONS OF DOLLARS) ASSETS ------ Current assets: Cash and equivalents........................................ $ 101.5 $ 541.4 Accounts receivable......................................... 728.6 158.9 Investment in accounts receivable securitization............ 86.0 48.7 Inventories................................................. 697.5 277.0 Prepaid expenses and income tax benefits.................... 261.0 113.2 Acquired businesses to be divested.......................... 443.8 -- -------- -------- Total current assets...................................... 2,318.4 1,139.2 Property, plant and equipment................................. 1,469.1 313.9 Goodwill...................................................... 2,675.9 143.8 Other intangible assets....................................... 379.4 48.4 Business investments and other assets......................... 555.9 156.8 -------- -------- Total Assets.............................................. $7,398.7 $1,802.1 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current liabilities: Short-term debt, including current portion of long-term debt....................................................... $ 837.8 $ 28.6 Accounts payable............................................ 418.2 102.3 Accrued compensation........................................ 162.2 36.8 Restructuring and rationalization reserves.................. 188.6 31.5 Payable to T&N plc shareholders............................. 60.3 -- Current portion of asbestos liability....................... 100.0 -- Other accrued liabilities................................... 343.5 130.4 -------- -------- Total current liabilities................................. 2,110.6 329.6 Long-term debt................................................ 2,273.7 273.1 Long-term portion of asbestos liability....................... 1,251.4 -- Postemployment benefits....................................... 452.0 190.9 Other accrued liabilities..................................... 84.3 50.6 Minority interest in consolidated subsidiaries................ 65.7 13.6 Minority interest--preferred securities of affiliate.......... 575.0 575.0 SHAREHOLDERS' EQUITY -------------------- Series C ESOP preferred stock................................. 48.1 49.0 Series E preferred stock...................................... 225.0 -- Common stock.................................................. 202.4 201.0 Additional paid-in capital.................................... 327.3 332.6 Accumulated deficit........................................... (130.8) (123.6) Unearned ESOP compensation.................................... (21.7) (21.8) Accumulated other comprehensive income........................ (61.5) (65.7) Other......................................................... (2.8) (2.2) -------- -------- Total Shareholders' Equity................................ 586.0 369.3 -------- -------- Total Liabilities and Shareholders' Equity.............. $7,398.7 $1,802.1 ======== ========
See accompanying Notes to Unaudited Consolidated Financial Statements. F-3 CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1998 AND 1997 (UNAUDITED)
THREE MONTHS ENDED MARCH 31 ----------------- 1998 1997 --------- ------ (MILLIONS OF DOLLARS) CASH PROVIDED FROM (USED BY) OPERATING ACTIVITIES Net earnings (loss)....................................... $ (7.2) $ 13.9 Adjustments to reconcile net earnings (loss) to net cash provided from operating activities Depreciation and amortization........................... 29.8 14.0 Purchased in-process research and development charge.... 18.6 -- Restructuring charges................................... 10.5 -- Adjustment of assets held for sale to fair value........ 20.0 -- Deferred income taxes................................... (0.7) 4.6 Postemployment benefits................................. (0.1) (0.4) Increase in accounts receivable......................... (57.1) (38.0) Decrease in inventories................................. 36.8 17.1 Increase (decrease) in accounts payable................. 22.0 (2.4) Increase in current liabilities and other............... 20.0 28.3 Payments against restructuring and reengineering reserves............................................... (4.5) (9.0) Payments against asbestos liability..................... (5.4) -- --------- ------ Net Cash Provided From Operating Activities............... 82.7 28.1 CASH PROVIDED FROM (USED BY) INVESTING ACTIVITIES Expenditures for property, plant and equipment............ (19.5) (8.4) Proceeds from sale of business investments................ 49.3 10.4 Proceeds from sale of options............................. 39.5 -- Business acquisitions, net of cash acquired............... (2,655.8) -- --------- ------ Net Cash Provided From (Used By) Investing Activities... (2,586.5) 2.0 CASH PROVIDED FROM (USED BY) FINANCING ACTIVITIES Issuance of common stock.................................. 7.4 0.8 Net increase (decrease) in debt........................... 2,111.7 (23.3) Fees paid for debt issuance............................... (33.3) -- Investment in accounts receivable securitization.......... (9.6) -- Dividends................................................. (5.4) (5.7) Other..................................................... (6.9) (2.0) --------- ------ Net Cash Provided From (Used By) Financing Activities... 2,063.9 (30.2) Decrease in Cash and Equivalents........................ (439.9) (0.1) Cash and Equivalents at Beginning of Period................. 541.4 33.1 --------- ------ Cash and Equivalents at End of Period..................... $ 101.5 $ 33.0 ========= ======
See accompanying Notes to Unaudited Consolidated Financial Statements. F-4 FEDERAL-MOGUL CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (U.S. GAAP) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 1998 are not necessarily indicative of the results that may be expected for the year ended December 31, 1998. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 1997. Certain items in the prior year condensed consolidated financial statements have been reclassified to conform with the presentation used in 1998. 2. ACQUISITIONS The Company acquired Fel-Pro, Incorporated and certain affiliated entities, which constitute the operating businesses of the Fel-Pro group of companies (Fel-Pro), and acquired T&N plc (T&N) and Bimet S.A. (Bimet) during the first quarter of 1998. In addition, the Company increased its ownership in the Summerton, South Carolina gasket business (Summerton) and KFM Bearing Co., Ltd. (KFM) during the first quarter. Due to the complexity of valuing certain assets and liabilities acquired and related valuation estimates that are in process, the purchase allocation may subsequently be adjusted as further information becomes available. Goodwill recognized in connection with these transactions is being amortized on a straight-line basis over forty years. Fel-Pro Transaction On February 24, 1998, the Company acquired all the equity interests of Fel- Pro, a privately owned manufacturer headquartered in Skokie, Illinois, for a total consideration of approximately $717 million, which included 1,030,325.6 shares of Federal-Mogul Series E Mandatory Exchangeable preferred stock with an imputed value of $225 million (refer also to Note 8) and approximately $492 million in cash. The acquisition has been accounted for as a purchase and, accordingly, the total consideration was allocated to the acquired assets and assumed liabilities based on estimated fair values as of the acquisition date. The preliminary purchase price allocation of the total consideration exceeds the estimated fair value of net assets acquired by $509.3 million which has been recognized as goodwill. The consolidated statement of operations includes the operating results of the acquired business, exclusive of the Fel-Pro chemical business (refer to the caption "Acquired Businesses to be Divested," described later in this section), from the acquisition date. T&N plc Transaction On March 6, 1998, the Company satisfied all regulatory conditions relating to the acquisition of T&N, a manufacturer based in Manchester, England, and made its offer wholly unconditional. The Company paid for the outstanding T&N shares on March 12, 1998. As of March 31, 1998 the Company has paid total consideration (including direct costs of the acquisition) of $2.356 billion. The Company also acquired cash of approximately $222 million and debt of approximately $707 million. In addition, the Company is required to pay 260 pence per share for certain T&N options expected to be converted to T&N shares subsequent to March 31, 1998. The Company has estimated the cost, net of cash to be received, of outstanding T&N options at March 31, 1998 and included the amount ($60.3 million) as a liability in the balance sheet caption "Payable to T&N plc shareholders." The acquisition has been accounted F-5 FEDERAL-MOGUL CORPORATION NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) for as a purchase and, accordingly, the total consideration was allocated to the acquired assets and assumed liabilities based on estimated fair values as of the acquisition date. The preliminary purchase price allocation of the total consideration exceeds the estimated fair value of net assets acquired by $2.035 billion which has been recognized as goodwill. The consolidated statement of operations for the three months ended March 31, 1998 includes the operating results of T&N, exclusive of the T&N Bearings Business (refer to the caption "Acquired Businesses to be Divested," described later in this section), from the acquisition date. The Company recognized an $18.6 million charge in the first quarter of 1998 associated with the estimated fair value of purchased in process research and development costs allocated in purchase accounting to a portion of the total consideration paid. Acquired Businesses to be Divested In connection with securing regulatory approvals for the acquisition of T&N, the Company executed an Agreement Containing Consent Order with the FTC on February 27, 1998. Pursuant to this agreement the Company must divest the T&N Bearings Business, consisting of T&N's thinwall and dry bearings (polymer bearings) operations within six months after the FTC declares the consent order final and must provide for independent management of those assets pending such divestiture. The agreement stipulates that the T&N Bearings business is to be maintained as a viable, independent competitor of the Company and that the Company shall not attempt to direct the activities of, or exercise control over, the T&N Bearings business or have contact with the T&N Bearings business outside of normal business activities. In addition, the Company is holding the chemical business acquired in the Fel-Pro transaction for sale. The Company expects to complete the divestiture of the chemical business within one year. The net assets of the T&N Bearings Business and chemical business have been recorded at their fair value based on estimates of selling values less costs to sell, calculated using multiples of earnings similar to recent comparable industry transactions. The Company's investment in the T&N Bearings Business and chemical business is included in the balance sheet caption "Acquired businesses to be divested." In addition, the Company's preliminary purchase price allocation for T&N includes an increase of $124 million to adjust the acquired income tax liability related to the anticipated divestiture of the T&N Bearings Business. Operating results for the T&N Bearings and chemical businesses (which includes amortization expense for goodwill allocated to the businesses and interest expense relating to the holding costs of the businesses) have been excluded from the condensed consolidated statement of operations for the three months ended March 31, 1998. Pro Forma Results The following unaudited pro forma financial information for the three months ended March 31, 1998 and 1997 assume the T&N and Fel-Pro acquisitions occurred as of the beginning of the respective periods, after giving effect to certain adjustments, including the amortization of intangible assets, interest expense on acquisition debt, divestitures of the T&N Bearings business and Fel-Pro chemical business, and income tax effects. The pro forma results (in millions of dollars, except per share data) have been prepared for comparative purposes only and are not necessarily indicative of the results of operations which may occur in the future or that would have occurred had the acquisitions of T&N and Fel-Pro been consummated on the dates indicated, nor are they necessarily indicative of the Company's future results of operations (refer also to Management's Discussion and Analysis of Financial Conditions and Results of Operations--Pro Forma Results). F-6 FEDERAL-MOGUL CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
UNAUDITED PRO FORMA FINANCIAL INFORMATION THREE MONTHS ENDED MARCH 31, ------------------------------------------ 1998 1997 -------------------- -------------------- Net sales.................... $ 1,193.6 $ 1,247.9 Net loss..................... $ (16.5) $ (7.0) Loss per share............... $ (0.44) $ (0.28) Loss per share assuming dilution.................... $ (0.44) $ (0.28)
Summerton, KFM and Bimet Transactions In February 1998, the Company increased its ownership in Summerton in connection with the Bruss Divestiture Agreement, described in Note 7. In March 1998, the Company increased its ownership from 30% to 87% in KFM, a Korean joint venture formed in 1988 with Kukje Special Metal Co., Ltd. Also in March 1998, the Company acquired Bimet, a manufacturer of engine bearings, bushings and related products located in Gdansk, Poland. The total cash consideration paid for the Summerton, KFM and Bimet acquisitions approximated $32 million. The Summerton, KFM and Bimet transactions have been accounted for as purchases and, accordingly, the total consideration was allocated to the acquired assets and assumed liabilities based on its estimated fair values as of the acquisition dates. The preliminary purchase price allocation of total consideration over the estimated fair value of net assets acquired of $16.4 million has been recognized as goodwill. The consolidated statement of operations for the three months ended March 31, 1998 includes the operating results of the acquired businesses from the applicable date of acquisition. 3. RESTRUCTURING AND RATIONALIZATION OF ACQUIRED BUSINESSES Restructuring Charge During the first quarter of 1998, the Company recognized a $10.5 million restructuring charge related to operations in place prior to the acquisitions of T&N and Fel-Pro. The restructuring charge included $10.2 million and $0.3 million for severance and exit costs, respectively. Employee severance costs result from planned terminations in various business operations of the Company. The severance costs were based on the estimated levels that will be paid to the affected employees pursuant to the Company's workforce reduction policies and certain foreign governmental regulations. The Company anticipates that the actions related to the first quarter 1998 restructuring plan will be completed primarily within one year. Rationalization of Acquired Businesses In connection with the previously discussed acquisitions, the Company recognized approximately $151 million in reserves related to the rationalization and integration of acquired businesses. The rationalization reserves provide for approximately $125 million and $26 million in severance and exit costs, respectively. The components of the integration plan include: closure of four manufacturing facilities worldwide; relocation of highly manual manufacturing product lines to lower cost regions or more suitable locations; consolidation of overlapping manufacturing, technical and sales facilities and joint ventures; closure of two aftermarket central warehouses and five in-country warehouses; consolidation of aftermarket marketing and customer support functions; and streamlining of administrative, sales, marketing and product engineering staffs worldwide. An anticipated result of the integration plan and the restructuring will be a reduction of approximately 4,200 full-time employees. F-7 FEDERAL-MOGUL CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 4. ASBESTOS LIABILITY AND LEGAL PROCEEDINGS T&N Asbestos As of March 31, 1998, the Company has provided $1.351 billion as its estimate for future costs related to resolving asbestos claims. In the United States, the Company's subsidiary, T&N, and two of T&N's U.S. subsidiaries (the T&N Companies) are among many defendants named in numerous court actions alleging personal injury resulting from exposure to asbestos or asbestos- containing products. T&N is also subject to asbestos-disease litigation, to a lesser extent, in the United Kingdom and to property damage litigation based upon asbestos in the United States. Because of the slow onset of asbestos- related diseases, management anticipates that similar claims will be made in the future. It is not known how many such claims may be made nor the expenditure which may arise therefrom. T&N has appointed the Center for Claims Resolution (CCR) as its exclusive representative in relation to all asbestos- related personal injury claims made against the T&N Companies in the United States. Prior to its acquisition, T&N secured a 500 million pound sterling (approximately $838 million at the March 31, 1998 exchange rate of 1.6758 U.S. dollars to 1 pound sterling) layer of insurance which will be triggered should the aggregate number of claims notified after June 30, 1996, where the exposure occurred prior to that date, exceed 690 million pound sterling (approximately $1,156 million at the March 31, 1998 exchange rate). At March 31, 1998 the Company has recorded reserves for incurred but not reported claims up to the insurance level, 690 million pound sterling. While management believes that estimated reserves, which have not been reduced by any potential insurance proceeds, are appropriate for anticipated losses arising from T&N's asbestos related claims, no assurance can be given that T&N will not be subject to material additional liabilities and significant additional litigation relating to asbestos. Any such liabilities or litigation could have a material adverse effect on the Company's results of operations, business, liquidity and financial condition. Federal-Mogul and Fel-Pro Asbestos Federal-Mogul Corporation also is one of a large number of defendants in a number of lawsuits brought by claimants alleging injury due to exposure to asbestos. In addition, Fel-Pro has been named as a defendant in approximately 18,000 product liability cases involving asbestos, primarily involving gasket or packing products sold to ship owners. The Company is defending all such claims vigorously and believes that it and Fel-Pro have substantial defenses to liability and adequate insurance coverage for defense and indemnity costs (though Fel-Pro has agreed with its insurers to pay 20% of defense costs, in exchange for the right to a significant role in decisions regarding litigation). While the outcome of litigation can't be predicted with certainty, management believes that asbestos claims pending against Federal- Mogul Corporation and Fel-Pro as of March 31, 1998 will not have a material effect on the Company's financial position. No related reserves, or payments, have been provided, or paid to date, related to asbestos claims pending against Federal-Mogul Corporation and Fel-Pro. Other The Company is involved in various other legal actions and claims, directly and through its subsidiaries (including T&N and Fel-Pro). After taking into consideration legal counsel's evaluation of such actions, management is of the opinion that its outcomes are not reasonably likely to have a material adverse affect on the Company's financial position, operating results, or cash flows. F-8 FEDERAL-MOGUL CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 5. BRITISH POUND CURRENCY OPTION AND FORWARD CONTRACT In the fourth quarter of 1997, in anticipation of the then pending T&N acquisition, the Company purchased a British pound currency option for $28.1 million with a notional amount of $2.5 billion. In January 1998, the Company settled the option and recognized a loss of $17.3 million. Also in January 1998, in anticipation of the then pending T&N acquisition, the Company entered into a forward contract to purchase 1.5 billion pounds sterling for a notional amount of approximately $2.45 billion. As a result of favorable exchange fluctuations in the British pound/U.S. dollar exchange rate experienced during the contract period, the Company recognized a $30.6 million gain. The Company entered into the above transactions to effectively serve as economic hedges for the purchase of T&N. Such transactions, however, do not qualify for "hedge accounting" under GAAP, and therefore the loss on the British pound currency option and the gain on the British pound forward contract are reflected in the statement of operations caption "Net gain on British pound currency option and forward contract." 6. ISSUANCE OF DEBT In connection with the acquisition of T&N, the Company entered into a $2.675 billion floating rate Senior Credit Agreement (consisting of a $2.275 billion term loan facility, and a $400 million revolving loan facility) and a $500 million floating rate Senior Subordinated Credit Agreement, each with Chase Manhattan Bank as agent and lender. As of March 31, 1998, the Company had $2.5 billion outstanding related to the Senior Credit Agreement and Senior Subordinated Credit Agreement. The Senior Credit Agreement has maturities ranging from March of 1999 through the year 2005. The Senior Subordinated Credit Agreement matures in March of 1999. In addition, the Company funded a portion of the T&N acquisition through the December 1997 sale of 7% Trust Convertible Preferred Securities (generating gross proceeds of $575 million) by Federal-Mogul Financing Trust, a subsidiary of the Company. On April 17, 1998, in connection with the Company's efforts to put into place a permanent capital structure with an appropriate combination of debt and equity to partially replace the Senior Credit Agreement and Senior Subordinated Credit Agreement debt. The Company filed a registration statement with the Securities and Exchange Commission for the offering from time to time of up to an aggregate $2.5 billion of debt or equity securities (including shares of common stock registered for the account of certain securityholders). On May 14, 1998 the Company filed an amendment to such registration statement relating to a proposed offering of 9,712.093 shares of common stock by the Company (exclusive of 1,287,907 shares of common stock for the account of certain securityholders). The net proceeds to the Company of such offering of common stock are expected to be used to repay certain existing indebtedness. The Company is also evaluating the possibility of issuing debt securities pursuant to such registration statement, all or a significant portion of the net proceeds, of which the Company would use to refinance certain additional indebtedness of the Company. There can be no assurance that any such offering of common stock or debt securities will be consummated. The accelerated payment, if any, of certain portions of the Senior Credit Agreement and Senior Subordinated Credit Agreement debt would result in a significant extraordinary charge due to the write-off of the issuance costs associated with the early retirement of debt. The total unamortized issuance costs related to the Senior Credit Agreement and Senior Subordinated Credit Agreement was approximately $56 million at March 31, 1998. F-9 FEDERAL-MOGUL CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Pursuant to the Senior Credit Agreement, the stock of Felt Products Mfg. Co. (Felt), a wholly owned subsidiary of the Company, is pledged as collateral for borrowings outstanding thereunder. Such pledge also secures the Company's ESOP obligation, Medium-term notes and Senior Notes. The following presents certain unaudited financial information of Felt as of March 31, 1998 and the period February 24, 1998 to March 31, 1998 (in millions):
FINANCIAL POSITION - ------------------ Current assets.......... $115.3 Noncurrent assets....... 661.6 Current liabilities..... 78.0 Noncurrent liabilities.. 547.7
OPERATING RESULTS - ----------------- Net Sales............... $36.2 Costs and expenses...... 35.0 Net earnings............ 1.2
Subsequent Event In April 1998, the Company retired $251 million in private placement debt assumed in connection with the acquisition of T&N. The early retirement of the debt required a make whole payment of approximately $27 million, which will be recognized as an extraordinary loss in the second quarter of 1998 of approximately $19 million, net of the related tax benefit. 7. ASSETS HELD FOR SALE AND DIVESTITURES In addition to the T&N Bearings Business and Fel-Pro chemical businesses held for sale, during the first quarter of 1998, the Company decided to sell its subsidiary, Bertolotti Pietro e Figli, S.r.l. (Bertolotti), conducting aftermarket operations in Italy. The carrying value of Bertolotti's assets have been reduced to its fair value based on estimates of selling values less costs to sell, calculated using multiples of earnings similar to recent automotive industry transactions in Italy. The Company recognized a $20.0 million first quarter charge primarily associated with the write-down of Bertolotti's assets to the estimated fair value. The Company expects to complete the sale of Bertolotti within one year. As part of its 1996 restructuring plan, the Company continued to close or sell certain retail aftermarket operations during the first quarter of 1998. As of March 31, 1998, retail aftermarket operations that continue to be held for sale include those in Puerto Rico. Net cash proceeds received for those retail aftermarket locations sold in the first quarter approximated $2 million. No gain or loss was recognized on the dispositions of those retail aftermarket locations, as the related assets had been previously adjusted to fair value. Bruss Divestiture Agreement In February 1998, the Company divested its minority interest in G. Bruss GmbH & Co. KG, a German manufacturer of seals and gaskets. As part of the divestiture agreement the Company also increased its ownership to 100% in Summerton. The Company received net proceeds of approximately $47 million related to the divestiture agreement and recognized a gain on the divestiture of $4.8 million. The gain on the divestiture is included as a component of other expense. Sale of Acquired Options In addition, the Company received proceeds from the sale of options which were acquired with the acquisition of T&N. No gain or loss was recognized in connection with the sale of the options acquired. F-10 FEDERAL-MOGUL CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 8. EARNINGS PER SHARE, NON-CASH TRANSACTION AND COMPREHENSIVE INCOME Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share for the three months ended March 31, 1998 and 1997 (in millions, except per share data):
1998 1997 ------ ----- Numerator: Net earnings (loss)..................................... $ (7.2) $13.9 Series C preferred dividend requirement................. (0.6) (0.6) Series D preferred dividend requirement................. -- (1.5) Series E preferred dividend requirement................. (0.2) -- ------ ----- Numerator for basic earnings per share--income (loss) available to common shareholders....................... $ (8.0) $11.8 Effect of dilutive securities: Series C preferred dividend requirement............... -- 0.6 Additional required ESOP contribution................. -- (0.5) ------ ----- Numerator for diluted earnings per share--income (loss) available to common shareholders after assumed conversions............................................ $ (8.0) $11.9 ====== ===== Denominator: Denominator for basic earnings per share--weighted average shares outstanding............................. 40.1 34.7 Effect of dilutive securities: Dilutive stock options outstanding...................... -- 0.2 Nonvested stock......................................... -- 0.4 Conversion of Series C preferred stock.................. -- 1.6 Contingent issuance of common stock to satisfy Series C redemption price guarantee............................. -- 0.3 ------ ----- Denominator for dilutive earnings per share adjusted weighted average after assumed conversions............. 40.1 37.2 ====== ===== Basic earnings (loss) per share........................... $(0.20) $0.34 ====== ===== Diluted earnings (loss) per share......................... $(0.20) $0.32 ====== =====
Convertible preferred securities redeemable for 11.2 million shares of common stock were outstanding during the first quarter of 1998. In addition, 1,030,325.6 shares of Series E Stock approximating 5.2 million shares of common stock were outstanding during a portion of the first quarter of 1998. The convertible preferred securities and Series E stock were not included in the computation of diluted earnings per share for the three months ended March 31, 1998 because the effect would be antidilutive. Quarterly dividends of $0.12 per common share were declared for both the first quarters of 1998 and 1997. Non-cash Transaction In connection with the Fel-Pro acquisition, the Company issued 1,030,325.6 million shares of Series E Mandatory Exchangeable Preferred Stock (Series E Stock) with an imputed value of $225 million. The shares of Series E Stock are exchangeable into shares of the Company's common stock at a rate of five shares of common stock per share of Series E Stock. The Series E Stock are required to be exchanged no later than February 24, 1999, subject to certain conditions and pay quarterly dividends at a rate of $0.12 per common stock equivalent. F-11 FEDERAL-MOGUL CORPORATION NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Comprehensive Income During 1997, the Financial Accounting Standards Board issued Statement No. 130, Reporting Comprehensive Income. This Statement establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The Company adopted Statement 130 as of January 1, 1998. The adoption of this Statement had no impact on the Company's net earnings (loss) or shareholders' equity. Statement 130 requires foreign currency translation adjustments and unrealized gains or losses on investments and certain derivative instruments, which prior to the adoption of Statement 130 were reported as a component of shareholders' equity, to be included in other comprehensive income. Total comprehensive income (loss), net of the related estimated tax, was $(4.6) million and $5.3 million for the three months ended March 31, 1998 and 1997, respectively. 9. INVENTORIES At March 31, 1998 and December 31, 1997, inventories consisted of the following (in millions of dollars):
1998 1997 ------ ------ Finished products......................................... $515.8 $254.6 Work-in-process........................................... 84.9 21.8 Raw materials............................................. 139.9 15.7 ------ ------ 740.6 292.1 Reserve for inventory valuation........................... (43.1) (15.1) ------ ------ $697.5 $277.0 ====== ======
The significant increase in inventory was primarily due to the previously described acquisitions in Note 2. 10. INCOME TAXES During the first quarter of 1998, the Company recognized charges for adjustment of assets held for sale to fair value and purchased in-process research and development and recognized a net gain on the British pound currency option and forward contract. These transactions resulted in a pre-tax net charge of $25.3 million. The net income tax benefit related to these transactions totaled $2.1 million. F-12 REPORT OF INDEPENDENT AUDITORS To the Shareholders and Board of Directors, Federal-Mogul Corporation: We have audited the accompanying consolidated balance sheets of Federal- Mogul Corporation and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. Our audit also included the financial statement schedule listed in Item 14(a). These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Federal-Mogul Corporation and subsidiaries at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst & Young LLP Detroit, Michigan January 30, 1998 except for Note 20, as to which the date is February 24, 1998 F-13 FEDERAL-MOGUL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31 ---------------------------- 1997 1996 1995 -------- -------- -------- (MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNT) Net sales........................................ $1,806.6 $2,032.7 $1,999.8 Cost of products sold............................ 1,381.8 1,660.5 1,602.2 -------- -------- -------- Gross margin..................................... 424.8 372.2 397.6 Selling, general and administrative expenses..... (286.2) (333.8) (299.3) Gain on sales of businesses...................... -- -- 24.0 Restructuring (charges) credits.................. 1.1 (57.6) (26.9) Reengineering and other related (charges) credits......................................... 1.6 (11.4) (13.9) Adjustment of assets held for sale to fair value and other long lived assets..................... (2.4) (151.3) (51.8) Interest expense................................. (32.0) (42.6) (37.3) Interest income.................................. 7.1 2.9 9.6 International currency exchange losses........... (0.6) (3.7) (2.9) British pound currency option cost, net.......... (10.5) -- -- Other expense, net............................... (3.4) (3.4) (2.4) -------- -------- -------- Earnings (Loss) before income taxes and extraordinary item.......................... 99.5 (228.7) (3.3) Income tax expense (benefit)..................... 27.5 (22.4) 2.5 -------- -------- -------- Net Earnings (Loss) before extraordinary Item........................................ 72.0 (206.3) (5.8) ======== ======== ======== Extraordinary item--loss on early retirement of debt, net of applicable income tax benefit...... (2.6) -- -- -------- -------- -------- Net Earnings (Loss).......................... 69.4 (206.3) (5.8) Preferred dividends.............................. 5.5 8.7 8.9 -------- -------- -------- Net Earnings (Loss) Available to Common Shareholders................................ $ 63.9 $ (215.0) $ (14.7) ======== ======== ======== EARNINGS (LOSS) PER COMMON SHARE: Income (loss) before extraordinary item........ $ 1.81 $ (6.20) $ (.42) Extraordinary item............................. (.07) -- -- -------- -------- -------- Net Earnings (Loss) Per Common Share......... $ 1.74 $ (6.20) $ (.42) ======== ======== ======== EARNINGS (LOSS) PER COMMON SHARE ASSUMING DILUTION: Income (loss) before extraordinary item........ $ 1.67 $ (6.20) $ (.42) Extraordinary item............................. (.06) -- -- -------- -------- -------- Net Earnings (Loss) Per Common Share Assuming Dilution.................................... $ 1.61 $ (6.20) $ (.42) ======== ======== ========
See accompanying Notes to Consolidated Financial Statements. F-14 FEDERAL-MOGUL CORPORATION CONSOLIDATED BALANCE SHEETS
DECEMBER 31 ------------------ ASSETS 1997 1996 ------ -------- -------- (MILLIONS OF DOLLARS) Cash and equivalents........................................ $ 541.4 $ 33.1 Accounts receivable......................................... 158.9 204.3 Investment in accounts receivable securitization............ 48.7 27.0 Inventories................................................. 277.0 417.0 Prepaid expenses and income tax benefits.................... 113.2 81.5 -------- -------- Total current assets.................................... 1,139.2 762.9 Property, plant and equipment............................... 313.9 350.3 Goodwill.................................................... 143.8 154.0 Other intangible assets..................................... 48.4 63.1 Business investments and other assets....................... 156.8 124.9 -------- -------- Total Assets............................................ $1,802.1 $1,455.2 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Short-term debt............................................. $ 28.6 $ 280.1 Accounts payable............................................ 102.3 142.7 Accrued compensation........................................ 36.8 37.6 Accrued customer incentives................................. 22.4 20.3 Restructuring reserves...................................... 31.5 55.2 Other accrued liabilities................................... 108.0 127.9 -------- -------- Total current liabilities............................... 329.6 663.8 Long-term debt.............................................. 273.1 209.6 Postemployment benefits..................................... 190.9 207.1 Other accrued liabilities................................... 64.2 56.2 -------- -------- Total liabilities....................................... 857.8 1,136.7 Minority interest--preferred securities of affiliate........ 575.0 -- SHAREHOLDERS' EQUITY -------------------- Series D preferred stock.................................... -- 76.6 Series C ESOP preferred stock............................... 49.0 53.1 Common stock................................................ 201.0 175.7 Additional paid-in capital.................................. 332.6 283.5 Accumulated deficit......................................... (123.6) (193.0) Unearned ESOP compensation.................................. (21.8) (28.4) Currency translation and other.............................. (67.9) (49.0) -------- -------- Total Shareholders' Equity.............................. 369.3 318.5 -------- -------- Total Liabilities and Shareholders' Equity.............. $1,802.1 $1,455.2 ======== ========
See accompanying Notes to Consolidated Financial Statements. F-15 FEDERAL-MOGUL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 ------------------------- 1997 1996 1995 ------- ------- ------- (MILLIONS OF DOLLARS) CASH PROVIDED FROM (USED BY) OPERATING ACTIVITIES Net earnings (loss)............................... $ 69.4 $(206.3) $ (5.8) Adjustments to reconcile net earnings (loss) to net cash provided from (used by) operating activities: Depreciation and amortization................... 52.8 63.7 61.0 Gain on sales of businesses..................... -- -- (24.0) Restructuring charges (credits)................. (1.1) 57.6 26.9 Reengineering and other related charges (credits)...................................... (1.6) 11.4 13.9 Adjustment of assets held for sale to fair value and other long lived assets.................... 2.4 151.3 51.8 Vesting of restricted stock..................... 9.0 0.4 0.1 Loss on early retirement of debt................ 4.1 -- -- British pound currency option cost, net......... 10.5 -- -- Deferred income taxes........................... 13.0 (27.8) (16.2) Postemployment benefits......................... (7.7) (2.0) 1.8 Decrease (increase) in accounts receivable...... 7.6 46.5 (5.0) Decrease (increase) in inventories.............. 59.9 54.5 (103.9) Increase (decrease) in accounts payable......... (19.5) (25.5) 7.2 Payments against restructuring and reengineering reserves....................................... (26.2) (17.6) (19.4) Increase (decrease) in current liabilities and other.......................................... 43.1 42.8 (23.1) ------- ------- ------- Net Cash Provided From (Used By) Operating Activities................................... $ 215.7 $ 149.0 $ (34.7) ======= ======= ======= CASH PROVIDED FROM (USED BY) INVESTING ACTIVITIES Expenditures for property, plant and equipment and other long-term assets........................... $ (49.7) $ (54.2) $ (78.5) Acquisitions of businesses........................ -- (.3) (72.1) Payments for rationalization of acquired businesses....................................... -- -- (7.3) Proceeds from sales of business investments....... 73.6 42.0 48.5 Fees paid in anticipation of business acquisition. (30.5) -- -- Other............................................. 1.1 -- -- ------- ------- ------- Net Cash Used By Investing Activities......... $ (5.5) $ (12.5) $(109.4) ======= ======= ======= CASH PROVIDED FROM (USED BY) FINANCING ACTIVITIES Issuance of common stock.......................... $ 14.2 $ .6 $ .2 Repurchase of common stock........................ -- -- (9.0) Proceeds from issuance of long-term debt.......... 179.6 -- 166.2 Principal payments on long-term debt.............. (127.4) (29.4) (24.9) Increase (decrease) in short-term debt............ (235.8) (61.4) 33.7 Fees for early retirement of debt................. (4.1) -- -- Fees paid for debt issuance....................... (25.6) -- -- Investment in accounts receivable securitization.. (31.8) -- -- Issuance of preferred securities of affiliate..... 575.0 -- -- Fees paid for issuance of preferred securities of affiliate........................................ (17.2) -- -- Dividends......................................... (24.8) (26.9) (27.3) Other............................................. (4.0) (5.7) (.4) ------- ------- ------- Net Cash Provided From (Used By) Financing Activities................................... 298.1 (122.8) 138.5 ------- ------- ------- Increase (Decrease) In Cash And Equivalents... 508.3 13.7 (5.6) Cash and equivalents at beginning of year........... 33.1 19.4 25.0 ------- ------- ------- Cash and Equivalents at End of Year........... $ 541.4 $ 33.1 $ 19.4 ======= ======= =======
See accompanying Notes to Consolidated Financial Statements F-16 FEDERAL-MOGUL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SERIES C RETAINED SERIES C ESOP ADDITIONAL EARNINGS UNEARNED CURRENCY PREFERRED PREFERRED COMMON PAID-IN (ACCUMULATED ESOP TRANSLATION STOCK STOCK STOCK CAPITAL DEFICIT) COMPENSATION AND OTHER TOTAL --------- --------- ------ ---------- ------------ ------------ ----------- ------ (MILLIONS OF DOLLARS) BALANCE AT DECEMBER 31, 1994................... $76.6 $59.1 $174.9 $277.8 $ 73.3 $(39.8) $ (33.4) $588.5 Net loss................ (5.8) (5.8) Net issuance of restricted stock....... 2.2 6.5 (7.7) 1.0 Exercise of stock options................ .2 .2 Repurchase of common stock.................. (1.9) (5.3) (7.2) Retirement of Series C ESOP preferred stock... (2.3) (2.3) Amortization of unearned ESOP compensation...... 5.5 5.5 Dividends............... (27.3) (27.3) Preferred dividend tax benefits............... 1.6 1.6 Currency translation.... (1.5) (1.5) Pension adjustment...... (2.4) (2.4) ----- ----- ------ ------ ------- ------ ------- ------ BALANCE AT DECEMBER 31, 1995................... $76.6 $56.8 $175.2 $280.8 $ 40.2 $(34.3) $(45.0) $550.3 ===== ===== ====== ====== ======= ====== ======= ====== Net loss................ (206.3) (206.3) Net issuance of restricted stock....... .3 .9 (1.2) -- Exercise of stock options................ .2 .4 .6 Retirement of Series C ESOP preferred stock... (3.7) (3.7) Amortization of unearned ESOP compensation...... 5.9 5.9 Dividends............... (26.9) (26.9) Preferred dividend tax benefits............... 1.4 1.4 Currency translation effect on assets held for sale............... 20.1 20.1 Currency translation.... (24.4) (24.4) Pension adjustment...... 1.5 1.5 ----- ----- ------ ------ ------- ------ ------- ------ BALANCE AT DECEMBER 31, 1996................... $76.6 $53.1 $175.7 $283.5 $(193.0) $(28.4) $(49.0) $318.5 ===== ===== ====== ====== ======= ====== ======= ====== Net earnings............ 69.4 69.4 Conversion of Series D preferred stock........ (76.6) 22.3 54.3 -- Net repurchase of restricted stock....... (.4) (1.1) 1.5 -- Vesting of restricted stock.................. 5.0 5.2 10.2 Exercise of stock options................ 3.4 10.8 14.2 Retirement of Series C ESOP preferred stock... (4.1) (4.1) Amortization of unearned ESOP compensation...... 6.6 6.6 Dividends............... (24.8) (24.8) Preferred dividend tax benefits............... 4.9 4.9 Currency translation.... (27.4) (27.4) Pension adjustment...... 1.8 1.8 ----- ----- ------ ------ ------- ------ ------- ------ BALANCE AT DECEMBER 31,1997................ $ -- $49.0 $201.0 $332.6 $(123.6) $(21.8) $ (67.9) $369.3 ===== ===== ====== ====== ======= ====== ======= ======
See accompanying Notes to Consolidated Financial Statements. F-17 FEDERAL-MOGUL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ACCOUNTING POLICIES Organization--Federal-Mogul Corporation (the Company) is a global manufacturer and distributor of a broad range of non-discretionary parts primarily for automobiles, light trucks, heavy trucks, farm and construction vehicles. The Company was founded in 1899. Principles of Consolidation--The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. Cash and Equivalents--The Company considers all highly liquid investments with maturities of 90 days or less from the date of purchase to be cash equivalents. Inventories--Inventories are stated at the lower of cost or market. Cost determined by the last-in, first-out (LIFO) method was used for 55% and 48% of the inventory at December 31, 1997 and 1996, respectively. The remaining inventories are costed using the first-in, first-out (FIFO) method. If inventories had been valued at current cost, amounts reported at December 31 would have been increased by $44.5 million in 1997 and $49.4 million in 1996. Inventory quantity reductions resulting in liquidations of certain LIFO inventory layers increased net earnings by $3.2 million and $3.1 million ($.08 and $.09 per diluted share) in 1997 and 1996, respectively. There was no effect on operations for 1995. At December 31, inventories consisted of the following:
1997 1996 ------ ------ (MILLIONS OF DOLLARS) Finished products......................................... $254.6 $417.0 Work-in-process........................................... 21.8 28.0 Raw materials............................................. 15.7 20.0 ------ ------ 292.1 465.0 Reserve for inventory valuation........................... (15.1) (48.0) ------ ------ $277.0 $417.0 ====== ======
The $32.9 million decrease in the reserve for inventory valuation resulted primarily from the Company's initiative to dispose of fully reserved slow moving and obsolete inventory, and the sales of certain international retail and wholesale businesses. Goodwill and Other Intangible Assets--Intangible assets, which result principally from acquisitions, consist of goodwill, trademarks, non-compete agreements, patents and other intangibles. Intangible assets are periodically reviewed for impairment based on an assessment of future cash flows, or fair value for assets held for sale, to ensure that they are appropriately valued. Intangible assets are amortized on a straight-line basis over their estimated useful lives, generally ranging from three to fifteen years for other intangible assets and generally forty years for goodwill. Goodwill and other intangible assets reflected in the consolidated balance sheets are net of accumulated amortization of $20.0 million and $18.7 million for goodwill and $28.9 million and $22.1 million for other intangible assets at December 31, 1997 and 1996, respectively. Impairment charges recorded in 1997, 1996 and 1995 related primarily to assets held for sale. Management believes that the remaining intangible assets, which relate only to the core manufacturing and distribution businesses, are not impaired, and their remaining amortization periods are appropriate. F-18 FEDERAL-MOGUL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Revenue Recognition--The Company recognizes revenue and returns from product sales and the related customer incentive and warranty expense when goods are shipped to the customer. Research and Development and Advertising Costs--The Company expenses research and development costs as incurred. Research and development expense was $13.1 million, $14.4 million and $15.1 million for 1997, 1996 and 1995, respectively. Costs associated with advertising and promotion are expensed as incurred. Advertising and promotion expense was $31.8 million, $34.0 million and $19.1 million for 1997, 1996 and 1995, respectively. Currency Translation--Exchange adjustments related to international currency transactions and translation adjustments for subsidiaries whose functional currency is the United States dollar (principally those located in highly inflationary economies) are reflected in the consolidated statements of operations. Translation adjustments of international subsidiaries for which the local currency is the functional currency are reflected in the consolidated financial statements as a separate component of shareholders' equity. Earnings Per Share--In 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings Per Share. Statement 128 replaced the calculation of primary and fully-diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the Statement 128 requirements (refer to Note 13). Effect of Accounting Pronouncement--In 1997, the Financial Accounting Standards Board issued Statement No. 130, Reporting Comprehensive Income. This Statement establishes standards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Statement 130 is effective for fiscal years beginning after December 15, 1997. Beginning in 1998, the Company will provide the information relating to comprehensive income to conform to the requirements. Environmental Liabilities--The Company recognizes estimated environmental liabilities when a loss is probable. Such liabilities are generally not subject to insurance coverage. Each environmental obligation is estimated by engineering and legal specialists within the Company based on current law and existing technologies. Such estimates are based primarily upon the estimated cost of investigation and remediation required and the likelihood that other potentially responsible parties will be able to fulfill their commitments at the sites where the Company may be jointly and severally liable with such parties (refer to Note 18). The Company regularly evaluates and revises its estimates for environmental obligations based on expenditures against established reserves and the availability of additional information. Use of Estimates--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Reclassifications--Certain items in the prior year financial statements have been reclassified to conform with the presentation used in 1997. F-19 FEDERAL-MOGUL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 2. RESTRUCTURING CHARGES The following is a summary of restructuring charges and related activity for 1995, 1996 and 1997 (in millions of dollars):
1995 1996 1997 RESTRUCTURING RESTRUCTURING RESTRUCTURING PROVISION PROVISION PROVISION --------------- --------------- -------------- SEVERANCE EXIT SEVERANCE EXIT SEVERANCE EXIT TOTAL --------- ----- --------- ----- --------- ---- ------ 1995 restructuring charge................. $ 20.1 $ 6.8 $ -- $ -- $ -- $-- $ 26.9 Payments against restructuring reserves. (16.2) -- -- -- -- -- (16.2) ------ ----- ------ ----- ----- ---- ------ Balance of restructuring reserves at December 31, 1995............... 3.9 6.8 -- -- -- -- 10.7 1996 restructuring charge................. -- -- 42.8 14.8 -- -- 57.6 Payments against restructuring reserves. (3.9) (3.4) (4.8) (1.0) -- -- (13.1) ------ ----- ------ ----- ----- ---- ------ Balance of restructuring reserves at December 31, 1996............... -- 3.4 38.0 13.8 -- -- 55.2 1997 restructuring charge................. -- -- -- -- 16.7 5.3 22.0 Adjustment to restructuring reserves. -- (.9) (20.8) (1.4) -- -- (23.1) ------ ----- ------ ----- ----- ---- ------ 1997 restructuring charges (net).......... -- (.9) (20.8) (1.4) 16.7 5.3 (1.1) Payments against restructuring reserves. -- (1.7) (14.0) (3.7) (.1) -- (19.5) ------ ----- ------ ----- ----- ---- ------ Balance of restructuring reserves at December 31, 1997............... $ -- $ 0.8 $ 3.2 $ 8.7 $16.6 $5.3 $ 34.6 ====== ===== ====== ===== ===== ==== ======
1997 The Company's total restructuring reserves at December 31, 1997 of $34.6 million include $3.1 million of severance which will be paid over the next two years and has been classified as noncurrent other accrued liabilities in the balance sheet. Results of operations in the fourth quarter of 1997 include a $22.0 million charge for 1997 severance and exit costs. The restructuring actions are designed to improve the Company's cost structure, streamline operations and divest the Company of underperforming assets. The majority of the 1997 charge is expected to be paid out during 1998. Employee severance costs for 1997 result from the planned termination of approximately 500 employees, in various business operations of the Company. The severance costs were based on the minimum levels that will be paid to the affected employees pursuant to the Company's workforce reduction policies and certain foreign governmental regulations. Exit costs for 1997 principally include lease termination costs for certain North American distribution service branches and retail aftermarket operations in Puerto Rico, and the consolidation of certain European distribution, and North American and European manufacturing operations. 1996 Primarily due to the T&N and Fel-Pro transactions (refer to Note 20), the Company elected not to fully implement the following actions under the 1996 restructuring plan: . Reductions to the operational and administrative staff were not made to the extent that was originally planned. F-20 FEDERAL-MOGUL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) . Reconfiguration of the North American distribution network was altered to accommodate the planned integration of T&N and Fel-Pro aftermarket operations; . Relocation of certain European manufacturing product lines to lower cost areas within Europe and related workforce reductions did not take place. Management of the Company decided not to pursue this action primarily in anticipation of the integration of future acquisitions. Primarily as a result of actions not fully implemented under the 1996 restructuring plan, the Company's 1997 operating results were increased by $23.1 million for the reversal of previously recognized 1996 and 1995 restructuring charges. Results of operations in the fourth quarter of 1996 include a restructuring charge of $57.6 million for severance and exit costs for certain facilities. As of December 31, 1997, employee severance costs related to the 1996 charge have resulted in the termination of approximately 600 employees, primarily in the international retail aftermarket and wholesale aftermarket operations, the North American distribution business and a closed manufacturing operation. The Company expects to pay out most of the remaining 1996 severance charge in 1998. Exit costs for 1996 principally include lease termination costs of international retail aftermarket stores and certain international wholesale aftermarket operations, the consolidation of certain North American distribution facilities and the closing of a North American manufacturing operation. The Company expects to pay out most of the remaining 1996 exit costs in 1998. 1995 Results of operations in the second and fourth quarters of 1995 include restructuring charges of $6.1 million and $20.8 million, respectively, for employee severance and exit costs for certain facilities. Employee severance costs for 1995 resulted from the termination of approximately 750 employees, primarily in Argentina, the United States and Europe. Exit costs for 1995 include efforts to consolidate and restructure selected operations primarily in the United States including costs for certain aftermarket and related facilities consolidated after the acquisition of SPX Corporation's Sealed Power Replacement aftermarket business. Operating results for 1997 were increased by $0.9 million relating to 1995 exit costs being reversed. 3. ADJUSTMENT OF ASSETS HELD FOR SALE TO FAIR VALUE AND OTHER LONG LIVED ASSETS The Company continually reviews all components of its businesses for possible improvement of future profitability through acquisition, divestiture, reengineering or restructuring. The Company also continually reviews and updates its impairment reserves related to the divestiture of its remaining international retail/wholesale aftermarket operations and other long lived assets and adjusts the reserve components to approximate their net fair value. In the fourth quarter of 1997, the Company recognized a charge of $2.4 million to write-down certain long lived assets to fair value. As of December 31, 1997, assets held for sale primarily include retail aftermarket operations in Puerto Rico, Ecuador, Venezuela and Panama. The Company expects to complete the actions related to those assets to be disposed of in 1998. During 1996, management designed and implemented a restructuring plan to aggressively improve the Company's cost structure, streamline operations and divest the Company of underperforming assets. As part of this plan, the Company decided to sell 132 international retail aftermarket operations, sell or restructure 30 F-21 FEDERAL-MOGUL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) wholesale aftermarket operations and consolidate a North American manufacturing operation. The carrying value of the assets held for sale was reduced to fair value based on estimates of selling values less costs to sell. Selling values used to determine the fair value of assets held for sale were determined using market prices (i.e. valuation multiples) of comparable companies from other 1996 transactions. The resulting adjustment of $148.5 million to reduce assets held for sale to fair value was recorded in the fourth quarter of 1996. During 1997, the Company completed the following actions related to the 1996 restructuring plan; 1) divested 72 international retail aftermarket operations, 2) sold or restructured 25 wholesale aftermarket operations, and 3) consolidated a North American manufacturing operation (refer to Note 7). In 1996, the Company also recorded an additional writedown of $2.8 million to the net asset value of the United States ball bearings manufacturing operations. In 1995, the Company decided to sell the ball bearings operations and reduced the carrying value by $17.0 million to record assets held for sale at fair value. In 1995, the Company decided to sell its heavy wall bearing operations in Germany and Brazil and certain other non-strategic assets. The Company estimated the fair value of the businesses held for sale based on discussions with prospective buyers, adjusted for selling costs. The Company reduced its carrying value by $17.0 million to record assets held for sale at fair value. In addition, in 1995, the Company reduced the carrying value of certain other impaired long-lived assets by $17.8 million to record them at fair value. No further significant fair value adjustments were recorded for these assets in 1996 or 1997. The carrying value of net assets held for sale as of December 31, 1997 and 1996 are as follows:
1997 1996 ---------- ----------- (MILLIONS OF DOLLARS) Accounts receivable............................. $ 5 $ 38 Inventory....................................... 27 88 Noncurrent assets............................... 3 11 Accounts payable................................ (4) (29) Other net current liabilities................... (2) (1) ---------- ----------- Total....................................... $ 29 $ 107 ========== ===========
Net sales for all assets held for sale and adjusted to fair value approximated $114 million, $335 million and $322 million in 1997, 1996 and 1995, respectively. Net sales for the remaining retail aftermarket operations held for sale at December 31, 1997 approximated $44 million, $48 million and $22 million in 1997, 1996 and 1995, respectively. 4. REENGINEERING AND OTHER RELATED CHARGES Operating results for 1997 include a credit of $1.6 million relating to the reversal of certain 1996 reengineering and other related charges. In 1996, the Company initiated an extensive effort to strategically review its businesses and focus on its competencies of manufacturing, engineering and distribution. As a result of this process, the Company incurred $11.4 million for professional fees and personnel costs related to the strategic review of the Company and changes in management and related costs. In 1995, the Company recognized $13.9 million for reengineering and other costs. These costs included $7.0 million in professional fees and personnel costs to reengineer the business on a Company-wide basis and $6.9 million primarily for certain other non-recurring costs relating to brand consolidation at the customer level of the Company's Federal-Mogul(R), TRW(R) and Sealed Power(R) branded engine parts. F-22 FEDERAL-MOGUL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 5. CHANGES IN ACCOUNTING ESTIMATES During the third and fourth quarters of 1996, the Company made certain changes in accounting estimates totaling $51 million ($34 million after tax, $.98 per share) attributable to 1996 events and new information becoming available. The changes in accounting estimates included increasing the provision for customer incentive programs and related sales initiatives by $18 million, increasing the provision for excess and obsolete inventory by $13 million, increasing the provision for bad debts by $3 million, increasing the provision for environmental and legal matters by $9 million and increasing various other provisions by approximately $8 million. 6. ACQUISITIONS OF BUSINESSES The Company accounted for the following acquisitions as purchases, and accordingly, the purchase prices have been allocated to the acquired assets and assumed liabilities based on their estimated fair values as of the acquisition date. The consolidated statements of operations include the operating results of the acquired businesses from the acquisition dates. In September 1995, the Company completed its acquisition of the Centropiezas group, a chain of retail stores in Puerto Rico. Also in September 1995, the Company purchased United Kingdom-based Seal Technology Systems Ltd., a leading designer and manufacturer of a specialized range of seals and gaskets for the automotive sector and other industrial markets. In June 1995, the Company acquired Bertolotti Pietro e Figli, S.r.1. (Bertolotti), a distributor of premium brand European auto and truck parts throughout Italy. 7. SALES OF BUSINESSES Results of operations have been included through the applicable date of sale for the following transactions: During 1997, the Company received $73.6 million in net cash proceeds for sales of their aftermarket operations in South Africa, Australia, and Chile and their heavy wall bearing operations in Germany and Brazil. During 1996, the Company received $42 million in net cash proceeds for sales of their United States ball bearings and electrical products manufacturing operations. Except for the sale of the electrical products manufacturing operations, sales of businesses in 1997 and 1996 relate to assets previously adjusted to fair value (refer to Note 3). Accordingly, no gain or loss was recognized on the date of sale related to these transactions. In addition, no gain or loss was recognized related to the sale of the electrical products manufacturing operations. In December 1995, the Company sold its equity interest in Westwind Air Bearings, Ltd. in the United Kingdom and its affiliated operations in the United States and Japan for $20.5 million. The Company recognized a pretax gain on the sale of $16.2 million. In April 1995, the Company completed the sale of the operations and substantially all of the assets of its Precision Forged Products Division to Borg-Warner Automotive, Inc. The Company received $28.0 million in cash and retained customer receivables while Borg-Warner assumed certain liabilities. The Company recognized a pretax gain on the sale of $7.8 million. F-23 FEDERAL-MOGUL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 8. FINANCIAL INSTRUMENTS Foreign Exchange Risk and Commodity Price Management In connection with the proposed T&N plc acquisition (refer to Note 20) the Company purchased a British pound currency option for $28.1 million with a notional amount of $2.5 billion to cap the effect of potential unfavorable fluctuations in the British pound/U.S. dollar exchange rate. The cost of the option and its change in fair value has been reflected in the results of operations in the fourth quarter of 1997. At December 31, 1997, the Company recognized a net loss on this transaction of $10.5 million. The option was settled in the first quarter of 1998 resulting in a loss of $17.3 million (refer to Note 20). The Company is subject to exposure to market risks from changes in foreign exchange rates and raw material price fluctuations. Derivative financial instruments are utilized by the Company to reduce those risks. Except for the British pound currency option discussed above, the Company does not hold or issue derivative financial instruments for trading purposes. Other than the British pound currency option discussed above, the Company does not have foreign exchange forward or currency option contracts outstanding at December 31, 1997. As of December 31, 1996, the Company had foreign exchange forward contracts principally for Japanese yen and South African rand totaling a notional amount of $6.6 million. At December 31, 1996, there was no deferred gain or loss related to foreign exchange forward contracts. The Company has entered into copper contracts to hedge against the risk of price increases. These contracts are expected to offset the effects of price changes on the firm purchase commitments for copper and expire in 1998. Under the agreements, the Company is committed to purchase 7.3 million pounds of copper. The net unrealized loss on these firm purchase commitments at December 31, 1997 is $0.7 million. Deferred gains and losses are included in other assets and liabilities and recognized in operations when the future purchase or sale occurs, or at the point in time when the purchase or sale is no longer expected to occur. Accounts Receivable Securitization During 1997, the Company replaced an existing accounts receivable securitization program with a new program which provides up to $100 million of financing. On an ongoing basis, the Company sells certain accounts receivable to Federal-Mogul Funding Corporation (FMFC), a wholly-owned subsidiary of the Company, which then sells such receivables, without recourse, to a master trust. Amounts sold under these arrangements were $63.2 million and $95 million at December 31, 1997 and 1996 respectively, and have been excluded from the balance sheets. The Company's retained interest in the accounts receivable sold to FMFC is included in the balance sheet caption Investment in Accounts Receivable Securitization. Concentrations of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable and cash investments. The Company's customer base includes virtually every significant global automotive manufacturer and a large number of distributors and installers of automotive aftermarket parts. The Company's credit evaluation process, reasonably short collection terms and the geographical dispersion of sales transactions help to mitigate any concentration of credit risk. The Company requires placement of investments in financial institutions evaluated as highly creditworthy. The Company does not generally require collateral for its trade accounts receivable or those assets included in the investment in accounts receivable securitization. The allowance for doubtful accounts of $18.7 million and $16.3 million at December 31, 1997 and 1996 is based upon the expected collectibility of trade accounts receivable. F-24 FEDERAL-MOGUL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Fair Value of Financial Instruments The carrying amounts of certain financial instruments such as cash and equivalents, accounts receivable, accounts payable, British pound currency option, and short-term debt approximate their fair values. The carrying amounts and estimated fair values of the Company's long term debt were $273.1 million and $286.1 million at December 31, 1997. The fair value of the long- term debt is estimated using discounted cash flow analysis and the Company's current incremental borrowing rates for similar types of arrangements. 9. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost and include expenditures which materially extend the useful lives of existing buildings, machinery and equipment. Depreciation is computed principally by the straight-line method for financial reporting purposes and by accelerated methods for income tax purposes. Depreciation expense for the years ended December 31, 1997, 1996 and 1995, was $42.6 million, $49.8 million and $48.3 million, respectively. At December 31, property, plant and equipment consisted of the following:
ESTIMATED USEFUL LIFE 1997 1996 ----------- ------ ------ (MILLIONS OF DOLLARS) Land.......................................... -- $ 29.1 $ 32.1 Buildings and building improvements........... 40 yrs. 124.0 144.1 Machinery and equipment....................... 3-12 yrs. 363.4 378.8 ------ ------ 516.5 555.0 Accumulated depreciation...................... (202.6) (204.7) ------ ------ $313.9 $350.3 ====== ======
The Company leases various facilities and equipment under both capital and operating leases. Net assets subject to capital leases were not significant at December 31, 1997 and 1996. The balance of the deferred gain resulting from the 1988 sale and leaseback of a portion of the corporate headquarters complex was $7.1 million at December 31, 1997. The deferred gain is being amortized over the term of the lease as a reduction of rent expense. Future minimum payments under noncancelable operating leases with initial or remaining terms of more than 1 year are, in millions: 1998--$20.3; 1999--$16.8; 2000 $13.8; 2001--$11.8; 2002--$10.6 and thereafter $42.0. Future minimum lease payments have been reduced by approximately $26.2 million for amounts to be received under sublease agreements. Total rental expense under operating leases was $29.1 million in 1997, $33.8 million in 1996 and $34.0 million in 1995, exclusive of property taxes, insurance and other occupancy costs generally payable by the Company. 10. DEBT In December 1997, the Company entered into a $3.25 billion committed bank facility with a reputable financial institution related to the proposed T&N plc acquisition (refer to Note 20). The facility provides for up to $2.75 billion of senior debt and up to $500 million of subordinated debt. This facility is contingent upon the acquisition of T&N plc. Accordingly no amounts are outstanding as of December 31, 1997. F-25 FEDERAL-MOGUL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) In June 1997, the Company entered into a new $350 million multicurrency revolving credit facility with a consortium of international banks which matures in June 2002. The multicurrency revolving credit facility replaced the existing U.S. and European revolving credit facilities. The multicurrency revolving credit facility contains restrictive covenants that, among other matters, require the Company to maintain certain financial ratios. As of December 31, 1997, there were no borrowings outstanding against the multicurrency revolving credit facility. As of December 31, 1996, the Company had $185 million borrowed against the U.S. revolver and $9 million borrowed against the European revolver, both of which were included in short-term debt. Short-term debt also includes international subsidiaries local credit arrangements that have terms in accordance with local customary practice. The weighted average interest rate for the Company's short-term debt was 9.9% and 7.9% as of December 31, 1997 and 1996, respectively. Long-term debt at December 31 consists of the following:
1997 1996 ------ ------ (MILLIONS OF DOLLARS) Medium-term notes.......................................... $125.0 $125.0 Senior notes............................................... 124.6 -- Private placement debt..................................... -- 64.7 ESOP obligation............................................ 21.9 28.0 Other...................................................... 11.8 17.8 ------ ------ 283.3 235.5 Less current maturities included in short-term debt........ 10.2 25.9 ------ ------ $273.1 $209.6 ====== ======
In April 1997, the Company issued $125.0 million of ten-year 8.8% senior notes. During the second quarter of 1997, the Company retired $64.7 million in private placement debt. The early retirement of the debt required a make-whole payment of $4.1 million, which was recognized as an extraordinary item of $2.6 million, net of the related tax benefit. In August 1994, the Company initiated a medium-term note program for up to $200 million. Notes were issued in maturities ranging from five to ten years. The average interest rate was approximately 8.4%. The ESOP obligation represents the unpaid principal balance on an 11 year loan entered into by the Company's ESOP in 1989. Proceeds of the loan were used by the ESOP to purchase the Company's Series C ESOP preferred stock. Payment of principal and interest on the notes is unconditionally guaranteed by the Company, and therefore, the unpaid principal balance of the borrowing is classified as long-term debt. Company contributions and dividends on the preferred shares held by the ESOP are used to meet semi-annual principal and interest obligations. The original ESOP obligation bore an annual interest rate of 11.5%. The obligation was refinanced on June 30, 1995 at a fixed interest rate of 7.2%. The ESOP obligation matures in December 2000. Aggregate maturities of long-term debt for each of the years following 1998 are, in millions: 1999--$29.2; 2000--$31.8; 2001--$45.0; 2002--$6.0 and thereafter $161.1. Interest paid in 1997, 1996 and 1995 was $30.7 million, $43.5 million and $37.1 million, respectively. F-26 FEDERAL-MOGUL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 11. CAPITAL STOCK AND PREFERRED SHARE PURCHASE RIGHTS The Company's articles of incorporation authorize the issuance of 60,000,000 shares of common stock, of which 40,196,603 shares, 35,130,359 shares and 35,044,859 shares were outstanding at December 31, 1997, 1996 and 1995, respectively. In August 1997, the Company announced a call for the redemption of all its outstanding $3.875 Series D Convertible Exchangeable Preferred Stock. These preferred stockholders elected to convert each preferred share into 2.778 shares of common stock. The Company issued 4.4 million shares of common stock in exchange for all of the outstanding Series convertible exchangeable preferred stock. The Company's ESOP covers substantially all domestic salaried employees and allocates Series ESOP Convertible Preferred Stock to eligible employees based on their contributions to the Salaried Employees' Investment Program and their eligible compensation. There were 773,351, 835,898 and 892,620 shares of Series C ESOP preferred stock outstanding at December 31, 1997, 1996 and 1995, respectively. The Series C ESOP preferred shares are nonvoting and pay dividends at a rate of 7.5%. The Company repurchased and retired 62,547 Series C ESOP preferred shares valued at $4.0 million during 1997 and 56,722 Series C ESOP preferred shares valued at $3.6 million during 1996, all of which were forfeited by participants upon early withdrawal from the plan. The Series C ESOP preferred stock is convertible into shares of the Company's common stock at a rate of two shares of common stock for each share of preferred stock. The Series C ESOP preferred stock may be issued only to a trustee acting on behalf of an employee stock ownership plan or other employee benefit plan of the Company. These shares are automatically converted into shares of common stock in the event of any transfer to any person other than the plan trustee. The Series C ESOP preferred stock is redeemable, in whole or in part, at the option of the Company. The charge to operations for the cost of the ESOP was $5.2 million in 1997, $4.2 million in 1996 and $4.4 million in 1995. The Company made cash contributions to the plan of $8.1 million in 1997 and 1996, and $8.5 million in 1995, including preferred stock dividends of $3.8 million in 1997, $4.1 million in 1996 and $4.3 million in 1995. ESOP shares are released as principal and interest on the debt is paid. The ESOP Trust uses the preferred dividends not allocated to employees to make principal and interest payments on the debt. Compensation expense is measured based on the fair value of shares committed to be released to employees. Dividends on ESOP shares are treated as a reduction of retained earnings in the period declared. The number of allocated shares and suspense shares held by the ESOP were 532,817 and 240,534 at December 31, 1997, and 504,435 and 331,463 at December 31, 1996, respectively. There were no committed-to-be-released shares at December 31, 1997 and December 31, 1996. Any repurchase of the ESOP shares is strictly at the option of the Company. In 1988, the Company's Board of Directors authorized the distribution of one Preferred Share Purchase Right (Right) for each outstanding share of common stock of the Company. Each Right entitles shareholders to buy one-half of one- hundredth of a share of a new Series of preferred stock at a price of $70. As distributed, the Rights trade together with the common stock of the Company. They may be exercised or traded separately only after the earlier to occur of: (i) ten days following a public announcement that a person or group of persons has obtained the right to acquire 10% or more of the outstanding common stock of the Company (20% in the case of certain institutional investors), or (ii) ten business days (or such later date as may be determined by action of the Board of Directors) following the commencement or announcement of an intent to make a tender offer or exchange offer which would result in beneficial ownership by a person or group of persons F-27 FEDERAL-MOGUL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) of 10% or more of the Company's outstanding common stock. Additionally, if the Company is acquired in a merger or other business combination, each Right will entitle its holder to purchase, at the Right's exercise price, shares of the acquiring Company's common stock (or stock of the Company if it is the surviving corporation) having a market value of twice the Right's exercise price. The Rights may be redeemed at the option of the Board of Directors for $.005 per Right at any time before a person or group of persons acquires 10% or more of the Company's common stock. The Board may amend the Rights at any time without shareholder approval. The Rights will expire by their terms on November 14, 1998. 12. MINORITY INTEREST--PREFERRED SECURITIES OF AFFILIATE In December 1997, the Company's wholly-owned financing trust ("Affiliated") completed a $575 million private issue of 11.5 million shares of 7.0% Trust Convertible Preferred Securities ("TCP Securities") with a liquidation value of $50 per convertible security. The net proceeds from the TCP Securities were used to purchase an equal amount of 7.0% Convertible Junior Subordinate Debentures ("Debentures") of the Company. The TCP Securities represent an undivided interest in the Affiliate's assets, with a liquidation preference of $50 per security. Distribution on the TCP Securities are cumulative and will be paid quarterly in arrears at an annual rate of 7.0%, and are included in the consolidated statement of operations as a component of Other Expense, Net. The Company has the option to defer payment of the distributions for an extension period of up to 20 consecutive quarters if the Company is in compliance with the terms of the TCP Securities. The shares of the TCP Securities are convertible, at the option of the holder, into the Company's common stock at an equivalent conversion price of approximately $51.50 per share, subject to adjustment in certain events. The TCP Securities and the Debentures will be redeemable, at the option of the Company, on or after December 6, 2000 at a Redemption Price, expressed as a percentage of principal which is added to accrued and unpaid interest. The Redemption Price range is from 104.2% on December 6, 2000 to 100.0% after December 1, 2007. All outstanding TCP Securities and Debentures are required to be redeemed by December 1, 2027. F-28 FEDERAL-MOGUL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 13. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share (in millions, except per share data):
1997 1996 1995 ----- ------- ------ Numerator: Net earnings (loss) after extraordinary item...... $69.4 $(206.3) $ (5.8) Extraordinary item--loss on early retirement of debt net of applicable tax benefit............... (2.6) -- -- ----- ------- ------ Net earnings (loss) before extraordinary item..... 72.0 (206.3) (5.8) Series C preferred dividend requirement........... (2.4) (2.5) (2.7) Series D preferred dividend requirement........... (3.1) (6.2) (6.2) ----- ------- ------ Numerator for basic earnings per share--income (loss) available to common shareholders before extraordinary item............................... $66.5 $(215.0) $(14.7) Effect of dilutive securities: Series C preferred dividend requirement......... 2.4 -- -- Series D preferred dividend requirement......... 3.1 -- -- Additional required ESOP contribution........... (1.9) -- -- ----- ------- ------ Numerator for diluted earnings per share--income (loss) available to common shareholders after assumed conversions, before extraordinary item... $70.1 $(215.0) $(14.7) ----- ------- ------ Numerator for basic earnings per share--income (loss) available to common shareholders after extraordinary item................................. $63.9 $(215.0) $(14.7) Numerator for diluted earnings per share--income (loss) available to common shareholders after extraordinary item................................. $67.5 $(215.0) $(14.7) Denominator: Denominator for basic earnings per share--weighted average shares 36.6 34.7 34.6 Effect of dilutive securities: Dilutive stock options outstanding.............. 0.4 -- -- Nonvested stock................................. 0.3 -- -- Conversion of Series C preferred stock.......... 1.6 -- -- Conversion of Series D preferred stock.......... 3.0 -- -- ----- ------- ------ Dilutive potential common shares.................. 5.3 -- -- Denominator for dilutive earnings per share-- adjusted weighted average shares and assumed conversions.................................... 41.9 34.7 34.6 ===== ======= ====== Basic earnings (loss) per share before extraordinary item............................................... $1.81 $ (6.20) $(0.42) ===== ======= ====== Basic earnings (loss) per share after extraordinary item............................................... $1.74 $ (6.20) $(0.42) ===== ======= ====== Diluted earnings (loss) per share before extraordinary item................................. $1.67 $ (6.20) $(0.42) ===== ======= ====== Diluted earnings (loss) per share after extraordinary item................................. $1.61 $ (6.20) $(0.42) ===== ======= ======
For additional disclosures regarding the Series C and Series D preferred stock, the employee stock options and nonvested stock shares, refer to Notes 11 and 14. Convertible preferred securities (refer to Note 12) redeemable for 11.5 million shares of common stock were outstanding for a portion of 1997 but were not included in the computation of diluted earnings per share because the effect would be antidilutive. F-29 FEDERAL-MOGUL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 14. INCENTIVE STOCK PLANS The Company's shareholders adopted stock option plans in 1976 and 1984 and performance incentive stock plans in 1989 and 1997. These plans provide generally for awarding restricted shares or granting options to purchase shares of the Company's common stock. Restricted shares entitle employees to all the rights of common stock shareholders, subject to certain transfer restrictions and to forfeiture in the event that the conditions for their vesting are not met. Options entitle employees to purchase shares at an exercise price not less than 100% of the fair market value on the grant date and expire after a five or ten year period as determined by the Board of Directors. Under the plans, awards vest from 6 months to 5 years after their date of grant, as determined by the Board of Directors at the time of grant. At December 31, 1997, there were 934,245 shares available for future grants under the plans. In October 1997, the Company met certain share price performance criteria under the 1989 Long-Term Incentive Plan which resulted in the recognition of $5.4 million in compensation expense relating to the vesting of restricted stock awards. The total compensation cost that has been charged to operations for vesting of restricted stock awards was $9.0 million, $0.4 million and $0.1 million in 1997, 1996 and 1995, respectively. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its employee stock awards. Accordingly, no compensation cost has been recognized for its stock option grants, as the exercise price of the Company's employee stock options equals the underlying stock price on the date of grant. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of Financial Accounting Standards Board Statement No. 123 "Accounting for Stock Based Compensation," the Company's net earnings (loss), in millions, and earnings (loss) per share would have been adjusted to the pro forma amounts indicated below:
1997 1996 1995 ----- ------- ----- Net earnings (loss) as reported.................... $69.4 $(206.3) $(5.8) Pro forma.......................................... $70.7 $(207.1) $(6.0) Basic earnings (loss) per share as reported........ $1.74 $ (6.20) $(.42) Pro forma.......................................... $1.78 $ (6.22) $(.43) Diluted earnings (loss) per share as reported...... $1.61 $ (6.20) $(.42) Pro forma.......................................... $1.64 $ (6.22) $(.43)
Pro forma information regarding net income and earnings per share is required by Statement 123 as if the Company had accounted for its employee stock options under the fair value method. The fair value for options is estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1997, 1996 and 1995, respectively: risk-free interest rates of 6.5%; dividend yields of 1.5%, 2.3% and 2.4%; volatility factors of the expected market price of the Company's common stock of 27.2%, 11.2% and 8.1% and a weighted average expected life of the option of five years. The fair value of nonvested stock awards is equal to the market price of the stock on the date of the grant. Since the above pro forma disclosures of results are only required to consider grants awarded in 1995 and thereafter, the pro forma effects during this initial phase-in period may not be representative of the effects on the reported results for future years. The weighted average fair value and the total number (in millions) of options granted was $9.99, $3.34 and $3.09, and 0.9, 0.3 and 0.1 for 1997, 1996 and 1995, respectively. The weighted average fair value and total F-30 FEDERAL-MOGUL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) number of nonvested stock awards granted was $24.47, $18.90 and $18.38 and 0.1, 0.2 and 0.4 for 1997, 1996 and 1995, respectively. All options and stock awards that are not vested at December 31, 1997, vest solely on employees' rendering additional service. The following table summarizes the activity relating to the Company's incentive stock plans:
NUMBER OF SHARES WEIGHTED-AVERAGE (IN MILLIONS) PRICE ---------------- ---------------- Outstanding at January 1, 1995......... 2.4 $22.98 Options/stock granted................ .5 18.72 Options/stock lapsed or canceled..... (.3) 23.69 ---- ------ Outstanding at December 31, 1995....... 2.6 22.02 Options/stock granted................ .5 22.08 Options exercised.................... -- -- Options/stock lapsed or canceled..... (.6) 22.32 ---- ------ Outstanding at December 31, 1996....... 2.5 22.03 Options/stock granted................ 1.0 31.74 Options exercised/stock vested....... (1.0) 21.94 Options/stock lapsed or canceled..... (0.3) 22.29 ---- ------ Outstanding at December 31, 1997....... 2.2 $26.46 ==== ====== Options exercisable at December 31, 1997................................ 0.9 $23.07 ==== ====== Options exercisable at December 31, 1996................................ 1.3 $22.50 ==== ====== Options exercisable at December 31, 1995................................ 1.5 $21.50 ==== ======
The following is a summary of the range of exercise prices for stock options that are outstanding and the amount of nonvested stock awards at December 31, 1997:
WEIGHTED AVERAGE OUTSTANDING ---------------- AWARDS REMAINING RANGE (IN MILLIONS) PRICE LIFE ----- ------------- ------ --------- Options: $15.69 to $23.50......................... 0.8 $21.63 4 years $23.50 to $41.28......................... 1.2 $31.26 5 years Nonvested stock.......................... 0.2 -- -- --- Total.................................. 2.2 ===
15. POSTEMPLOYMENT BENEFITS The Company maintains several defined benefit pension plans which cover substantially all domestic employees and certain employees in other countries. Benefits for domestic salaried employees are based on compensation, age and years of service, while hourly employees' benefits are primarily based on negotiated rates and years of service. International plans maintained by the Company provide benefits based on years of service and compensation. The Company's funding policy is consistent with funding requirements of federal and international laws and regulations. Plan assets consist primarily of listed equity securities and fixed income instruments. F-31 FEDERAL-MOGUL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Net periodic pension cost for the Company's defined benefit plans in 1997, 1996 and 1995 consists of the following: UNITED STATES PLANS
1997 1996 1995 ------ ------ ------ (MILLIONS OF DOLLARS) (INCOME)/EXPENSE Service cost--benefits earned during the period. $ 7.8 $ 9.0 $ 7.3 Interest cost on projected benefit obligation... 14.0 15.0 15.0 Actual return on plan assets.................... (61.8) (30.8) (51.6) Net amortization and deferral................... 33.4 3.3 28.6 Curtailment loss................................ -- 3.7 .5 ------ ------ ------ Net periodic pension (income) cost.............. $ (6.6) $ .2 $ (.2) ====== ====== ====== INTERNATIONAL PLANS 1997 1996 1995 ------ ------ ------ (MILLIONS OF DOLLARS) (INCOME)/EXPENSE Service cost--benefits earned during the period. $ .3 $ .4 $ .4 Interest cost on projected benefit obligation... 1.9 2.5 2.7 ------ ------ ------ Net periodic pension cost....................... $ 2.2 $ 2.9 $ 3.1 ====== ====== ======
The following table sets forth the funded status for the Company's defined benefit plans at December 31: UNITED STATES PLANS
PLANS WITH ASSETS PLANS WITH IN EXCESS OF ACCUMULATED ACCUMULATED BENEFITS IN BENEFITS EXCESS OF ASSETS ------------------- ------------------ 1997 1996 1997 1996 --------- -------- -------- -------- (MILLIONS OF DOLLARS) Actuarial present value of benefit obligations: Vested benefit obligation....... $ 129.9 $ 96.2 $ 45.8 $ 88.8 ========= ======== ======== ======== Accumulated benefit obligation.. 139.1 102.1 55.5 106.4 ========= ======== ======== ======== Projected benefit obligation.... 140.8 104.0 56.4 107.1 --------- -------- -------- -------- Plan assets at fair value....... 243.8 177.8 49.9 84.8 --------- -------- -------- -------- Plan assets in excess of (less than) projected benefit obligation..................... 103.0 73.8 (6.5) (22.3) Unrecognized net (asset) liability at transition........ (2.7) (5.8) .7 .5 Unrecognized prior service cost. 3.7 .5 6.0 10.0 Unrecognized net (gain) loss.... (54.7) (23.2) (5.6) 3.2 --------- -------- -------- -------- Accrued pension asset (liability) included in the consolidated balance sheets.... $ 49.3 $ 45.3 $ (5.4) $ (8.6) ========= ======== ======== ========
F-32 FEDERAL-MOGUL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) INTERNATIONAL PLANS
ACCUMULATED BENEFITS EXCEED ASSETS -------------- 1997 1996 ------ ------ (MILLIONS OF DOLLARS) Actuarial present value of benefit obligations: Vested benefit obligation.............................. $ 25.3 $ 32.9 ------ ------ Accumulated benefit obligation......................... 26.6 34.5 ------ ------ Projected benefit obligation........................... 26.6 34.5 ------ ------ Plan assets less than projected benefit obligation....... (26.6) (34.5) Unrecognized net loss.................................... 2.8 4.0 ------ ------ Accrued pension liability included in the consolidated balance sheet........................................... $(23.8) $(30.5) ====== ======
The assumptions used in computing the above information are as follows:
1997 1996 1995 ------ ------ ------ Discount rates....................................... 7 1/2% 7 1/2% 7 1/2% Rates of increase in compensation levels............. 4 1/2% 4 1/2% 4 1/2% Expected long-term rates of return on assets......... 10% 10% 10%
The Company's minimum liability adjustment was $1.3 million and $13.4 million for United States plans at December 31, 1997 and 1996, respectively, and $2.7 million and $3.5 million for international plans at December 31, 1997 and 1996, respectively. The Company also provides health care and life insurance benefits for certain domestic retirees covered under company-sponsored benefit plans. Participants in these plans may become eligible for these benefits if they reach normal retirement age while working for the Company. The Company's policy is to fund benefit costs as they are provided, with retirees paying a portion of the costs. The components of net periodic postretirement benefit costs are as follows as of December 31:
1997 1996 1995 ----- ---- ----- (MILLIONS OF DOLLARS) Service cost.......................................... $ 2.5 $2.8 $ 2.3 Interest cost......................................... 10.5 10.8 10.4 Curtailment gain...................................... -- (7.5) (1.0) Amortized gains....................................... (.5) (.5) (1.1) ----- ---- ----- Net periodic postretirement benefits cost............. $12.5 $5.6 $10.6 ===== ==== =====
The following schedule reconciles the funded status of the Company's postretirement benefit plans to the amounts recorded in the Company's balance sheets as of December 31:
1997 1996 ------ ------ (MILLIONS OF DOLLARS) Accumulated postretirement benefit obligation (APBO): Retirees................................................... $107.6 $103.9 Active plan participants................................... 42.8 46.9 ------ ------ 150.4 150.8 Unrecognized net gain (loss)............................... 3.8 (1.4) Unrecognized prior service cost............................ 3.5 4.1 ------ ------ Accrued postretirement benefits liability.................. $157.7 $153.5 ====== ======
F-33 FEDERAL-MOGUL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The discount rate used in determining the APBO was 7.5% at December 31, 1997 and 1996. At December 31, 1997, the assumed annual health care cost trend used in measuring the APBO approximated 7.5% in 1997 declining to 7.1% in 1998 and to an ultimate rate of 5.5% estimated to be achieved in 2009. At December 31, 1996, the assumed annual health care cost trend used in measuring the APBO approximated 7.5% in 1996, declining to 7.1% in 1997 and to an ultimate annual rate of 5.5% estimated to be achieved in 2008. Increasing the assumed cost trend rate by 1% each year would have increased the APBO by approximately 8.3% and 8.4% at December 31, 1997 and 1996, respectively. Aggregate service and interest costs would have increased by approximately 9.4% for 1997 and 1996, and 12.9% for 1995. In 1991, the Company established a retiree health benefits account (as defined in Section 401(h) of the Internal Revenue Code) within its domestic salaried employees' pension plan. Annually, the Company may elect to transfer excess pension plan assets (subject to defined limitations) to the 401(h) account for purposes of funding current salaried retiree health care costs. The Company transferred excess pension plan assets of $4.4 million in 1997, $4.2 million in 1996 and $4.2 million in 1995 to the 401(h) account to fund salaried retiree health care benefits. The Company sponsors two defined contribution retirement saving plans covering substantially all domestic employees. Matching Company contributions for the Salaried Employees' Investment Program are provided through the ESOP (refer to Note 11). In addition, the Company provided matching contributions to eligible employees based upon their contributions to the Employee Investment Program of approximately $1.5 million, $1.6 million, and $1.2 million for 1997, 1996, and 1995, respectively. 16. INCOME TAXES Under the liability method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The components of earnings (loss) before income taxes and extraordinary item consisted of the following:
1997 1996 1995 ----- ------- ----- (MILLIONS OF DOLLARS) Domestic............................................ $50.1 $ (88.3) $ 7.9 International....................................... 49.4 (140.4) (11.2) ----- ------- ----- $99.5 $(228.7) $(3.3) ===== ======= ===== Significant components of the provision for income taxes (tax benefit) are as follows: 1997 1996 1995 ----- ------- ----- (MILLIONS OF DOLLARS) Current: Federal........................................... $ 9.6 $ (4.0) $12.7 State and local................................... 0.2 2.3 1.2 International..................................... 6.6 6.3 9.3 ----- ------- ----- Total current................................... 16.4 4.6 23.2 Deferred: Federal........................................... 6.1 (25.2) (9.0) State and local................................... 0.7 (1.8) (.9) International..................................... 4.3 -- (10.8) ----- ------- ----- Total deferred.................................. 11.1 (27.0) (20.7) ----- ------- ----- $27.5 $ (22.4) $ 2.5 ===== ======= =====
F-34 FEDERAL-MOGUL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The reconciliation of income taxes (tax benefits) computed at the United States federal statutory tax rate to income tax expense (benefit) is:
1997 1996 1995 ----- ------ ----- (MILLIONS OF DOLLARS) Income taxes (tax benefits) at United States statutory rate.................................... $34.9 $(80.1) $(1.1) Tax effect from: Tax credits, state income taxes and other........ 2.1 1.8 (2.3) Tax benefit related to the sale of South African and Australian businesses....................... (6.8) -- -- Losses on international operations without tax benefits and foreign tax rate differences....... (2.7) 55.9 5.9 ----- ------ ----- $27.5 $(22.4) $ 2.5 ===== ====== ===== The following table summarizes the Company's total provision for income taxes/(tax benefits): 1997 1996 1995 ----- ------ ----- (MILLIONS OF DOLLARS) Income tax expense (benefit)....................... $27.5 $(22.4) $ 2.5 Allocated to equity: Currency translation............................. (3.6) (4.9) 5.3 Preferred dividends.............................. (1.3) (1.5) (1.6) Investment securities............................ (0.6) .8 -- Other............................................ 1.2 .7 .8 ----- ------ ----- $23.2 $(27.3) $ 7.0 ===== ====== =====
Significant components of the Company's deferred tax assets and liabilities as of December 31 are as follows:
1997 1996 ------ ------ (MILLIONS OF DOLLARS) Deferred tax assets: Postretirement benefits................................ $ 58.2 $ 57.2 Net operating loss carryforwards of international subsidiaries.......................................... 45.0 68.1 Loss on foreign investment............................. 23.2 49.0 Restructuring costs.................................... -- 8.3 Inventory basis........................................ 10.3 12.0 Allowance for doubtful accounts........................ 11.3 7.0 Other temporary differences............................ 36.9 27.6 ------ ------ Total deferred tax assets............................ 184.9 229.2 Valuation allowance for deferred tax assets.............. (44.4) (89.4) ------ ------ Net deferred tax assets.............................. 140.5 139.8 ------ ------ Deferred tax liabilities: Fixed asset basis differences.......................... (50.5) (55.0) Pension................................................ (17.3) (12.4) Restructuring costs.................................... (8.1) -- ------ ------ Total deferred tax liabilities....................... (75.9) (67.4) ------ ------ $64.6 $ 72.4 ====== ======
F-35 FEDERAL-MOGUL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Deferred tax assets and liabilities are recorded in the consolidated balance sheets as follows:
1997 1996 ----- ----- (MILLIONS OF DOLLARS) Assets: Prepaid expenses and income tax benefits.................. $46.6 $54.6 Business investments and other assets..................... 26.7 21.9 Liabilities: Other current accrued liabilities......................... (4.2) (3.6) Other long-term accrued liabilities....................... (4.5) (.5) ----- ----- $64.6 $72.4 ===== =====
Income taxes paid in 1997, 1996 and 1995 were $2.6 million, $6.7 million and $19.4 million, respectively. Undistributed earnings of the Company's international subsidiaries amounted to approximately $39 million at December 31, 1997. No taxes have been provided on approximately $30 million of these earnings, which are considered by the Company to be permanently reinvested. F-36 FEDERAL-MOGUL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Upon distribution of these earnings, the Company would be subject to United States income taxes and foreign withholding taxes. Determining the unrecognized deferred tax liability on the distribution of these earnings is not practicable as such liability, if any, is dependent on circumstances existing when remittance occurs. The Company has a $67 million German net operating loss carryforward at December 31, 1997 that has no expiration date. The Company has $50 million of additional foreign operating losses with various expiration dates through 2003. 17. OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA The Company is a global manufacturer and distributor of a broad range of non-discretionary parts, primarily vehicular components for automobiles, light trucks, heavy duty trucks, farm and construction vehicles. The Company sells parts to original equipment manufacturers, principally the major automotive manufacturers in the United States and Europe. Through its worldwide distribution network, the Company also sells replacement parts in the vehicular replacement market. All of these activities constitute a single business segment. Canadian operations are aggregated with the U.S. operations as they are not significant under the materiality thresholds of Financial Accounting Standards Board Statement No. 14. Financial information, summarized by geographic area, is as follows:
1997 1996 1995 -------- -------- -------- (MILLIONS OF DOLLARS) Net sales: United States and Canada.................. $1,132.2 $1,224.7 $1,280.6 Europe.................................... 372.3 436.0 382.8 Other international....................... 302.1 372.0 336.4 -------- -------- -------- $1,806.6 $2,032.7 $1,999.8 ======== ======== ======== Operating earnings (loss): United States and Canada.................. $ 114.3 $ (53.2) $ 57.5 Europe.................................... 20.6 11.8 (13.2) Other international....................... 31.9 (112.8) 13.2 -------- -------- -------- 166.8 (154.2) 57.5 Corporate expenses and other................ (27.9) (27.7) (27.8) -------- -------- -------- $ 138.9 $ (181.9) $ 29.7 ======== ======== ======== Identifiable assets: United States and Canada.................. $1,240.4 $ 775.5 $ 893.5 Europe.................................... 467.0 451.0 493.9 Other international....................... 94.7 228.7 322.7 -------- -------- -------- $1,802.1 $1,455.2 $1,710.1 ======== ======== ========
Transfers between geographic areas are not significant, and when made, are recorded at prices comparable to normal unaffiliated customer sales. The information presented above was prepared in accordance with Statement 14. In 1997, the Financial Accounting Standards Board issued Statement No. 131, Disclosures about Segments of an Enterprise and Related Information. The statement supersedes Statement 14 and establishes standards for the way public business enterprises report selected information about operating segments in annual reports and interim financial reports issued to shareholders. Statement 131 is effective for fiscal years beginning after December 15, 1997. For the year ended 1998, the Company will provide financial and descriptive information about its reportable operating segments to conform to the requirements. F-37 FEDERAL-MOGUL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 18. LITIGATION AND ENVIRONMENTAL MATTERS The Company is one of a large number of defendants in a number of lawsuits brought by claimants alleging injury due to exposure to asbestos. The Company is defending all such claims vigorously and believes it has substantial defenses to liability and adequate insurance coverage for its defense costs. The Company is also involved in various other legal actions and claims. While the outcome of litigation cannot be predicted with certainty, after consulting with counsel for the Company, management believes that these matters will not have a material effect on the Company's consolidated financial statements. The Company is a party to lawsuits filed in various jurisdictions alleging claims pursuant to the Comprehensive Environmental Response Compensation and Liability Act of 1980 (CERCLA) or other state or federal environmental laws. In addition, the Company has been notified by the Environmental Protection Agency and various state agencies that it may be a potentially responsible party (PRP) for the cost of cleaning up certain other hazardous waste storage or disposal facilities pursuant to CERCLA and other federal and state environmental laws. PRP designation requires the funding of site investigations and subsequent remedial activities. Although these laws could impose joint and several liability upon each party at any site, the potential exposure is expected to be limited because at all sites other companies, generally including many large, solvent public companies, have been named as PRPs. In addition, the Company has identified certain present and former properties at which it may be responsible for cleaning up environmental contamination. The Company is actively seeking to resolve these matters. Although difficult to quantify based on the complexity of the issues, the Company has accrued the estimated cost associated with such matters based upon current available information from site investigations and consultants. The environmental and legal reserve was approximately $11 million at December 31, 1997 and $12 million at December 31, 1996 and is included in other long-term accrued liabilities. Management believes these accruals, which have not been reduced by any anticipated insurance proceeds, will be adequate to cover the Company's estimated liability for these exposures. F-38 FEDERAL-MOGUL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 19. QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND(1) THIRD FOURTH(2) YEAR ------ --------- -------- --------- -------- (MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) Year ended December 31, 1997: Net sales...................... $485.6 $481.8 $424.2 $ 415.0 $1,806.6 Gross margin................... 112.1 115.3 102.8 94.6 424.8 Net earnings before extraordinary item............ 13.9 28.5 17.4 12.2 72.0 Extraordinary item--loss on early retirement of debt, net of tax benefit................ -- (2.6) -- -- (2.6) Net earnings................... 13.9 25.9 17.4 12.2 69.4 Diluted earnings per share(5).. .32 .61 .40 .28 1.61 FIRST SECOND THIRD(3) FOURTH(4) YEAR ------ --------- -------- --------- -------- (MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) Year ended December 31, 1996: Net sales...................... $522.9 $536.6 $492.4 $ 480.8 $2,032.7 Gross margin................... 113.2 117.5 83.2 58.3 372.2 Net earnings (loss)............ 11.2 15.9 (12.6) (220.8) (206.3) Diluted earnings (loss) per share(5)...................... .25 .36 (.43) (6.43) (6.20)
- -------- (1) Includes an income tax benefit of $6.8 million related to the sales of the South African and Australian businesses. (2) Includes $1.1 million for a net restructuring credit, a $2.4 million charge for an adjustment of assets held for sale to fair value, a $1.6 million credit for reengineering and other related charges, and a $10.5 million net charge related to the British pound currency option. (3) Net loss includes a pretax charge of $38.5 million primarily relating to changes in estimates, adjustment of assets held for sale to fair value and other related charges. (4) Net loss includes a pretax charge for restructuring of $57.6 million, adjustment of assets held for sale to fair value of $144.9 million and $61.7 million primarily relating to changes in estimates, and other related charges. (5) The 1996 and first three quarters of 1997 earnings per share amounts have been restated to comply with Statement 128, Earnings Per Share.
1997 1996 ------------- ------------- QUARTER HIGH LOW HIGH LOW ------- ------ ------ ------ ------ First......................................... $26.75 $21.63 $20.88 $17.38 Second........................................ 35.38 24.50 19.88 17.88 Third......................................... 39.94 32.75 22.50 16.25 Fourth........................................ 47.63 36.75 24.50 20.38
Quarterly dividends of $.12 per common share were declared for 1997 and 1996. In February 1998, the Company's Board of Directors declared a quarterly dividend of $.12 per common share. This was the 248th consecutive quarterly dividend declared by the Company. 20. SUBSEQUENT EVENTS T&N PLC Transaction On October 16, 1997, the Company announced it made a cash offer to acquire all the outstanding common stock of T&N plc (T&N) for 260 pence per share. The offer valued T&N's issued share capital at approximately $2.4 billion. T&N, headquartered in Manchester, England, had 1997 net sales of approximately $2.9 billion. On January 6, 1998, the Company's offer to acquire all of the outstanding common stock of T&N was declared F-39 FEDERAL-MOGUL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED) unconditional as to acceptances. By the second closing date under the offer, January 2, 1998, valid acceptances of the offer had been received for approximately 95% of the entire issued share capital of T&N. The Company will finance the acquisition through a committed bank facility from a reputable financial institution. The Company's intention is to put in place a permanent capital structure with an appropriate combination of equity and debt financing. The offer is subject to various conditions customary in the United Kingdom and the receipt of all applicable regulatory approvals in the United States and Europe. As part of the acquisition process, certain financing, professional and other related fees have been incurred in 1997. These fees have been capitalized as incurred and will be accounted for as direct acquisition or financing costs once the transaction closes. Management fully expects the acquisition to close in the first quarter of 1998, however, in the event the acquisition is not completed, these fees would be charged to operations and would materially impact earnings at that time. As of December 31, 1997, the Company had capitalized $28 million of these fees. In addition, the Company may elect to accelerate payment of certain portions of the bank facility which would result in an extraordinary charge due to the write-off of the financing cost associated with the early retirement of debt. The British pound currency option (refer to Note 8) was settled by the Company in the first quarter of 1998 resulting in a $17.3 million pretax loss. Also in the first quarter of 1998, the Company entered into a forward contract to purchase 1.5 billion British pounds for a notional amount of approximately $2.45 billion. The forward contract expires in the first quarter of 1998. Fel-Pro Incorporated Transaction On February 24, 1998, the Company acquired Fel-Pro Inc., a privately owned manufacturer, headquartered in Skokie, Illinois, with net sales of approximately $500 million for total consideration of $720 million which includes $225 million in equity and $495 million in cash. The $495 million in cash was primarily provided through available borrowings on the $350 million multicurrency revolver. The remaining consideration paid was through the issuance of promissory notes. Divestiture of Minority Interest In February 1998, the Company announced the divestiture of its minority interest in G. Bruss GmbH & Co. KG, a German manufacturer of seals and gaskets. As part of the divestiture agreement the Company increased their ownership to 100% in the Summerton, South Carolina gasket business. The Company also received cash and recognized a gain as a result of these transactions. The gain recognized is not expected to be significant to 1998 first quarter results. F-40 INDEPENDENT AUDITOR'S REPORT To the Board of Directors of T&N plc We have audited the accompanying consolidated balance sheets of T&N plc and its subsidiaries at 31 December 1997 and 31 December 1996, and the related consolidated profit and loss accounts, reconciliations of movements in shareholders' funds and consolidated cash flow statements for each of the years in the three year period ended 31 December 1997. These consolidated financial statements are the responsibility of the management of T&N plc. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United Kingdom, which are substantially consistent with those of 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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of T&N plc and its subsidiaries at 31 December 1997 and 31 December 1996, and the results of their operations and their cash flows for each of the years in the three year period ended 31 December 1997, in conformity with generally accepted accounting principles in the United Kingdom. Accounting principles generally accepted in the United Kingdom vary in certain significant respects from accounting principles generally accepted in the United States of America. Application of accounting principles generally accepted in the United States would have affected net income for the two years ended 31 December 1997 and shareholders' funds at 31 December 1997 and 31 December 1996, to the extent summarised in Note 29 to the consolidated financial statements. /s/ KPMG Audit Plc Chartered Accountants Registered Auditor London, England 17 February 1998 F-41 T&N PLC CONSOLIDATED PROFIT AND LOSS ACCOUNTS FOR THE YEARS ENDED 31 DECEMBER
NOTES 1997 1996 1995 ---------- ----------------- ----------------- ----------------- (POUND STERLING)M (POUND STERLING)M (POUND STERLING)M Turnover Turnover including share of associated undertakings......... 1,883.3 2,037.9 2,164.5 Associated undertakings......... (84.2) (81.9) (73.0) -------- -------- -------- Turnover excluding associated undertakings......... 1,799.1 1,956.0 2,091.5 Continuing operations. 1,734.7 1,814.4 1,777.0 Acquisitions.......... 29.6 -- -- -------- -------- -------- Total continuing operations........... 1,764.3 1,814.4 1,777.0 Discontinued operations........... 34.8 141.6 314.5 -------- -------- -------- Total turnover excluding associated undertakings......... 2(a) 1,799.1 1,956.0 2,091.5 Cost of sales......... 2(d) (1,293.5) (1,418.3) (1,507.8) -------- -------- -------- Gross profit............ 505.6 537.7 583.7 Federal-Mogul bid related costs........ (10.0) -- -- Other operating expenses............. 2(d) (331.6) (370.3) (369.7) -------- -------- -------- Group operating profit before asbestos- related costs........ 164.0 167.4 214.0 Share of profits of associated undertakings......... 2(d) 13.2 11.8 11.8 -------- -------- -------- Operating profit before asbestos- related costs........ 2(b), 2(e) 177.2 179.2 225.8 Asbestos-related costs................ 2(d) -- (515.0) (51.3) -------- -------- -------- Operating profit/(loss) on ordinary activities. Continuing operations. 171.4 (350.3) 148.0 Acquisitions.......... 3.2 -- -- -------- -------- -------- Total continuing operations........... 174.6 (350.3) 148.0 Discontinued operations........... 2.6 14.5 26.5 -------- -------- -------- Total operating profit/(loss) on ordinary activities.... 2(d) 177.2 (335.8) 174.5 Profit/(loss) on disposal of discontinued operations........... 3 14.5 (1.0) 1.5 Release/(charge) of provision against loss on disposals.... 3 -- 1.4 (1.4) Provision for loss/loss on disposal of properties (continuing operations).......... (3.1) (2.0) -- Release of provision/(provision against) fixed asset investments: Kolbenschmidt costs.. 4 32.4 (23.4) (19.5) -------- -------- -------- Profit/(loss) on ordinary activities before finance charges. 221.0 (360.8) 155.1 Net interest payable and similar charges-- Group................ 5 (28.4) (26.8) (35.8) Net interest (payable)/receivable and similar charges-- Associates........... (2.5) (0.7) 0.8 -------- -------- -------- Profit/(loss) on ordinary activities before taxation........ 190.1 (388.3) 120.1 Tax on profit/(loss) on ordinary activities........... 6 (62.8) (8.0) (41.4) -------- -------- -------- Profit/(loss) on ordinary activities after taxation......... 127.3 (396.3) 78.7 Minority interests.... (4.9) (4.5) (8.4) -------- -------- -------- Profit/(loss) attributable to shareholders......... 122.4 (400.8) 70.3 Dividends paid and proposed............. 7 (49.5) (16.0) (31.9) -------- -------- -------- Transfer to/(from) reserves............... 21 72.9 (416.8) 38.4 ======== ======== ======== Earnings/(loss) per share................ 8 22.9p (75.4)p 13.3p Earnings per share pre asbestos-related costs................ 8 20.4p 14.8 p 22.7p Dividends per share... 7 9.2p 3.0 p 6.0p
Where applicable, figures for the year ended 31 December 1996 and 31 December 1995 have been restated to disclose separately the results of business discontinued during 1997. In addition, the 1996 and 1995 figures have been restated to show the share of interest payable and similar charges of associated companies below operating profit. See accompanying notes to consolidated financial statements F-42 T&N PLC CONSOLIDATED BALANCE SHEETS AS AT 31 DECEMBER
BEFORE ASBESTOS 1997 ASBESTOS NOTES RELATED ITEMS RELATED ITEMS TOTAL 1997 TOTAL 1996 ----- --------------- ------------- ---------- ---------- (POUND (POUND (POUND (POUND STERLING)M STERLING)M STERLING)M STERLING)M Fixed assets Tangible assets....... 11 676.4 -- 676.4 697.2 Investments........... 12 83.6 -- 83.6 59.5 ----- ------ ------- ------- 760.0 -- 760.0 756.7 ----- ------ ------- ------- Current assets Stocks................ 13 221.9 -- 221.9 247.6 Debtors falling due within one year...... 14 318.8 -- 318.8 350.8 Debtors falling due after more than one year................. 14 73.5 -- 73.5 66.1 Investments........... 15 8.0 -- 8.0 5.6 Cash at bank and in hand................. 18 115.8 78.2 194.0 131.5 ----- ------ ------- ------- 738.0 78.2 816.2 801.6 ----- ------ ------- ------- Creditors: due within one year Borrowings............ 18 103.7 -- 103.7 77.2 Other creditors....... 16 403.4 19.6 423.0 472.5 ----- ------ ------- ------- 507.1 19.6 526.7 549.7 ----- ------ ------- ------- Net current assets...... 230.9 58.6 289.5 251.9 ----- ------ ------- ------- Total assets less current liabilities.. 990.9 58.6 1,049.5 1,008.6 Creditors: due after more than one year... Borrowings............ 18 285.4 -- 285.4 260.2 Other creditors....... 17 12.0 -- 12.0 15.9 ----- ------ ------- ------- 297.4 -- 297.4 276.1 ----- ------ ------- ------- Provisions for liabilities and charges.............. 19 147.1 388.2 535.3 589.5 ----- ------ ------- ------- Net assets.............. 546.4 (329.6) 216.8 143.0 ===== ====== ======= ======= Capital and reserves Called up share capital.............. 20 219.5 532.2 Share premium account. 21 2.7 0.2 Shares to be issued... 0.7 -- Special reserve....... 63.2 -- Revaluation reserve... 21 14.2 21.6 Associated undertakings' reserve.............. 21 (2.1) 5.0 Goodwill write off reserve.............. 21 (182.9) (181.1) Profit and loss account.............. 21 76.1 (259.6) ------- ------- Equity shareholders' funds................ 191.4 118.3 Minority equity interests............ 25.4 24.7 ------- ------- 216.8 143.0 ======= =======
These financial statements were approved by the board of directors and were signed on its behalf by Sir Colin Hope (Chairman) and David Harding (Finance Director) on 17 February 1998. See accompanying notes to consolidated financial statements F-43 T&N PLC CONSOLIDATED CASH FLOW STATEMENTS FOR THE YEARS ENDED 31 DECEMBER
BEFORE ASBESTOS ASBESTOS RELATED RELATED NOTES FLOWS FLOWS 1997 TOTAL ----- ---------- ---------- ---------- (POUND (POUND (POUND STERLING)M STERLING)M STERLING)M Cash inflow from operating activities Before asbestos related payments... 22(a) 260.8 -- 260.8 Asbestos related payments.......... 22(a) IBNR............................. -- (12.7) (12.7) Other claims..................... -- (44.7) (44.7) Insurance........................ -- (92.0) (92.0) ------ ------ ------ Net cash inflow from operating activities.......................... 22(a) 260.8 (149.4) 111.4 Dividends from associates............ 6.5 -- 6.5 Returns on investments and servicing of finance.......................... 22(b) (27.6) 2.7 ( 24.9) Taxation............................. 22(c) (20.1) -- (20.1) Capital expenditure and financial investment.......................... 22(d) (101.9) -- (101.9) ------ ------ ------ 117.7 (146.7) (29.0) Acquisitions and disposals........... 22(e) 43.1 -- 43.1 Equity dividends paid................ (17.6) -- (17.6) ------ ------ ------ 143.2 (146.7) (3.5) ------ ------ ------ Management of liquid resources....... 22(f) (76.5) -- (76.5) Financing............................ 22(g) 34.0 -- 34.0 ------ ------ ------ Increase/(decrease) in cash.......... 100.7 (146.7) (46.0) ====== ====== ====== Reconciliation of asbestos-related flows to asbestos fund Cash outflows (as above)........... (146.7) Cash transferred to asbestos fund.. 88.2 Non IBNR payments.................. 136.7 ------ Asbestos fund at year end.......... 78.2 ======
See accompanying notes to consolidated financial statements F-44 T&N PLC CONSOLIDATED CASH FLOW STATEMENTS--(CONTINUED) FOR THE YEAR ENDED 31 DECEMBER
BEFORE ASBESTOS ASBESTOS RELATED RELATED NOTES FLOWS FLOWS 1996 TOTAL 1995 TOTAL ----- ---------- ---------- ---------- ---------- (POUND (POUND (POUND (POUND STERLING)M STERLING)M STERLING)M STERLING)M Cash inflow from operating activities Before asbestos related payments............... 22(a) 280.5 -- 280.5 298.6 Asbestos related payments............... 22(a) IBNR.................. -- (1.2) (1.2) -- Other claims.......... -- (63.6) (63.6) (55.7) Insurance............. -- -- -- -- ------ ----- ------ ------ Net cash inflow from operating activities..... 22(a) 280.5 (64.8) 215.7 242.9 Dividends from associates. 6.8 -- 6.8 1.6 Returns on investments and servicing of finance..... 22(b) ( 31.4) -- (31.4) (37.4) Taxation.................. 22(c) (28.9) -- (28.9) (13.3) Capital expenditure and financial investment..... 22(d) (125.5) -- (125.5) (155.6) ------ ----- ------ ------ 101.5 (64.8) 36.7 38.2 Acquisitions and disposals................ 22(e) 59.3 -- 59.3 5.8 Equity dividends paid..... (31.9) -- (31.9) (33.0) ------ ----- ------ ------ 128.9 (64.8) (64.1) 11.0 ------ ----- ------ ------ Management of liquid resources................ 22(f) (6.2) -- (6.2) 6.7 Financing................. 22(g) (27.1) -- (27.1) (0.4) ------ ----- ------ ------ Increase/(decrease) in cash..................... 95.6 (64.8) (30.8) 17.3 ====== ===== ====== ====== Reconciliation of asbestos related flows to asbestos fund Cash outflows (as above)................. (64.8) (55.7) Cash transferred to asbestos fund.......... 1.2 -- Non IBNR payments....... 63.6 55.7 ----- ------ Asbestos fund at year end.................... -- -- ===== ======
See accompanying notes to consolidated financial statements F-45 T&N PLC CONSOLIDATED CASH FLOW STATEMENTS--(CONTINUED) FOR THE YEAR ENDED 31 DECEMBER
NOTES 1997 1996 1995 ----- ---------- ---------- ---------- RECONCILIATION OF NET CASH FLOW TO (POUND (POUND (POUND MOVEMENT IN NET DEBT STERLING)M STERLING)M STERLING)M (Decrease)/increase in cash in the year.................................. (46.0) 30.8 17.3 Cash (inflow)/outflow from movement in debt.................................. 22(g) and lease financing................... (22.8) 30.1 3.2 Cash outflow/(inflow) from movement in liquid resources...................... 76.5 6.2 (6.7) Loans acquired with businesses......... (4.8) -- (7.4) ------ ------ ------ Change in net debt resulting from cash flows................................. 2.9 67.1 6.4 Deduction of costs of raising finance paid from net debt.................... 1.6 -- -- Amortisation of costs of raising finance............................... (0.2) -- -- Exchange difference.................... 8.9 42.6 (14.9) ------ ------ ------ Reduction/(increase) in net debt....... 13.2 109.7 (8.5) Net debt at start of year.............. (200.3) (310.0) (301.5) ------ ------ ------ Net debt at end of year................ (187.1) (200.3) (310.0) ====== ====== ======
See accompanying notes to consolidated financial statements F-46 T&N PLC STATEMENTS OF TOTAL RECOGNISED GAINS AND LOSSES FOR THE YEARS ENDED 31 DECEMBER
NOTES 1997 1996 1995 ----- ---------- ---------- ---------- (POUND (POUND (POUND STERLING)M STERLING)M STERLING)M Profit/(loss) attributable to shareholders............................ 122.4 (400.8) 70.3 Other recognised gains and losses Unrealised loss on revaluation of fixed assets................................ 21 (1.7) -- 1.6 Currency translation differences on foreign currency net investments...... 21 (17.4) (23.1) (1.6) Other recognised losses................ -- (0.6) (1.4) ----- ------ ----- Total recognised gains and losses relating to the year................ 103.3 (424.5) 68.9 ===== ====== ===== Historical cost profits/(losses) Reported profit/(loss) on ordinary activities before taxation............ 190.1 (388.3) 120.1 Realisation of revaluation surpluses... 4.8 5.6 6.6 Difference between the historical depreciation charge and the actual depreciation charge................... 0.5 0.6 0.7 ----- ------ ----- Historical cost profit/(loss) on ordinary activities before taxation.............. 195.4 (382.1) 127.4 ----- ------ ----- Historical cost profit/(loss) for the year after taxation, minority interests and dividends........................... 78.2 (410.6) 45.7 ===== ====== =====
See accompanying notes to consolidated financial statements F-47 T&N PLC RECONCILIATIONS OF MOVEMENTS IN SHAREHOLDERS' FUNDS FOR THE YEARS ENDED 31 DECEMBER
NOTES 1997 1996 1995 ----- ---------- ---------- ---------- (POUND (POUND (POUND STERLING)M STERLING)M STERLING)M Profit/(loss) attributable to shareholders........................... 122.4 (400.8) 70.3 Dividends............................... (49.5) (16.0) (31.9) ----- ------ ----- Transfer to/(from) to reserves.......... 72.9 (416.8) 38.4 Other recognised gains and losses (as above)................................. (19.1) (23.7) (1.4) New share capital subscribed............ 9.2 1.2 2.2 Scrip dividends......................... 15.4 -- -- Shares to be issued under Executive Share Option Schemes................... 0.7 -- -- Goodwill................................ 21 (6.0) 9.4 (4.4) ----- ------ ----- Net change.............................. 73.1 (429.9) 34.8 Shareholders' funds at start of year.... 118.3 548.2 513.4 ----- ------ ----- Shareholders' funds at end of year...... 191.4 118.3 548.2 ===== ====== =====
See accompanying notes to consolidated financial statements F-48 T&N PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ACCOUNTING POLICIES The Group follows applicable UK Accounting Standards and Practice. The consolidated financial statements are prepared under the historical cost convention, as modified by the revaluation of certain fixed assets. During 1997 the accounting policy for Executive share options has been amended as set out below, in accordance with UITF Abstract 17, Employee Share Schemes. Basis of Consolidation The consolidated financial statements comprise the audited accounts of the Company and its subsidiary undertakings, together with the Group's share of the profits and losses and of the reserves of its associated undertakings. The accounts of subsidiaries are drawn up to the same date as those of the Company. Results of subsidiaries acquired or sold during the year are included from, or up to, their respective dates of acquisition or disposal. Associated Undertakings Associated undertakings are companies, other than subsidiaries, in which the Group has a long-term and substantial investment and over which significant influence is exercised, normally through board representation. Associated undertakings are accounted for on the equity basis, that is, the Group's share of operating profit and items reported below operating profit are included in the profit and loss account. Its interest in their net assets, other than goodwill, is included in investments in the Group balance sheet. Deferred Tax Deferred tax is attributable to timing differences between results as computed for tax purposes and as stated in the accounts. These differences arise from, for example, different rates at which allowances are granted for capital expenditure for tax purposes and at which depreciation is charged in the accounts. Provision for deferred tax, including that relating to post retirement benefits, is made only to the extent that it is probable that an actual liability or asset will crystallise. Depreciation Depreciation is provided on cost or the revalued amount, as applicable, to write fixed assets down to their estimated residual values on a straight line basis as follows: . Freehold buildings, 2.5% per annum; . Leasehold buildings are assumed to have a life equal to the period of the lease, but with a maximum of 40 years; . Plant and machinery, at rates ranging from 7% to 33% per annum. Foreign Currencies Overseas companies' results and cash flows are translated into sterling at average exchange rates and their balance sheets at year end exchange rates. An adjustment to local currency results is made to reflect current price levels, where appropriate, before translation into sterling. Exchange differences arising from the translation of the opening balance sheets and results of overseas companies are dealt with through reserves. Exchange differences on transactions in foreign currencies are included in the profit and loss account. F-49 T&N PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Grants Grants related to expenditure on tangible fixed assets are credited to profit over a period approximating to the lives of qualifying assets. Grants receivable to date, less the amounts so far credited to profit, are included in creditors. Intangibles Goodwill, being the excess of the fair value of purchase consideration over the fair value attributed to the net assets acquired, is charged to reserves. On disposal of businesses, any goodwill previously eliminated on acquisition is included in determining the profit or loss on disposal. Other intangibles are written off when acquired. Leasing Finance leases of significant items of plant and machinery are capitalised and depreciated in accordance with the Group's depreciation policy. The capital element of future lease payments is included under borrowings. Interest, calculated on the reducing balance method, is included within net financing charges. Operating lease rentals are charged to the profit and loss account on a straight line basis over the life of the lease. Pensions and Other Post-Retirement Benefits The cost of providing pensions and other post-employment benefits is charged against profits on a systematic basis, with pension surpluses and deficits being amortised over the expected remaining service lives of current employees. Differences between the amounts charged in the profit and loss account and payments made to the plans are treated as assets or liabilities in the consolidated balance sheet. The unfunded post-employment medical benefit liability is included in provisions in the consolidated balance sheet. Research and Development Research and development revenue expenditure, including all expenditure on patents and trademarks, is written off when incurred. Share Options For options which are expected to be exercised under the Executive share option schemes, the difference between the market value on the date of granting options and the option price is charged to the profit and loss account over the period to which the employees' performance relates. No charge is made in respect of the Save As You Earn option scheme which is open to all UK employees who satisfy the necessary length of service requirements. Stocks Stocks are stated at the lower of original costs and net realisable value on a first-in-first out basis. Cost comprises material, labour and an allocation of attributable overhead expenses. Net realisable value is the price at which stock can be sold in the normal course of business after allowing for the costs of realisation. Turnover Turnover is the value of sales to third parties at net invoice value excluding value added tax or equivalent overseas sales taxes. F-50 T&N PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 2. ANALYSIS OF RESULTS The composites and camshafts grouping comprises camshafts, powder metal products, heat transfer products and industrial products and materials. Figures for the engine parts aftermarket group are reflected in the product groupings to which they relate. (a) Turnover
1997 1996 1995 ----------------- ----------------- ----------------- (POUND STERLING)M (POUND STERLING)M (POUND STERLING)M Market supplied Light vehicle original equipment............. 731.2 772.9 756.6 Automotive aftermarket. 497.1 529.4 480.1 Industrial and heavy duty original equipment............. 570.8 653.7 854.8 ------- ------- ------- 1,799.1 1,956.0 2,091.5 ======= ======= ======= 1997 1996 1995 ----------------- ----------------- ----------------- (POUND STERLING)M (POUND STERLING)M (POUND STERLING)M Product groupings Bearings............... 329.6 333.1 342.5 Sealing Products....... 195.1 216.0 227.0 Friction Products...... 293.9 309.5 319.0 Piston Products........ 572.8 574.7 559.6 Composites and Camshafts............. 372.9 381.1 328.9 ------- ------- ------- Continuing operations.... 1,764.3 1,814.4 1,777.0 Discontinued operations.. 34.8 141.6 314.5 ------- ------- ------- 1,799.1 1,956.0 2,091.5 ======= ======= =======
1997 1996 1995 ACQUISITIONS DISCONTINUED DISCONTINUED DISCONTINUED ----------------- ----------------- ----------------- ----------------- (POUND STERLING)M (POUND STERLING)M (POUND STERLING)M (POUND STERLING)M Business acquired and discontinued Sealing Products...... -- 12.1 49.8 49.6 Friction Products..... -- 12.5 18.6 10.9 Piston Products....... 27.7 -- -- -- Composites and Camshafts............ 1.9 10.2 18.9 170.8 Construction Materials and Engineering...... -- -- 54.3 83.2 ---- ---- ----- ----- 29.6 34.8 141.6 314.5 ==== ==== ===== =====
F-51 T&N PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
BY ORIGIN BY DESTINATION -------------------------------- -------------------------------- 1997 1996 1995 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- ---------- (POUND (POUND (POUND (POUND POUND POUND STERLING)M STERLING)M STERLING)M STERLING)M STERLING)M STERLING)M Regional UK.................... 442.1 431.5 418.6 283.3 280.4 271.8 Mainland Europe....... 640.2 724.4 720.6 715.0 785.3 791.9 North America......... 563.1 527.7 503.2 568.1 540.2 518.7 South Africa.......... 101.7 111.2 115.0 93.1 93.0 99.8 Other countries....... 17.2 19.6 19.6 104.8 115.5 94.8 ------- ------- ------- ------- ------- ------- Continuing operations... 1,764.3 1,814.4 1,777.0 1,764.3 1,814.4 1,777.0 Discontinued operations. 34.8 141.6 314.5 34.8 141.6 314.5 ------- ------- ------- ------- ------- ------- 1,799.1 1,956.0 2,091.5 1,799.1 1,956.0 2,091.5 ======= ======= ======= ======= ======= =======
Inter-group turnover between product groupings and regions is not material. (b) Operating profit before asbestos-related costs
1997 1996 1995 ---------- ---------- ---------- (POUND (POUND (POUND STERLING)M STERLING)M STERLING)M Product groupings Bearings..................................... 47.9 44.1 48.5 Sealing Products............................. 18.8 16.1 25.1 Friction Products............................ 20.4 16.0 28.2 Piston Products.............................. 50.9 43.9 56.5 Composites and Camshafts..................... 46.6 44.6 41.8 ----- ----- ----- 184.6 164.7 200.1 ----- ----- ----- Bid costs...................................... (10.0) -- -- ----- ----- ----- Continuing operations.......................... 174.6 164.7 200.1 Discontinued operations........................ 2.6 14.5 26.5 ----- ----- ----- 177.2 179.2 226.6 ===== ===== =====
1997 1996 1995 ACQUISITIONS DISCONTINUED DISCONTINUED DISCONTINUED ------------ ------------ ------------ ------------ (POUND (POUND (POUND (POUND STERLING)M STERLING)M STERLING)M STERLING)M Business acquired and discontinued Sealing Products......... -- 1.1 5.2 1.2 Friction Products........ -- (0.1) 0.4 0.6 Piston Products.......... 3.4 -- -- -- Composites and Camshafts. (0.2) 1.6 3.5 7.9 Construction Materials and Engineering......... -- -- 5.4 16.8 ---- ---- ---- ---- 3.2 2.6 14.5 26.5 ==== ==== ==== ====
F-52 T&N PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1997 1996 1995 ---------- ---------- ---------- (POUND (POUND (POUND STERLING)M STERLING)M STERLING)M Regional UK........................................... 53.6 58.5 59.3 Mainland Europe.............................. 62.7 46.4 73.4 North America................................ 64.0 52.7 52.3 South Africa................................. 7.0 7.6 12.9 Other countries.............................. (2.7) (0.5) 2.2 ----- ----- ----- 184.6 164.7 200.1 Bid costs...................................... (10.0) -- -- ----- ----- ----- Continuing operations.......................... 174.6 164.7 200.1 Discontinued operations........................ 2.6 14.5 26.5 ----- ----- ----- 177.2 179.2 226.6 ===== ===== =====
Asbestos-related costs, finance charges, losses on disposal of discontinued operations and the movements in the provision against the Kolbenschmidt investment are not allocated by product groupings or region. (c) Capital employed
1997 1996 ---------------- ---------------- (POUND STERLING) (POUND STERLING) M M Product groupings Bearings................................... 128.1 121.5 Sealing Products........................... 67.1 65.6 Friction Products.......................... 117.3 124.6 Piston Products............................ 294.0 272.9 Composites and Camshafts................... 148.5 137.0 ------ ------ Continuing operations........................ 755.0 721.6 Discontinued operations...................... -- 22.9 ------ ------ 755.0 744.5 Assets held for disposal and trade investments................................. 37.0 14.6 Asbestos-related provisions.................. (388.2) (440.6) Net deferred consideration for acquisitions and disposals............................... 0.1 24.8 ------ ------ Capital employed............................. 403.9 343.3 Net borrowings............................... (187.1) (200.3) ------ ------ Net assets................................... 216.8 143.0 ====== ======
F-53 T&N PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1997 1996 ---------------- ---------------- (POUND STERLING) (POUND STERLING) M M Regional UK.......................................... 251.2 230.6 Mainland Europe............................. 181.2 240.4 North America............................... 236.4 190.7 South Africa................................ 43.0 40.4 Other countries............................. 43.2 42.4 ----- ----- 755.0 744.5 ===== =====
(d) Continuing and discontinued activities
1997 CONTINUING ACQUISITIONS DISCONTINUED TOTAL ---------- ------------ ------------ --------- (POUND (POUND (POUND (POUND STERLING) STERLING) STERLING) STERLING) M M M M Turnover........................ 1,734.7 29.6 34.8 1,799.1 Cost of sales................... (1,245.2) (24.3) (24.0) (1,293.5) -------- ----- ----- -------- Gross profit.................... 489.5 (53) 10.8 505.6 Selling and distribution costs.. (143.5) (0.3) (5.0) (148.8) Administrative expenses......... (137.0) (1.1) (2.6) (140.7) Research and development........ (50.7) (0.7) (0.7) (52.1) Share of profits of associated undertakings................... 13.1 -- 0.1 13.2 -------- ----- ----- -------- Operating profit before asbestos-related costs......... 171.4 3.2 2.6 177.2 Asbestos-related costs.......... -- -- -- -- -------- ----- ----- -------- Operating profit................ 171.4 3.2 2.6 177.2 ======== ===== ===== ========
1996 CONTINUING DISCONTINUED TOTAL ---------- ------------ --------- (POUND (POUND (POUND STERLING) STERLING) STERLING) M M M Turnover..................................... 1,814.4 141.6 1,956.0 Cost of sales................................ (1,317.2) (101.1) (1,418.3) -------- ------ -------- Gross profits................................ 497.2 (40.5) 517.7 Selling and distribution costs............... (155.2) (13.2) (168.6) Administrative expenses...................... (137.4) (11.3) (148.7) Research and development..................... (51.5) (1.5) (53.0) Share of profits of associated undertakings.. 11.6 0.2 11.8 -------- ------ -------- Operating profit before asbestos-related costs....................................... 164.7 14.5 179.2 Asbestos-related costs....................... (515.0) -- (515.0) -------- ------ -------- Operating profit............................. (350.3) 14.5 (335.8) ======== ====== ========
F-54 T&N PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1995 CONTINUING DISCONTINUED TOTAL ---------- ------------ --------- (POUND (POUND (POUND STERLING) STERLING) STERLING) M M M Turnover..................................... 1,777.0 314.5 2,091.5 Cost of sales................................ (1,267.8) (240.0) (1,507.8) -------- ------ -------- Gross profit................................. 509.2 (74.5) 583.7 Selling and distribution costs............... (152.0) (21.5) (173.5) Administrative expenses...................... (120.5) (23.5) (144.0) Research and development..................... (49.2) (3.0) (52.2) Share of profits of associated undertakings.. 11.8 -- 11.8 -------- ------ -------- Operating profit before asbestos-related costs....................................... 199.3 26.5 225.8 Asbestos-related costs....................... (51.3) -- (51.3) -------- ------ -------- Operating profit............................. 148.0 26.5 174.5 ======== ====== ========
1996 and 1995 amounts have been restated to reflect businesses disposed of in 1997. (e) Costs of continuing operations charged in arriving at operating profit before asbestos-related costs include 17.5 pound sterling millions (1996 15.3 pound sterling millions, 1995 11.3 pound sterling million) in respect of redundancy and rationalisation. 4.5 pound sterling millions of these costs (1996 8.1 pound sterling millions) have been charged as administrative costs and the majority of the remainder as cost of sales. (f) Profit before finance charges is stated after charging
1997 1996 1995 --------- --------- --------- (POUND (POUND (POUND STERLING) STERLING) STERLING) M M M Auditors and its associates' remuneration --as Group auditors (including T&N plc 0.4 pound sterling millions (1996 0.6 pound sterling millions 1995 pound 0.6m))........... (1.3) (1.8) (1.8) --fees for other services (includes T&N plc 0.9 pound sterling millions (1996 0.9 pound sterling millions 1995 0.4 pound sterling million))..................................... (1.9) (1.4) (0.9) Depreciation of tangible fixed assets --owned assets................................. (94.2) (97.3) (100.3) --finance leased assets........................ (0.7) (1.0) (1.3) Operating lease rentals --on plant and machinery....................... (9.1) (8.7) (7.8) --on land and buildings........................ (6.3) (7.4) (7.0)
F-55 T&N PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 3. SALE OF DISCONTINUED OPERATIONS
1997 ---------------- (POUND STERLING) M The profit for the year on disposal of discontinued operations comprises Provisions against amounts receivable on disposal of the Construction Materials business in Zimbabwe................ (7.5) Profit on disposal in the year.............................. 22.0 ---- Net profit................................................ 14.5 ====
BUSINESS DISPOSED EFFECTIVE DATE - ----------------- --------------- Flexitallic..................................................... 10 April 1997 Ferodo Caemarfon................................................ 3 May 1997 Kafue Fisheries................................................. 26 June 1997 Tenmal.......................................................... 4 August 1997 Ferodo US Heavy Parts........................................... 9 December 1997
Details of assets disposed are set out below:
NET ASSETS AT DATE OF T&N DISPOSAL FLEXITALLIC TENMAT OTHERS S AFRICA TOTAL - --------------------- ----------- --------- --------- --------- --------- (POUND (POUND (POUND (POUND (POUND STERLING) STERLING) STERLING) STERLING) STERLING) M M M M M Fixed assets............... 10.7 6.5 5.7 -- 22.9 Investments................ 0.5 -- -- -- 0.5 Stocks..................... 4.7 1.8 2.9 -- 9.4 Debtors.................... 7.8 2.9 3.0 -- 13.7 Creditors and provisions... (5.1) (2.3) (1.1) -- (8.5) Net cash................... -- 0.4 -- -- 0.4 Goodwill on acquisition of businesses................ 1.6 2.4 -- -- 4.0 Minority interest sold..... -- -- -- 0.4 0.4 ---- ---- ---- --- ---- Assets disposed............ 20.2 11.7 10.5 0.4 42.8 Profit/(loss).............. 20.8 5.0 (3.8) -- 22.0 ---- ---- ---- --- ---- Cash consideration realised.................. 41.0 16.7 6.7 0.4 64.8 ==== ==== ==== === ==== Cash arising during the year from the disposal of operations................ Net cash proceeds.......... 64.8 Prior year disposals....... 9.6 Deferred payments.......... 1.7 Net cash disposed.......... (0.4) ---- Cash flow.................. 75.7 ==== Operating profit in 1997 to date of disposal.......... 1.1 1.6 (0.1) -- 2.6 ==== ==== ==== === ====
During the year the Group's shareholdings in T&N Holdings Ltd in South Africa was reduced from 52.4% to 50.8% by selling shares which were taken up as scrip dividends. F-56 T&N PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 4. OPTION OVER SHARES IN KOLBENSCHMIDT AG ("KS") In December 1996 option arrangements with Commerzbank AG over 6,727,260 shares in KS expired. Commerzbank AG subsequently sold the shares subject to the arrangement and under the terms of the agreement, the Company received part of the proceeds. The gain of pound sterling 13.2 million has been recognised as a profit. At 31 December 1996 the Company held options to acquire 6,727,260 shares in KS, representing 24.99% of the issued share capital of KS. The option price is DM 17 per share and the consideration payable on exercise of the options would be DM 114.4 pound sterling millions (38.7 pound sterling millions). On 28 May 1997 the Company announced that it had entered into option arrangements to sell 6,727,260 shares in KS at a price of DM 30 per share. The revenue receivable on exercise of these options would be DM 201.8 pound sterling millions (68.2 pound sterling millions). The costs of these options, which are exercisable in December 1999, was 6.1 pound sterling million. An offer has been received to purchase both of the above rights for 10.7 pound sterling million per share resulting in a release of provisions totalling 19.2 pound sterling million.
1997 1996 1995 --------- --------- --------- (POUND (POUND (POUND STERLING) STERLING) STERLING) M M M Received from Commerzbank AG on sale of shares... 13.2 -- -- Release/(creation) of provision made in prior years........................................... 19.2 -- (12.0) Transfer of options to Metallbank GmbH........... -- (8.5) -- Payable on lapse of options with Commerzbank AG.. -- (10.0) -- Other holding costs.............................. -- (4.9) (7.5) ---- ----- ----- 32.4 (23.4) (19.5) ==== ===== =====
5. NET INTEREST PAYABLE AND SIMILAR CHARGES
1997 1996 1995 --------- --------- --------- (POUND (POUND (POUND STERLING) STERLING) STERLING) M M M Interest payable on bank loans, overdrafts and other loans -- repayable within five years, not by instalments.................................. (28.4) (26.2) (31.5) -- repayable within five years, by instalments.................................. (4.0) (4.4) (4.6) -- repayable wholly or partly in more than five years................................... (4.1) (1.5) (3.4) Interest on finance leases repayable within five years.......................................... (0.3) (0.4) (0.3) Amortisation of discounted asbestos provisions.. (2.5) -- -- ----- ----- ----- (39.3) (32.5) (39.8) ===== ===== ===== Interest receivable On asbestos fund................................ 2.7 -- -- Other interest receivable....................... 8.2 5.7 4.0 ----- ----- ----- 10.9 5.7 4.0 ===== ===== ===== Net interest payable and similar charges........ (28.4) (26.8) (35.8) ===== ===== =====
F-57 T&N PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 6. TAXATION
1997 1996 1995 --------- --------- --------- (POUND (POUND (POUND STERLING) STERLING) STERLING) M M M UK corporation tax at 31.5% (1996 33% 1995 33%)... (13.1) (15.2) (13.9) Relief for overseas taxation...................... 7.8 8.6 8.8 Advance corporation tax written (off)/back........ (3.2) 0.7 (3.9) Deferred tax...................................... (0.5) 9.0 (4.4) Adjustments in respect of prior years............. (2.7) -- 0.4 ----- ----- ----- Total UK.......................................... (11.7) 3.1 (13.0) Overseas.......................................... (30.6) (21.5) (23.3) Overseas deferred tax............................. (15.3) 16.2 (0.8) Associated undertakings........................... (5.0) (7.0) (5.6) Adjustments in respect of prior years............. (0.2) 1.2 1.3 ----- ----- ----- (62.8) (8.0) (41.4) ===== ===== =====
The overseas tax charge has been reduced by pound sterling 10.9 million (1996 pound sterling 5.0 million, 1995 pound sterling 6.0 million) by utilising losses brought forward.
1997 1996 1995 --------- --------- --------- (POUND (POUND (POUND STERLING) STERLING) STERLING) M M M The tax (charge)/credit arise as follows On the disposal of operations.................. (5.1) (1.8) (2.4) On provision for loss/loss on disposal of properties.................................... -- (0.1) -- On (release of provision)/provision against fixed asset investments....................... (11.9) 0.6 5.5 On asbestos-related costs...................... 13.1 35.5 1.6 On other profits............................... (58.9) (42.2) (46.1) ----- ----- ----- (62.8) (8.0) (41.4) ===== ===== =====
The tax credit taken in these accounts in respect of asbestos is calculated by reference to the payments made rather than the charge in the accounts and has been reduced by the related movements in the deferred tax debtor. No tax relief is available on the goodwill of pound sterling 4.0 million (1996: pound sterling 9.7 million) charged in arriving at the profit on disposal of operations of pound sterling 14.5 million (1996: pound sterling 0.4 million). F-58 T&N PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The group's tax charge differs from the "expected" tax charge that would result from applying the UK rate of 31.5% (1996 and 1995: 33%) to profit before tax as follows:
1997 1996 1995 --------- --------- --------- (POUND (POUND (POUND STERLING) STERLING) STERLING) M M M Tax actually (charged)........................... (62.8) (8.0) (41.4) Less: "Expected" tax charge at 31.5% (1996: 33%). 59.9 (128.0) 39.6 ----- ------ ----- (2.9) (136.0) (1.8) ===== ====== ===== Reconciliation Differences from UK tax rate..................... (12.2) 2.6 (6.0) Prior year differences........................... (2.7) -- -- UK tax on inter-company dividends................ (14.3) -- -- Bid costs not deductible for tax................. (3.1) -- -- Other items not deductible for tax (permanent differences).................................... (6.6) (3.5) (3.6) Timing differences on asbestos provisions not provided for.................................... 39.1 (132.7) 11.0 Timing differences not provided for other........ 2.2 (0.3) 8.4 Impact of ACT.................................... (3.2) 0.7 (4.0) Others........................................... (2.1) (2.8) (7.6) ----- ------ ----- (2.9) (136.0) (1.8) ===== ====== =====
The UK tax charge for 1997 has increased by pound 2.2 million due to the reduction in the rate of UK corporation tax as from 1 April 1997 from 33% to 31% the reduced rate means there is a smaller deferred tax asset carried forward. 7. DIVIDENDS
1997 1997 1996 1996 1995 1995 ----- --------- ----- --------- ----- --------- PENCE (POUND PENCE (POUND PENCE (POUND PER STERLING) PER STERLING) PER STERLING) SHARE M SHARE M SHARE M First interim paid on 11 July 1997.......................... 3.0 (16.0) -- -- 3.0 (15.9) Second interim paid on 14 November 1997................. 3.2 (17.0) 3.0 (16.0) -- -- Third interim paid 30 January 1998.......................... 3.0 (16.5) -- -- -- -- Final proposed................. -- -- -- -- 3.0 (16.0) --- ----- --- ----- --- ----- 9.2 (49.5) 3.0 (16.0) 6.0 (31.9) === ===== === ===== === =====
Because of the exceptional asbestos-related charge during 1996, the Company did not have sufficient distributable reserves to declare a final dividend for 1996. A first interim dividend of 3.0 pence per share was paid to shareholders on the register on 2 May 1997 in lieu of the final 1996 dividend with the result that shareholders received dividends totalling 6.0 pence per share in respect of 1996. A third interim dividend of 3.0 pence per share was declared on 16 October 1997 and paid on 30 January 1998. No final dividend for 1997 is proposed. Together with the second interim dividend of 3.2 pence per share, shareholders have received dividends totalling 6.2 pence per share in respect of 1997. Dividends with a value of pound 15.4 million were taken up as scrip dividends. This comprises pound sterling 0.6 million in respect of the first interim dividend and pound 14.8 million in respect of the second interim dividend. F-59 T&N PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 8. EARNINGS/(LOSS) PER SHARE
1997 1997 1996 1996 1995 1995 ----- --------- ----- --------- ----- --------- PENCE (POUND PENCE (POUND PENCE (POUND PER STERLING) PER STERLING) PER STERLING) SHARE M SHARE M SHARE M Earnings/(loss): Net basis................... 22.9 122.4 (75.4) (400.8) 13.3 70.3 Nil basis................... 24.4 130.9 (75.6) (401.5) 14.0 74.2 Pre asbestos-related cost basis...................... 20.4 109.3 14.8 78.7 22.7 22.7 Average number of shares in issue weighted on a time basis...................... 534.5m 531.6m 530.2m
In addition to earnings per share on a net basis as required by SSAP 3, the earnings per share are also shown after adjustment for asbestos-related costs. The adjustment made is to add back asbestos-related costs of pound sterling nil (1996 pound sterling 515.0 million, 1995 pound sterling 51.3 million) and associated tax credits of pound sterling 13.1 million (1996 pound sterling 35.5 million, 1995 pound sterling 1.6 million). In the opinion of the directors, this allows shareholders to gain a clearer understanding of the performance of the Group. There is no material differences between the earnings per share figures noted above and those calculated on a fully diluted basis. Earnings per share calculated on a nil basis has been adjusted for Advance Corporate Tax payable for the year of pound sterling 8.5 million (1996 write back of pound sterling 0.7 million, 1995 charge of pound sterling 3.9 million). 9. EMPLOYEES
1997 1996 1995 AVERAGE AVERAGE AVERAGE NUMBERS NUMBERS NUMBERS ------- ------- ------- UK...................................................... 8,637 10,036 11,613 Mainland Europe......................................... 9,388 9,765 10,228 North America........................................... 7,398 7,172 7,115 South America........................................... 3,767 4,379 4,221 Zimbabwe................................................ -- 2,069 8,785 Other countries......................................... 444 472 695 ------ ------ ------ 29,634 33,893 42,657 ====== ====== ======
At the year end the total number of employees was 28,904 (1996 30,473).
1997 1996 1995 --------- --------- --------- (POUND (POUND (POUND STERLING) STERLING) STERLING) M M M Employment costs Wages and salaries................................ 543.0 601.1 635.8 Social security costs............................. 81.4 96.0 96.0 Other pension costs (note 10)....................... 11.3 12.9 12.4 Other post-employment benefits (note 10)............ 3.0 3.0 2.6 Redundancy payments............................... 14.6 13.9 6.5 ----- ----- ----- 653.3 726.9 753.3 ===== ===== =====
F-60 T&N PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 10. POST-EMPLOYMENT BENEFITS The Company and most of its subsidiaries operate both defined benefit and defined contribution pension schemes. With the exception of the schemes in Germany, the assets of the principal schemes are held in separate trustee- administered funds. The most significant schemes are in the UK, Germany, and the US. The element of the total pension cost relating to overseas schemes has been determined in accordance with local best practice and regulations and, where applicable, on the advice of consultant actuaries. The major pension costs are:
1997 1996 1995 --------- --------- --------- (POUND (POUND (POUND STERLING) STERLING) STERLING) M M M UK (credit)....................................... (6.4) (5.7) (4.9) United States..................................... 5.9 5.9 5.9 Germany........................................... 5.7 6.0 4.4 France............................................ 2.3 3.3 3.5 Others............................................ 3.8 3.4 3.5 ---- ---- ---- Total......................................... 11.3 12.9 12.4 ==== ==== ====
The UK scheme is the largest, covering the majority of UK employees. The pension cost is assessed in accordance with the advice of independent qualified actuaries in order to secure final salary-related benefits. The most recent actuarial review, using the projected unit method, was carried out on 31 March 1996 and, as a result of this review, a number of scheme improvements were made. At 31 March 1996 the market value of the assets of the UK scheme was 963 pound sterling millions (1993 747 pound sterling millions) and the actuarial value of these assets represented 121% (1993 129%) of the benefits that had accrued to members, after allowing for increases in earnings and scheme improvements. The assumptions made which have the most significant effect on the results of this valuation are those relating to the differentials between the rates of return on investments and the rates of increase in salaries and pensions. It was assumed that the investment return would be 2% (1993 2%) per annum higher than the rate of annual salary increases, and 5% (1993 5%) per annum higher than the rate at which present and future pensions would increase. The surplus in the UK scheme is being amortised over 13 years, the average remaining service lives of employees. The credit arising from the amortisation of this surplus more than offsets ongoing pension costs. The resultant SSAP 24 credit, including interest, was 6.6 pound sterling millions (1996 5.7 pound sterling millions, 1995 4.9 pound sterling millions). From January 1995 until 31 March 1996 the Group made payments to the UK scheme at a rate of 4% of pensionable earnings. Since 1 April 1996 no payments have been necessary because of the surplus in the scheme. During the year the prepayment in respect of pensions for the UK scheme increased by 6.6 pound sterling millions to 51.6 pound sterling millions at the end of 1997. This amount is included in debtors (note 14). In the US, the Group operates a number of defined benefits schemes and defined contribution schemes. These schemes undergo an actuarial analysis annually. In Germany, the Group operates a number of defined benefit pension schemes. These undergo an actuarial valuation annually. Provisions for the liabilities amounted to 70.0 pound sterling millions at the end of 1997 (1996 76.9 pound sterling millions, 1995 89.1 pound sterling millions). In addition, other post-employment benefits in the US are fully provided for in accordance with UK accounting standards. Provisions amounted to 32.3 pound sterling millions the end of 1997 (1996 31.1 pound sterling millions, 1995 34.3 pound sterling millions) in respect of these benefits. The cost of post- employment medical benefits in the US was 2.8 pound sterling millions (1996 2.8 pound sterling millions, 1995 2.9 pound sterling millions). There are no other significant post-employment benefits. F-61 T&N PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 11. TANGIBLE FIXED ASSETS
PLANT & LAND & BUILDINGS MACHINERY TOTAL ---------------- ---------------- ---------------- (POUND STERLING) (POUND STERLING) (POUND STERLING) M M M Cost or valuation At 1 January 1997......... 230.8 1,017.8 1,248.6 Currency translation...... (8.6) (31.8) (40.4) Acquisition of business... 3.5 14.4 17.6 Capital expenditure....... 10.8 94.6 105.4 Transfers between Group companies and reclassifications........ 2.2 (2.2) -- Disposal of operations.... (9.8) (36.9) (46.7) Other disposals........... (4.4) (22.9) (27.3) Valuation adjustment...... (1.7) -- (1.7) ----- ------- ------- At 31 December 1997....... 222.8 1,032.6 1,255.4 ===== ======= ======= Comprising: Cost...................... 145.2 937.5 1,082.7 Valuation in 1989.................... 48.0 11.0 59.0 Other years............. 29.6 84.1 113.7 ----- ------- ------- 222.8 1,032.6 1,255.4 ===== ======= =======
Revaluations are carried out on an existing use basis. The valuation adjustment of 1.7 pound sterling millions relates to one property. The value of this property has been estimated by the directors.
PLANT & LAND & BUILDINGS MACHINERY TOTAL Depreciation ---------------- ---------------- ---------------- (POUND STERLING) (POUND STERLING) (POUND STERLING) M M M At 1 January 1997........... 30.9 520.5 551.4 Currency translation........ (1.2) (18.5) (19.7) Transfers between Group companies and reclassifications.......... 0.5 (0.5) -- Disposal of operations...... (1.8) (22.0) (23.8) Other disposals............. (2.4) (20.9) (23.5) Charge for the year......... 7.4 87.5 94.9 ----- ----- ----- At 31 December 1997......... 33.4 545.6 579.0 ===== ===== ===== Net book value At 31 December 1997......... 189.4 487.0 676.4 ===== ===== ===== At 31 December 1996......... 199.9 497.3 697.2 ===== ===== =====
F-62 T&N PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Included in the cost of fixed assets at 31 December 1997 are buildings in the course of construction of 0.5 pound sterling millions (1996 2.8 pound sterling millions) and plant and machinery in the course of construction of 29.0 pound sterling millions. (1996 25.9 pound sterling millions).
1997 1996 ----------------- ----------------- (POUND STERLING)M (POUND STERLING)M Net book value of land and buildings Freehold land--not depreciated.......... 44.9 49.5 Freehold buildings...................... 142.4 148.3 Long leasehold (over 50 years unexpired)............................. 0.2 0.2 Short leasehold......................... 1.9 1.9 ----- ----- 189.4 199.9 ===== ===== 1997 1996 ----------------- ----------------- (POUND STERLING)M (POUND STERLING)M Capitalised leases included in plant and machinery Cost.................................... 24.1 28.4 Depreciation............................ (20.9) (23.8) ----- ----- Net book value............................ 3.2 4.6 ===== =====
LAND & BUILDINGS PLANT & MACHINERY TOTAL ----------------- ----------------- ----------------- (POUND STERLING)M (POUND STERLING)M (POUND STERLING)M Historical cost of tangible fixed assets Cost (or ascribed value)................ 196.7 1,031.7 1,228.4 Depreciation........... (32.1) (544.9) (577.0) ----- ------- ------- Net historical cost value at 31 December 1997..... 164.6 486.8 651.4 ----- ------- ------- Net historical cost value at 31 December 1996..... 161.6 497.1 658.7 ===== ======= =======
F-63 T&N PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 12. FIXED ASSET INVESTMENTS
ASSOCIATED OTHER OTHER UNDERTAKINGS SHARES INVESTMENTS TOTAL ----------------- ----------------- ----------------- ----------------- (POUND STERLING)M (POUND STERLING)M (POUND STERLING)M (POUND STERLING)M Cost of valuation At 1 January 1997..... 51.7 7.9 37.6 97.2 Currency translation.. (4.7) (0.2) (3.8) (8.7) Additions............. 5.3 0.2 6.1 11.6 Acquisitions of operations........... -- 0.6 -- 0.6 Disposals and repayments........... (0.7) -- (12.8) (13.5) Share of retained losses............... (0.8) -- -- (0.8) ---- ---- ----- ----- At 31 December 1997... 50.8 8.5 27.1 86.4 ==== ==== ===== ===== Provisions At 1 January 1996..... -- (0.1) (37.6) (37.7) Currency translation.. -- -- 2.8 2.8 Disposals............. -- -- 12.8 12.8 Release of provision.. -- 0.1 19.2 19.3 ---- ---- ----- ----- At 31 December 1997... -- -- (2.8) (2.8) ==== ==== ===== ===== Net book value At 31 December 1997... 50.8 8.5 24.3 83.6 ==== ==== ===== ===== At 31 December 1996... 51.7 7.8 -- 59.5 ==== ==== ===== =====
Listed investments included above in associated undertakings at net book value are (pound sterling)7.7m (1996 (pound sterling)7.5m)--market value (pound sterling)4.7m (1996 (pound sterling)5.7m). At 31 December 1997, Group associated undertakings investments included loans receivable of (pound sterling)5.1m (1996 (pound sterling)1.8m). 13. STOCKS
1997 1996 ----------------- ----------------- (POUND STERLING)M (POUND STERLING)M Raw materials and consumables............... 45.5 41.9 Work in progress............................ 39.3 45.7 Finished goods.............................. 137.1 160.0 ----- ----- 221.9 247.6 ===== =====
F-64 T&N PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 14. DEBTORS
1997 1996 ----------------- ----------------- (POUND STERLING)M (POUND STERLING)M Debtors falling due within one year Trade...................................... 264.4 260.2 Amounts owed by associated undertakings.... 3.9 1.4 Amounts owed in respect of disposals of operations................................ 7.8 24.8 Assets held for disposal................... 4.2 6.8 Overseas taxation recoverable.............. 2.8 6.1 Deferred tax recoverable (note 25)........... 1.8 13.9 Prepayments and accrued income............. 9.8 13.9 Other...................................... 24.1 23.7 ----- ----- 318.8 350.8 ===== ===== Debtors falling due after more than one year Amounts owed in respect of disposal of operations................................ 0.6 3.4 Prepaid pension costs (note 10).............. 51.6 45.0 Deferred tax recoverable (note 25)........... 19.3 16.5 Overseas taxation recoverable.............. 0.4 0.2 Other debtors.............................. 1.6 1.0 ----- ----- 73.5 66.1 ===== ===== Total debtors............................ 392.3 416.9 ===== =====
15. CURRENT ASSET INVESTMENT
1997 1996 ----------------- ----------------- (POUND STERLING)M (POUND STERLING)M Listed investments-- market value(pound sterling)8.1m (1996(pound sterling)5.1m).. 7.7 5.1 Other investments-- market value(pound sterling)0.4m (1996(pound sterling)0.6m).. 0.3 0.5 --- --- 8.0 5.6 === ===
16. CREDITORS--DUE WITHIN ONE YEAR
1997 1996 ----------------- ----------------- (POUND STERLING)M (POUND STERLING)M Trade..................................... 165.3 168.9 Amounts owed to associated undertakings... 2.7 2.1 Amounts owed in respect of acquisitions... 2.8 -- Payroll and other taxes, including social security................................. 48.4 54.1 Taxation--United Kingdom corporation tax.. 8.7 5.9 --Overseas taxation.................... 30.1 13.6 Accruals and deferred income.............. 88.4 69.4 Grants not yet credited to profit......... 1.3 1.7 Proposed dividend (note 7)................ 16.5 -- Asbestos-related insurance premium........ -- 92.0 Other..................................... 58.8 64.8 ----- ----- 423.0 472.5 ===== =====
F-65 T&N PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 17. CREDITORS--DUE AFTER MORE THAN ONE YEAR
1997 1996 ----------------- ----------------- (POUND STERLING)M (POUND STERLING)M Amounts owed in respect of acquisitions..... 5.5 3.4 Accruals and deferred income................ -- 1.3 Grants not yet credited to profit........... 3.8 4.4 Other....................................... 2.7 6.8 ---- ---- 12.0 15.9 ==== ====
18. NET BORROWINGS
1997 1996 ----------------- ----------------- (POUND STERLING)M (POUND STERLING)M Borrowings Repayable after more than five years --instalments.......................... 7.3 7.7 --otherwise............................ 153.7 0.7 Two to five years --instalments.......................... 16.9 23.0 --otherwise............................ 100.3 186.0 One to two years --instalments.......................... 5.8 8.7 --otherwise............................ 1.4 34.1 ------ ------ Total due after more than one year......... 285.4 260.2 Total due within one year.................. 103.7 77.2 ------ ------ Total borrowings........................... 389.1 337.4 Cash at bank and in hand and current asset investments............................... (202.0) (137.1) ------ ------ Net borrowings............................. 187.1 200.3 ====== ====== Analysis of total borrowings Finance leases........................... 3.9 5.3 Bank overdrafts and loans secured on assets of the Group..................... 27.5 37.4 Unsecured bank overdrafts and loans...... 357.7 294.7 ------ ------ 389.1 337.4 ====== ====== Analysis of borrowings by currency Sterling................................. (28.6) (33.9) Other European currencies................ 78.0 130.3 United States Dollar..................... 119.0 80.4 South African Rand....................... 8.1 9.3 Other currencies......................... 10.6 14.2 ------ ------ 187.1 200.3 ====== ======
The majority of the Group's borrowings are at variable rates between 35 and 50 basis points above the applicable base rate for the currency. Interest rate swaps have been entered into in a mix of currencies whereby the interest charge on total debt of (pound sterling)154.2m has been swapped from variable to fixed rates for periods of between two and five years. Included in cash and current asset investments, at 31 December 1997, amounts totalling (pound sterling)23.7m (1996 (pound sterling)22.8m) are held by the Group's insurance company of which (pound sterling)18.0m (1996 (pound sterling)17.6m) is required to meet insurance regulatory requirements and which, as a result, is not readily available for the general purposes of the Group. F-66 T&N PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 19. PROVISIONS FOR LIABILITIES AND CHARGES
POST- DEFERRED EMPLOYMENT ASBESTOS OTHER TAXATION BENEFITS RELATED PROVISIONS TOTAL ---------- ---------- ---------- ---------- ---------- (POUND (POUND (POUND (POUND (POUND STERLING)M STERLING)M STERLING)M STERLING)M STERLING)M At 1 January 1997....... -- 142.1 440.6 6.8 589.5 Reclassified from creditors.............. -- -- 90.7 -- 90.7 Reclassified from debtors................ -- -- (0.3) -- (0.3) Acquisition of operations............. -- 0.6 -- 0.4 1.0 Currency translation.... (0.2) (9.1) 4.1 (0.2) (5.4) Charge for the year..... 5.9 13.9 -- 0.6 20.4 Amortisation of discount............... -- -- 2.5 -- 2.5 Payments................ -- (11.5) (149.4) (2.2) (163.1) ---- ----- ------ ---- ------ At 31 December 1997..... 5.7 136.0 388.2 5.4 535.3 ==== ===== ====== ==== ======
Other provisions include leaving benefits payable to employees in certain acquired companies and costs of environmental cleaning. 20. CALLED UP SHARE CAPITAL
AUTHORISED ISSUED AND NO. OF FULLY PAID ISSUED AND SHARES AUTHORISED NO. OF SHARES FULLY PAID ----------- ---------- ------------- ---------- (POUND (POUND STERLING)M STERLING)M Ordinary Shares At 1 January 1997............ 725,000,000 725.0 532,203,165 532.2 Options exercised to 30 January 1997................ -- -- 113,269 0.1 ----------- ------ ----------- ------ At 30 January 1997........... 725,000,000 725.0 532,316,434 532.3 Capital reduction............ -- (435.0) -- (319.4) ----------- ------ ----------- ------ After capital reduction...... 725,000,000 290.0 532,316,434 212.9 Options issued to 31 December 1997........................ -- -- 6,275,782 2.6 Issued as scrip dividends.... -- -- 10,111,955 4.0 ----------- ------ ----------- ------ At 31 December 1997.......... 725,000,000 290.0 548,704,171 219.5 =========== ====== =========== ======
A capital reduction was approved by the Court on 29 January 1997 and took effect on 30 January 1997. In accordance with the terms of the capital reduction, the nominal value of authorised and issued shares was reduced from (pound sterling) 1.00 to 40p.
SAVINGS- EXECUTIVE RELATED TOTAL NO. OF SHARES NO. OF SHARES NO. OF SHARES ------------- ------------- ------------- Share option schemes At 1 January 1997................... 12,332,229 12,537,575 24,869,804 Granted............................. 2,965,000 4,100,923 7,065,923 Exercised........................... (4,001,750) (2,387,301) (6,389,051) Lapsed.............................. (628,255) (2,234,510) (2,862,765) ---------- ---------- ---------- At 31 December 1997................. 10,667,224 12,016,687 22,683,911 ========== ========== ==========
F-67 T&N PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SAVINGS- EXECUTIVE RELATED TOTAL ---------- ---------- ---------- Share option schemes Number of holders............................ 236 3,976 4,212 Latest dates exercisable range between....... 1998/2007 1998/2003 Exercisable at the following price per share 101.7p..................................... -- 599,843 599,843 111.4p..................................... 873,136 -- 873,136 119.7p-147.8p.............................. 812,777 6,459,850 7,272,627 151.6p-172.1p.............................. 6,294,224 4,420,819 10,715,043 182.8p-199.8p.............................. 271,162 536,175 807,337 201.6p-226.2p.............................. 2,415,925 -- 2,415,925 ---------- ---------- ---------- 10,667,224 12,016,687 22,683,911 ========== ========== ==========
ORDINARY SHARES ----------------------- 31 DECEMBER 31 DECEMBER 1997 1996 ----------- ----------- The interests in the Company, of those who were directors at 31 December 1997, were as follows: Sir Colin Hope...................................... 107,774 105,562 R G Beeston......................................... 10,000 -- R H Boissier........................................ 2,595 2,488 D A Harding......................................... 5,104 5,000 Sir Terence Harrison................................ 10,000 5,000 Professor F R Hartley............................... 3,131 3,001 P S Lewis........................................... 1,000 1,000 A C McWilliam....................................... 2,375 2,326 I F R Much.......................................... 34,952 34,168 T A Welsh........................................... 19,445 5,914 Sir Geoffrey Whalen................................. 4,856 4,654 ------- ------- 201,232 169,113 ======= =======
F-68 T&N PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) There have been no changes in the interests of directors between 31 December 1997 and 17 February 1998. No director has any beneficial interest in shares of any subsidiary.
SHARE ASSOCIATED PREMIUM SHARES TO SPECIAL REVALUATION UNDERTAKINGS ACCOUNT BE ISSUED RESERVE RESERVES RESERVES ---------- ---------- ---------- ----------- ------------ (POUND (POUND (POUND (POUND (POUND STERLING)M STERLING)M STERLING)M STERLING)M STERLING)M Reserves At 1 January 1995..... -- -- -- 34.3 7.8 Currency translation on overseas assets... -- -- -- 0.1 (1.0) Currency translation on net debt.......... -- -- -- -- -- Transfer to profit & loss................. -- -- -- -- 6.1 Realisation of revaluation surplus.. -- -- -- 1.6 -- Premium on share issues............... 0.5 -- -- (6.6) -- Goodwill arising on acquisitions......... -- -- -- -- -- Goodwill arising on formation of Turkish joint venture ....... -- -- -- -- -- Goodwill on disposals. -- -- -- -- -- Scrip issues of shares............... (0.5) -- -- (0.1) -- Other movements....... -- -- -- -- -- ---- --- ------ ---- ---- At 31 December 1995... -- -- -- 29.3 12.9 Currency translation on overseas assets... -- -- -- (1.7) (5.9) Currency translation on net debt.......... -- -- -- -- -- Transfer to profit & loss................. -- -- -- -- (2.7) Realisation of revaluation surplus.. -- -- -- (5.6) -- Premium on share issues............... 0.2 -- -- -- -- Goodwill arising on acquisitions......... -- -- -- -- -- Goodwill on disposals. -- -- -- -- -- Other movements....... -- -- -- (0.4) 0.7 ---- --- ------ ---- ---- At 31 December 1996... 0.2 -- -- 21.6 5.0 Transfer to special reserve.............. -- -- (262.5) -- -- Transfer capital reduction to special reserve.............. -- -- 319.4 -- -- Currency translation on overseas assets... -- -- -- (0.4) (4.9) Currency translation on net debt.......... -- -- -- -- -- Transfer to profit and loss................. -- -- -- -- (0.8) Realisation of revaluation surplus.. -- -- 5.2 (5.3) -- Revaluations.......... -- -- -- (1.7) -- Premium on share issues............... 6.5 -- -- -- -- Scrip dividend (Note 7)................... (4.0) -- -- -- -- Goodwill arising on acquisitions......... -- -- -- -- -- Goodwill on disposals. -- -- 1.1 -- -- Realisation of reserves on disposal. -- -- -- -- (0.3) Executive share options.............. -- 0.7 -- -- -- Other movements....... -- -- -- -- (1.1) ---- --- ------ ---- ---- At 31 December 1997... 2.7 0.7 63.2 14.2 (2.1) ==== === ====== ==== ====
F-69 T&N PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
GOODWILL PROFIT & LOSS WRITE OFF RESERVE ACCOUNT ----------------- ----------------- (POUND STERLING)M (POUND STERLING)M At 1 January 1995.......................... (186.1) 127.9 Currency translation on overseas assets.... -- 14.4 Currency translation on net debt........... -- (15.1) Transfer to profit & loss.................. -- 32.3 Realisation of revaluation surplus......... -- -- Premium on share issues.................... -- 6.6 Goodwill arising on acquisitions........... (7.5) -- Goodwill arising on formation of Turkish joint venture............................. (3.5) -- Goodwill on disposals...................... 6.6 -- Scrip issues of shares..................... -- 0.6 Other movements............................ -- (1.4) ------ ------ At 31 December 1995........................ (190.5) 165.3 Currency translation on overseas assets.... -- (58.1) Currency translation on net debt........... -- 42.6 Transfer to profit & loss.................. -- (414.1) Realisation of revaluation surplus......... -- 5.6 Premium on share issues.................... -- -- Goodwill arising on acquisitions........... (0.3) -- Goodwill on disposals...................... 9.7 -- Other movements............................ -- (0.9) ------ ------ At 31 December 1996........................ (181.1) (259.6) Transfer to special reserve................ 5.3 257.2 Transfer capital reduction to special reserve................................... -- -- Currency translation on overseas assets.... -- (21.0) Currency translation on net debt........... -- 8.9 Transfer to profit and loss................ -- 73.7 Realisation of revaluation surplus......... -- 0.1 Revaluations............................... -- -- Premium on share issues.................... -- -- Scrip dividend (Note 7).................... -- 15.4 Goodwill arising on acquisitions........... (10.0) -- Goodwill on disposals...................... 2.9 -- Realisation of reserves on disposal........ -- 0.3 Executive share options.................... -- -- Other movements............................ -- 1.1 ------ ------ At 31 December 1997........................ (182.9) 76.1 ====== ======
A capital reduction, which was approved by the Court on 29 January 1997, took effect on 30 January 1997 and, in accordance with the Court Order, was applied to eliminating the deficit on the Company's profit and loss account (including goodwill previously written off). The accounting entries recorded in the accounting records of the Company in accordance with the terms approved by the Court were as follows: (i) The nominal value of each share in issue at 30 January 1997 was reduced from (pound sterling)1.00 to 40p. As a consequence, the nominal value of shares in issue at 30 January 1997 (1996 (pound sterling) 532.2m, 1995 (pound sterling) 531.2m) was reduced by (pound sterling) 319.4m to (pound sterling) 212.9m. The reduction of (pound sterling) 319.4m was credited to the special reserve. F-70 T&N PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (ii) The balance of (pound sterling) 5.3m on the goodwill reserve of the Company at 31 December 1996 was transferred to the special reserve. (iii) The balance of (pound sterling) 257.2m on the profit and loss account reserve of the Company at 31 December 1996 was transferred to the special reserve. The special reserve is not distributable except in certain limited circumstances. Any goodwill or revaluation reserves in existence at 1 January 1997 must be credited to the special reserve when they are realised. Cumulative goodwill written off to Group reserves at 31 December 1997 totals (pound sterling) 254.3m (1996 (pound sterling) 248.3m, 1995 (pound sterling) 257.7m), comprising (pound sterling) 182.9m (1996 (pound sterling) 181.1m, 1995 (pound sterling) 190.5m) shown above, (pound sterling) 67.2m (1996 (pound sterling) 67.2m, 1995 (pound sterling) 67.2m) written off to a merger reserve in earlier years and (pound sterling) 4.2m transferred to the special reserve in 1997. Retained earnings of overseas subsidiaries and associated undertakings would be liable to tax if remitted as dividends to the United Kingdom. No provision has been made for this liability as there are no plans to remit such earnings. 22. NOTES TO THE CASH FLOW STATEMENT (A) Recognition of Operating Profit to Net Cash Inflow from Operating Activities
1997 1996 1995 ---------- ---------- ---------- (POUND (POUND (POUND STERLING)M STERLING)M STERLING)M Operating profit/(loss)....................... 177.2 (335.8) 175.3 Share of profit of associated undertakings.... (13.2) (11.8) (12.6) Depreciation.................................. 93.5 98.3 101.6 Loss on sale of tangible fixed assets......... 0.8 2.5 2.3 Decrease/(increase) in stocks................. 12.8 22.2 (15.8) (Increase)/decrease in debtors................ (25.4) 1.0 (1.7) Increase/(decrease) in creditors.............. 13.7 (2.0) 21.4 Increase/(decrease) in provisions............. 1.6 (7.9) (19.1) Other non cash movements...................... (0.2) (1.0) (4.1) Charge for asbestos-related costs............. -- 515.0 51.3 ------ ------ ----- Cash inflow from operating activities before asbestos-related payments.................... 260.8 280.5 298.6 Asbestos-related payments..................... (149.4) (64.8) (55.7) ------ ------ ----- Cash inflow from operating activities after asbestos-related payments.................... 111.4 215.7 242.9 ====== ====== =====
(B) Returns on Investment and Servicing of Finance
1997 1996 1995 ---------- ---------- ---------- (POUND (POUND (POUND STERLING)M STERLING)M STERLING)M Interest received.............................. 11.0 5.2 3.8 Interest paid.................................. (35.1) (35.4) (40.1) Dividends paid to minorities................... (0.8) (1.2) (1.1) ----- ----- ----- (24.9) (31.4) (37.4) ===== ===== =====
F-71 T&N PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (C) Taxation
1997 1996 1995 ---------- ---------- ---------- (POUND (POUND (POUND STERLING)M STERLING)M STERLING)M UK tax paid.................................... (8.5) (9.3) (5.0) Overseas tax paid.............................. (11.6) (19.6) (8.3) ----- ----- ----- (20.1) (28.9) (13.3) ===== ===== =====
(D) Capital Expenditure and Financial Investment
1997 1996 1995 ---------- ---------- ---------- (POUND (POUND (POUND STERLING)M STERLING)M STERLING)M Purchase of tangible fixed assets............. (103.9) (114.3) (151.8) Grants received............................... 0.2 -- 0.2 Disposal of tangible fixed assets............. 3.3 2.3 2.0 Additions to trade and other investments (primarily Kolbenschmidt).................... (14.7) (13.6) (6.0) Disposal of trade investments (Kolbenschmidt). 13.2 0.1 -- ------ ------ ------ (101.9) (125.5) (155.6) ====== ====== ======
(E) Acquisitions and Disposals
1997 1996 1995 ---------- ---------- ---------- (POUND (POUND (POUND STERLING)M STERLING)M STERLING)M Acquisitions (note 23)......................... (27.3) (8.5) (58.7) Sale of discontinued operations (note 3)....... 75.7 74.8 69.3 Additions to associated undertakings........... (5.3) (7.0) (1.1) Impact of Turkish joint venture................ -- -- (3.7) ----- ---- ----- 43.1 59.3 5.8 ===== ==== =====
(F) Management of Liquid Resources
1997 1996 1995 ---------- ---------- ---------- (POUND (POUND (POUND STERLING)M STERLING)M STERLING)M (Additions)/reduction to current asset investments.................................. (2.4) (4.4) 5.4 (Increase)/reduction in short term investments.................................. (74.1) (1.8) 1.3 ----- ---- --- (76.5) (6.2) 6.7 ===== ==== ===
F-72 T&N PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (G) Financing
1997 1996 1995 ---------- ---------- ---------- (POUND (POUND (POUND STERLING)M STERLING)M STERLING)M New loans..................................... 139.4 176.7 60.4 Repayment of loans............................ (116.6) (206.8) (63.6) ------ ------ ----- Cash inflow/(outflow) from decrease in debt and lease financing.......................... 22.8 (30.1) (3.2) Issue of ordinary share capital............... 9.1 1.2 1.6 Capital input by minorities................... 2.1 1.8 1.2 ------ ------ ----- 34.0 (27.1) (0.4) ====== ====== =====
(H) Acquired and Discontinued Operations In 1997, acquired and discontinued operations had no significant impact on any of the cash flow categories, other than as disclosed in acquisitions and disposals (Note 22(e)) above. 23. ACQUISITIONS On 27 February 1997 the group acquired Michigan Stamping Corporation, which manufactures heat shields and is based in Michigan, USA. On 16 June 1997 The group acquired Metal Leve Inc, a manufacturer of articulated pistons also based in Michigan, USA. This Company was subsequently renamed AE Goetze Carolina Inc. In addition, on various dates during the year, the Group acquired the following minority interests:
% OWNERSHIP AT % OWNERSHIP AT START OF YEAR END OF YEAR -------------- -------------- Ferodo a.s........................................ 55% 100% Ferodo India Pvt Ltd.............................. 76% 100% AE Goetze Argentina SA............................ 94% 100% Nanchang Payen Company Limited.................... 70% 80%
Details of the acquisitions, including the fair value adjustments made to the assets and liabilities acquired, are set out below. Substantially all the assets and goodwill acquired relate to Metal Leve Inc. Substantially all the minority interest acquired relate to Ferodo a.s.
BOOK VALUE AT ACCOUNTING POLICY ACQUISITION ALIGNMENT OTHER ADJUSTMENTS FAIR VALUE ----------------- ----------------- ----------------- ----------------- (POUND STERLING)M (POUND STERLING)M (POUND STERLING)M (POUND STERLING)M Tangible fixed assets... 15.6 -- 2.3 17.9 Investments............. 0.6 -- -- 0.6 Stocks.................. 3.4 0.3 -- 3.7 Debtors................. 8.6 -- (0.5) 8.1 Creditors............... (8.9) -- -- (8.9) Provisions.............. (1.5) (0.4) 1.0 (0.9) Cash.................... 4.2 -- -- 4.2 Loans................... (4.8) -- -- (4.8) Minority interests...... -- -- -- -- ---- ---- ---- ---- Assets acquired......... 17.2 (0.1) 2.8 19.9 Goodwill................ 10.3 ---- Cash consideration...... 30.2 ====
F-73 T&N PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
MINORITY INTERESTS TOTAL ----------------- ----------------- (POUND STERLING)M (POUND STERLING)M Tangible fixed assets....................... -- 17.9 Investments................................. -- 0.6 Stocks...................................... -- 3.7 Debtors..................................... -- 8.1 Creditors................................... -- (8.9) Provisions.................................. -- (0.9) Cash........................................ -- 4.2 Loans....................................... -- (4.8) Minority interests.......................... 5.1 5.1 ---- ---- Assets acquired............................. 5.1 25.0 Goodwill.................................... (0.3) 10.0 ---- ---- Cash consideration.......................... 4.8 35.0 ==== ====
All accounting policy alignments and other adjustments relate to Metal Leve Inc. The accounting policy alignments comprise the recording as stocks of (pound sterling)0.3m of consumable stores previously written off and a provision of (pound sterling)0.4m in respect of environmental work required at the date of acquisition. Other adjustments comprise the revaluation of fixed assets ((pound sterling)2.3m) and the elimination of deferred tax debtors ((pound sterling)0.5m) and creditors ((pound sterling)1.0m). In its last statutory year, ended 31 December 1996, Metal Leve Inc earned profits after taxation of(pound sterling)1.4m; in the period from 1 January 1997 to 15 June 1997 it earned profits after taxation of(pound sterling)1.6m.
(POUND STERLING)M ----------------- Cash paid for acquisitions Cash consideration.......................................... 35.0 Consideration deferred...................................... (4.0) Prior year deferred consideration paid...................... 0.5 Less cash acquired.......................................... (4.2) ---- Cash outflow on acquisitions................................ 27.3 ====
24. ANALYSIS OF MOVEMENT IN NET DEBT
OTHER NON CASH AT 1 JANUARY 1997 CASH FLOW MOVEMENTS DEBT ACQUIRED ----------------- ----------------- ----------------- ----------------- (POUND STERLING)M (POUND STERLING)M (POUND STERLING)M (POUND STERLING)M Cash at bank and in hand................... 110.4 (3.2) -- -- Overdrafts.............. (24.0) (42.8) -- -- ------ ----- --- ---- 86.4 (46.0) -- -- ------ ----- --- ---- Debt due within one year................... (51.7) 12.4 -- (1.5) Debt due after one year. (256.4) (36.4) 1.4 (3.2) Finance leases.......... (5.3) 1.2 -- (0.1) ------ ----- --- ---- (313.4) (22.8) 1.4 (4.8) ------ ----- --- ---- Short term deposits..... 21.1 74.1 -- -- Current asset investments............ 5.6 2.4 -- -- ------ ----- --- ---- 26.7 76.5 -- -- ------ ----- --- ---- Net borrowings.......... (200.3) 7.7 1.4 (4.8) ====== ===== === ====
F-74 T&N PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EXCHANGE MOVEMENT ON AT 31 DECEMBER OPENING BALANCES MOVEMENT IN YEAR 1997 -------------------- ----------------- ----------------- (POUND STERLING)M (POUND STERLING)M (POUND STERLING)M Cash at bank and in hand................... (5.0) (2.3) 99.9 Overdrafts.............. 1.4 0.3 (65.1) ---- ---- ------ (3.6) (2.0) 34.8 ---- ---- ------ Debt due within one year................... 3.9 (0.6) (37.5) Debt due after one year. 10.5 1.5 (282.6) Finance leases.......... 0.3 -- (3.9) ---- ---- ------ 14.7 0.9 (324.0) ---- ---- ------ Short term deposits..... (0.2) (0.9) 94.1 Current asset investments............. -- -- 8.0 ---- ---- ------ (0.2) (0.9) 102.1 ---- ---- ------ Net borrowings.......... 10.9 (2.0) (187.1) ==== ==== ======
Included within the closing balance of short term deposits is (pound sterling) 78.2m in the asbestos fund. 25. DEFERRED TAXATION
1997 1996 ----------------- ----------------- (POUND STERLING)M (POUND STERLING)M Asset/(liability) recognised Asbestos-related costs.................... 21.1 27.4 Losses and other timing differences....... (5.7) 3.0 ---- ---- 15.4 30.4 ==== ====
No provision has been made for tax which would become payable on the amount by which assets have been revalued because there is no current intention to dispose of these assets. Provision for deferred taxation is only made to the extent that it is probable that an actual liability or asset will crystallise, as noted below.
1997 1996 ----------------- ----------------- (POUND STERLING)M (POUND STERLING)M Deferred tax assets: Advance corporation tax.................. 61.9 56.5 Operating losses......................... 36.6 41.6 Capital losses........................... 24.8 30.8 Asbestos provision....................... 129.7 179.1 Other.................................... 40.9 78.3 ------ ------ 293.9 386.3 Less: Deferred tax not recognised under UK GAAP...................................... (272.8) (355.9) ------ ------ Deferred tax asset recognised under UK GAAP...................................... 21.1 30.4 ====== ======
F-75 T&N PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1997 1996 ----------------- ----------------- (POUND STERLING)M (POUND STERLING)M Deferred tax liability: Accelerated capital allowances........... (64.5) (60.8) Other.................................... (26.8) (25.3) ----- ----- (91.3) (86.1) Less: Deferred tax not recognized under UK GAAP...................................... (85.6) (86.1) ----- ----- Deferred tax liability provided under UK GAAP...................................... (5.7) -- ===== ===== Net deferred tax asset recognized under UK GAAP...................................... 15.4 30.4 ===== =====
A deferred tax asset is carried in respect of the provision for asbestos claims settlements in the UK and US (and at 1996 additionally in respect of the insurance premium against asbestos liabilities). The amount recognised is the forecast tax relief to be obtained for asbestos claims settlements over the next three years. The analysis of the deferred tax liability provided under UK GAAP between current and non-current amounts is as follows:
1997 1996 ----------------- ----------------- (POUND STERLING)M (POUND STERLING)M Current: UK........................................ -- -- US........................................ 1.8 10.8 Germany................................... -- 3.1 ---- ---- 1.8 13.9 ==== ==== Non-current: UK........................................ 9.9 10.3 US........................................ 9.4 6.2 Germany................................... (5.7) -- ---- ---- 13.6 16.5 ==== ==== Total deferred tax asset................ 15.4 30.4 ==== ====
No deferred tax liability has been recognised for temporary differences related to investments in foreign subsidiaries and associates. Remittance of retained earnings of overseas subsidiaries and associates as dividends would be liable to tax in the UK. However, it is likely that no net tax liability would arise, since credit would be available for foreign taxes suffered on those earnings, and surplus ACT, of (pound sterling)61.9 million at 31 December 1997 ((pound sterling)56.5 million at 31 December 1996) that has not been recognised for deferred tax, would be available to offset the liability. The temporary difference could also become taxable if capital of the foreign companies were repaid to their UK parent company. However, the taxable gain would be reduced by the base cost of the shares and an inflation allowance. Additionally, capital losses, with a value of (pound sterling)24.8 million at 31 December 1997 ((pound sterling)30.8 million at 31 December 1996) that have not been recognised for deferred tax, would be available to offset the net taxable gain. The value of tax losses (excluding capital losses) carried forward and their expiry dates are as follows:
(POUND STERLING)M ----------------- 1998.......................................................... 4.4 1999.......................................................... 4.1 2000.......................................................... 3.2 2001.......................................................... 1.0 After 2001.................................................... 23.8 ---- 36.5 ====
F-76 T&N PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 26. RELATED PARTY TRANSACTIONS The T&N Group is related to all its associated undertakings because it exerts significant influence over them. During the year various transaction have occurred between the T&N Group and its associates including: . Sales of goods and equipment to associated undertakings of (pound sterling)12.1m (1996 (pound sterling)12.8m); . purchases of goods from associated undertakings of (pound sterling)15.9m (1996 (pound sterling)15.5m); . royalties received from associated undertakings of (pound sterling)1.9m (1996 (pound sterling)1.4m); . dividends received from associated undertakings of (pound sterling)6.5m (1996 (pound sterling)6.8m); . investments in associated undertakings as set out in Note 12. Sales between associated undertakings totalled (pound sterling)26.1m (1996 (pound sterling)16.0m). Trading balances with associated undertakings at 31 December 1996 and 1997 are set out in Notes 14 and 16. Entities which the T&N Group sold and acquired during the year, details of which are set out in Notes 3 and 23, are deemed to be related parties because the T&N Group exercise control over these whilst they were part of the T&N Group. Transactions during the year which are not eliminated on consolidation totalled (pound sterling)0.3m (1996 (pound sterling)1.0m) comprising mainly the provision of utilities to disposed businesses. All these transaction were entered into on arms length terms. 27. COMMITMENTS AND CONTINGENT LIABILITIES
1997 1996 ----------------- ----------------- (POUND STERLING)M (POUND STERLING)M Future capital expenditure--contracts placed................................... 20.0 12.6 ==== ==== Operating leases--payment commitments for 1998 on leases of land and buildings expiring: --within one year....................... 1.0 1.0 --between two and five years............ 3.3 2.1 --in more than five years............... 2.5 2.1 ---- ---- 6.8 5.2 ==== ==== On leases of plant and machinery expiring: --within one year....................... 1.2 1.4 --between two and five years............ 5.7 7.0 --in more than five years............... -- 0.1 ---- ---- 6.9 8.5 ==== ====
At 31 December 1997 the Company and its UK subsidiaries had contingent liabilities of (pound sterling)67.6m (1996 (pound sterling)64.3m) in connection with guarantees relating to bank borrowings of certain overseas subsidiaries. The maximum potential liability under those guarantees is (pound sterling)99.4m (1996 (pound sterling)121.4m). Contingent liabilities also exist in respect of cross-guarantees given by the Company and its UK subsidiaries to support some of the Group's UK bank borrowings. F-77 T&N PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 28. ASBESTOS-RELATED LITIGATION In the United States of America, T&N plc and two of its US subsidiaries ("the T&N Companies") are among many defendants named in numerous court actions alleging personal injury resulting from exposure to asbestos or asbestos-containing products. T&N plc is also subject to asbestos-disease litigation, to a lesser extent, in the UK. Because of the slow onset of asbestos-related diseases, the directors anticipate that similar claims will be made in the future. It is not known how many such claims may be made nor the expenditure which may arise therefrom. Provisions are, however, made in respect of both known and possible future claims, on the following bases. Claims Notified after 30 June 1996 As announced on 27 November 1996 the Company has secured, by payment of a premium of (pound sterling)92m, a (pound sterling)500m layer of insurance cover which will be triggered should the aggregate number of claims notified after 30 June 1996, where the exposure occurred prior to that date ("IBNR claims"), exceed (pound sterling)690m. This, together with recent claims experience and medical information, enabled the directors of the company during 1996 to estimate the cost of IBNR claims with reasonable accuracy. Accordingly, provision was made of (pound sterling)550m during the year ended 31 December 1996 for IBNR claims at 30 June 1996 (being a point between the high ((pound sterling)690m) and low ((pound sterling)429m) estimates prepared by actuaries using assumptions referred to below). The provision was made on a discounted basis, using a rate of 7%. The directors intend to set aside this provision in a separate fund, and the provision established in 1996 of (pound sterling)327m allowed a margin to enable this to be phased in accordance with the assumptions over a period of approximately 36 months. Tax relief is available on this provision when payments are made. At 31 December 1997, the provision amounted to (pound sterling)300m and the fund established for IBNR claims stood at (pound sterling)78.2m. Details of the movement in the IBNR provision are set out in Note 19. Claims Notified and Outstanding at 30 June 1996 As regards claims notified and outstanding at 30 June 1996 in the UK, full provision is made in respect of such claims, based on estimates agreed with the Company's external litigation lawyers. As regards claims notified and outstanding at 30 June 1996 in the US, provision continues to be made based on data provided by the Center for Claims Resolution (CCR), who T&N has appointed as its exclusive representative in relation to all asbestos-related personal injury claims made against the T&N Companies in the United States. In estimating the provision, the directors have had regard principally to the industry in which the plaintiff claims exposure, the alleged disease type, the State in which the action is being brought and the share which will be applicable to the T&N Companies having regard to the agreed method of operation of the CCR. Such shares may in certain circumstances be subject to retroactive adjustment. Even where settlement has already been agreed in principle with plaintiffs' lawyers in respect of a group of cases, the actual cost of each claim to the T&N Companies may not be determined until it is finally processed and paid sometime in the future. Contingent Liability Accordingly, although the directors believe that they have made appropriate provision for claims, because of the factors described in this note, there are contingencies in relation to the amount at which such claims will be finally settled. Given the substantial layer of insurance cover, one contingency in relation to IBNR claims concerns claims exceeding the amount provided, but below the level of insurance cover. This amounts to (pound sterling)140m F-78 T&N PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) gross, and (pound sterling)58m when discounted. The directors also recognise the importance of setting up a separate fund in accordance with the assumptions used in arriving at the discounted provision. During 1997 the sum of (pound sterling)88.2m was put into such a fund. In arriving at the IBNR provision, assumptions have been made regarding the total number of claims which it is anticipated may be received in the future, the average cost of settlement (which is sensitive to the industry in which the plaintiff claims exposure, the alleged disease type and the State in which the action is being brought), the rate of receipt of claims and the timing of settlement and the level of subrogation claims brought by insurance companies. So far as relates to claims reported at 30 June 1996, T&N is primarily exposed to differences between the assumptions referred to above and the actual claims settlement experience as it emerges. US Property Damage Litigation Following the successful jury verdict in the Chase Manhattan property damage case in December 1995, judgement was entered in the Company's favour on all counts during the year. The Chase Manhattan Bank has appealed against the decision in the Company's favour. That appeal is still pending. The Company has received legal advice that such appeal stands no realistic prospect of success. Full provision has been made in respect of the anticipated legal costs which may be incurred in relation to the Chase Manhattan case, and for the other three remaining property claims. 29. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. The Group's accounts are prepared in conformity with generally accepted accounting principles applicable in the United Kingdom (UK GAAP), which differ in certain significant respects from those applicable in the United States (US GAAP). These differences, together with the approximate effects of the adjustments on net profit and shareholders' funds, relate principally to the items set out below: Goodwill and Other Intangible Assets Under UK GAAP goodwill arising on acquisition is charged to reserves. Under US GAAP goodwill is capitalised and amortised by charges against income over the period, not to exceed 40 years, over which the benefit arises. For US GAAP, goodwill has been amortised by the Group over periods not exceeding 40 years. Under UK GAAP the profit and loss on the disposal of all or part of a previously acquired business is calculated after taking account of the gross amount of any goodwill previously charged to reserves. Under US GAAP an adjustment to profit or loss on disposal is required in respect of goodwill previously amortised. Under UK GAAP patents acquired as part of the acquisition of a company are written off to reserves as part of goodwill. US GAAP requires patents to be capitalised and amortised by charges against income over the period to expiring of the patent. US GAAP requires direct costs, such as legal fees and filing fees, to be capitalised in respect of internally developed intangibles. Dividends Under UK GAAP dividends proposed after the end of an accounting period in respect of that accounting period are deducted in arriving at retained earnings for that period. Under US GAAP such dividends are not deducted until formally approved. F-79 T&N PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Deferred Taxation Under UK GAAP provision is made for deferred taxation only to the extent that it is probable that an actual liability or asset will crystallise in the foreseeable future. US GAAP requires full provision for deferred income taxes under the liability method on all temporary differences and, if required, a valuation allowance is established to reduce gross deferred taxation assets to the amount which is likely to be realised. Deferred taxation also arises in relation to the tax effect of other US GAAP differences. Pension Costs Under UK GAAP, the cost of providing pensions and post employment benefits is charged against profits on a systematic basis, with pension surpluses and deficits being amortised over the expected remaining service lives of current employees. Under US GAAP, costs and surpluses are similarly spread over the expected remaining service lives but based on prescribed actuarial assumptions, allocation of costs and valuation methods, which differ in certain respects from those used for UK GAAP. Derivatives Under UK GAAP only the accrued interest to the balance sheet date is carried on the consolidated balance sheet. Under US GAAP, where the swaps do not meet specific hedging criteria the swap must be carried on the consolidated balance sheet at fair value with the related gains or losses recorded in income. Asbestos Provision Under UK GAAP an element of asbestos provision has been discounted to reflect the long term nature of this environmental provision. Under US GAAP, such environmental provisions are not generally discounted. Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of The Group, for US GAAP purposes, has adopted the provision of SFAS No. 121, Accounting for The Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognised is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Restructuring Costs Under US GAAP the Group recognises a liability for restructuring costs and charges the Group's profit and loss account in the period in which the decision has been made to restructure a part of the business. Under US GAAP, certain types of restructuring costs are only recognised when further specific criteria have been met. Among these criteria is the requirement that all significant actions arising from a restructuring and integration plan and their completion dates must be identified by the balance sheet date. These criteria also apply to the recognition of integration costs considered liabilities on acquisition. Capitalisation of Interest Under UK GAAP the capitalisation of interest is not required. US GAAP requires that gross interest should be capitalised on all qualifying assets during the time required to prepare them for their intended use. F-80 T&N PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Share Option Schemes Under UK GAAP the Group does not recognise any compensation cost for share options granted to directors and employees. US GAAP requires compensation cost to be recorded, over the vesting period, for the excess of the market value of the underlying shares, at the date of granting of the options, over the exercise price of the options. Revaluation of Fixed Assets Under UK GAAP the Group has revalued certain fixed assets. This is not permitted under US GAAP. Carrying Value of Investments Under UK GAAP the Group has during 1997 reversed certain provisions in respect of fixed asset investments held at the balance sheet date. Under US GAAP these provisions would not be reversed on the basis that they related to impairments which were other than temporary in nature. Discontinued Operations UK and US GAAP have different criteria for determining discontinued operations. Under UK GAAP, certain disposals in 1996 and 1997 have been treated as discontinued operations. Under US GAAP, the only disposal in 1996 and 1997 treated as discontinued operations was the disposal of the Construction Materials business in 1996. Current Assets and Liabilities Under UK GAAP current assets include amounts which fall due after more than one year. Under US GAAP such assets would be reclassified as non-current assets. Also under UK GAAP provisions for liabilities and charges include amounts due within one year which would be reclassified to current liabilities under US GAAP. Associated Undertakings The Group's share of the results of associated undertakings, excluding interest and taxation, have been disclosed within the UK Group financial statements as part of operating results. The net interest in respect of associated undertakings is included, and separately disclosed, within net interest payable and similar charges; The tax attributable to the Group's share of the results of associated undertakings is included within the Group tax charge. Under US GAAP, the Group's share of the results of associated undertakings would be disclosed, net of interest and tax, below the operating result of the Group. Capital Grants Under UK GAAP capital grants not yet released to the profit and loss account are held as deferred income within creditors due within one year and due after more than one year. Under US GAAP such capital grants are netted off against the carrying value of the fixed assets to which they relate. Cash Flows The principal difference between UK GAAP and US GAAP is in respect of classification. Under UK GAAP, the Group presents its cash flows for operating activities, returns on investments and servicing of finance, taxation, capital expenditures and financial investments, acquisition and disposals, equity dividends paid, F-81 T&N PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) management of liquid resources, and financing. US GAAP requires only three categories of cash flow activities which are operating, investing and financing. Cash flows arising from taxation and returns on investments and servicing of finance under UK GAAP would, with the exception of dividends paid, be included as operating activities under US GAAP; dividend payments would be included as a financing activity under US GAAP. In addition, capital expenditures and financial investment, acquisition and disposals, and management of liquid resources under UK GAAP would be presented as investing activities under US GAAP. UK GAAP defines cash as cash in hand and deposits repayable on demand. Short term deposits which are readily convertible into cash into known amounts of cash at, or close to, their carrying value are classified as liquid resources. US GAAP defines cash and cash equivalents as cash in hand and short term highly liquid investments with original maturities of three months or less. Cash flows in respect of short term deposits with original maturities exceeding three months are included in investing activities under US GAAP and are included in capital expenditure and financial investment under UK GAAP. Under US GAAP, the following amounts would be reported:
1997 1996 ----------------- ----------------- (POUND STERLING)M (POUND STERLING)M Net cash provided by operating activities.. 163.4 73.7 Net cash used in investing activities...... (70.9) (135.1) Net cash provided by/(used in) financing activities................................ (71.9) 56.7 Effect of changes in exchange rate......... (4.1) (5.6) ----- ------ Net increase/(decrease) in cash and cash equivalents............................... 16.5 (10.3) Cash and cash equivalents at beginning of year...................................... 114.8 131.3 ----- ------ Cash and cash equivalents at end of year... 131.3 121.0 ===== ======
Effect on profit/(loss) attributable to shareholders of differences between UK and US GAAP
1997 1996 ----------------- ----------------- (POUND STERLING)M (POUND STERLING)M Profit/(loss) attributable to shareholders as reported under UK GAAP................. 122.4 (400.8) US GAAP adjustments: Goodwill................................. (6.8) (3.4) Amortisation of patents.................. (1.6) (1.6) Deferred taxation--full provision........ (40.8) 101.2 Tax effect of other US GAAP reconciling items................................... 1.8 77.7 Pension costs............................ (7.0) (15.1) Asbestos provision....................... (0.5) (227.0) Fixed asset revaluations................. 5.8 6.2 Carrying value of investments............ (19.2) -- Other.................................... 1.3 1.3 Minority interests....................... (0.5) (0.7) ----- ------ Net income/(loss) under US GAAP............ 54.9 (462.2) ===== ====== Basic and diluted earnings per 40p (1996:(pound sterling)1) share under US GAAP...................................... .10 (0.87) ===== ======
F-82 T&N PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The after-tax net loss under US GAAP for 1996 comprises income from discontinued operations of(pound sterling)3.6 million (per share(pound sterling)0.01) and loss from continuing operations of(pound sterling)465.8 million (per share(pound sterling)0.87). Effect on shareholders' funds of differences between UK and US GAAP
1997 1996 ----------------- ----------------- (POUND STERLING)M (POUND STERLING)M Shareholders' funds as reported under UK GAAP...................................... 191.4 118.3 US GAAP adjustments: Goodwill................................. 208.0 207.0 Amortisation of patents.................. 9.2 10.7 Deferred taxation--full provision........ 64.5 100.8 Tax effect of other US GAAP reconciling items................................... 85.6 83.5 Pension costs............................ (11.0) (4.0) Asbestos provision....................... (230.5) (227.0) Fixed asset revaluations................. (14.2) (21.6) Carrying value of investments............ (19.2) -- Other.................................... (0.1) (1.4) Minority interests....................... (0.1) 0.4 ------ ------ Shareholders' funds under US GAAP.......... 283.6 266.7 ====== ======
Under US GAAP the gross value of goodwill, prior to amortisation, at 31 December 1997 was (pound sterling)254.6 million (1996: (pound sterling)248.3 million). New US Accounting Standards and Pronouncements Not Yet Adopted SFAS No. 131--Disclosure about segments of an Enterprise and Related Information: SFAS No. 131 was issued in June 1997 and is effective for fiscal years beginning after 15 December 1997. In the initial year of application, comparative information for earlier years is to be restated. It requires that companies disclose segment data based on how management makes decisions about allocating resources to segments and measuring their performance. It also requires entity wide disclosures about the products and services and entity provides, the material countries in which it holds assets and reports revenues and its major customers. New UK Accounting Standards Not Yet Adopted FRS 9--Associates and Joint Ventures: In December 1997, the Accounting Standards Board in the United Kingdom issued Financial Reporting Standard No. 9 "Associates and Joint Ventures" (FRS 9). FRS 9 sets out the definitions and accounting treatments for associated companies, joint ventures and joint arrangements. It requires the Group's share of results of associated companies to be analysed between operating income, interest, exceptional items and taxation. Previously the Group's share of associated companies income before tax was included in the consolidated statement of income on a single line. FRS 9 requires the sales of joint ventures to be separately disclosed, though the underlying accounting is the same as for associated companies. FRS 9 is effective for accounting periods ending on or after 23 June 1998. FRS 10--Goodwill and Intangible Assets: In December 1997, the Accounting Standard Board in the United Kingdom issued Financial Reporting Standard No. 10 "Goodwill and Intangible Assets" (FRS 10). FRS 10 requires that purchased goodwill and intangible assets should be capitalised as assets and amortised over the life of the assets. Goodwill and intangible assets need not be amortised if it can be demonstrated that the current F-83 T&N PLC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED) market value of the goodwill or intangible is not below its carrying value. FRS 10 is effective for accounting periods ending on or after 23 December 1998. The standard does not require reinstatement of goodwill previously eliminated against retained surplus. Companies Act 1985 These consolidated financial statements do not constitute "statutory accounts" within the meaning of the Companies Act 1985 of Great Britain for any of the periods presented. Statutory accounts for the year ended 31 December 1996 have been filed with the United Kingdom's Registrar of Companies and statutory accounts for the year ended 31 December 1997 will be filed with the United Kingdom's Registrar of Companies. The auditor has reported on these accounts. The reports were unqualified and did not contain statements under Section 237 (2) or (3) of the Act. These consolidated financial statements exclude certain parent company statements and other information required by the Companies Act 1985, however, they include all material disclosures required by generally accepted accounting principles in the United Kingdom including those Companies Act 1985 disclosures relating to the statement of income and balance sheet items. F-84 REPORT OF INDEPENDENT AUDITORS The Management of the Operating Businesses of the Fel-Pro Group We have audited the accompanying balance sheets of the Operating Businesses of the Fel-Pro Group as of December 28, 1997 and December 29, 1996 and the related statements of operations and cash flows for each of the three fiscal years in the period ended December 28, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Operating Businesses of the Fel-Pro Group at December 28, 1997 and December 29, 1996 and the results of their operations and their cash flows for each of the three fiscal years in the period ended December 28, 1997 in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP February 13, 1998 Chicago, Illinois F-85 OPERATING BUSINESSES OF THE FEL-PRO GROUP STATEMENTS OF OPERATIONS (IN THOUSANDS)
YEAR ENDED -------------------------------------- DECEMBER 28, DECEMBER 29, DECEMBER 31, 1997 1996 1995 ------------ ------------ ------------ Net sales................................ $489,305 $448,042 $387,928 Cost of goods sold....................... 268,477 245,761 217,572 -------- -------- -------- Gross profit............................. 220,828 202,281 170,356 Operating expenses: Shipping............................... 22,537 19,808 16,946 Advertising and selling................ 74,955 72,433 63,335 General and administrative............. 72,829 68,026 57,754 Other.................................. 3,496 2,897 3,831 -------- -------- -------- 173,817 163,164 141,866 -------- -------- -------- Income from operations................... 47,011 39,117 28,490 Other income (expense), net.............. (66) 125 (265) -------- -------- -------- Income before income taxes............... 46,945 39,242 28,225 Income taxes............................. 25,488 6,871 4,796 -------- -------- -------- Net income............................... $ 21,457 $ 32,371 $ 23,429 ======== ======== ========
See notes to financial statements. F-86 OPERATING BUSINESSES OF THE FEL-PRO GROUP BALANCE SHEETS (IN THOUSANDS)
DECEMBER 28, DECEMBER 29, 1997 1996 ------------ ------------ ASSETS ------ Current assets: Trade accounts receivable, less allowances of $5,009 in 1997 and $3,210 in 1996................. $ 83,412 $ 79,266 Inventories, net................................... 61,009 51,469 Refundable income taxes............................ 530 3,859 Deferred income taxes.............................. -- 5,530 Other current assets............................... 4,162 2,972 -------- -------- Total current asset.............................. 149,113 143,096 Property, plant, and equipment: Land............................................... 4,197 4,165 Buildings and improvements......................... 45,750 44,371 Machinery and equipment............................ 64,426 58,555 Construction in process............................ 9,087 5,945 Accumulated depreciation........................... (42,828) (41,419) -------- -------- Total property, plant, and equipment............. 80,632 71,617 Other assets: Investment in marketable securities................ 7,490 10,352 Intangible assets, net............................. 16,685 17,665 Deferred income taxes.............................. -- 10,183 Other long-term assets............................. 16,199 8,872 -------- -------- Total other assets............................... 40,374 47,072 -------- -------- Total assets..................................... $270,119 $261,785 ======== ======== LIABILITIES AND EQUITY ---------------------- Current liabilities: Trade accounts payable............................. $ 22,703 $ 17,596 Accrued income taxes............................... 6,725 -- Accrued sales rebates.............................. 10,466 7,999 Accrued real estate taxes.......................... 2,169 1,958 Accrued payroll and benefits....................... 24,142 21,640 Other current liabilities.......................... 10,507 8,969 -------- -------- Total current liabilities........................ 76,712 58,162 Accrued postretirement benefit obligation............ 46,835 46,572 Other long-term liabilities.......................... 6,633 5,203 Equity: Owners' equity..................................... 138,159 149,925 Foreign currency translation adjustments........... 1,256 1,483 Unrealized gain on marketable equity securities, net of taxes...................................... 524 440 -------- -------- Total equity..................................... 139,939 151,848 -------- -------- Total liabilities and equity..................... $270,119 $261,785 ======== ========
See notes to financial statements. F-87 OPERATING BUSINESSES OF THE FEL-PRO GROUP STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED -------------------------------------- DECEMBER 28, DECEMBER 29, DECEMBER 31, 1997 1996 1995 ------------ ------------ ------------ OPERATING ACTIVITIES Net income............................. $ 21,457 $ 32,371 $ 23,429 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation......................... 9,486 8,775 8,003 Amortization of intangibles.......... 2,016 2,526 2,750 Provision for losses on accounts receivable.......................... 2,754 707 (71) Deferred income taxes................ 15,978 (835) (209) Accrued postretirement benefit obligation.......................... 263 2,406 2,139 Other................................ (406) (165) (8,591) Changes in operating assets and liabilities: Trade accounts receivable.......... (6,121) (17,447) (3,351) Inventories........................ (8,553) (4,608) 348 Other assets....................... (5,166) (6,578) (4,443) Trade accounts payable............. 5,107 1,615 3,555 Accrued payroll and benefits....... 2,502 6,354 1,132 Other liabilities.................. 12,371 5,979 (2,480) -------- -------- -------- Net cash provided by operating activities...................... 51,688 31,100 22,211 INVESTING ACTIVITIES Acquisition of business, less cash acquired.............................. (3,501) (13,491) (7,101) Proceeds from sale of marketable securities............................ 3,850 -- -- Purchases of marketable securities..... (988) (3,042) (7,310) Purchases of property, plant, and equipment............................. (18,277) (14,058) (12,505) Proceeds from disposal of property, plant, and equipment.................. 451 72 -- Other investment activities............ -- (112) -- -------- -------- -------- Net cash used in investing activities...................... (18,465) (30,631) (26,916) FINANCING ACTIVITIES Cash distributions to owners........... (27,500) (21,055) (11,099) -------- -------- -------- Net Cash provided to/from affiliates...................... $ (5,723) $ 20,586 $ 15,804 ======== ======== ========
See notes to financial statements F-88 OPERATING BUSINESSES OF THE FEL-PRO GROUP NOTES TO FINANCIAL STATEMENTS DECEMBER 28, 1997 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES On January 9, 1998, the owners of the Fel-Pro Group of affiliated entities signed an agreement to sell the Fel-Pro Group operating businesses and certain related real estate (collectively, the operating businesses of the Fel-Pro Group or the Company) to Federal Mogul Corporation (Federal Mogul). Certain non-operating assets, including cash, debt, certain marketable securities, real estate and insurance assets, are not included in the transaction. The transaction closed on February 24, 1998 and the owners received $491.8 million in cash plus $225 million of Federal Mogul Corporation stock. The accompanying financial statements include the net assets and operations purchased by Federal Mogul and are presented as if the Company had existed as an entity separate from certain affiliated entities not purchased by Federal Mogul. Any activity with those affiliated entities has been reflected in owners' equity. The operating businesses of the Fel-Pro Group are owned by the following affiliated entities: Felt Products Mfg. Co. and subsidiaries (Felt) Fel-Pro Specialty Sealing Products Fel-Pro Mexico S.A. de C.V. (FP Mexico) L.P. (SSP) Fel-Pro Chemical Products L.P. Meridian Parts Corporation (Meridian) (Chemical) FP Performance Products L.P. FP Diesel L.P. (Diesel) (Performance) All significant intercompany accounts and transactions have been eliminated in the financial statements. The Company is engaged in the manufacture and/or distribution of automotive, heavy duty and industrial gaskets (primary product line); replacement parts for heavy duty diesel engines; adhesives, lubricants, sealers, and other chemical products for industrial use, and high performance transmissions and torque converters. Products are primarily sold to customers located throughout the United States, Canada, Mexico, South America, the Middle East, Asia and Europe either directly to original equipment manufacturers or to aftermarket customers. All of these activities constitute a single business segment. Domestic sales, including export sales, represent over 90% of total net sales in 1997, 1996 and 1995. Export sales represent approximately 13%, 11% and 9% of total net sales for 1997, 1996 and 1995, respectively. The Company performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. The terms of customer receivables vary based on customer agreements. Credit losses are provided for in the financial statements and consistently have been within management's expectations. Primary manufacturing operations and corporate offices are located at facilities in Skokie, Illinois. The following is a summary of significant accounting policies: Fiscal Year The Company uses a 52 or 53 week year, ending on the last Sunday in December. The fiscal years ended December 28, 1997 and December 29, 1996 include 52 weeks, while the fiscal year ended December 31, 1995 includes 53 weeks. Cash and Cash Equivalents An affiliated entity provides a centralized cash management function; accordingly, the Company does not maintain separate cash accounts and its cash disbursements and collections are settled through owners' equity. F-89 OPERATING BUSINESSES OF THE FEL-PRO GROUP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Marketable Securities Management determines the appropriate classification of its investments at the time of acquisition and reevaluates such determination at each balance sheet date. All investments are classified as available-for-sale securities which are carried at fair value, with unrealized holding gains and losses, net of tax, reported as a separate component of equity. Marketable equity and debt securities being held for non-current uses such as the funding of postretirement benefit obligations are classified as long-term assets. Quoted market prices have been used in determining the fair value of these investments. Inventories Inventories owned by Felt, Diesel and Meridian, are carried at the lower of last in, first out (LIFO) cost or market. The aggregate inventories owned by all other entities are carried at the lower of first in, first out (FIFO) cost or market. At December 28, 1997 and December 29, 1996, 21% of total inventories are carried on a FIFO basis. Intangible Assets Goodwill, patents, and trademarks are being amortized over periods of 14 to 20 years using the straight-line method. Noncompetition agreements are being amortized over the terms of the related agreements. Translation of Foreign Operations The financial statements of the foreign entities have been translated in accordance with Statement of Financial Accounting Standards No. 52 and accordingly, unrealized foreign currency translation adjustments are reflected as a component of equity, except for those related to FP Mexico. In 1997, Mexico was determined to be a highly inflationary country. As a result, unrealized foreign currency translation adjustments related to peso denominated monetary assets and liabilities, which are not significant, are reported under "Other income, net", and other assets and liabilities are translated at historical exchange rates. Depreciation and Amortization Property, plant, and equipment is recorded at cost. For depreciable assets acquired prior to 1991, provisions for depreciation and amortization are computed using both straight-line and accelerated methods for financial reporting purposes, based on the estimated useful lives of the assets. Beginning in 1991, provisions for newly acquired depreciable assets are computed using the straight-line method, based on the estimated useful lives of the assets. Research and Development Activities related to new product development and major improvements to existing products and processes are expensed as incurred and amounted to approximately $4.4 million in 1997, $4.1 million in 1996, and $4.2 million in 1995. Management Estimates The financial statements include estimated amounts and disclosures based on management's assumptions about future events. Actual results could differ from those estimates. F-90 OPERATING BUSINESSES OF THE FEL-PRO GROUP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 2. INVESTMENTS The composition of marketable securities is as follows:
DECEMBER 28, 1997 DECEMBER 29, 1996 ----------------- ----------------- COST FAIR VALUE COST FAIR VALUE ------ ---------- ------ ---------- (IN THOUSANDS) Long term investments: Brinson Global Fund................. $6,617 $7,490 $9,618 $10,352 ====== ====== ====== =======
Interest and dividend income, net is included in other income(expense), net, and was $.8 million in 1997 and 1996, and $.5 million in 1995. 3. INVENTORIES Inventories at December 28, 1997, and December 29, 1996 consist of the following:
1997 1996 ------- ------- Raw materials............................................ $13,931 $12,595 Work in process.......................................... 6,869 7,930 Finished goods........................................... 59,871 51,396 ------- ------- Inventories at FIFO...................................... 80,671 71,921 Less: Excess of FIFO cost over LIFO cost................. 19,662 20,452 ------- ------- $61,009 $51,469 ======= =======
4. INCOME TAXES Earnings of the operating businesses of the Fel-Pro Group owned by Diesel, SSP, Performance and Chemical are not subject to federal or state income taxes because these entities are partnerships. The partners include the earnings from these partnerships in the partner's Federal and state income tax returns. Effective December 30, 1996, the stockholders of Felt elected under Subchapter S of the Internal Revenue Code to include Felt's income in their own income for federal tax purposes. Accordingly, Felt is not subject to federal income taxes effective December 30, 1996, and the net deferred tax asset of approximately $15.7 million at December 29, 1996 was written off as a charge to tax expense in fiscal 1997. Additionally, the LIFO reserve of $21.2 million was included in taxable income and the tax cost recorded as a charge to tax expense in the income statement in fiscal 1997. F-91 OPERATING BUSINESSES OF THE FEL-PRO GROUP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes for Felt for the year ended December 29, 1996. Significant components of the deferred tax assets and liabilities are as follows:
1996 -------------- (IN THOUSANDS) Deferred Tax Assets Postretirement benefit obligation........................ $14,383 Other.................................................... 7,538 ------- Total deferred tax assets................................ 21,921 Deferred Tax Liabilities Tax over book depreciation............................... (5,877) Other.................................................... (331) ------- Total deferred tax liabilities........................... (6,208) ======= Net deferred tax assets/(liabilities).................... $15,713 =======
The income tax provision consists of the following:
1997 1996 1995 ------- ------ ------ (IN THOUSANDS) Current: Federal......................................... $ 8,986 $5,500 $3,992 State........................................... 719 1,436 758 Foreign......................................... 70 770 255 ------- ------ ------ 9,775 7,706 5,005 Deferred (credit)................................. 15,713 (835) (209) ------- ------ ------ $25,488 $6,871 $4,796 ======= ====== ======
The reconciliation of income taxes (tax benefits) computed at the United States federal statutory tax rate to income tax expense is:
1997 1996 1995 --------- --------- --------- (IN THOUSANDS) Pretax income for taxable entities........ $ 2,133.0 $19,502.0 $11,966.0 ========= ========= ========= Income taxes at U.S. statutory rate....... $ 746.6 $ 6,825.7 $ 4,088.1 Tax effect from: Reversal of deferred taxes.............. 15,713.0 LIFO recapture.......................... 7,420.0 State income taxes...................... 251.6 933.4 492.7 Other................................... 1,356.8 (888.1) 215.2 --------- --------- --------- $25,488.0 $ 6,871.0 $ 4,796.0 ========= ========= =========
Income taxes paid were approximately $3.7 million in 1997, $12.8 million in 1996, and $5.6 million in 1995. F-92 OPERATING BUSINESSES OF THE FEL-PRO GROUP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) 5. OWNERS' EQUITY A summary of the account activity is as follows:
1997 1996 1995 -------- -------- -------- (IN THOUSANDS) Beginning balance........................... $149,925 $118,023 $ 89,889 Net income.................................. 21,457 32,371 23,429 Distribution to owners...................... (27,500) (21,055) (11,099) Net cash provided to/(from) affiliates...... (5,723) 20,586 15,804 -------- -------- -------- Ending balance.............................. $138,159 $149,925 $118,023 ======== ======== ========
The operating businesses of the Fel-Pro Group are owned by entities having the following stock authorized and issued at December 28, 1997. These amounts are included in owners' equity above. FELT Authorized shares ($.01 par value)........................... 200,100 Shares issued and outstanding................................ 198,137.62 Par value.................................................... $ 1,981 FP MEXICO Authorized shares ($.12 par value)........................... 410,000 Shares issued and outstanding................................ 410,000 Par value.................................................... $ 48,200 MERIDIAN Authorized shares ($1 par value)............................. 250,000 Shares issued and outstanding................................ 20,000 Par value.................................................... $ 20,000
6. EMPLOYEE BENEFIT PLANS AND OTHER POSTRETIREMENT BENEFITS The Company maintains, for the benefit of its eligible employees, the following benefit plans: Employees' Profit-Sharing and Retirement Plan This plan is noncontributory on the part of participants, except for their voluntary contributions (which are limited, as provided in the plan agreement). Discretionary contributions by the Company for each year are determined by the Board of Directors. Distributions from the plan are made to participants or their beneficiaries on death, retirement, disability, or termination of employment. Contributions were approximately $9.8 million in 1997, $9.3 million in 1996, and $7.8 million in 1995. Death Benefit Plan The Company maintains a "death benefit plan" for selected managerial employees. The plan provides that in the event of death of a participant, before termination of employment or retirement, the applicable death benefits, as defined, are payable to the participant's designated beneficiaries. There were no beneficiary payments made in 1997, 1996, or 1995. The Company may at any time amend or revoke the "death benefit plan" without the consent of its participants. Since the plan is presently fully funded through life insurance policies in which the participants possess no interest and the payment of benefits is contingent upon the death of participants, no provision for such future possible payments has been reflected in the financial statements. F-93 OPERATING BUSINESSES OF THE FEL-PRO GROUP NOTES TO FINANCIAL STATEMENTS--(CONTINUED) Deferred Compensation Plan The Company maintains deferred compensation plans for qualified managers. The plans allow such participants to defer up to 90% of their annual bonuses and salary (subject to certain limitations). The plans also provide for matching amounts (as defined) from the employer, provide for a growth increment dependent on several factors, and provide for additional employer contributions on compensation in excess of $160,000. Distributions from the plan are made to the participants or their designated beneficiaries upon the earlier of death, retirement, disability, termination of employment, or by participant choice. Employer and employee contributions, including interest, of $2.7 million, $2.3 million, and $2.2 million were paid to the plans in 1997, 1996, and 1995, respectively. Other Postretirement Benefits The Company provides postretirement medical, dental, and death benefits to domestic employees hired prior to January 1, 1988, who have worked at least 10 years and attained age 55 while in service with the Company. All employees hired subsequent to this date are eligible for these benefits if they have worked at least 20 years and attained age 55. The plan amendment in November 1996 provided that for all retiree groups, the Company caps its contributions toward retiree health care at the employer cost levels reached in 2004, thereby reducing the liability and annual expense. The plan is contributory and contains certain cost-sharing features such as deductibles, coinsurance, and a lifetime payout maximum. Assets with a fair value of $7.5 million and $10.4 million which are included in investments in marketable securities at December 28, 1997 and December 29, 1996, respectively, are being held for non- current uses such as the posretirement benefits. The Company's foreign entities provide no significant postretirement benefits. The following table presents the components of the liability recognized in the Company's balance sheet:
1997 1996 ------- ------- (IN THOUSANDS) Accumulated postretirement benefit obligation: Retirees............................................... $16,297 $13,412 Fully eligible active plan participants................ 4,708 7,592 Other active plan participants......................... 7,381 9,238 Unrecognized net gain.................................... 4,514 1,205 Unrecognized plan reduction.............................. 13,935 15,125 ------- ------- Accrued postretirement benefit cost...................... $46,835 $46,572 ======= =======
A summary of the components of net periodic postretirement benefit cost is as follows:
1997 1996 1995 ------- ------ ------ (IN THOUSANDS) Service cost..................................... $ 666 $1,612 $1,435 Interest cost.................................... 1,991 2,824 2,978 Amortization of plan reduction................... (1,190) (421) (267) Amortization of unrecognized gain................ (97) -- -- ------- ------ ------ Net periodic postretirement benefit cost......... $ 1,370 $4,015 $4,146 ======= ====== ======
The health care cost trend rate utilized to determine the benefit cost was 9.5% for 1997 and 1996, decreasing gradually to 5.5% for 2005 and thereafter. Increasing the trend rate by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 28, 1997, by $1.8 million and increase the 1997 postretirement benefit cost by $0.2 million. The discount rate used in determining the accumulated postretirement benefit obligation was 7.50% at December 28, 1997 and December 29, 1996. F-94 OPERATING BUSINESSES OF THE FEL-PRO GROUP NOTES TO FINANCIAL STATEMENTS--(CONCLUDED) 7. COMMITMENTS AND CONTINGENCIES The Company is engaged in various legal actions arising in the ordinary course of its business. Management, after taking into consideration legal counsel's evaluation of such actions, is of the opinion that it has adequate legal defenses or insurance coverages and that the outcome of these matters will not have a material adverse effect on the Company's financial position. 8. ACQUISITIONS On September 8, 1997, Chemical acquired for $3.5 million certain operating assets of Biwax Corporation, a manufacturer of urethane potting and encapsulating products. On June 27, 1996, Diesel acquired for $1.2 million certain operating assets of Infinitive, a manufacturer of pistons and liners. On December 29, 1995, Performance acquired for $12.3 million the net assets of Torque Converters, Inc. (TCI), a high performance transmission and torque converter remanufacturer, marketer and distributor and assumed a $0.4 million of long-term liability. On October 30, 1995, Diesel acquired for $7.1 million certain operating assets of Korody-Colyer, a marketer and distributor of heavy duty diesel engine parts and gaskets. The acquisitions were accounted for under the purchase method, and, accordingly, the accounts and transactions of the acquired companies have been included in the financial statements from the dates of acquisition. 9. IMPACT OF YEAR 2000 (UNAUDITED) Felt personnel are presently implementing an enterprise resource planning system using Oracle software for manufacturing, OEM management, and financial systems, and IMI software for an Aftermarket order management system. This system will be Year 2000 compliant. This project was undertaken in late 1996 recognizing that information will be a key driver for growth in the 21st century and that business needs are changing. The system solution provides the ability to handle multiple product lines, currencies, businesses, and locations. The existing mainframe systems lack functionality and flexibility, and are also incompatible with the Year 2000. The total project is expected to be completed by February 1999. Information systems for Chemical, Performance, SSP, Meridian, Diesel and FP Mexico will undertake system changes in 1998 to ensure compatibility with the Year 2000 by such date. F-95 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR- MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPO- RATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS IN CONNEC- TION WITH THE OFFER CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING SHAREHOLDER OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PRO- SPECTUS, NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTI- TUTE ANY OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OF- FER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. ---------------- TABLE OF CONTENTS
PAGE ---- PROSPECTUS SUPPLEMENT Prospectus Summary........................................................ S-3 Risk Factors.............................................................. S-11 Forward-Looking Statements................................................ S-14 Use of Proceeds........................................................... S-15 Exchange Rates............................................................ S-15 T&N and Fel-Pro Acquisitions.............................................. S-16 Price Range of Common Stock and Dividends................................. S-18 Capitalization............................................................ S-19 Unaudited Pro Forma Financial Data........................................ S-20 Selected Consolidated Financial Data-- Federal-Mogul............................................................ S-27 Selected Consolidated Financial Data--T&N................................. S-28 Selected Consolidated Financial Data--Fel-Pro............................. S-30 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... S-31 Description of Certain Indebtedness....................................... S-52 Business.................................................................. S-55 Management................................................................ S-66 Principal Shareholders.................................................... S-70 Selling Shareholders...................................................... S-71 Description of Capital Stock.............................................. S-73 Certain United States Tax Consequences to Non-United States Holders................................................ S-78 Underwriting.............................................................. S-79 Presentation of Financial Information..................................... S-82 Legal Matters............................................................. S-82 Experts................................................................... S-82 PROSPECTUS Available Information..................................................... 2 The Company............................................................... 3 Ratio Of Earnings To Fixed Charges And Ratio Of Earnings To Combined Fixed Charges And Preferred Stock Dividends.................................... 4 Use of Proceeds........................................................... 4 Description of Debt Securities............................................ 4 Description of Preferred Stock and Common Stock........................... 14 Selling Shareholders...................................................... 17 Plan of Distribution...................................................... 19 Incorporation of Certain Information by Reference......................... 20 Legal Matters............................................................. 21 Experts................................................................... 21 FINANCIAL STATEMENTS Index to Financial Statements............................................. F-1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 11,000,000 SHARES LOGO COMMON STOCK ---------------- PROSPECTUS SUPPLEMENT ---------------- MERRILL LYNCH & CO. BEAR, STEARNS & CO. INC. MORGAN STANLEY DEAN WITTER SALOMON SMITH BARNEY DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION SCHRODER & CO. INC. , 1998 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS + +SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY + +NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH + +OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR + +QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS SUPPLEMENT DATED MAY 14, 1998 PROSPECTUS SUPPLEMENT (TO PROSPECTUS DATED , 1998) 11,000,000 SHARES LOGO COMMON STOCK ----------- Of the 11,000,000 shares of Common Stock, without par value (the "Common Stock"), of Federal-Mogul Corporation (the "Company" or "Federal-Mogul") being offered hereby, 9,712,093 shares are being offered by Federal-Mogul and 1,287,907 shares are being offered by certain shareholders of Federal-Mogul (the "Selling Shareholders"). Federal-Mogul will not receive any of the proceeds from the sale of shares of Common Stock by the Selling Shareholders. See "Selling Shareholders" and "Underwriting." Of the 11,000,000 shares of Common Stock offered hereby, 2,200,000 are being offered initially outside the United States and Canada (the "International Offering") and 8,800,000 shares are being offered initially in a concurrent offering inside the United States and Canada (the "U.S. Offering," and together with the International Offering, the "Offerings"). The public offering price and the underwriting discount per share are identical for both Offerings. See "Underwriting." The Common Stock is listed on the New York Stock Exchange, Inc. (the "NYSE") under the trading symbol "FMO." On May 12, 1998, the last reported sale price of Common Stock on the NYSE was $63 15/16 per share. See "Price Range of Common Stock and Dividends." SEE "RISK FACTORS" BEGINNING ON PAGE S-11 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PROCEEDS TO PROCEEDS TO PRICE TO UNDERWRITING FEDERAL- SELLING PUBLIC DISCOUNT(1) MOGUL(2) SHAREHOLDERS - ---------------------------------------------------------------------------------- Per Share........................ - ---------------------------------------------------------------------------------- Total(3).........................
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) Federal-Mogul and the Selling Shareholders have agreed to indemnify the several Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). See "Underwriting." (2) Before deducting expenses of the Offerings payable by Federal-Mogul estimated at $2,000,000. (3) Federal-Mogul and the Selling Shareholders have granted options to the U.S. Underwriters, exercisable within 30 days of the date hereof, to purchase up to an aggregate of 1,320,000 additional shares of Common Stock and options to the International Managers, exercisable within 30 days of the date hereof, to purchase up to an aggregate of 330,000 additional shares of Common Stock, solely to cover over-allotments, if any. If such options are exercised in full, the total Price to Public, Underwriting Discounts, Proceeds to Federal-Mogul and Proceeds to Selling Shareholders will be $ , $ , $ and $ , respectively. See "Underwriting." ----------- The shares of Common Stock are being offered by the several Underwriters, subject to prior sale, when, as and if delivered to and accepted by them, subject to approval of certain legal matters by counsel to the Underwriters and to certain other conditions. The Underwriters reserve the right to withdraw, cancel or modify such offer and to reject orders in whole or in part. It is expected that delivery of Common Stock will be made in New York, New York on or about , 1998. ----------- MERRILL LYNCH INTERNATIONAL BEAR, STEARNS INTERNATIONAL LIMITED MORGAN STANLEY DEAN WITTER SALOMON SMITH BARNEY INTERNATIONAL DONALDSON, LUFKIN & JENRETTE INTERNATIONAL SCHRODERS ABN AMRO ROTHSCHIL___CREDITDLYONNAIS SECURITIE____DRESDNERSKLEINWORT BENSON ----------- The date of this Prospectus Supplement is , 1998. UNDERWRITING Subject to the terms and conditions set forth in the International Purchase Agreement (the "International Purchase Agreement") among Federal-Mogul, the Selling Shareholders and each of the underwriters named below (the "International Managers"), and concurrently with the sale of 8,800,000 shares of Common Stock to the U.S. Underwriters (as defined below), Federal-Mogul and the Selling Shareholders severally have agreed to sell to each of the International Managers, and each of the International Managers severally has agreed to purchase, the aggregate number of shares of Common Stock set forth opposite its name below:
NUMBER OF SHARES INTERNATIONAL MANAGERS --------- Merrill Lynch International..................................... Bear, Stearns International Limited............................. Morgan Stanley & Co. International Limited...................... Smith Barney Inc................................................ Donaldson, Lufkin & Jenrette International...................... J. Henry Schroder & Co. Limited................................. ABN AMRO Rothschild............................................. Credit Lyonnais Securities ..................................... Kleinwort Benson Limited........................................ --------- Total....................................................... 2,200,000 =========
Merrill Lynch International ("Merrill Lynch"), Bear, Stearns International Limited, Morgan Stanley & Co. International Limited, Smith Barney Inc., Donaldson, Lufkin & Jenrette International, J. Henry Schroder & Co. Limited, ABN AMRO Rothschild, Credit Lyonnais Securities and Kleinwort Benson Limited are acting as representatives (the "International Managers") of the International Managers. Federal-Mogul and the Selling Shareholders have also entered into a Purchase Agreement (the "U.S. Purchase Agreement" and, together with the International Purchase Agreement, the "Purchase Agreements") with certain underwriters in the United States and Canada (collectively, the "U.S. Underwriters" and, together with the International Managers, the "Underwriters"). Subject to the terms and conditions set forth in the U.S. Purchase Agreement, and concurrently with the sale of 2,200,000 shares of Common Stock to the International Managers pursuant to the International Purchase Agreement, Federal-Mogul and the Selling Shareholders severally have agreed to sell to the U.S. Underwriters, and the U.S. Underwriters severally have agreed to purchase from Federal-Mogul and the Selling Shareholders, an aggregate of 8,800,000 shares of Common Stock. The offering price per share and the total underwriting discount per share are identical under the U.S. Purchase Agreement and the International Purchase Agreement. In each Purchase Agreement, the several International Managers and the several U.S. Underwriters, respectively, have agreed, subject to the terms and conditions set forth in such Purchase Agreement, to purchase all of the shares of Common Stock being sold pursuant to such Purchase Agreement if any of such shares of Common Stock being sold pursuant to such Purchase Agreement are purchased. Under certain circumstances, the commitments of non-defaulting International Managers or U.S. Underwriters (as the case may be) may be increased. The sale of Common Stock to the International Managers is conditioned upon the sale of shares of Common Stock to the U.S. Underwriters, and vice versa. S-79 The International Managers and the U.S. Underwriters have entered into an intersyndicate agreement (the "Intersyndicate Agreement") that provides for the coordination of their activities. Pursuant to the Intersyndicate Agreement, the Underwriters are permitted to sell shares of Common Stock to each other for purposes of resale at the public offering price set forth on the cover page of this Prospectus Supplement, less an amount not greater than the selling concession. Under the terms of the Intersyndicate Agreement, the International Managers and any dealer to whom they sell shares of Common Stock will not offer to sell or sell shares of Common Stock to persons who are U.S. or Canadian persons or to persons they believe intend to resell to persons who are U.S. or Canadian persons, and the U.S. Underwriters and any dealer to whom they sell shares of Common Stock will not offer to sell or sell shares of Common Stock to non-U.S. persons or non-Canadian persons or to persons they believe intend to resell to non-U.S. persons or non-Canadian persons, except, in each case, for transactions pursuant to the Intersyndicate Agreement. The International Managers have advised Federal-Mogul and the Selling Shareholders that the International Managers propose initially to offer the shares of Common Stock to the public at the public offering price set forth on the cover page of this Prospectus Supplement and to certain dealers at such price less a concession not in excess of $ per share of Common Stock. The International Managers may allow, and such dealers may reallow, a discount not in excess of $ per share of Common Stock on sales to certain other dealers. After the public offering, the public offering price, concession and discount may be changed. Each International Manager has agreed that (i) it has not offered or sold, and will not for a period of six months following consummation of the Offerings offer or sell, in the United Kingdom by means of any document, any shares of Common Stock offered hereby, other than to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances that do not constitute an offer to the public within the meaning of the Public Offers of Securities Regulations of 1995; (ii) it has complied with and will comply with all applicable provisions of the Financial Services Act of 1986 with respect to anything done by it in relation to the Common Stock in form or otherwise involving the United Kingdom and (iii) it has only issued or passed on and will only issue the Common Stock if that person is a kind described in Article 11(3) of the Financial Services Act of 1986 (Investment Advertisements) (Exemptions) Order 1996, as amended, or is a person to whom the document may otherwise lawfully be issued or passed on. Purchasers of the shares of Common Stock offered hereby may be required to pay stamp taxes and other charges in accordance with the laws and practices of the country of purchase, in addition to the offering price set forth on the cover page hereof. Federal-Mogul, certain of its executive officers and the Selling Shareholders have granted options to the International Managers, exercisable during the 30-day period after the date of this Prospectus Supplement, to purchase up to an additional 165,000 shares and 165,000 shares, respectively, of Common Stock at the public offering price set forth on the cover page hereof, less the underwriting discount. The International Managers may exercise this option only to cover over-allotments, if any, made on the sale of shares of Common Stock offered hereby. To the extent that the International Managers exercise this option, each International Manager will be obligated, subject to certain conditions, to purchase approximately the number of additional shares of Common Stock proportionate to such International Managers' initial amount reflected in the foregoing table. Federal-Mogul and the Selling Shareholders have also granted options to the U.S. Underwriters, exercisable during the 30-day period after the date of this Prospectus Supplement, to purchase up to an additional 660,000 shares and 660,000 shares, respectively, of Common Stock to cover over-allotments, if any, on terms similar to those granted to the International Managers. Federal-Mogul, certain of its executive officers and the Selling Shareholders have agreed that, except under certain circumstances (including issuances of securities in connection with acquisitions), they will not, directly or indirectly, for a period of 90 days following the date of the Prospectus Supplement, except with the prior consent of Merrill Lynch, on behalf of the Underwriters, sell, offer to sell, grant any option for the sale of, or otherwise dispose of, any Common Stock, except that Federal-Mogul may issue Common Stock or options for shares of Common Stock issued pursuant to or sold in connection with any employee benefit plan. S-80 Until the distribution of the Common Stock is completed, rules of the Commission may limit the ability of the International Managers and certain selling group members to bid for and purchase the Common Stock. As an exception to these rules, the International Managers are permitted to engage in certain transactions that stabilize the price of the Common Stock. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Common Stock. If the International Managers create a short position in the Common Stock in connection with the Offerings (i.e., if they sell more shares of Common Stock than are set forth on the cover page of this Prospectus Supplement), the International Managers may reduce that short position by purchasing Common Stock in the open market. The International Managers may also elect to reduce any short position through the exercise of all or part of the over-allotment option described above. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. Neither Federal-Mogul nor the International Managers make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Common Stock. In addition, neither Federal-Mogul nor the Underwriters make any representation that the Underwriters will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice. Federal-Mogul and the Selling Shareholders have agreed to indemnify the International Managers and the U.S. Underwriters, Federal-Mogul has agreed to indemnify certain Selling Shareholders, and such Selling Shareholders have agreed to indemnify Federal-Mogul, in each case against certain liabilities, including liabilities under the Securities Act of 1933. S-81 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR- MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPO- RATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS IN CONNEC- TION WITH THE OFFER CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING SHAREHOLDER OR THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PRO- SPECTUS, NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTI- TUTE ANY OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OF- FER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. ---------------- TABLE OF CONTENTS
PAGE ---- PROSPECTUS SUPPLEMENT Prospectus Summary........................................................ S-3 Risk Factors.............................................................. S-11 Forward-Looking Statements................................................ S-14 Use of Proceeds........................................................... S-15 Exchange Rates............................................................ S-15 T&N and Fel-Pro Acquisitions.............................................. S-16 Price Range of Common Stock and Dividends................................. S-18 Capitalization............................................................ S-19 Unaudited Pro Forma Financial Data........................................ S-20 Selected Consolidated Financial Data--Federal-Mogul....................... S-27 Selected Consolidated Financial Data--T&N................................. S-28 Selected Consolidated Financial Data--Fel-Pro............................. S-30 Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................... S-31 Description of Certain Indebtedness....................................... S-52 Business.................................................................. S-55 Management................................................................ S-66 Principal Shareholders.................................................... S-70 Selling Shareholders...................................................... S-71 Description of Capital Stock.............................................. S-73 Certain United States Tax Consequences to Non-United States Holders....... S-78 Underwriting.............................................................. S-79 Presentation of Financial Information..................................... S-82 Legal Matters............................................................. S-82 Experts................................................................... S-82 PROSPECTUS Available Information..................................................... 2 The Company............................................................... 3 Ratio Of Earnings To Fixed Charges And Ratio Of Earnings To Combined Fixed Charges And Preferred Stock Dividends.................................... 4 Use of Proceeds........................................................... 4 Description of Debt Securities............................................ 4 Description of Preferred Stock and Common Stock........................... 14 Selling Shareholders...................................................... 17 Plan of Distribution...................................................... 19 Incorporation of Certain Information by Reference......................... 20 Legal Matters............................................................. 21 Experts................................................................... 21 FINANCIAL STATEMENTS Index to Financial Statements............................................. F-1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 11,000,000 SHARES LOGO COMMON STOCK ---------------- PROSPECTUS SUPPLEMENT ---------------- MERRILL LYNCH INTERNATIONAL BEAR, STEARNS INTERNATIONAL LIMITED MORGAN STANLEY DEAN WITTER SALOMON SMITH BARNEY INTERNATIONAL DONALDSON, LUFKIN & JENRETTE INTERNATIONAL SCHRODERS ABN AMRO ROTHSCHILD CREDIT LYONNAIS SECURITIES DRESDNER KLEINWORT BENSON , 1998 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The estimated expenses of issuance and distribution, other than underwriting discounts and commissions, expected to be incurred by the Registrant are as follows: Filing fee of Securities and Exchange Commission relating to registration statement...................................... $ 737,500 Fees and expenses of counsel for the Registrant.............. 450,000 Fee of accountants........................................... 100,000 Printing expenses............................................ 700,000 Miscellaneous................................................ 12,500 ---------- Total.................................................... $2,000,000 ==========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Sections 561 through 571 of the Michigan Business Corporation Act (the "Act"), and Article XI of Federal-Mogul's Bylaws relate to the indemnification of Federal-Mogul's directors and officers, among others, in a variety of circumstances against Liabilities arising in connection with the performance of their duties. The Act permits indemnification of directors and officers acting in good faith and in a manner they reasonably believe to be in or not opposed to the best interests of Federal-Mogul or its shareholders (and, with respect to a criminal proceeding, if they have no reasonable cause to believe their conduct to be unlawful) against (i) expenses (including attorney's fees), judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred in connection with any threatened, pending, or completed action, suit, or proceeding (other than an action by or in the right of Federal-Mogul) arising by reason of the fact that such person is or was a director or officer of Federal-Mogul (or with some other entity at Federal-Mogul's request) and (ii) expenses (including attorneys' fees) and amounts paid in settlement actually and reasonably incurred in connection with a threatened, pending or completed action or suit by or in the right of Federal-Mogul, unless the director or officer is found liable to Federal-Mogul and an appropriate court does not determine that he or she is nevertheless fairly and reasonably entitled to indemnification. The Act requires indemnification for expenses to the extent that a director or officer is successful on the merits in defending against any such action, suit or proceeding, and otherwise requires in general that the indemnification provided for in (i) and (ii) above be made only on a determination by (a) a majority vote of a quorum of the Board of Directors who were not parties or threatened to be made parties to the action, suit or proceeding, (b) if a quorum cannot be obtained, by a majority vote of a committee duly designated by the Board and consisting solely of two or more directors not at the time parties or threatened to be made parties to the action, suit or proceeding, (c) by independent legal counsel, (d) by all independent directors who are not parties or threatened to be made parties to the action, suit or proceeding, or (e) by the shareholders (but shares held by directors or officers who are parties or are threatened to be made parties may not be voted). In certain circumstances, the Act further permits advances to cover such expenses before a final determination that indemnification is permissible, upon receipt of a written affirmation by the director or officer of their good-faith belief that they have met the applicable standard of conduct set forth in Sections 561 and 562 of the Act, receipt of a written undertaking by or on behalf of the director or officer to repay such amounts unless it shall ultimately be determined that they are entitled to indemnification and a determination that the facts then known to those making the advance would not preclude indemnification. Indemnification under the Act is not exclusive of other rights to indemnification to which a person may be entitled under Federal-Mogul's Articles of Incorporation, Bylaws, or a contractual agreement. The Act permits II-1 Federal-Mogul to purchase insurance on behalf of its directors and officers against liabilities arising out of their positions with Federal-Mogul whether or not such liabilities would be within the foregoing indemnification provisions. BYLAWS Under Federal-Mogul's Bylaws, Federal-Mogul is required to indemnify any person who was or is a party or is threatened to be made a party to or called as a witness in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (whether formal or informal) and any appeal thereof (other than an action by or in the right of Federal-Mogul, a "derivative action") by reason of the fact that such person is, was or agreed to become a director or officer of Federal-Mogul, against expenses (including attorneys' fees), judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person was successful in defending such action, suit or proceeding, or otherwise if such person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of Federal-Mogul or its shareholders, and, with respect to any criminal action or proceeding, if the person had no reasonable cause to believe his or her conduct was unlawful. A similar standard of care is applicable in the case of derivative actions, except the indemnification extends only to expenses (including actual and reasonable attorneys' fees) and amounts paid in settlement incurred by the person in connection with such action and, where the person is found to be liable to Federal-Mogul, only if and to the extent that the court in which such action was brought determines that such person is fairly and reasonably entitled to such indemnification for the expenses which the court considers proper. Federal-Mogul's Bylaws provide that Federal-Mogul shall pay for the expenses incurred by an indemnified director or officer in defending the proceedings specified above, in advance of their final disposition, provided that if required by the Act, the person furnishes Federal-Mogul with an undertaking to reimburse Federal-Mogul if it is ultimately determined that such person is not entitled to indemnification. Federal-Mogul shall provide indemnification to any person who is or was serving at the request of Federal-Mogul as a director, officer, partner, trustee, employee or agent of another corporation, partnership, joint venture, trust, or other enterprise, whether for profit or not, to the same degree as the foregoing indemnification of directors and officers. In addition, Federal-Mogul may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of Federal-Mogul (or is serving or was serving at the request of Federal-Mogul in a position and at an entity listed in the preceding sentence) against any liability asserted against and incurred by such person in such capacity, or arising out of the person's status as such whether or not Federal-Mogul would have the power to indemnify the person against such liability under the provisions of Federal-Mogul's Bylaws. ITEM 16. EXHIBITS **1.1 Form of Shelf Underwriting Agreement relating to Debt and Equity Securities **1.2 Form of U.S. Purchase Agreement **1.3 Form of International Purchase Agreement *3.1 Federal-Mogul's Second Restated Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3.1 to Federal- Mogul's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992) **3.2 Amendment to Federal-Mogul's Second Restated Articles of Incorporation, as amended *3.3 Federal-Mogul's Bylaws, as amended (filed as Exhibit 3.2 to Federal-Mogul's Form 10-K for the year ended December 31, 1997) *4.1 Form of Senior Indenture *4.2 Form of Subordinated Indenture 4.3 Form of Debt Security. The form or forms of such Debt Securities with respect to each particular offering will be filed as an exhibit subsequently included or incorporated by reference herein.
II-2 4.4 Form of Preferred Stock. Any amendment to the Company's Articles of Incorporation authorizing the creation of any series of Preferred Stock and setting forth the rights, preferences and designations thereof will be filed as an exhibit subsequently included or incorporated by reference herein. **5 Opinion of David M. Sherbin, Esq. **12.1 Computation of Ratio of Earnings to Fixed Charges **12.2 Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends *23.1 Consent of Ernst & Young LLP *23.2 Consent of KPMG Audit Plc **23.3 Consent of David M. Sherbin, Esq. (included in his opinion filed as Exhibit 5) *23.4 Consent of Paul S. Lewis *23.5 Consent of Sir Geoffrey Whalen *24 Power of Attorney (included on the signature page of the original filing) *25.1 Statement of Eligibility on Form T-1 under the Trust Indenture Act of 1939, as amended, of The Bank of New York, as Trustee under the Indentures
- -------- *Previously filed. **Filed herewith. ITEM 17. UNDERTAKINGS The Undersigned registrant hereby undertakes: A. to file, during any period in which offers or sales are being made of the securities registered hereby, a post-effective amendment to this registration statement: (i) to include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) to reflect in the prospectus any fact or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in "Calculation of Registration Fee" table in the effective registration statement; (iii) to include any material information with respect to the plan of distribution not previously disclosed in this registration statement or any material change to such information in the registration statement; provided, however, that the undertakings set forth in the paragraphs (i) and (ii) above do not apply if the information required to be included in a post-effective amendment by those paragraphs is contained in periodic reports filed by the registrant pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in this registration statement. B. that, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 C. to remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. D. that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. E. insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. F. that, for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. G. that, for purposes of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. H. to file an application for the purpose of determining the eligibility of the trustee to act under subsection (a) of Section 310 of the Trust Indenture Act in accordance with the rules and regulations prescribed by the Commission under Section 305(b)(2) of such Act. II-4 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SOUTHFIELD, MICHIGAN ON THE 3RD DAY OF JUNE, 1998. Federal-Mogul Corporation /s/ David M. Sherbin By: _________________________________ David M. Sherbin Associate General Counsel II-5 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SOUTHFIELD, STATE OF MICHIGAN, ON THE 3RD DAY OF JUNE, 1998. Federal-Mogul Corporation /s/ David M. Sherbin By: _________________________________ David M. Sherbin Associate General Counsel Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities indicated on the 3rd day of June, 1998.
SIGNATURE TITLE --------- ----- * Chairman of the Board, President, Chief ___________________________________________ Executive Officer and Director (Principal Richard A. Snell Executive Officer) * Executive Vice President and Chief ___________________________________________ Financial Officer (Principal Financial Thomas W. Ryan Officer) * Vice President and Controller (Principal ___________________________________________ Accounting Officer) Kenneth P. Slaby * Director ___________________________________________ John J. Fannon * Director ___________________________________________ Roderick M. Hills * Director ___________________________________________ Antonio Madero * Director ___________________________________________ Robert S. Miller, Jr. * Director ___________________________________________ John C. Pope * Director ___________________________________________ Dr. Hugo Michael Sekyra
/s/ David M. Sherbin *By: ________________________________ David M. Sherbin, Attorney-in-fact II-6 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- 1.1 Form of Shelf Underwriting Agreement relating to Debt and Eq- uity Securities 1.2 Form of U.S. Purchase Agreement 1.3 Form of International Purchase Agreement 3.1 Federal-Mogul's Second Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit 3.1 to Federal- Mogul's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992) 3.2 Amendment to Federal-Mogul's Second Restated Articles of In- corporation, as amended 3.3 Federal-Mogul's Bylaws, as amended (filed as Exhibit 3.2 to Federal-Mogul's Form 10-K for the year ended December 31, 1997) 4.1 Form of Senior Indenture 4.2 Form of Subordinated Indenture 4.3 Form of Debt Security. The form or forms of such Debt Securi- ties with respect to each particular offering will be filed as an exhibit subsequently included or incorporated by reference herein. 4.4 Form of Preferred Stock. Any amendment to the Company's Arti- cles of Incorporation authorizing the creation of any series of Preferred Stock and setting forth the rights, preferences and designations thereof will be filed as an exhibit subse- quently included or incorporated by reference herein. 5 Opinion of David M. Sherbin, Esq. 12.1 Computation of Ratio of Earnings to Fixed Charges 12.2 Computation of Ratio of Earnings to Combined Fixed Changes and Preferred Stock Dividends 23.1 Consent of Ernst & Young LLP 23.2 Consent of KPMG Audit Plc 23.3 Consent of David M. Sherbin, Esq. (included in his opinion filed as Exhibit 5) 23.4 Consent of Paul S. Lewis 23.5 Consent of Sir Geoffrey Whalen 24 Power of Attorney (included on the signature page of the orig- inal filing) 25.1 Statement of Eligibility on Form T-1 under the Trust Indenture Act of 1939, as amended, of The Bank of New York, as Trustee under the Indentures
EX-1.1 2 FORM OF SHELF UNDERWRITING AGREEMENT EXHIBIT 1.1 ________________________________________________________________________________ ________________________________________________________________________________ FEDERAL-MOGUL CORPORATION (a Michigan corporation) Common Stock, Preferred Stock and Debt Securities UNIVERSAL SHELF UNDERWRITING AGREEMENT Dated: June ., 1998 ________________________________________________________________________________ ________________________________________________________________________________ TABLE OF CONTENTS
UNDERWRITING AGREEMENT............................................................................................ 1 - ---------------------- SECTION 1. Representations and Warranties............................................................... 4 ------------------------------ (a) Representations and Warranties by the Company................................................... 4 (1) Compliance with Registration Requirements............................................... 4 (2) Incorporated Documents.................................................................. 5 (3) Independent Accountants................................................................. 5 (4) Financial Statements.................................................................... 5 (5) No Material Adverse Change in Business.................................................. 6 (6) Good Standing of the Company............................................................ 6 (7) Good Standing of Subsidiaries........................................................... 6 (8) Capitalization.......................................................................... 7 (9) Authorization of this Underwriting Agreement and Terms Agreement........................ 7 (10) Authorization of Common Stock........................................................... 7 (11) Authorization of Preferred Stock........................................................ 7 (12) Authorization of Senior Debt Securities and/or Subordinated Debt Securities............. 8 (13) Authorization of the Indentures......................................................... 8 (14) Authorization of Underlying Securities.................................................. 8 (15) Descriptions of the Underwritten Securities, Underlying Securities and Indentures ...... 9 (16) Absence of Defaults and Conflicts....................................................... 9 (17) Absence of Labor Dispute................................................................ 10 (18) Absence of Proceedings.................................................................. 10 (19) Accuracy of Exhibits.................................................................... 11 (20) Absence of Further Requirements......................................................... 11 (21) Possession of Intellectual Property..................................................... 11 (22) Possession of Licenses and Permits...................................................... 11 (23) Title to Property....................................................................... 11 (24) Commodity Exchange Act.................................................................. 12 (25) Investment Company Act.................................................................. 12 (26) Environmental Laws...................................................................... 12 (b) Officers' Certificates.......................................................................... 13 SECTION 2. Sale and Delivery to Underwriters; Closing................................................... 13 ------------------------------------------ (a) Underwritten Securities......................................................................... 13 (b) Option Underwritten Securities.................................................................. 13 (c) Payment......................................................................................... 14 (d) Denominations; Registration..................................................................... 14 SECTION 3. Covenants of the Company..................................................................... 15 ------------------------ (a) Compliance with Securities Regulations and Commission Requests.................................. 15
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PAGE ---- (b) Filing of Amendments............................................................................ 15 (c) Delivery of Registration Statements............................................................. 15 (d) Delivery of Prospectuses........................................................................ 16 (e) Continued Compliance with Securities Laws....................................................... 16 (f) Blue Sky Qualifications......................................................................... 16 (g) Earnings Statement.............................................................................. 17 (h) Reservation of Securities....................................................................... 17 (i) Use of Proceeds................................................................................. 17 (j) Listing......................................................................................... 17 (k) Restriction on Sale of Securities............................................................... 17 (l) Reporting Requirements.......................................................................... 17 SECTION 4. Payment of Expenses.......................................................................... 18 ------------------- (a) Expenses........................................................................................ 18 (b) Termination of Agreement........................................................................ 18 SECTION 5. Conditions of Underwriters' Obligations...................................................... 18 --------------------------------------- (a) Effectiveness of Registration Statement......................................................... 19 (b) Opinion of Counsel for Company.................................................................. 19 (c) Opinion of Counsel for Underwriters............................................................. 19 (d) Officers' Certificate........................................................................... 19 (e) Accountant's Comfort Letter..................................................................... 20 (f) Bring-down Comfort Letter....................................................................... 20 (g) Ratings......................................................................................... 20 (h) Approval of Listing............................................................................. 20 (i) No Objection.................................................................................... 21 (j) Lock-up Agreements.............................................................................. 21 (k) Over-Allotment Option........................................................................... 21 (l) Additional Documents............................................................................ 22 (m) Termination of Terms Agreement.................................................................. 22 SECTION 6. Indemnification.............................................................................. 22 --------------- (a) Indemnification of Underwriters................................................................. 22 (b) Indemnification of Company, Directors and Officers.............................................. 23 (c) Actions against Parties; Notification........................................................... 23 (d) Settlement without Consent if Failure to Reimburse.............................................. 24 SECTION 7. Contribution................................................................................. 24 ------------ SECTION 8. Representations, Warranties and Agreements to Survive Delivery............................... 26 -------------------------------------------------------------- SECTION 9. Termination.................................................................................. 26 ----------- (a) Underwriting Agreement.......................................................................... 26 (b) Terms Agreement................................................................................. 26
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Page ---- (c) Liabilities..................................................................................... 27 SECTION 10. Default by One or More of the Underwriters.................................................. 27 ------------------------------------------ SECTION 11. Notices..................................................................................... 28 ------- SECTION 12. Parties..................................................................................... 28 ------- SECTION 13. Governing Law and Time..................................................................... 28 ----------------------- SECTION 14. Effect of Headings.......................................................................... 28 ------------------
iii Draft of June 1, 1998 FEDERAL-MOGUL CORPORATION (a Michigan corporation) Common Stock, Preferred Stock and Debt Securities UNDERWRITING AGREEMENT ---------------------- June ., 199__ MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated North Tower World Financial Center New York, New York 10281-1209 Ladies and Gentlemen: Federal-Mogul Corporation, a Michigan corporation (the "Company"), proposes to issue and sell up to $2,500,000,000 aggregate initial public offering price of its (i) shares of common stock, no par value per share (the "Common Stock"), (ii) shares of preferred stock, without par value (the "Preferred Stock"), or (iii) senior or subordinated debt securities (the "Debt Securities"), or any combination thereof, from time to time, in or pursuant to one or more offerings on terms to be determined at the time of sale. The Preferred Stock will be issued in one or more series and each series of Preferred Stock may vary, as applicable, as to the title, specific number of shares, rank, stated value, liquidation preference, dividend rate or rates (or method of calculation), dividend payment dates, redemption provisions, sinking fund requirements, conversion provisions (and terms of the related Underlying Securities (as defined below)) and any other variable terms as set forth in the applicable certificate of designations (each, the "Certificate of Designations") relating to such series of Preferred Stock. The Debt Securities will be issued in one or more series as senior indebtedness (the "Senior Debt Securities") under an indenture, dated as of . (the "Senior Indenture"), between the Company and The Bank of New York, as trustee (the "Senior Trustee"), or as subordinated indebtedness (the "Subordinated Debt Securities") under an indenture, dated as of . (the "Subordinated Indenture", and collectively with the Senior Indenture, the "Indentures", and each, an "Indenture"), between the Company and The Bank of New York, as trustee (the "Subordinated Trustee", and collectively with the Senior Trustee, the "Trustees", and each, a "Trustee"). Each series of Debt Securities may vary, as applicable, as to title, aggregate principal amount, rank, interest rate or formula and timing of payments thereof, stated maturity date, redemption and/or repayment provisions, sinking fund requirements, conversion provisions (and terms of the related Underlying Securities) and any other variable terms established by or pursuant to the applicable Indenture. As used herein, "Securities" shall mean the Common Stock, Preferred Stock, Senior Debt Securities or Subordinated Debt Securities, or any combination thereof, initially issuable by the Company and "Underlying Securities" shall mean the Common Stock, Preferred Stock, Senior Debt Securities or Subordinated Debt Securities issuable upon conversion of the Preferred Stock, Senior Debt Securities or Subordinated Debt Securities, as applicable. Whenever the Company determines to make an offering of Securities through Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), or through an underwriting syndicate managed by Merrill Lynch, the Company will enter into an agreement (each, a "Terms Agreement") providing for the sale of such Securities to, and the purchase and offering thereof by, Merrill Lynch and such other underwriters, if any, selected by Merrill Lynch (the "Underwriters", which term shall include Merrill Lynch, whether acting as sole Underwriter or as a member of an underwriting syndicate, as well as any Underwriter substituted pursuant to Section 10 hereof). The Terms Agreement relating to the offering of Securities shall specify the number or aggregate principal amount, as the case may be, of Securities to be initially issued (the "Initial Underwritten Securities"), the name of each Underwriter participating in such offering (subject to substitution as provided in Section 10 hereof) and the name of any Underwriter other than Merrill Lynch acting as co-manager in connection with such offering, the number or aggregate principal amount, as the case may be, of Initial Underwritten Securities which each such Underwriter severally agrees to purchase, whether such offering is on a fixed or variable price basis and, if on a fixed price basis, the initial offering price, the price at which the Initial Underwritten Securities are to be purchased by the Underwriters, the form, time, date and place of delivery and payment of the Initial Underwritten Securities and any other material variable terms of the Initial Underwritten Securities, as well as the material variable terms of any related Underlying Securities. In addition, if applicable, such Terms Agreement shall specify whether the Company has agreed to grant to the Underwriters an option to purchase additional Securities to cover over-allotments, if any, and the number or aggregate principal amount, as the case may be, of Securities subject to such option (the "Option Underwritten Securities"). As used herein, the term "Underwritten Securities" shall include the Initial Underwritten Securities and all or any portion of any Option Underwritten Securities. The Terms Agreement, which shall be substantially in the form of Exhibit A hereto, may take the form of an exchange of any standard form of written telecommunication between the Company and Merrill Lynch, acting for itself and, if applicable, as representative of any other Underwriters. Each offering of Underwritten Securities through Merrill Lynch as sole Underwriter or through an underwriting syndicate 2 managed by Merrill Lynch will be governed by this Underwriting Agreement, as supplemented by the applicable Terms Agreement. The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-3 (No. 333-50413) and pre- effective amendments nos. 1 and 2 thereto for the registration of the Securities and the Underlying Securities under the Securities Act of 1933, as amended (the "1933 Act"), and the offering thereof from time to time in accordance with Rule 415 of the rules and regulations of the Commission under the 1933 Act (the "1933 Act Regulations"), and the Company has filed such post-effective amendments thereto as may be required prior to the execution of the applicable Terms Agreement. Such registration statement (as so amended, if applicable) has been declared effective by the Commission and each Indenture has been duly qualified under the Trust Indenture Act of 1939, as amended (the "1939 Act"). Such registration statement (as so amended, if applicable), including the information, if any, deemed to be a part thereof pursuant to Rule 430A(b) of the 1933 Act Regulations (the "Rule 430A Information") or Rule 434(d) of the 1933 Act Regulations (the "Rule 434 Information"), is referred to herein as the "Registration Statement"; and the final prospectus and the final prospectus supplement relating to the offering of the Underwritten Securities, in the form first furnished to the Underwriters by the Company for use in connection with the offering of the Underwritten Securities, are collectively referred to herein as the "Prospectus"; provided, however, that all references to the "Registration Statement" and the "Prospectus" shall also be deemed to include all documents incorporated therein by reference pursuant to the Securities Exchange Act of 1934, as amended (the "1934 Act"), prior to the execution of the applicable Terms Agreement; provided, further, that if the Company files a registration statement with the Commission pursuant to Rule 462(b) of the 1933 Act Regulations (the "Rule 462 Registration Statement"), then, after such filing, all references to "Registration Statement" shall also be deemed to include the Rule 462 Registration Statement; and provided, further, that if the Company elects to rely upon Rule 434 of the 1933 Act Regulations, then all references to "Prospectus" shall also be deemed to include the final or preliminary prospectus and the applicable term sheet or abbreviated term sheet (the "Term Sheet"), as the case may be, in the form first furnished to the Underwriters by the Company in reliance upon Rule 434 of the 1933 Act Regulations, and all references in this Underwriting Agreement to the date of the Prospectus shall mean the date of the Term Sheet. A "preliminary prospectus" shall be deemed to refer to any prospectus used before the registration statement became effective and any prospectus that omitted, as applicable, the Rule 430A Information, the Rule 434 Information or other information to be included upon pricing in a form of prospectus filed with the Commission pursuant to Rule 424(b) of the 1933 Act Regulations, that was used after such effectiveness and prior to the execution and delivery of the applicable Terms Agreement. For purposes of this Underwriting Agreement, all references to the Registration Statement, Prospectus, Term Sheet or preliminary prospectus or to any amendment or supplement to any of the foregoing shall be deemed to include any copy filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval system ("EDGAR"). 3 All references in this Underwriting Agreement to financial statements and schedules and other information which is "contained," "included" or "stated" (or other references of like import) in the Registration Statement, Prospectus or preliminary prospectus shall be deemed to mean and include all such financial statements and schedules and other information which is incorporated by reference in the Registration Statement, Prospectus or preliminary prospectus, as the case may be; and all references in this Underwriting Agreement to amendments or supplements to the Registration Statement, Prospectus or preliminary prospectus shall be deemed to mean and include the filing of any document under the 1934 Act which is incorporated by reference in the Registration Statement, Prospectus or preliminary prospectus, as the case may be. SECTION 1. Representations and Warranties. ------------------------------ (a) Representations and Warranties by the Company. The Company represents and warrants to Merrill Lynch, as of the date hereof, and to each Underwriter named in the applicable Terms Agreement, as of the date thereof, as of the Closing Time (as defined below) and, if applicable, as of each Date of Delivery (as defined below) (in each case, a "Representation Date"), as follows: (1) Compliance with Registration Requirements. The Company meets the ----------------------------------------- requirements for use of Form S-3 under the 1933 Act. Each of the Registration Statement and any Rule 462(b) Registration Statement has become effective under the 1933 Act and no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the 1933 Act and no proceedings for that purpose have been instituted or are pending or, to the knowledge of the Company, are contemplated by the Commission, and any request on the part of the Commission for additional information has been complied with. In addition, each Indenture has been duly qualified under the 1939 Act. At the respective times the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendments thereto (including the filing of the Company's most recent Annual Report on Form 10-K with the Commission (the "Annual Report on Form 10-K")) became effective and at each Representation Date, the Registration Statement, any Rule 462(b) Registration Statement and any amendments and supplements thereto complied and will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations and the 1939 Act and the rules and regulations of the Commission under the 1939 Act (the "1939 Act Regulations") and did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. At the date of the Prospectus, at the Closing Time and at each Date of Delivery, if any, the Prospectus and any amendments and supplements thereto did not and will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If the Company elects to rely upon Rule 434 of 4 the 1933 Act Regulations, the Company will comply with the requirements of Rule 434. Notwithstanding the foregoing, the representations and warranties in this subsection shall not apply to statements in or omissions from the Registration Statement or the Prospectus made in reliance upon and in conformity with information furnished to the Company in writing by any Underwriter through Merrill Lynch expressly for use in the Registration Statement or the Prospectus. Each preliminary prospectus and prospectus filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so filed in all material respects with the 1933 Act Regulations and each preliminary prospectus and the Prospectus delivered to the Underwriters for use in connection with the offering of Underwritten Securities will, at the time of such delivery, be identical to any electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (2) Incorporated Documents. The documents incorporated or deemed to ---------------------- be incorporated by reference in the Registration Statement and the Prospectus, when they became effective or at the time they were or hereafter are filed with the Commission, complied and will comply in all material respects with the requirements of the 1934 Act and the rules and regulations of the Commission thereunder (the "1934 Act Regulations") and, when read together with the other information in the Prospectus, at the date of the Prospectus, at the Closing Time and at each Date of Delivery, if any, did not and will not include an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (3) Independent Accountants. The accountants who certified the ----------------------- financial statements and any supporting schedules thereto included in the Registration Statement and the Prospectus are independent public accountants as required by the 1933 Act and the 1933 Act Regulations. (4) Financial Statements. The financial statements of the Company -------------------- and its consolidated subsidiaries included in the Registration Statement and the Prospectus, together with the related schedules and notes, as well as those financial statements, schedules and notes of any other entity included therein, present fairly the financial position of the Company and its consolidated subsidiaries, or such other entity, as the case may be, at the dates indicated and the statement of operations, stockholders' equity and cash flows of the Company and its consolidated subsidiaries, or such other entity, as the case may be, for the periods specified. Such financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods involved except as disclosed therein, except that financial statements of T & N plc ("T & N") have been prepared in accordance with U.K. GAAP applied on a consistent basis throughout the periods involved except as disclosed therein. The supporting schedules, if any, included in the Registration Statement and the Prospectus present fairly in accordance with GAAP the 5 information required to be stated therein. The selected financial data and the summary financial information included in the Prospectus present fairly the information shown therein and have been compiled on a basis consistent with that of the audited financial statements included in the Registration Statement and the Prospectus. In addition, any pro forma financial statements of the Company and its subsidiaries and the related notes thereto included in the Registration Statement and the Prospectus present fairly the information shown therein, have been prepared in accordance with the Commission's rules and guidelines with respect to pro forma financial statements and have been properly compiled on the bases described therein, and the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein. (5) No Material Adverse Change in Business. Since the respective -------------------------------------- dates as of which information is given in the Registration Statement and the Prospectus, except as otherwise stated therein, (A) there has been no material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business (a "Material Adverse Effect"), (B) there have been no transactions entered into by the Company or any of its subsidiaries, other than those arising in the ordinary course of business, which are material with respect to the Company and its subsidiaries considered as one enterprise and (C) except for regular dividends on the Company's common stock or preferred stock, in amounts per share that are consistent with past practice or the applicable charter document or supplement thereto, respectively, there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock. (6) Good Standing of the Company. The Company has been duly ---------------------------- organized and is validly existing as a corporation in good standing under the laws of the State of Michigan and has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and to enter into and perform its obligations under, or as contemplated under, this Underwriting Agreement and the applicable Terms Agreement. The Company is duly qualified as a foreign corporation to transact business and is in good standing in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify or be in good standing would not result in a Material Adverse Effect. (7) Good Standing of Subsidiaries. Each "significant subsidiary" of ----------------------------- the Company (as such term is defined in Rule 1-02 of Regulation S-X promulgated under the 1933 Act) and (each, a "Subsidiary" and, collectively, the "Subsidiaries"), if any, has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and is 6 duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure to so qualify or be in good standing would not result in a Material Adverse Effect. Except as otherwise stated in the Registration Statement and the Prospectus, all of the issued and outstanding capital stock of each Subsidiary has been duly authorized and is validly issued, fully paid and non-assessable and is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity. None of the outstanding shares of capital stock of any Subsidiary was issued in violation of preemptive or other similar rights of any securityholder of such Subsidiary. (8) Capitalization. If the Prospectus contains a "Capitalization" -------------- section, the authorized, issued and outstanding shares of capital stock of the Company is as set forth in the column entitled "Actual" under such section (except for subsequent issuances thereof, if any, contemplated under this Underwriting Agreement, pursuant to reservations, agreements or employee benefit plans referred to in the Prospectus or pursuant to the exercise of convertible securities or options referred to in the Prospectus). Such shares of capital stock have been duly authorized and validly issued by the Company and are fully paid and non-assessable, and none of such shares of capital stock was issued in violation of preemptive or other similar rights of any securityholder of the Company. (9) Authorization of this Underwriting Agreement and Terms Agreement. ---------------------------------------------------------------- This Underwriting Agreement has been, and the applicable Terms Agreement as of the date thereof will have been, duly authorized, executed and delivered by the Company. (10) Authorization of Common Stock. If the Underwritten Securities ----------------------------- being sold pursuant to the applicable Terms Agreement include Common Stock, such Underwritten Securities have been, or as of the date of such Terms Agreement will have been, duly authorized by the Company for issuance and sale pursuant to this Underwriting Agreement and such Terms Agreement. Such Underwritten Securities, when issued and delivered by the Company pursuant to this Underwriting Agreement and such Terms Agreement against payment of the consideration therefor specified in such Terms Agreement, will be validly issued, fully paid and non-assessable and will not be subject to preemptive or other similar rights of any securityholder of the Company. No holder of such Underwritten Securities is or will be subject to personal liability by reason of being such a holder. (11) Authorization of Preferred Stock. If the Underwritten Securities -------------------------------- being sold pursuant to the applicable Terms Agreement include Preferred Stock, such Underwritten Securities have been, or as of the date of such Terms Agreement will have been, duly authorized by the Company for issuance and sale pursuant to this Underwriting Agreement and such Terms Agreement. The applicable Preferred Stock, when issued and delivered by the Company pursuant to this Underwriting Agreement and such Terms Agreement against payment of the consideration therefor specified in such Terms 7 Agreement will be validly issued, fully paid and non-assessable and will not be subject to preemptive or other similar rights of any securityholder of the Company. No holder of such Preferred Stock is or will be subject to personal liability by reason of being such a holder. The applicable Certificate of Designations will be in full force and effect prior to the Closing Time. (12) Authorization of Senior Debt Securities and/or Subordinated Debt ---------------------------------------------------------------- Securities. If the Underwritten Securities being sold pursuant to the ---------- applicable Terms Agreement include Senior Debt Securities and/or Subordinated Debt Securities, such Underwritten Securities have been, or as of the date of such Terms Agreement will have been, duly authorized by the Company for issuance and sale pursuant to this Underwriting Agreement and such Terms Agreement. Such Underwritten Securities, when issued and authenticated in the manner provided for in the applicable Indenture and delivered against payment of the consideration therefor specified in such Terms Agreement, will constitute valid and legally binding obligations of the Company, enforceable against the Company in accordance with their terms, except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles, and except further as enforcement thereof may be limited by (A) requirements that a claim with respect to any Debt Securities denominated other than in U.S. dollars (or a foreign or composite currency judgment in respect of such claim) be converted into U.S. dollars at a rate of exchange prevailing on a date determined pursuant to applicable law or (B) governmental authority to limit, delay or prohibit the making of payments outside the United States. Such Underwritten Securities will be in the form contemplated by, and each registered holder thereof is entitled to the benefits of, the applicable Indenture. (13) Authorization of the Indentures. If the Underwritten Securities ------------------------------- being sold pursuant to the applicable Terms Agreement include Senior Debt Securities and/or Subordinated Debt Securities or if Preferred Stock is convertible into Debt Securities, each applicable Indenture has been, or prior to the issuance of the Debt Securities thereunder will have been, duly authorized, executed and delivered by the Company and, upon such authorization, execution and delivery, will constitute a valid and legally binding agreement of the Company, enforceable against the Company in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles. (14) Authorization of Underlying Securities. If the Underlying -------------------------------------- Securities related to the Underwritten Securities being sold pursuant to the applicable Terms Agreement include Common Stock or Preferred Stock, such Underlying Securities have been, or as of the date of such Terms Agreement will have been, duly authorized and reserved for issuance by the Company upon conversion of the related Preferred Stock, Senior Debt Securities or Subordinated Debt Securities, as applicable. If the Underlying 8 Securities include Common Stock or Preferred Stock, such Underlying Securities, when issued upon such conversion, will be validly issued, fully paid and non-assessable and will not be subject to preemptive or other similar rights of any securityholder of the Company. No holder of such Common Stock or Preferred Stock is or will be subject to personal liability by reason of being such a holder. If the Underlying Securities related to the Underwritten Securities being sold pursuant to the applicable Terms Agreement include Senior Debt Securities and/or Subordinated Debt Securities, such Underlying Securities have been, or as of the date of such Terms Agreement will have been, duly authorized for issuance by the Company upon conversion of the related Preferred Stock. Such Underlying Securities, when issued and authenticated in the manner provided for in the applicable Indenture and delivered in accordance with the terms of the related Preferred Stock, will constitute valid and legally binding obligations of the Company, enforceable against the Company in accordance with their terms, except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles, and except further as enforcement thereof may be limited by (A) requirements that a claim with respect to any Debt Securities denominated other than in U.S. dollars (or a foreign or composite currency judgment in respect of such claim) be converted into U.S. dollars at a rate of exchange prevailing on a date determined pursuant to applicable law or (B) governmental authority to limit, delay or prohibit the making of payments outside the United States. (15) Descriptions of the Underwritten Securities, Underlying ------------------------------------------------------- Securities and Indentures. The Underwritten Securities being sold pursuant ------------------------- to the applicable Terms Agreement and each applicable Indenture, as of the date of the Prospectus, and any Underlying Securities, when issued and delivered in accordance with the terms of the related Underwritten Securities, will conform in all material respects to the statements relating thereto contained in the Prospectus and will be in substantially the form filed or incorporated by reference, as the case may be, as an exhibit to the Registration Statement. (16) Absence of Defaults and Conflicts. Neither the Company nor any --------------------------------- of its subsidiaries is in violation of its charter or by-laws or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or any of its subsidiaries is subject (collectively, "Agreements and Instruments"), except for such defaults that would not result in a Material Adverse Effect. The execution, delivery and performance of this Underwriting Agreement, the applicable Terms Agreement and each applicable Indenture and any other agreement or instrument entered into or issued or to be entered into or issued by the Company in connection with the transactions contemplated hereby or thereby or in the Registration Statement and the Prospectus and the consummation of the transactions contemplated herein and in the 9 Registration Statement and the Prospectus (including the issuance and sale of the Underwritten Securities and the use of the proceeds from the sale of the Underwritten Securities as described under the caption "Use of Proceeds ") and compliance by the Company with its obligations hereunder and thereunder have been duly authorized by all necessary corporate action and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon any assets, properties or operations of the Company or any of its subsidiaries pursuant to, any Agreements and Instruments (except for such conflicts, breaches, defaults, events or liens, charges or encumbrances that would not result in a Material Adverse Effect) nor will such action result in any violation of the provisions of the charter or by-laws of the Company or any of its subsidiaries or any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any of its subsidiaries or any of their assets, properties or operations. As used herein, a "Repayment Event" means any event or condition which gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder's behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company or any of its subsidiaries. (17) Absence of Labor Dispute. No labor dispute with the employees ------------------------ of the Company or any of its subsidiaries exists or, to the knowledge of the Company, is imminent which may reasonably be expected to result in a Material Adverse Effect. (18) Absence of Proceedings. There is no action, suit, proceeding, ---------------------- inquiry or investigation before or brought by any court or governmental agency or body, domestic or foreign, now pending, or to the knowledge of the Company, threatened, against or affecting the Company or any of its subsidiaries which is required to be disclosed in the Registration Statement and the Prospectus (other than as stated therein), or which might reasonably be expected to result in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the consummation of the transactions contemplated by this Underwriting Agreement, the applicable Terms Agreement or any applicable Indenture, or the performance by the Company of its obligations hereunder and thereunder. The aggregate of all pending legal or governmental proceedings to which the Company or any of its subsidiaries is a parry or of which any of their respective assets, properties or operations is the subject which are not described in the Registration Statement and the Prospectus, including ordinary routine litigation incidental to the business, could not reasonably be expected to result in a Material Adverse Effect. 10 (19) Accuracy of Exhibits. There are no contracts or documents which -------------------- are required to be described in the Registration Statement, the Prospectus or the documents incorporated by reference therein or to be filed as exhibits thereto which have not been so described and filed as required. (20) Absence of Further Requirements. No filing with, or ------------------------------- authorization, approval, consent, license, order registration, qualification or decree of, any court or governmental authority or agency, domestic or foreign, is necessary or required for the performance by the Company of its obligations under this Underwriting Agreement or the applicable Terms Agreement or in connection with the actions contemplated under this Underwriting Agreement, such Terms Agreement or any applicable Indenture, except such as have been already obtained or as may be required under state securities laws. (21) Possession of Intellectual Property. The Company and its ----------------------------------- subsidiaries own or possess, or can acquire on reasonable terms, adequate patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, trade names or other intellectual property (collectively, "Intellectual Property") necessary to carry on the business now operated by them, except where the failure to own or possess or otherwise be able to acquire such Intellectual Property would not result in a Material Adverse Effect, and neither the Company nor any of its subsidiaries has received any notice or is otherwise aware of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property or of any facts or circumstances which would render any Intellectual Property invalid or inadequate to protect the interest of the Company or any of its subsidiaries therein, and which infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or inadequacy, singly or in the aggregate, would result in a Material Adverse Effect. (22) Possession of Licenses and Permits. The Company and its ---------------------------------- subsidiaries possess such permits, licenses, approvals, consents and other authorizations (collectively, "Governmental Licenses") issued by the appropriate federal, state, local or foreign regulatory agencies or bodies necessary to conduct the business now operated by them. The Company and its subsidiaries are in compliance with the terms and conditions of all such Governmental Licenses, except where the failure so to comply would not, singly or in the aggregate, result in a Material Adverse Effect. All of the Governmental Licenses are valid and in full force and effect, except where the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not result in a Material Adverse Effect. Neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification of any such Governmental Licenses which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Effect. 11 (23) Title to Property. The Company and its subsidiaries have good ----------------- and marketable title to all real property owned by the Company and its subsidiaries which is material to the business of the Company and its subsidiaries taken as a whole and good title to all other properties owned by them which is material to the business of the Company and its subsidiaries taken as a whole, in each case, free and clear of all mortgages, pledges, liens, security interests, claims, restrictions or encumbrances of any kind, except (A) as otherwise stated in the Registration Statement and the Prospectus or (B) those which do not, singly or in the aggregate, materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company or any of its subsidiaries. All of the leases and subleases material to the business of the Company and its subsidiaries considered as one enterprise, and under which the Company or any of its subsidiaries holds properties described in the Prospectus, are in full force and effect, and neither the Company nor any of its subsidiaries has received any notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company or any of its subsidiaries under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company or such subsidiary of the continued possession of the leased or subleased premises under any such lease or sublease. (24) Commodity Exchange Act. If the Underwritten Securities being ---------------------- sold pursuant to the applicable Terms Agreement include Debt Securities or if any related Underlying Securities include Debt Securities, as the case may be, such Debt Securities, upon issuance, will be excluded or exempted under, or beyond the purview of, the Commodity Exchange Act, as amended (the "Commodity Exchange Act"), and the rules and regulations of the Commodity Futures Trading Commission under the Commodity Exchange Act (the "Commodity Exchange Act Regulations"). (25) Investment Company Act. The Company is not, and upon the ---------------------- issuance and sale of the Underwritten Securities as herein contemplated and the application of the net proceeds therefrom as described in the Prospectus will not be, an "investment company" within the meaning of the Investment Company Act of 1940, as amended (the "1940 Act"). (26) Environmental Laws. Except as otherwise stated in the ------------------ Registration Statement and the Prospectus and except as would not, singly or in the aggregate, result in a Material Adverse Effect, (A) neither the Company nor any of its subsidiaries is in violation of any federal, state, local or foreign statute, law, rule, regulation, ordinance, code, policy or rule of common law or any judicial or administrative interpretation thereof including any judicial or administrative order, consent, decree or judgment, relating to pollution or protection of human health, the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including, without limitation, laws and regulations relating to the release or threatened release of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products (collectively, "Hazardous Materials") or to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or 12 handling of Hazardous Materials (collectively, "Environmental Laws"), (B) the Company and its subsidiaries have all permits, authorizations and approvals required under any applicable Environmental Laws and are each in compliance with their requirements, (C) there are no pending or, to the Company's knowledge, threatened administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigation or proceedings relating to any Environmental Law against the Company or any of its subsidiaries and (D) there are no events or circumstances that might reasonably be expected to form the basis of an order for clean-up or remediation, or an action, suit or proceeding by any private party or governmental body or agency, against or affecting the Company or any of its subsidiaries relating to Hazardous Materials or any Environmental Laws. (b) Officers' Certificates. Any certificate signed by any officer of the Company or any of its subsidiaries and delivered to any Underwriter or to counsel for the Underwriters in connection with the offering of the Underwritten Securities shall be deemed a representation and warranty by the Company to each Underwriter as to the matters covered thereby on the date of such certificate and, unless subsequently amended or supplemented, at each Representation Date subsequent thereto. SECTION 2. Sale and Delivery to Underwriters; Closing. ------------------------------------------ (a) Underwritten Securities. The several commitments of the Underwriters to purchase the Underwritten Securities pursuant to the applicable Terms Agreement shall be deemed to have been made on the basis of the representations and warranties herein contained and shall be subject to the terms and conditions herein set forth. (b) Option Underwritten Securities. In addition, subject to the terms and conditions herein set forth, the Company may grant, if so provided in the applicable Terms Agreement, an option to the Underwriters, severally and not jointly, to purchase up to the number or aggregate principal amount, as the case may be, of the Option Underwritten Securities set forth therein at a price per Option Underwritten Security equal to the price per Initial Underwritten Security, less an amount equal to any dividends or distributions declared by the Company and paid or payable on the Initial Underwritten Securities but not payable on the Option Underwritten Securities. Such option, if granted, will expire 30 days after the date of such Terms Agreement, and may be exercised in whole or in part from time to time only for the purpose of covering over- allotments which may be made in connection with the offering and distribution of the Initial Underwritten Securities upon notice by Merrill Lynch to the Company setting forth the number or aggregate principal amount, as the case may be, of Option Underwritten Securities as to which the several Underwriters are then exercising the option and the time, date and place of payment and delivery for such Option Underwritten Securities. Any such time and date of payment and delivery (each, a "Date of Delivery") shall be determined by Merrill Lynch, but shall not be later than seven full business days after the exercise of said option, nor in any event prior to the Closing Time, unless otherwise agreed upon by Merrill Lynch and the Company. If the option is exercised as to all or 13 any portion of the Option Underwritten Securities, each of the Underwriters, severally and not jointly, will purchase that proportion of the total number or aggregate principal amount, as the case may be, of Option Underwritten Securities then being purchased which the number or aggregate principal amount, as the case may be, of Initial Underwritten Securities each such Underwriter has severally agreed to purchase as set forth in such Terms Agreement bears to the total number or aggregate principal amount, as the case may be, of Initial Underwritten Securities, subject to such adjustments as Merrill Lynch in its discretion shall make to eliminate any sales or purchases of a fractional number or aggregate principal amount, as the case may be, of Option Underwritten Securities. (c) Payment. Payment of the purchase price for, and delivery of, the Initial Underwritten Securities shall be made at the offices of counsel for the Underwriters, or at such other place as shall be agreed upon by Merrill Lynch and the Company, at 10:00 A.M. (Eastern time) on the third (fourth, if the pricing occurs after 4:30 P.M. (Eastern time) on any given day) business day after the date of the applicable Terms Agreement (unless postponed in accordance with the provisions of Section 10 hereof), or such other time not later than ten business days after such date as shall be agreed upon by Merrill Lynch and the Company (such time and date of payment and delivery being herein called "Closing Time"). In addition, in the event that the Underwriters have exercised their option, if any, to purchase any or all of the Option Underwritten Securities, payment of the purchase price for, and delivery of such Option Underwritten Securities, shall, be made at the above-mentioned offices of counsel for the Underwriters, or at such other place as shall be agreed upon by Merrill Lynch and the Company, on the relevant Date of Delivery as specified in the notice from Merrill Lynch to the Company. Payment shall be made to the Company by wire transfer of immediately available funds to a bank account designated by the Company, against delivery to Merrill Lynch for the respective accounts of the Underwriters of the Underwritten Securities to be purchased by them. It is understood that each Underwriter has authorized Merrill Lynch, for its account, to accept delivery of, receipt for, and make payment of the purchase price for, the Underwritten Securities which it has severally agreed to purchase. Merrill Lynch, individually and not as representative of the Underwriters, may (but shall not be obligated to) make payment of the purchase price for the Underwritten Securities to be purchased by any Underwriter whose funds have not been received by the Closing Time or the relevant Date of Delivery, as the case may be, but such payment shall not relieve such Underwriter from its obligations hereunder. (d) Denominations; Registration. The Underwritten Securities or certificates for the Underwritten Securities, as applicable, shall be in such denominations and registered in such names as Merrill Lynch may request in writing at least one full business day prior to the Closing Time or the relevant Date of Delivery, as the case may be. The Underwritten Securities or certificates for the Underwritten Securities, as applicable, will be made available for examination and packaging by Merrill Lynch in The City of New York not later than 10:00 A.M. (Eastern time) on the business day prior to the Closing Time or the relevant Date of Delivery, as the case may be. 14 SECTION 3. Covenants of the Company. The Company covenants with Merrill ------------------------ Lynch and with each Underwriter participating in the offering of Underwritten Securities, as follows: (a) Compliance with Securities Regulations and Commission Requests. The Company, subject to Section 3(b), will comply with the requirements of Rule 430A of the 1933 Act Regulations and/or Rule 434 of the 1933 Act Regulations, if and as applicable, and, during the period in which the Prospectus is required to be delivered in connection with the sales of Underwritten Securities purchased pursuant to this Agreement, will notify the Representative(s) immediately, and confirm the notice in writing, of (i) the effectiveness of any post-effective amendment to the Registration Statement or the filing of any supplement or amendment to the Prospectus, (ii) the receipt of any comments from the Commission, (iii) any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information, and (iv) the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any preliminary prospectus, or of the suspension of the qualification of the Underwritten Securities for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes. The Company will promptly effect the filings necessary pursuant to Rule 424 and will take such steps as it deems necessary to ascertain promptly whether the Prospectus transmitted for filing under Rule 424 was received for filing by the Commission and, in the event that it was not, it will promptly file the Prospectus. The Company will make every reasonable effort to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible moment. (b) Filing of Amendments. The Company will, during the period in which the Prospectus is required by the 1933 Act to be delivered in connection with sales of Underwritten Securities purchased pursuant to this Agreement, give Merrill Lynch notice of its intention to file or prepare any amendment to the Registration Statement (including any filing under Rule 462(b) of the 1933 Act Regulations), any Term Sheet or any amendment, supplement or revision to either the prospectus included in the Registration Statement at the time it became effective or to the Prospectus, whether pursuant to the 1933 Act, the 1934 Act or otherwise, will furnish Merrill Lynch with copies of any such documents a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file or use any such document to which Merrill Lynch or counsel for the Underwriters shall reasonably object. (c) Delivery of Registration Statements. The Company has furnished or will deliver to Merrill Lynch and counsel for the Underwriters, without charge, signed copies of the Registration Statement as originally filed and of each amendment thereto (including exhibits filed therewith or incorporated by reference therein and documents incorporated or deemed to be incorporated by reference therein) and signed copies of all consents and certificates of experts, and will also deliver to Merrill Lynch, without charge, a conformed 15 copy of the Registration Statement as originally filed and of each amendment thereto (without exhibits) for each of the Underwriters. Copies of the Registration Statement and each amendment thereto furnished to the Underwriters will be identical to any electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (d) Delivery of Prospectuses. The Company will deliver to each Underwriter, without charge, as many copies of each preliminary prospectus as such Underwriter may reasonably request, and the Company hereby consents to the use of such copies for purposes permitted by the 1933 Act. The Company will furnish to each Underwriter, without charge, during the period when the Prospectus is required to be delivered under the 1933 Act or the 1934 Act, such number of copies of the Prospectus as such Underwriter may reasonably request. The Prospectus and any amendments or supplements thereto furnished to the Underwriters will be identical to any electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (e) Continued Compliance with Securities Laws. The Company will comply with the 1933 Act and the 1933 Act Regulations and the 1934 Act and the 1934 Act Regulations so as to permit the completion of the distribution of the Underwritten Securities as contemplated in this Underwriting Agreement and the applicable Terms Agreement and in the Registration Statement and the Prospectus. If at any time when the Prospectus is required by the 1933 Act or the 1934 Act to be delivered in connection with sales of the Securities, any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of counsel for the Underwriters or for the Company, to amend the Registration Statement in order that the Registration Statement will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading or to amend or supplement the Prospectus in order that the Prospectus will not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, or if it shall be necessary, in the opinion of such counsel, at any such time to amend the Registration Statement or amend or supplement the Prospectus in order to comply with the requirements of the 1933 Act or the 1933 Act Regulations, the Company will promptly prepare and file with the Commission, subject to Section 3(b), such amendment or supplement as may be necessary to correct such statement or omission or to make the Registration Statement or the Prospectus comply with such requirements, and the Company will furnish to the Underwriters, without charge, such number of copies of such amendment or supplement as the Underwriters may reasonably request. (f) Blue Sky Qualifications. The Company will use its best efforts, in cooperation with the Underwriters, to qualify the Underwritten Securities and any related Underlying Securities for offering and sale under the applicable securities laws of such states and other 16 jurisdictions (domestic or foreign) as Merrill Lynch may designate and to maintain such qualifications in effect for a period of not less than one year from the date of the applicable Terms Agreement; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject. In each jurisdiction in which the Underwritten Securities or any related Underlying Securities have been so qualified, the Company will file such statements and reports as may be required by the laws of such jurisdiction to continue such qualification in effect for a period of not less than one year from the date of such Terms Agreement. (g) Earnings Statement. The Company will timely file such reports pursuant to the 1934 Act as are necessary in order to make generally available to its security holders as soon as practicable an earnings statement for the purposes of, and to provide the benefits contemplated by, the last paragraph of Section 11 (a) of the 1933 Act. (h) Reservation of Securities. If the applicable Terms Agreement specifies that any related Underlying Securities include Common Stock and/or Preferred Stock, the Company will reserve and keep available at all times, free of preemptive or other similar rights, a sufficient number of shares of Common Stock and/or Preferred Stock, as applicable, for the purpose of enabling the Company to satisfy any obligations to issue such Underlying Securities upon conversion of the Preferred Stock or Senior Debt Securities or Subordinated Debt Securities, as applicable. (i) Use of Proceeds. The Company will use the net proceeds received by it from the sale of the Underwritten Securities in the manner specified in the Prospectus under "Use of Proceeds". (j) Listing. The Company will use its best efforts to effect the listing of the Underwritten Securities and any related Underlying Securities, prior to the Closing Time, on any national securities exchange or quotation system if and as specified in the applicable Terms Agreement. (k) Restriction on Sale of Securities. Between the date of the applicable Terms Agreement and the Closing Time or such other date specified in such Terms Agreement, the Company will not, without the prior written consent of Merrill Lynch, directly or indirectly, issue, sell, offer to sell, grant any option for the sale of, or otherwise dispose of, the securities specified in such Terms Agreement. (l) Reporting Requirements. The Company, during the period when the prospectus is required to be delivered under the 1933 Act or the 1934 Act, will file all documents required to be filed with the Commission pursuant to the 1934 Act within the time periods required by the 1934 Act and the 1934 Act Regulations. 17 SECTION 4. Payment of Expenses. (a) Expenses. The Company will pay all ------------------- expenses incident to the performance of its obligations under this Underwriting Agreement or the applicable Terms Agreement, including (i) the preparation, printing and filing of the Registration Statement (including financial statements and exhibits) as originally filed and of each amendment thereto, (ii) the preparation, printing and delivery to the Underwriters of this Underwriting Agreement, any Terms Agreement, any Agreement among Underwriters, the Indentures, and such other documents as may be required in connection with the offering, purchase, sale, issuance or delivery of the Underwritten Securities or any related Underlying Securities, (iii) the preparation, issuance and delivery of the Underwritten Securities and any related Underlying Securities, any certificates for the Underwritten Securities or such Underlying Securities, as applicable, to the Underwriters, including any transfer taxes and any stamp or other duties payable upon the sale, issuance or delivery of the Underwritten Securities to the Underwriters, (iv) the fees and disbursements of the Company's counsel, accountants and other advisors or agents (including transfer agents and registrars), as well as the fees and disbursements of the Trustees and their respective counsel, (v) the qualification of the Underwritten Securities and any related Underlying Securities under state securities laws in accordance with the provisions of Section 3(f) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection therewith and in connection with the preparation, printing and delivery of the Blue Sky Survey and any Legal Investment Survey, and any amendment thereto, (vi) the printing and delivery to the Underwriters of copies of each preliminary prospectus, any Term Sheet, and the Prospectus and any amendments or supplements thereto, (vii) the fees charged by nationally recognized statistical rating organizations for the rating of the Underwritten Securities and any related Underlying Securities, if applicable, (viii) the fees and expenses incurred with respect to the listing of the Underwritten Securities and any related Underlying Securities, if applicable, (ix) the filing fees incident to, and the reasonable fees and disbursements of counsel to the Underwriters in connection with, the review, if any, by the National Association of Securities Dealers, Inc. (the "NASD") of the terms of the sale of the Underwritten Securities and any related Underlying Securities, and (x) the fees and expenses of any Underwriter acting in the capacity of a "qualified independent underwriter" (as defined in Section 2(l) of Schedule E of the bylaws of the NASD), if applicable. (b) Termination of Agreement. If the applicable Terms Agreement is terminated by Merrill Lynch in accordance with the provisions of Section 5 or Section 9(b)(i) hereof, the Company shall reimburse the Underwriters for all of their out-of-pocket expenses, including the reasonable fees and disbursements of counsel for the Underwriters. SECTION 5. Conditions of Underwriters' Obligations. The obligations of --------------------------------------- the Underwriters to purchase and pay for the Underwritten Securities pursuant to the applicable Terms Agreement are subject to the accuracy of the representations and warranties of the Company contained in Section 1 hereof or in certificates of any officer of the Company or any of its subsidiaries delivered pursuant to the provisions hereof, to the performance by the Company of its covenants and other obligations hereunder, and to the following further conditions: 18 (a) Effectiveness of Registration Statement. The Registration Statement, including any Rule 462(b) Registration Statement, has become effective under the 1933 Act and no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act and no proceedings for that purpose shall have been initiated or be pending or threatened by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of counsel to the Underwriters. A prospectus containing information relating to the description of the Underwritten Securities and any related Underlying Securities, the specific method of distribution and similar matters shall have been filed with the Commission in accordance with Rule 424(b)(1), (2), (3), (4) or (5), as applicable (or any required post-effective amendment providing such information shall have been filed and declared effective in accordance with the requirements of Rule 430A), or, if the Company has elected to rely upon Rule 434 of the 1933 Act Regulations, a Term Sheet including the Rule 434 Information shall have been filed with the Commission in accordance with Rule 424(b)(7). (b) Opinion of Counsel for Company. At Closing Time, Merrill Lynch shall have received the favorable opinion, dated as of Closing Time, of counsel for the Company, in form and substance satisfactory to counsel for the Underwriters, together with signed or reproduced copies of such letter for each of the other Underwriters, to the effect set forth in Exhibit B hereto and to such further effect as counsel to the Underwriters may reasonably request. (c) Opinion of Counsel for Underwriters. At Closing Time, Merrill Lynch shall have received the favorable opinion, dated as of Closing Time, of counsel for the Underwriters, together with signed or reproduced copies of such letter for each of the other Underwriters, with respect to the matters set forth in (1), (6), (7) to (14), as applicable, (15), (16) (solely as to the information in the Prospectus under "Description of the Underwritten Securities" and "Description of the Underlying Securities", if any, or any caption purporting to describe any such Securities), (22), (23) and the penultimate paragraph of Exhibit B hereto. In giving such opinion, such counsel may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of New York, the federal law of the United States and the General Corporation Law of the State of Delaware, upon the opinions of counsel satisfactory to Merrill Lynch. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the Company and its subsidiaries and certificates of public officials. (d) Officers' Certificate. At Closing Time, there shall not have been, since the date of the applicable Terms Agreement or since the respective dates as of which information is given in the Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the 19 ordinary course of business, and Merrill Lynch shall have received a certificate of the President or a Vice President of the Company and of the chief financial officer or chief accounting officer of the Company, dated as of Closing Time, to the effect that (i) there has been no such material adverse change, (h) the representations and warranties in Section 1 are true and correct with the same force and effect as though expressly made at and as of the Closing Time, (iii) the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to the Closing Time, and (iv) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been initiated or threatened by the Commission. (e) Accountant's Comfort Letter. At the time of the execution of the applicable Terms Agreement, Merrill Lynch shall have received from each firm of independent certified public accountants that have certified financial statements contained in or incorporated by reference into the Registration Statement a letter dated such date, in form and substance satisfactory to Merrill Lynch, together with signed or reproduced copies of such letter for each of the other Underwriters, containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectus. (f) Bring-down Comfort Letter. At Closing Time, Merrill Lynch shall have received from each firm of independent certified public accountants that have certified financial statements contained in or incorporated by reference into the Registration Statement a letter, dated as of Closing Time, to the effect that they reaffirm the statements made in the letter finished pursuant to subsection (e) of this Section 5, except that the specified date referred to shall be a date not more than three business days prior to the Closing Time. (g) Ratings. At Closing Time and at any relevant Date of Delivery, the Underwritten Securities shall have the ratings accorded by any "nationally recognized statistical rating organization", as defined by the Commission for purposes of Rule 436(g)(2) of the 1933 Act Regulations, if and as specified in the applicable Terms Agreement, and the Company shall have delivered to Merrill Lynch a letter, dated as of such date, from each such rating organization, or other evidence satisfactory to Merrill Lynch, confirming that the Underwritten Securities have such ratings. Since the time of execution of such Terms Agreement, there shall not have occurred a downgrading in the rating assigned to the Underwritten Securities or any of the Company's other securities by any such rating organization, and no such rating organization shall have publicly announced that it has under surveillance or review its rating of the Underwritten Securities or any of the Company's other securities. 20 (h) Approval of Listing. At Closing Time, the Underwritten Securities shall have been approved for listing, subject only to official notice of issuance, if and as specified in the applicable Terms Agreement. (i) No Objection. If the Registration Statement or an offering of Underwritten Securities has been filed with the NASD for review, the NASD shall not have raised any objection with respect to the fairness and reasonableness of the underwriting terms and arrangements. (j) Lock-up Agreements. On the date of the applicable Terms Agreement, Merrill Lynch shall have received, in form and substance satisfactory to it, each lock-up agreement, if any, specified in such Terms Agreement as being required to be delivered by the persons listed therein. (k) Over-Allotment Option. In the event that the Underwriters are granted an overallotment option by the Company in the applicable Terms Agreement and the Underwriters exercise their option to purchase all or any portion of the Option Underwritten Securities, the representations and warranties of the Company contained herein and the statements in any certificates furnished by the Company or any of its subsidiaries hereunder shall be true and correct as of each Date of Delivery, and, at the relevant Date of Delivery, Merrill Lynch shall have received: (1) A certificate, dated such Date of Delivery, of the President or a Vice President of the Company and the chief financial officer or chief accounting officer of the Company, confirming that the certificate delivered at the Closing Time pursuant to Section 5(d) hereof remains true and correct as of such Date of Delivery. (2) The favorable opinion of counsel for the Company, in form and substance satisfactory to, counsel for the Underwriters, dated such Date of Delivery, relating to the Option Underwritten Securities and otherwise to the same effect as the opinion required by Section 5(b) hereof. (3) The favorable opinion of counsel for the Underwriters, dated such Date of Delivery, relating to the Option Underwritten Securities and otherwise to the same effect as the opinion required by Section 5(c) hereof. (4) A letter from each firm of independent certified public accountants that have certified financial statements contained in or incorporated by reference into the Registration Statement, in form and substance satisfactory to Merrill Lynch and dated such Date of Delivery, substantially in the same form and substance as the letter furnished to 21 Merrill Lynch pursuant to Section 5(f) hereof, except that the "specified date" on the letter furnished pursuant to this paragraph shall be a date not more than three business days prior to such Date of Delivery. (l) Additional Documents. At Closing Time and at each Date of Delivery, counsel for the Under writers shall have been furnished with such documents and opinions as they may require for the purpose of enabling them to pass upon the issuance and sale of the Underwritten Securities as herein contemplated, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company in connection with the issuance and sale of the Underwritten Securities as herein contemplated shall be satisfactory in form and substance to Merrill Lynch and counsel for the Underwriters. (m) Termination of Terms Agreement. If any condition specified in this Section 5 shall not have been fulfilled when and as required to be fulfilled, the applicable Terms Agreement (or, with respect to the Underwriters' exercise of any applicable over-allotment option for the purchase of Option Underwritten Securities on a Date of Delivery after the Closing Time, the obligations of the Underwriters to purchase the Option Underwritten Securities on such Date of Delivery) may be terminated by Merrill Lynch by notice to the Company at any time at or prior to the Closing Time (or such Date of Delivery, as applicable), and such termination shall be without liability of any party to any other party except as provided in Section 4 and except that Sections 1, 6, 7 and 8 shall survive any such termination and remain in full force and effect. SECTION 6. Indemnification. --------------- (a) Indemnification of Underwriters. The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows: (1) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information deemed to be a part thereof, if applicable, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact included in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; 22 (2) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided that (subject to Section 6(d) below) any such settlement is effected with the written consent of the Company; and (3) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by Merrill Lynch), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above; provided, however, that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by any Underwriter through Merrill Lynch expressly for use in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information deemed to be a part thereof, if applicable, or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto); and provided further that the Company will not be liable to an Underwriter with respect to any preliminary prospectus to the extent that the Company shall sustain the burden of proving that any such loss, liability, claim, damage or expense resulted from the fact that such Underwriter failed to send or give, at or prior to the Closing Date, a copy of the Prospectus, as then amended or supplemented if: (i) the Company has previously furnished copies thereof (sufficiently in advance of the Closing Date to allow for distribution by the Closing Date) to the Underwriters and the loss, liability, claim, damage or expense of such Underwriter resulted from an untrue statement or omission of a material fact contained in or omitted from the preliminary prospectus which was corrected in the Prospectus as, if applicable, amended or supplemented prior to the Closing Date and such Prospectus was required by law to be delivered at or prior to the written confirmation of sale to such person and (ii) such failure to give or send such Prospectus by the Closing Date to the party or parties asserting such loss, liability, claim, damage or expense would have constituted the sole defense to the claim asserted by such person. Insofar as this indemnity agreement may permit indemnification for liabilities under the 1933 Act of any person who is a partner of an Underwriter or who controls an Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act and who is a director or officer of the Company or controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, such indemnity agreement is subject to the undertaking of the Company in the Registration Statement under Item 13 of Form S-3. 23 (b) Indemnification of Company, Directors and Officers. Each Underwriter severally agrees to indemnify and hold harmless the Company, its directors, each of its officers who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information deemed to be a part thereof, if applicable, or any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by such Underwriter through Merrill Lynch expressly for use in the Registration Statement (or any amendment thereto) or such preliminary prospectus or the Prospectus (or any amendment or supplement thereto). (c) Actions against Parties; Notification. Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise Om on account of this indemnity agreement. In the case of parties indemnified pursuant to Section 6(a) above, counsel to the indemnified parties shall be selected by Merrill Lynch, and, in the case of parties indemnified pursuant to Section 6(b) above, counsel to the indemnified parties shall be selected by the Company. An indemnifying party may participate at its own expense in the defense of any such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 6 or Section 7 hereof (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (d) Settlement without Consent if Failure to Reimburse. If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 6(a)(ii) effected without its written consent if (i) such settlement 24 is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. SECTION 7. Contribution. If the indemnification provided for in Section ------------ 6 hereof is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company, on the one hand, and the Underwriters, on the other hand, from the offering of the Underwritten Securities pursuant to the applicable Terms Agreement or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, on the one hand, and of the Underwriters, on the other hand, in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company, on the one hand, and the Underwriters, on the other hand, in connection with the offering of the Underwritten Securities pursuant to the applicable Terms Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of such Underwritten Securities (before deducting expenses) received by the Company and the total underwriting discount received by the Underwriters, in each case as set forth on the cover of the Prospectus, or, if Rule 434 is used, the corresponding location on the Term Sheet bear to the aggregate initial public offering price of such Underwritten Securities as set forth on such cover. The relative fault of the Company, on the one hand, and the Underwriters, on the other hand, shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or by the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 7. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 7 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency 25 or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission. Notwithstanding the provisions of this Section 7, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Underwritten Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such Underwriter has otherwise been required to pay by reason of any such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7, each person, if any, who controls an Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Company. The Underwriters' respective obligations to contribute pursuant to this Section 7 are several in proportion to the number or aggregate principal amount, as the case may be, of Initial Underwritten Securities set forth opposite their respective names in the applicable Terms Agreement, and not joint. SECTION 8. Representations, Warranties and Agreements to Survive Delivery. -------------------------------------------------------------- All representations, warranties and agreements contained in this Underwriting Agreement or the applicable Terms Agreement or in certificates of officers of the Company submitted, pursuant hereto or thereto shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or controlling person, or by or on behalf of the Company, and shall survive delivery of and payment for the Underwritten Securities. SECTION 9. Termination. ----------- (a) Underwriting Agreement. This Underwriting Agreement (excluding the applicable Terms Agreement) may be terminated for any reason at any time by the Company or by Merrill Lynch upon the giving of 30 days' prior written notice of such termination to the other party hereto. (b) Terms Agreement. Merrill Lynch may terminate the applicable Terms Agreement, by notice to the Company, at any time at or prior to the Closing Time or any relevant Date of Delivery, if (i) there has been, since the time of execution of such Terms Agreement or since the respective dates as of which information is given in the Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the 26 ordinary course of business, or (ii) there has occurred any material adverse change in the financial markets in the United States or, if the Underwritten Securities or any related Underlying Securities include Debt Securities denominated or payable in, or indexed to, one or more foreign or composite currencies, in the international financial markets, or any outbreak of hostilities or escalation thereof or other calamity or crisis or any change or development involving a prospective change in national or international political, financial or economic conditions, in each case the effect of which is such as to make it, in the judgment of Merrill Lynch, impracticable to market the Underwritten Securities or to enforce contracts for the sale of the Underwritten Securities, or (iii) trading in any securities of the Company has been suspended or limited by the Commission or the New York Stock Exchange, or if trading generally on the New York Stock Exchange has been suspended or limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by either of said exchanges or by such system or by order of the Commission, the NASD or any other governmental authority, or (iv) a banking moratorium has been declared by either Federal or New York authorities or, if the Underwritten Securities or any related Underlying Securities include Debt Securities denominated or payable in, or indexed to, one or more foreign or composite currencies, by the relevant authorities in the related foreign country or countries. (c) Liabilities. If this Underwriting Agreement or the applicable Terms Agreement is terminated pursuant to this Section 9, such termination shall be without liability of any party to any other party except as provided in Section 4 hereof, and provided further that Sections 1, 6, 7 and 8 shall survive such termination and remain in full force and effect. SECTION 10. Default by One or More of the Underwriters. If one or more of ------------------------------------------ the Underwriters shall fail at the Closing Time or the relevant Date of Delivery, as the case may be, to purchase the Underwritten Securities which it or they are obligated to purchase under the applicable Terms Agreement (the "Defaulted Securities"), then Merrill Lynch shall have the right, within 24 hours thereafter, to make arrangements for one or more of the non-defaulting Underwriters, or any other underwriters, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms herein set forth; if, however, Merrill Lynch shall not have completed such arrangements within such 24-hour period, then: (a) if the number or aggregate principal amount, as the case may be, of Defaulted Securities does not exceed 10% of the number or aggregate principal amount, as the case may be, of Underwritten Securities to be purchased on such date pursuant to such Terms Agreement, the non-defaulting Underwriters shall be obligated, severally and not jointly, to purchase the full amount thereof in the proportions that their respective underwriting obligations under such Terms Agreement bear to the underwriting obligations of all non-defaulting Underwriters, or 27 (b) if the number or aggregate principal amount, as the case may be, of Defaulted Securities exceeds 10% of the number or aggregate principal amount, as the case may be, of Underwritten Securities to be purchased on such date pursuant to such Terms Agreement, such Terms Agreement (or, with respect to the Underwriters' exercise of any applicable over-allotment option for the purchase of Option Underwritten Securities on a Date of Delivery after the Closing Time, the obligations of the Underwriters to purchase, and the Company to sell, such Option Underwritten Securities on such Date of Delivery) shall terminate without liability on the part of any non-defaulting Underwriter. No action taken pursuant to this Section 10 shall relieve any defaulting Underwriter from liability in respect of its default. In the event of any such default which does not result in (i) a termination of the applicable Terms Agreement or (ii) in the case of a Date of Delivery after the Closing Time, a termination of the obligations of the Underwriters and the Company with respect to the related Option Underwritten Securities, as the case may be, either Merrill Lynch or the Company shall have the right to postpone the Closing Time or the relevant Date of Delivery, as the case may be, for a period not exceeding seven days in order to effect any required changes in the Registration Statement or the Prospectus or in any other documents or arrangements. SECTION 11. Notices. All notices and other communications hereunder ------- shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the Underwriters shall be directed to Merrill Lynch at World Financial Center, North Tower, New York, New York 10281-1201, attention of .; and notices to the Company shall be directed to it at 26555 Northwestern Highway, Southfield, Michigan 48034, attention of General Counsel. SECTION 12. Parties. This Underwriting Agreement and the applicable ------- Terms Agreement shall each inure to the benefit of and be binding upon the Company, Merrill Lynch and, upon execution of such Terms Agreement, any other Underwriters and their respective successors. Nothing expressed or mentioned in this Underwriting Agreement or such Terms Agreement is intended or shall be construed to give any person, firm or corporation, other than the Underwriters and the Company and their respective successors and the controlling persons and officers and directors referred to in Sections 6 and 7 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Underwriting Agreement or such Terms Agreement or any provision herein or therein contained. This Underwriting Agreement and such Terms Agreement and all conditions and provisions hereof and thereof are intended to be for the sole and exclusive benefit of the parties hereto and thereto and their respective successors, and said controlling persons and officers and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No purchaser of Underwritten Securities from any Underwriter shall be deemed to be a successor by reason merely of such purchase. 28 SECTION 13. GOVERNING LAW AND TIME. THIS UNDERWRITING AGREEMENT AND ANY ---------------------- APPLICABLE TERMS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME. SECTION 14. Effect of Headings. The Article and Section headings herein ------------------ and the Table of Contents are for convenience only and shall not affect the construction hereof. 29 If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company a counterpart hereof, whereupon this Underwriting Agreement, along with all counterparts, will become a binding agreement between Merrill Lynch and the Company in accordance with its terms. Very truly yours, FEDERAL-MOGUL CORPORATION By:_____________________________ Name: Title: CONFIRMED AND ACCEPTED, as of the date first above written: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By:_________________________________ Authorized Signatory 30 Exhibit A FEDERAL-MOGUL CORPORATION (a Michigan) Common Stock, Debt Securities, Preferred Stock TERMS AGREEMENT --------------- ., 199__ To: Federal-Mogul Corporation [address of Issuer] Ladies and Gentlemen: We understand that Federal-Mogul Corporation, a Michigan corporation (the "Company"), proposes to issue and sell [ shares of its common stock, no par value per share (the "Common Stock")] [ shares of its preferred stock, no par value per share (the "Preferred Stock")] [$ aggregate principal amount of its [senior] [subordinated] debt securities (the "Debt Securities")] ([such securities also being hereinafter referred to as] the "[Initial] Underwritten Securities"). Subject to the terms and conditions set forth or incorporated by reference herein, we [the underwriters named below (the "Underwriters")] offer to purchase [, severally and not jointly,] the [[number] [principal] [amount] of] Underwritten Securities [opposite their names set forth below] at the purchase price set forth below [, and a proportionate share of Option Underwritten Securities set forth below, to the extent any are purchased]. A-1 [Number] [Principal Amount] Underwriter of [Initial] Underwritten Securities - ----------- ------------------------------------ Total [$] === The Underwritten Securities shall have the following terms: [Common Stock] ------------ Title: Number of shares: Number of Option Underwritten Securities: Initial public offering price per share: $ Purchase price per share: $ Listing requirements: Black-out provisions: Lock-up provisions: Other terms and conditions: Closing date and location: [Preferred Stock] --------------- Title: Rank: Ratings: Number of shares: Number of Option Underwritten Securities: Dividend rate (or formula) per share: $ Dividend payment dates: Stated value: $ Liquidation preference per share: $ Redemption provisions: Sinking fund requirements: Conversion provisions: Listing requirements: Black-out provisions: A-2 Lock-up provisions: Initial public offering price per share: $____ plus accumulated dividends, if any, from ____ Purchase price per share: $____ plus accumulated dividends, if any, from ____ Other terms and conditions: Closing date and location: [Debt Securities] --------------- Title: Rank: Ratings: Aggregate principal amount: Denominations: Currency of payment: Interest rate or formula: Interest payment dates: Regular record dates: Stated maturity date: Redemption provisions: Sinking fund requirements: Conversion provisions: Listing requirements: Black-out provisions: Fixed or Variable Price Offering: [Fixed] [Variable] Price Offering If Fixed Price Offering, initial public offering price per share: % of the principal amount, plus accrued interest [amortized original issue discount], if any, from _______________________. Purchase price per share: ___% of principal amount, plus accrued interest [amortized original issue discount], if any, from ________________. Form: Other terms and conditions: Closing date and location: All of the provisions contained in the document attached as Annex I hereto entitled "Federal-Mogul Corporation--Common Stock, Preferred Stock and Debt Securities--Underwriting Agreement" are hereby incorporated by reference in their entirety herein and shall be deemed to be a part of this Terms Agreement to the same extent as if such provisions had been set forth in full herein. Terms defined in such document are used herein as therein defined. A-3 Please accept this offer no later than ___ o'clock P.M. (New York City time) on ________________ by signing a copy of this Terms Agreement in the space set forth below and returning the signed copy to us. Very truly yours, MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By_____________________________ Authorized Signatory [Acting on behalf of itself and the other named Underwriters.] Accepted: FEDERAL-MOGUL CORPORATION By_______________________ Name: Title: A-4 EX-1.2 3 FORM OF U.S. PURCHASE AGREEMENT EXHIBIT 1.2 ________________________________________________________________________________ ________________________________________________________________________________ FEDERAL-MOGUL CORPORATION (a Michigan corporation) ____________ Shares of Common Stock U.S. PURCHASE AGREEMENT Dated: June ., 1998 ________________________________________________________________________________ ________________________________________________________________________________ TABLE OF CONTENTS
PAGE ---- U.S. PURCHASE AGREEMENT.............................................................................. 1 SECTION 1. Representations and Warranties...................................................... 4 (a) Representations and Warranties by the Company....................................... 4 (i) Compliance with Registration Requirements....................................... 4 (ii) Incorporated Documents......................................................... 5 (iii) Independent Accountants....................................................... 5 (iv) Financial Statements........................................................... 5 (v) No Material Adverse Change in Business.......................................... 6 (vi) Good Standing of the Company................................................... 6 (vii) Good Standing of Subsidiaries................................................. 6 (viii) Capitalization............................................................... 7 (ix) Authorization of Agreement..................................................... 7 (x) Authorization and Description of Securities..................................... 7 (xi) Absence of Defaults and Conflicts.............................................. 7 (xii) Absence of Labor Dispute...................................................... 8 (xiii) Absence of Proceedings....................................................... 8 (xiv) Accuracy of Exhibits.......................................................... 9 (xv) Possession of Intellectual Property............................................ 9 (xvi) Absence of Further Requirements............................................... 9 (xvii) Possession of Licenses and Permits........................................... 9 (xviii) Title to Property........................................................... 10 (xix) [Intentionally omitted]....................................................... 10 (xx) Investment Company Act......................................................... 10 (xxi) Environmental Laws............................................................ 10 (b) Representations and Warranties by the Selling Shareholders and Covenants of the Selling Shareholders......................................................... 11 (i) Accurate Disclosure............................................................. 11 (ii) Authorization of Agreements.................................................... 11 (iii) Good and Marketable Title..................................................... 12 (iv) Due Execution of Power of Attorney and Custody Agreement....................... 12 (v) Absence of Manipulation......................................................... 13 (vi) Absence of Further Requirements................................................ 13 (vii) Restriction on Sale of Securities............................................. 13 (viii) Certificates Suitable for Transfer........................................... 13 (ix) No Association with NASD....................................................... 14 (c) Officer's Certificates.............................................................. 14 (d) Selling Shareholder's Certificates.................................................. 14 SECTION 2. Sale and Delivery to U.S. Underwriters; Closing..................................... 14 (a) Initial Securities.................................................................. 14 (b) Option Securities................................................................... 14
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PAGE ---- (c) Payment............................................................................. 15 (d) Denominations; Registration......................................................... 16 SECTION 3. Covenants of the Company............................................................ 16 (a) Compliance with Securities Regulations and Commission Requests...................... 16 (b) Filing of Amendments................................................................ 16 (c) Delivery of Registration Statements................................................. 17 (d) Delivery of Prospectuses............................................................ 17 (e) Continued Compliance with Securities Laws........................................... 17 (f) Blue Sky Qualifications............................................................. 17 (g) Earnings Statement.................................................................. 18 (h) Use of Proceeds..................................................................... 18 (i) Listing............................................................................. 18 (j) Restriction on Sale of Securities................................................... 18 (k) Reporting Requirements.............................................................. 18 SECTION 4. Payment of Expenses. ............................................................... 19 (a) Expenses............................................................................ 19 (b) Termination of Agreement............................................................ 19 SECTION 5. Conditions of U.S. Underwriters' Obligations........................................ 19 (a) Effectiveness of Registration Statement............................................. 19 (b) Opinion of Counsel for Company...................................................... 20 (c) Opinion of Counsel for the Selling Shareholders..................................... 20 (d) Opinion of Counsel for U.S. Underwriters............................................ 20 (e) Officers' Certificate............................................................... 20 (f) Certificate of Selling Shareholders................................................. 21 (g) Accountant's Comfort Letter......................................................... 21 (h) Bring-down Comfort Letter........................................................... 21 (i) Approval of Listing................................................................. 21 (j) Lock-up Agreements.................................................................. 21 (k) Purchase of Initial International Securities........................................ 21 (l) Conditions to Purchase of U.S. Option Securities.................................... 21 (i) Officers' Certificate...................................................... 22 (ii) Certificate of Selling Shareholders........................................ 22 (iii) Opinion of Counsel for the Company......................................... 22 (iv) Opinion of Counsel for the Selling Shareholders............................ 22 (m) Additional Documents................................................................ 23 (n) Termination of Agreement............................................................ 23 SECTION 6. Indemnification..................................................................... 23 (a) Indemnification of U.S. Underwriters............................................... 23 (b) Indemnification of Company, Directors and Officers.................................. 24 (c) Actions against Parties; Notification............................................... 25 (d) Settlement without Consent if Failure to Reimburse.................................. 25 (e) Limitation on Selling Shareholders' Indemnification................................. 25
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PAGE ---- SECTION 7. Contribution.......................................................................... 26 SECTION 8. Representations, Warranties and Agreements to Survive Delivery........................ 27 SECTION 9. Termination of Agreement.............................................................. 27 (a) Termination; General.................................................................. 27 (b) Liabilities........................................................................... 28 SECTION 10. Default by One or More of the U.S. Underwriters....................................... 28 SECTION 11. Default by One or More of the Selling Shareholder(s) or the Company................... 29 SECTION 12. Notices............................................................................... 29 SECTION 13. Parties............................................................................... 29 SECTION 14. Governing Law and Time................................................................ 30 SECTION 15. Effect of Headings.................................................................... 30 SCHEDULES Schedule A-1 - List of Underwriters...................................................... Sch A-1 Schedule A-2 - Initial U.S. Securities and U.S. Option Securities........................ Sch A-2 Schedule B - Pricing Information....................................................... Sch B-1 Schedule C - List of Subsidiaries...................................................... Sch C-1 Schedule D - List of persons and entities subject to Lock-up........................... Sch D-1 EXHIBITS Exhibit A - Form of Opinion of Company's Counsel................................................ A-1 Exhibit A-2 - Form of Opinion of Selling Shareholders' Counsel.................................. A-2 Exhibit B - Form of Lock-up Letter.............................................................. B-1
-iii- Draft of June 1, 1998 FEDERAL-MOGUL CORPORATION (a Michigan corporation) ____________ Shares of Common Stock (Without Par Value) U.S. PURCHASE AGREEMENT ------------------------ June ., 1998 MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated Bear, Stearns & Co. Inc. Donaldson, Lufkin & Jenrette Securities Corporation Morgan Stanley & Co., Inc. Smith Barney Inc. Schroder & Co. Inc. as U.S. Representatives of the several U.S. Underwriters c/o Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated North Tower World Financial Center New York, New York 10281-1209 Ladies and Gentlemen: Federal-Mogul Corporation, a Michigan corporation (the "Company"), and the shareholders listed on Schedule A-2 hereto (the "Selling Shareholders"), confirm their respective agreements with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and each of the other U.S. Underwriters named in Schedule A hereto (collectively, the "U.S. Underwriters", which term shall also include any underwriter substituted as hereinafter provided in Section 10 hereof), for whom Merrill Lynch, Bear, Stearns & Co. Inc., Donaldson, Lufkin & Jenrette Securities Corporation, Morgan Stanley & Co., Inc., Smith Barney Inc. and Schroder & Co. Inc. are acting as representatives (in such capacity, the "U.S. Representatives"), with respect to (i) the sale by the Company and the Selling Shareholders, acting severally and not jointly, and the purchase by the U.S. Underwriters, acting severally and not jointly, of the respective numbers of shares of Common Stock, without par value, of the Company ("Common Stock") as set forth in said Schedules A and A-1 (which, with respect to the Selling Shareholders, reflect shares of Common Stock to be issued upon conversion of shares of Series E Mandatory Exchangeable Preferred Stock ("Series E Stock")), and (ii) the grant by the Company and the Selling Shareholders to the U.S. Underwriters, acting severally and not jointly, of the option described in Section 2(b) hereof to purchase all or any part of ____________ additional shares of Common Stock to cover over-allotments, if any. The aforesaid ____________ shares of Common Stock (the "Initial U.S. Securities") to be purchased by the U.S. Underwriters and all or any part of the ____________ shares of Common Stock subject to the option described in Section 2(b) hereof (the "U.S. Option Securities") are hereinafter called, collectively, the "U.S. Securities". It is understood that the Company and the Selling Shareholders are concurrently entering into an agreement dated the date hereof (the "International Purchase Agreement") providing for the offering by the Company and the Selling Shareholders of an aggregate of ____________ shares of Common Stock (the "Initial International Securities") through arrangements with certain underwriters outside the United States and Canada (the "International Managers") for which Merrill Lynch International, Bear, Stearns International Limited, Morgan Stanley & Co. International Limited, Smith Barney Inc., Donaldson, Lufkin & Jenrette International, J. Henry Schroder & Co. Limited, ABN AMRO Rothschild, Credit Lyonnais Securities and Kleinwort Benson Limited are acting as lead managers) (the "Lead Managers") and the grant by the Company and the Selling Shareholders to the International Managers, acting severally and not jointly, of an option to purchase all or any part of the International Managers' pro rata portion of up to ____________ additional shares of Common Stock solely to cover overallotments, if any (the "International Option Securities" and, together with the U.S. Option Securities, the "Option Securities"). The Initial International Securities and the International Option Securities are hereinafter called the "International Securities". It is understood that the Company and the Selling Shareholders are not obligated to sell and the U.S. Underwriters are not obligated to purchase, any Initial U.S. Securities unless all of the Initial International Securities are contemporaneously purchased by the International Managers. The U.S. Underwriters and the International Managers are hereinafter collectively called the "Underwriters", the Initial U.S. Securities and the Initial International Securities are hereinafter collectively called the "Initial Securities", and the U.S. Securities, and the International Securities are hereinafter collectively called the "Securities". The Underwriters will concurrently enter into an Intersyndicate Agreement of even date herewith (the "Intersyndicate Agreement") providing for the coordination of certain transactions among the Underwriters under the direction of Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (in such capacity, the "Global Coordinator"). The Company and the Selling Shareholders understand that the U.S. Underwriters propose to make a public offering of the U.S. Securities as soon as the U.S. Representatives deem advisable after this Agreement has been executed and delivered. -2- The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-3 (No. 333-50413) and pre- effective amendment nos. 1 and 2 thereto covering the registration of the Securities under the Securities Act of 1933, as amended (the "1933 Act"), including the related preliminary prospectus or prospectuses. Promptly after execution and delivery of this Agreement, the Company will either (i) prepare and file a prospectus in accordance with the provisions of Rule 430A ("Rule 430A") of the rules and regulations of the Commission under the 1933 Act (the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule 434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a "Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). Two forms of prospectus are to be used in connection with the offering and sale of the Securities: one relating to the U.S. Securities (the "Form of U.S. Prospectus") and one relating to the International Securities (the "Form of International Prospectus"). The Form of International Prospectus is identical to the Form of U.S. Prospectus, except for the front cover and back cover pages and the information under the caption "Underwriting." The information included in any such prospectus or in any such Term Sheet, as the case may be, that was omitted from such registration statement at the time it became effective but that is deemed to be part of such registration statement at the time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is referred to as "Rule 434 Information." Each Form of U.S. Prospectus and Form of International Prospectus used before such registration statement became effective, and any prospectus that omitted, as applicable, the Rule 430A Information or the Rule 434 Information, that was used after such effectiveness and prior to the execution and delivery of this Agreement, is herein called a "preliminary prospectus." Such registration statement, including the exhibits thereto, schedules thereto, if any, and the documents incorporated by reference therein pursuant to Item 12 of Form S-3 under the 1933 Act, at the time it became effective and including the Rule 430A Information and the Rule 434 Information, as applicable, is herein called the "Registration Statement." Any registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b) Registration Statement," and after such filing the term "Registration Statement" shall include the Rule 462(b) Registration Statement. The final Form of U.S. Prospectus and the final Form of International Prospectus, including the documents incorporated by reference therein pursuant to Item 12 of Form S-3 under the 1933 Act, in the forms first furnished to the Underwriters for use in connection with the offering of the Securities are herein called the "U.S. Prospectus" and the "International Prospectus," respectively, and collectively, the "Prospectuses." If Rule 434 is relied on, the terms "U.S. Prospectus" and "International Prospectus" shall refer to the preliminary U.S. Prospectus dated _____, 1998 and preliminary International Prospectus dated ____, 1998, respectively, each together with the applicable Term Sheet and all references in this Agreement to the date of such Prospectuses shall mean the date of the applicable Term Sheet. For purposes of this Agreement, all references to the Registration Statement, any preliminary prospectus, the U.S. Prospectus, the International Prospectus or any Term Sheet or any amendment or supplement to any of the foregoing shall be deemed to include the copy filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval system ("EDGAR"). All references in this Agreement to financial statements and schedules and other information which is "contained," "included" or "stated" in the Registration Statement, any preliminary prospectus -3- (including the Form of U.S. Prospectus and Form of International Prospectus) or the Prospectuses (or other references of like import) shall be deemed to mean and include all such financial statements and schedules and other information which is incorporated by reference in the Registration Statement, any preliminary prospectus (including the Form of U.S. Prospectus and Form of International Prospectus) or the Prospectuses, as the case may be; and all references in this Agreement to amendments or supplements to the Registration Statement, any preliminary prospectus or the Prospectuses shall be deemed to mean and include the filing of any document under the Securities Exchange Act of 1934 (the "1934 Act") which is incorporated by reference in the Registration Statement, such preliminary prospectus or the Prospectuses, as the case may be. SECTION 1. Representations and Warranties. ------------------------------ (a) Representations and Warranties by the Company. The Company represents and warrants to each U.S. Underwriter as of the date hereof, as of the Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery (if any) referred to in Section 2(b) hereof, and agrees with each U.S. Underwriter, as follows: (i) Compliance with Registration Requirements. The Company meets ----------------------------------------- the requirements for use of Form S-3 under the 1933 Act. Each of the Registration Statement and any Rule 462(b) Registration Statement has become effective under the 1933 Act and no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the 1933 Act and no proceedings for that purpose have been instituted or are pending or, to the knowledge of the Company, are contemplated by the Commission, and any request on the part of the Commission for additional information has been complied with. At the respective times the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendments thereto became effective and at the Closing Time (and, if any U.S. Option Securities are purchased, at the Date of Delivery), the Registration Statement, the Rule 462(b) Registration Statement and any amendments and supplements thereto complied and will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations and did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. Neither of the Prospectuses nor any amendments or supplements thereto, at the time the Prospectuses or any amendments or supplements thereto were issued and at the Closing Time (and, if any U.S. Option Securities are purchased, at the Date of Delivery), included or will include an untrue statement of a material fact or omitted or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If Rule 434 is used, the Company will comply with the requirements of Rule 434. The representations and warranties in this subsection shall not apply to statements in or omissions from the Registration Statement or the U.S. Prospectus made in reliance upon and in conformity with information furnished to the Company in writing by any U.S. Underwriter -4- through the U.S. Representatives expressly for use in the Registration Statement or the U.S. Prospectus. Each preliminary prospectus and the prospectuses filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so filed in all material respects with the 1933 Act Regulations and each preliminary prospectus and the Prospectuses delivered to the Underwriters for use in connection with this offering was identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (ii) Incorporated Documents. The documents incorporated or deemed ---------------------- to be incorporated by reference in the Registration Statement and the Prospectuses, at the time they were or hereafter are filed with the Commission, complied and will comply in all material respects with the requirements of the 1934 Act and the rules and regulations of the Commission thereunder (the "1934 Act Regulations"), and, when read together with the other information in the Prospectuses, at the time the Registration Statement became effective, at the time the Prospectuses were issued and at the Closing Time (and, if any U.S. Option Securities are purchased, at the Date of Delivery), did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. (iii) Independent Accountants. The accountants who certified the ----------------------- financial statements and supporting schedules included in the Registration Statement are independent public accountants as required by the 1933 Act and the 1933 Act Regulations. (iv) Financial Statements. The financial statements of the Company -------------------- and its consolidated subsidiaries included in the Registration Statement and the Prospectuses, together with the related schedules and notes, as well as those financial statements, schedules and notes of any other entity included therein, present fairly the financial position of the Company and its consolidated subsidiaries, or such other entity, as the case may be, at the dates indicated and the statement of operations, shareholders' equity and cash flows of the Company and its consolidated subsidiaries, or such other entity, as the case may be, for the periods specified; said financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods involved except as disclosed therein, except that financial statements of T&N plc ("T&N") have been prepared in conformity with U.K. GAAP applied on a consistent basis throughout the periods involved except as disclosed therein. The supporting schedules, if any, included in the Registration Statement present fairly in accordance with GAAP, or U.K. GAAP with respect to T&N supporting schedules, the information required to be stated therein. The selected financial data and the summary financial information included in the Prospectuses present fairly the information shown therein and have been compiled on a basis consistent with that of the audited financial statements included in the Registration Statement and the Prospectuses. The pro forma financial statements and the related notes thereto -5- included in the Registration Statement and the Prospectuses present fairly the information shown therein, have been prepared in accordance with the Commission's rules and guidelines with respect to pro forma financial statements and have been properly compiled on the bases described therein, and the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein. (v) No Material Adverse Change in Business. Since the respective -------------------------------------- dates as of which information is given in the Registration Statement and the Prospectuses, except as otherwise stated therein, (A) there has been no material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business (a "Material Adverse Effect"), (B) there have been no transactions entered into by the Company or any of its subsidiaries, other than those in the ordinary course of business, which are material with respect to the Company and its subsidiaries considered as one enterprise, and (C) except for regular quarterly dividends on the Common Stock in amounts per share that are consistent with past practice or with the Company's new dividend policy summarized in the Prospectuses under the caption "Price Range of Common Stock and Dividends" and dividends on the Company's outstanding preferred stock in the ordinary course, there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock. (vi) Good Standing of the Company. The Company has been duly ---------------------------- organized and is validly existing as a corporation in good standing under the laws of the State of Michigan and has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and to enter into and perform its obligations under this Agreement; and the Company is duly qualified as a foreign corporation to transact business and is in good standing in each other jurisdiction (including foreign jurisdictions) in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect. (vii) Good Standing of Subsidiaries. Each "significant subsidiary" ----------------------------- of the Company (as such term is defined in Rule 1-02 of Regulation S-X) (each a "Subsidiary" and, collectively, the "Subsidiaries") has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction (including foreign jurisdictions) in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect; except as otherwise disclosed in the Registration Statement, all of the issued and outstanding capital stock of each such Subsidiary has been duly authorized and validly issued, is fully paid and non-assessable and greater than -6- 90% of such capital stock is owned by the Company, directly or through subsidiaries, and to the extent such capital stock is owned by the Company it is owned free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; none of the outstanding shares of capital stock of any Subsidiary was issued in violation of the preemptive or similar rights of any securityholder of such Subsidiary. The only subsidiaries of the Company are (a) the subsidiaries listed on Schedule C hereto and (b) certain other subsidiaries which, considered in the aggregate as a single subsidiary, do not constitute a "significant subsidiary" as defined in Rule 1-02 of Regulation S-X. (viii) Capitalization. The authorized, issued and outstanding -------------- capital stock of the Company is as set forth in the Prospectuses in the column entitled "Actual" under the caption "Capitalization" (except for subsequent issuances, if any, pursuant to this Agreement or the International Purchase Agreement, pursuant to reservations, agreements or employee benefit plans referred to in the Prospectuses or pursuant to the exercise of convertible securities or options referred to in the Prospectuses). The shares of issued and outstanding capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable, and the Securities to be issued upon conversion of shares of Series E Stock held by such Selling Shareholders and to be sold to the Underwriters hereunder and under the International Purchase Agreement ("Conversion Shares") have been duly authorized and will be, prior to the Closing Time and at each Time of Delivery (if any), as applicable, duly authorized and validly issued and fully paid and non-assessable; none of the outstanding shares of capital stock of the Company was issued, and none of the Conversion Shares will be issued, in violation of the preemptive or other similar rights of any securityholder of the Company; as of the Closing Time and each Date of Delivery (if any), as applicable, shares of Series E Stock shall have been duly and validly converted into the appropriate number of Conversion Shares. (ix) Authorization of Agreement. This Agreement and the -------------------------- International Purchase Agreement have been duly authorized, executed and delivered by the Company. (x) Authorization and Description of Securities. The Securities ------------------------------------------- to be purchased by the U.S. Underwriters and the International Managers from the Company have been duly authorized for issuance and sale to the U.S. Underwriters pursuant to this Agreement and the International Managers pursuant to the International Purchase Agreement, respectively, and, when issued and delivered by the Company pursuant to this Agreement and the International Purchase Agreement, respectively, against payment of the consideration set forth herein and in the International Purchase Agreement, respectively, will be validly issued, fully paid and non-assessable; the Common Stock conforms to all statements relating thereto contained in the Prospectuses and such description conforms in all material respects to the rights set forth in the instruments defining the same; no holder of the Securities will be subject to personal liability by reason of being such a holder; and the issuance of the Securities is not subject to the preemptive or other similar rights of any securityholder of the Company. -7- (xi) Absence of Defaults and Conflicts. Neither the Company nor --------------------------------- any of its subsidiaries is in violation of its charter or by-laws or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or any subsidiary is subject (collectively, "Agreements and Instruments") except for such defaults that would not result in a Material Adverse Effect; and the execution, delivery and performance of this Agreement and the International Purchase Agreement and the consummation of the transactions contemplated in this Agreement, in the International Purchase Agreement and in the Registration Statement (including the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Prospectuses under the caption "Use of Proceeds") and compliance by the Company with its obligations under this Agreement and the International Purchase Agreement have been duly authorized by all necessary corporate action and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined below) (except to the extent described in the Prospectuses under the caption "Description of Certain Indebtedness-- Repayments and Refinancings") under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any subsidiary pursuant to, the Agreements and Instruments (except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not result in a Material Adverse Effect), nor will such action result in any violation of the provisions of the charter or by-laws of the Company or any subsidiary or any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any subsidiary or any of their assets, properties or operations. As used herein, a "Repayment Event" means any event or condition which gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder's behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company or any subsidiary. (xii) Absence of Labor Dispute. No labor dispute with the employees ------------------------ of the Company or any subsidiary exists or, to the knowledge of the Company, is imminent which may reasonably be expected to result in a Material Adverse Effect. (xiii) Absence of Proceedings. There is no action, suit, ---------------------- proceeding, inquiry or investigation before or brought by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Company, threatened, against or affecting the Company or any subsidiary, which is required to be disclosed in the Registration Statement (other than as disclosed therein), or which might reasonably be expected to result in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the consummation of the transactions contemplated by this Agreement and the International Purchase Agreement or the performance by the Company of its obligations hereunder or thereunder; the aggregate of all pending legal or governmental proceedings to -8- which the Company or any subsidiary is a party or of which any of their respective properties, assets or operations is the subject which are not described in the Registration Statement and the Prospectuses, including ordinary routine litigation incidental to the business, could not reasonably be expected to result in a Material Adverse Effect. (xiv) Accuracy of Exhibits. There are no contracts or documents -------------------- which are required to be described in the Registration Statement, the Prospectuses or the documents incorporated by reference therein or to be filed as exhibits thereto which have not been so described and filed as required. (xv) Possession of Intellectual Property. The Company and its ----------------------------------- subsidiaries own or possess, or can acquire on reasonable terms, adequate patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, trade names or other intellectual property (collectively, "Intellectual Property") necessary to carry on the business now operated by them, except where the failure to own or possess or otherwise be able to acquire such Intellectual Property would not result in a Material Adverse Effect, and neither the Company nor any of its subsidiaries has received any notice or is otherwise aware of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property or of any facts or circumstances which would render any Intellectual Property invalid or inadequate to protect the interest of the Company or any of its subsidiaries therein, and which infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or inadequacy, singly or in the aggregate, would result in a Material Adverse Effect. (xvi) Absence of Further Requirements. No filing with, or ------------------------------- authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency, domestic or foreign, is necessary or required for the performance by the Company of its obligations hereunder, in connection with the offering, issuance or sale of the Securities by the Company under this Agreement and the International Purchase Agreement or the consummation by the Company of the transactions contemplated by this Agreement and the International Purchase Agreement, except such as have been already obtained or as may be required under the 1933 Act or the 1933 Act Regulations and foreign or state securities or blue sky laws. (xvii) Possession of Licenses and Permits. The Company and its ---------------------------------- subsidiaries possess such permits, licenses, approvals, consents and other authorizations (collectively, "Governmental Licenses") issued by the appropriate federal, state, local or foreign regulatory agencies or bodies necessary to conduct the business now operated by them; the Company and its subsidiaries are in compliance with the terms and conditions of all such Governmental Licenses, except where the failure so to comply would not, singly or in the aggregate, have a Material Adverse Effect; all of the Governmental Licenses are valid and in full force and effect, except when the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not have a Material Adverse -9- Effect; and neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification of any such Governmental Licenses which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Effect. (xviii) Title to Property. The Company and its subsidiaries have ----------------- good and marketable title to all real property owned by the Company and its subsidiaries which is material to the business of the Company and its subsidiaries taken as a whole and good title to all other properties owned by them which is material to the business of the Company and its subsidiaries taken as a whole, in each case, free and clear of all mortgages, pledges, liens, security interests, claims, restrictions or encumbrances of any kind except such as (a) are described in the Prospectuses or (b) do not, singly or in the aggregate, materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company or any of its subsidiaries; and all of the leases and subleases material to the business of the Company and its subsidiaries, considered as one enterprise, and under which the Company or any of its subsidiaries holds properties described in the Prospectuses, are in full force and effect, and neither the Company nor any subsidiary has any notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company or any subsidiary under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company or such subsidiary to the continued possession of the leased or subleased premises under any such lease or sublease. (xix) [Intentionally omitted.] (xx) Investment Company Act. The Company is not, and upon the ---------------------- issuance and sale of the Securities as herein contemplated and the application of the net proceeds therefrom as described in the Prospectuses will not be, an "investment company" or an entity "controlled" by an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended (the "1940 Act"). (xxi) Environmental Laws. Except as described in the Registration ------------------ Statement and except as would not, singly or in the aggregate, result in a Material Adverse Effect, (A) neither the Company nor any of its subsidiaries is in violation of any federal, state, local or foreign statute, law, rule, regulation, ordinance, code, policy or rule of common law or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent, decree or judgment, relating to pollution or protection of human health, the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including, without limitation, laws and regulations relating to the release or threatened release of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products (collectively, "Hazardous Materials") or to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials (collectively, "Environmental Laws"), (B) the Company and its subsidiaries have all permits, authorizations and approvals required under any applicable Environmental Laws and are each in compliance with their -10- requirements, (C) there are no pending or, to the Company's knowledge, threatened administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigation or proceedings relating to any Environmental Law against the Company or any of its subsidiaries and (D) there are no events or circumstances that might reasonably be expected to form the basis of an order for clean-up or remediation, or an action, suit or proceeding by any private party or governmental body or agency, against or affecting the Company or any of its subsidiaries relating to Hazardous Materials or any Environmental Laws. (xxii) Registration Rights. There are no persons with registration ------------------- rights or other similar rights to have any securities registered pursuant to the Registration Statement or otherwise registered by the Company under the 1933 Act, except for persons who are Selling Shareholders or other shareholders described in the Prospectus as having registration rights. Each Selling Shareholder has validly and effectively exercised such Selling Shareholder's rights to require registration of Conversion Shares because of the filing of the Registration Statement and the consummation of the transactions contemplated by this Agreement and the International Purchase Agreement and each Selling Shareholder, with respect to any securities of the Company other than Conversion Shares, and each other holder of any security of the Company that has any right to require registration of shares of Common Stock or any other security of the Company because of the filing of the Registration Statement or consummation of the transactions contemplated by this Agreement or the International Purchase Agreement, has validly and effectively waived such rights. (b) Representations and Warranties by the Selling Shareholders and Covenants of the Selling Shareholders. Each Selling Shareholder severally and not jointly represents and warrants to each U.S. Underwriter as of the date hereof, as of the Closing Time, and as of each Date of Delivery (if any) referred to in Section 2(b) hereof, and agrees with each U.S. Underwriter, as follows: (i) Accurate Disclosure. [With respect to Kenneth Lehman and ------------------- David Weinberg: the representations and warranties of the Company contained in Section 1(a) hereof, insofar as they relate to Fel-Pro Incorporated and the affiliated companies purchased together with Fel-Pro Incorporated by Federal-Mogul (collectively, "Fel-Pro") or information about Fel-Pro at or prior to the Company's acquisition thereof, are true and correct.] Each Selling Shareholder has reviewed and is familiar with the Registration Statement and the Prospectuses and neither the Prospectuses nor any amendments or supplements thereto include any untrue statement of a material fact with respect to such Selling Shareholder [and, with respect to Kenneth Lehman and David Weinberg, Fel-Pro] or omits to state a material fact with respect to such Selling Shareholder [and, with respect to Kenneth Lehman and David Weinberg, Fel-Pro] necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (ii) Authorization of Agreements. Such Selling Shareholder has the --------------------------- full right, power and authority to enter into this Agreement, the International Purchase Agreement and a Power of Attorney and Custody Agreement (in each case, a "Power of Attorney and Custody -11- Agreement") and to sell and cause to be delivered the Securities to be sold by such Selling Shareholder hereunder and thereunder. The execution and delivery of this Agreement, the International Purchase Agreement and the Power of Attorney and Custody Agreement and the sale and delivery of the Securities to be sold by such Selling Shareholder and the consummation of the transactions contemplated herein and therein and compliance by such Selling Shareholder with its obligations hereunder and thereunder have been duly authorized, if necessary, by such Selling Shareholder and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default under, or result in the creation or imposition of any lien, charge or encumbrance upon the Securities to be sold by such Selling Shareholder nor will such action result in any violation of the provisions of the charter or by-laws or other organizational or governing instrument of such Selling Shareholder, if applicable, or any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over such Selling Shareholder or any of its properties. (iii) Good and Marketable Title. Such Selling Shareholder has good ------------------------- and marketable title to the shares of Series E Stock to be converted into Conversion Shares and sold by such Selling Shareholder pursuant hereto and the International Purchase Agreement, free and clear of any security interest, mortgage pledge, lien, claim, equity or encumbrance, and at the Closing Time and at each applicable Time of Delivery (if any), as applicable, and upon delivery of such Securities and payment of the purchase price therefor as herein contemplated, assuming due authorization and valid issuance of the Conversion Shares by the Company and assuming each such Underwriter has no notice of any adverse claim, each of the Underwriters will receive good and marketable title to the Securities purchased by it from such Selling Shareholder, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity, except for any lien created by such Underwriter. (iv) Due Execution of Power of Attorney and Custody Agreement. Such -------------------------------------------------------- Selling Shareholder has duly executed and delivered, in the form heretofore furnished to the Representatives, the Power of Attorney and Custody Agreement with ________________, _______________ or ________________ as attorney-in-fact and custodian (each a "Shareholder Representatives"); the Shareholder Representatives are authorized to take such actions as are necessary to validly and effectively exercise such Selling Shareholder's rights to require registration of Conversion Shares and to waive any such rights with respect to any other securities of the Company, to take such actions as are necessary to validly effectuate the conversion of shares of Series E Stock held by such Selling Shareholder into Conversion Shares, to direct the Company to deliver the Securities to be sold by such Selling Shareholder hereunder and under the International Purchase Agreement and to accept payment therefor; and each Shareholder Representative is authorized to execute and deliver this Agreement and the International Purchase Agreement and the certificate referred to in Section 5(f) or that may be required pursuant to Section 5(l) on behalf of such Selling Shareholder, to sell to the Underwriters the Securities to be sold by such Selling Shareholder hereunder and under the International Purchase Agreement, to determine the purchase price to be paid by the -12- Underwriters to such Selling Shareholder, as provided in Section 2(a) hereof, to authorize the delivery of the Securities to be sold by such Selling Shareholder hereunder and under the International Purchase Agreement, to accept payment therefor, and otherwise to act on behalf of such Selling Shareholder in connection with this Agreement and under the International Purchase Agreement. (v) Absence of Manipulation. Such Selling Shareholder has not ----------------------- taken, and will not take, directly or indirectly, any action which is designed to or which has constituted or which might reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities. (vi) Absence of Further Requirements. No filing with, or ------------------------------- authorization, approval, consent, order, registration, qualification or decree of, any court or governmental authority or agency, domestic or foreign, is necessary or required for the performance by such Selling Shareholder of its obligations hereunder, under the International Purchase Agreement or in the Power of Attorney and Custody Agreement, or in connection with the offering or sale of the Securities hereunder or under the International Purchase Agreement or the consummation of the transactions contemplated by this Agreement except such as may have been previously been made or obtained or as may be required under the 1933 Act or the 1933 Act Regulations or state securities laws. (vii) Restriction on Sale of Securities. During a period of 90 days --------------------------------- from the date of the Prospectuses, such Selling Shareholder will not, without the prior written consent of the Global Coordinator, (i) directly or indirectly offer, pledge, sell, contract to sell, sell any options or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any share of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or file any registration statement under the 1933 Act with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequences of ownership of the Common Stock, whether any such swap or transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to the Securities to be sold under this Agreement of the International Purchase Agreement. (viii) Certificates Suitable for Transfer. Certificates ---------------------------------- representing shares of Series E Stock to be converted into at least the maximum number of Conversion Shares to be sold by such Selling Shareholder to the Underwriters hereunder and under the International Purchase Agreement, in suitable form for transfer by delivery or accompanied by duly executed instruments of transfer or assignment in blank with signatures guaranteed, have been placed in custody with such Selling Shareholder's Shareholder Representative with irrevocable conditional instructions to deliver such certificates to the Company for conversion into Conversion Shares to be delivered to the Underwriters pursuant to this Agreement and the International Purchase Agreement. -13- (ix) No Association with NASD. Neither such Selling Shareholder nor ------------------------ any of its affiliates directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, or has any other association with (within the meaning of Article I, Section 1(m) of the By-laws of the National Association of Securities Dealers, Inc.), any member firm of the National Association of Securities Dealers, Inc. (x) Registration Rights. Such Selling Shareholder has validly and ------------------- effectively exercised such Selling Shareholder's rights to require registration of Conversion Shares because of the filing of the Registration Statement and the consummation of the transaction contemplated by the Agreement and the International Purchase Agreement and such Selling Shareholder has not, and will not, exercise any other right to require registration of shares of Common Stock or any other security of the Company (other than Conversion Shares) because of the filing of the Registration Statement or consummation of the transactions contemplated by this Agreement or the International Purchase Agreement. (c) Officer's Certificates. Any certificate signed by any officer of the Company or any of its subsidiaries delivered to the Global Coordinator, the U.S. Representatives or to counsel for the U.S. Underwriters shall be deemed a representation and warranty by the Company to each U.S. Underwriter as to the matters covered thereby. (d) Selling Shareholder's Certificates. Any certificate signed by or on behalf of a Selling Shareholder delivered to the Global Coordinator, the U.S. Representatives or to counsel for the U.S. Underwriters shall be deemed a representation and warranty by such Selling Shareholder to each U.S. Underwriter as to the matters covered thereby. SECTION 2. Sale and Delivery to U.S. Underwriters; Closing. ----------------------------------------------- (a) Initial Securities. On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company and each Selling Shareholder, severally and not jointly, agree to sell to each U.S. Underwriter, severally and not jointly, and each U.S. Underwriter, severally and not jointly, agrees to purchase from the Company and each Selling Shareholder, at the price per share set forth in Schedule B, that proportion of the number of Initial U.S. Securities set forth in Schedule A-2 opposite the name of the Company or such Selling Shareholder, as the case may be, which the number of Initial U.S. Securities set forth in Schedule A opposite the name of such U.S. Underwriter, plus any additional number of Initial U.S. Securities which such U.S. Underwriter may become obligated to purchase pursuant to the provisions of Section 10 hereof, bears to the total number of Initial U.S. Securities, subject, in each case to such adjustments among the U.S. Underwriters as the U.S. Representatives in their sole discretion shall make to eliminate any sales or purchases of fractional securities. (b) Option Securities. In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company and the Selling Shareholders, acting severally and not jointly, hereby grant an option to the U.S. Underwriters, severally and not jointly, to purchase up to an additional ____________ shares of Common Stock -14- at the price per share set forth in Schedule B, less an amount per share equal to any dividends or distributions declared by the Company and payable on the Initial U.S. Securities but not payable on the U.S. Option Securities. The option hereby granted will expire 30 days after the date hereof and may be exercised in whole or in part from time to time only for the purpose of covering over-allotments which may be made in connection with the offering and distribution of the Initial U.S. Securities upon notice by the Global Coordinator to the Company and the Selling Shareholders setting forth the number of U.S. Option Securities as to which the several U.S. Underwriters are then exercising the option and the time and date of payment and delivery for such U.S. Option Securities. Any such time and date of delivery for the U.S. Option Securities (a "Date of Delivery") shall be determined by the Global Coordinator, but shall not be later than seven full business days after the exercise of said option, nor in any event prior to the Closing Time, as hereinafter defined. If the option is exercised as to all or any portion of the U.S. Option Securities, each of the U.S. Underwriters, acting severally and not jointly, will purchase that proportion of the total number of U.S. Option Securities then being purchased which the number of Initial U.S. Securities set forth in Schedule A opposite the name of such U.S. Underwriter bears to the total number of Initial U.S. Securities, subject in each case to such adjustments as the Global Coordinator in its discretion shall make to eliminate any sales or purchases of fractional shares. (c) Payment. Payment of the purchase price for, and delivery of certificates for, the Initial Securities shall be made at the offices of Sidley & Austin, One First National Plaza, Chicago, Illinois 60603, or at such other place as shall be agreed upon by the Global Coordinator and the Company, at 9:00 A.M. (Eastern time) on the third (fourth, if the pricing occurs after 4:30 P.M. (Eastern time) on any given day) business day after the date hereof (unless postponed in accordance with the provisions of Section 10), or such other time not later than ten business days after such date as shall be agreed upon by the Global Coordinator and the Company (such time and date of payment and delivery being herein called "Closing Time"). In addition, in the event that any or all of the U.S. Option Securities are purchased by the U.S. Underwriters, payment of the purchase price for, and delivery of certificates for, such U.S. Option Securities shall be made at the above-mentioned offices, or at such other place as shall be agreed upon by the Global Coordinator and the Company, on each Date of Delivery as specified in the notice from the Global Coordinator to the Company. Payment shall be made to the Company and the Selling Shareholders by wire transfer of immediately available funds to bank accounts designated by the Company and the Shareholder Representatives Custodian pursuant to each Selling Shareholder's Power of Attorney and Custody Agreement, as the case may be, against delivery to the U.S. Representatives for the respective accounts of the U.S. Underwriters of certificates for the U.S. Securities to be purchased by them. It is understood that each U.S. Underwriter has authorized the U.S. Representatives, for its account, to accept delivery of, receipt for, and make payment of the purchase price for, the Initial U.S. Securities and the U.S. Option Securities, if any, which it has agreed to purchase. Merrill Lynch, individually and not as representative of the U.S. Underwriters, may (but shall not be obligated to) make payment of the purchase price for the Initial U.S. Securities or the U.S. Option Securities, if any, to be purchased by any U.S. Underwriter whose funds have not been received by the Closing -15- Time or the relevant Date of Delivery, as the case may be, but such payment shall not relieve such U.S. Underwriter from its obligations hereunder. (d) Denominations; Registration. Certificates for the Initial U.S. Securities and the U.S. Option Securities, if any, shall be in such denominations and registered in such names as the U.S. Representatives may request in writing at least one full business day before the Closing Time or the relevant Date of Delivery, as the case may be. The certificates for the Initial U.S. Securities and the U.S. Option Securities, if any, will be made available for examination and packaging by the U.S. Representatives in The City of New York not later than 10:00 A.M. (Eastern time) on the business day prior to the Closing Time or the relevant Date of Delivery, as the case may be. SECTION 3. Covenants of the Company. The Company covenants with each ------------------------ U.S. Underwriter as follows: (a) Compliance with Securities Regulations and Commission Requests. The Company, subject to Section 3(b), will comply with the requirements of Rule 430A or Rule 434, as applicable, and, during the period in which the Prospectuses are required to be delivered in connection with the sales of the Common Stock purchased pursuant to this Agreement, will notify the Global Coordinator immediately, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement shall become effective, or any supplement to the Prospectuses or any amended Prospectuses shall have been filed, (ii) of the receipt of any comments from the Commission, (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectuses or for additional information, and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any preliminary prospectus, or of the suspension of the qualification of the Securities for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes. The Company will promptly effect the filings necessary pursuant to Rule 424(b) and will take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Company will make every reasonable effort to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible moment. (b) Filing of Amendments. The Company will, during the period in which the Prospectuses are required by the 1933 Act to be delivered in connection with sales of the Common Stock purchased pursuant to this Agreement, give the Global Coordinator notice of its intention to file or prepare any amendment to the Registration Statement (including any filing under Rule 462(b)), any Term Sheet or any amendment, supplement or revision to either the prospectus included in the Registration Statement at the time it became effective or to the Prospectuses, whether pursuant to the 1933 Act, the 1934 Act or otherwise, will furnish the Global Coordinator with copies of any such documents a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file or use any such document to which the Global Coordinator or counsel for the U.S. Underwriters shall reasonably object. -16- (c) Delivery of Registration Statements. The Company has furnished or will deliver to the U.S. Representatives and counsel for the U.S. Underwriters, without charge, signed copies of the Registration Statement as originally filed and of each amendment thereto (including exhibits filed therewith or incorporated by reference therein and documents incorporated or deemed to be incorporated by reference therein) and signed copies of all consents and certificates of experts, and will also deliver to the U.S. Representatives, without charge, a conformed copy of the Registration Statement as originally filed and of each amendment thereto (without exhibits) for each of the U.S. Underwriters. The copies of the Registration Statement and each amendment thereto furnished to the U.S. Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (d) Delivery of Prospectuses. The Company has delivered to each U.S. Underwriter, without charge, as many copies of each preliminary prospectus as such U.S. Underwriter reasonably requested, and the Company hereby consents to the use of such copies for purposes permitted by the 1933 Act. The Company will furnish to each U.S. Underwriter, without charge, during the period when the U.S. Prospectus is required to be delivered under the 1933 Act or the 1934 Act, such number of copies of the U.S. Prospectus (as amended or supplemented) as such U.S. Underwriter may reasonably request. The U.S. Prospectus and any amendments or supplements thereto furnished to the U.S. Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (e) Continued Compliance with Securities Laws. The Company will comply with the 1933 Act and the 1933 Act Regulations and the 1934 Act and the 1934 Act Regulations so as to permit the completion of the distribution of the Securities as contemplated in this Agreement, the International Purchase Agreement and in the Prospectuses. If at any time when a prospectus is required by the 1933 Act to be delivered in connection with sales of the Securities, any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of counsel for the U.S. Underwriters or for the Company, to amend the Registration Statement or amend or supplement any Prospectus in order that the Prospectuses will not include any untrue statements of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, or if it shall be necessary, in the opinion of such counsel, at any such time to amend the Registration Statement or amend or supplement any Prospectus in order to comply with the requirements of the 1933 Act or the 1933 Act Regulations, the Company will promptly prepare and file with the Commission, subject to Section 3(b), such amendment or supplement as may be necessary to correct such statement or omission or to make the Registration Statement or the Prospectuses comply with such requirements, and the Company will furnish to the U.S. Underwriters such number of copies of such amendment or supplement as the U.S. Underwriters may reasonably request. (f) Blue Sky Qualifications. The Company will use its best efforts, in cooperation with the U.S. Underwriters, to qualify the Securities for offering and sale under the applicable securities laws of such states and other jurisdictions (domestic or foreign) as the Global Coordinator may designate and to maintain such qualifications in effect for a period of not less than one year from the -17- later of the effective date of the Registration Statement and any Rule 462(b) Registration Statement; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject. In each jurisdiction in which the Securities have been so qualified, the Company will file such statements and reports as may be required by the laws of such jurisdiction to continue such qualification in effect for a period of not less than one year from the effective date of the Registration Statement and any Rule 462(b) Registration Statement. (g) Earnings Statement. The Company will timely file such reports pursuant to the 1934 Act as are necessary in order to make generally available to its securityholders as soon as practicable an earnings statement for the purposes of, and to provide the benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act. (h) Use of Proceeds. The Company will use the net proceeds received by it from the sale of the Securities in the manner specified in the Prospectuses under "Use of Proceeds". (i) Listing. The Company will use its best efforts to effect the listing of the Securities on the New York Stock Exchange. (j) Restriction on Sale of Securities. During a period of 90 days from the date of the Prospectuses, the Company will not, without the prior written consent of the Global Coordinator, (i) directly or indirectly, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any share of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or file any registration statement under the 1933 Act with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Stock, whether any such swap or transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (A) the Securities to be sold hereunder or under the International Purchase Agreement, (B) any shares of Common Stock issued by the Company upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof and referred to in the Prospectuses or the documents incorporated therein by reference (as of the date of the Prospectuses), (C) any shares of Common Stock issued or options to purchase Common Stock granted pursuant to existing employee benefit plans of the Company referred to in the Prospectuses or the documents incorporated therein by reference (as of the date of the Prospectuses), (D) any shares of Common Stock issued pursuant to any non- employee director stock plan or dividend reinvestment plan, (E) any securities issued as consideration for or to otherwise finance an acquisition of capital stock or assets of a business, provided that the recipient of any such -------- ---- securities agrees in writing to be bound by the restrictions set forth in this Section 3(j) or (F) [cover trust preferred securities and Series E Stock] (k) Reporting Requirements. The Company, during the period when the Prospectuses are required to be delivered under the 1933 Act or the 1934 Act, will file all documents required to -18- be filed with the Commission pursuant to the 1934 Act within the time periods required by the 1934 Act and the 1934 Act Regulations. SECTION 4. Payment of Expenses. (a) Expenses. The Company will pay ------------------- all expenses incident to the performance of its obligations under this Agreement, including (i) the preparation, printing and filing of the Registration Statement (including financial statements and exhibits) as originally filed and of each amendment thereto, (ii) the preparation, printing and delivery to the Underwriters of this Agreement, any Agreement among Underwriters and such other documents as may be required in connection with the offering, purchase, sale, issuance or delivery of the Securities, (iii) the preparation, issuance and delivery of the certificates for the Securities to the Underwriters, including any stock or other transfer taxes and any stamp or other duties payable upon the sale, issuance or delivery of the Securities to the Underwriters and the transfer of the Securities between the U.S. Underwriters and the International Managers, (iv) the fees and disbursements of the Company's counsel, accountants and other advisors, (v) the qualification of the Securities under securities laws in accordance with the provisions of Section 3(f) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection therewith and in connection with the preparation of the Blue Sky Survey and any supplement thereto, (vi) the printing and delivery to the Underwriters of copies of each preliminary prospectus, any Term Sheets and of the Prospectuses and any amendments or supplements thereto, (vii) the preparation, printing and delivery to the Underwriters of copies of the Blue Sky Survey and any supplement thereto, (viii) the fees and expenses of any transfer agent or registrar for the Securities, (ix) the filing fees incident to, and the reasonable fees and disbursements of counsel to the Underwriters in connection with, the review by the National Association of Securities Dealers, Inc. (the "NASD") of the terms of the sale of the Securities and (x) the fees and expenses incurred in connection with the listing of the Securities on the New York Stock Exchange. (b) Termination of Agreement. If this Agreement is terminated by the U.S. Representatives in accordance with the provisions of Section 5 or Section 9(a)(i) hereof, the Company shall reimburse the U.S. Underwriters for all of their out-of-pocket expenses, including the reasonable fees and disbursements of counsel for the U.S. Underwriters. SECTION 5. Conditions of U.S. Underwriters' Obligations. The -------------------------------------------- obligations of the several U.S. Underwriters hereunder are subject to the accuracy of the representations and warranties of the Company and the Selling Shareholders contained in Section 1 hereof or in certificates of any officer of the Company or any subsidiary of the Company or on behalf of any Selling Shareholder delivered pursuant to the provisions hereof, to the performance by the Company of its covenants and other obligations hereunder, and to the following further conditions: (a) Effectiveness of Registration Statement. The Registration Statement, including any Rule 462(b) Registration Statement, has become effective and at Closing Time no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act or proceedings therefor initiated or threatened by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of counsel to the U.S. Underwriters. A prospectus containing the Rule 430A Information shall have -19- been filed with the Commission in accordance with Rule 424(b) (or a post- effective amendment providing such information shall have been filed and declared effective in accordance with the requirements of Rule 430A) or, if the Company has elected to rely upon Rule 434, a Term Sheet shall have been filed with the Commission in accordance with Rule 424(b). (b) Opinion of Counsel for Company. At Closing Time, the U.S. Representatives shall have received the favorable opinion, dated as of Closing Time, of each of David M. Sherbin, Associate General Counsel of the Company and Cleary, Gottlieb, Steen & Hamilton, counsel for the Company, each in form and substance satisfactory to counsel for the U.S. Underwriters, together with signed or reproduced copies of such letter for each of the other U.S. Underwriters to the effect set forth in Exhibit A hereto and to such further effect as counsel to the U.S. Underwriters may reasonably request. (c) Opinion of Counsel for the Selling Shareholders. At Closing Time, the Representatives shall have received the favorable opinion, dated as of Closing Time, of Katten Muchin & Zavis, counsel for the Selling Shareholders, in form and substance satisfactory to counsel for the U.S. Underwriters, together with signed or reproduced copies of such letter for each of the other U.S. Underwriters to the effect set forth in Exhibit A-2 hereto and to such further effect as counsel to the U.S. Underwriters may reasonably request. (d) Opinion of Counsel for U.S. Underwriters. At Closing Time, the U.S. Representatives shall have received the favorable opinion, dated as of Closing Time, of each of (A) Sidley & Austin, counsel for the U.S. Underwriters, together with signed or reproduced copies of such letter for each of the other U.S. Underwriters with respect to the matters set forth in clauses (i), (ii), (v), (vi) (solely as to preemptive or other similar rights arising by operation of law or under the charter or by-laws of the Company), (viii) through (x), inclusive, (xiii), (xv) (solely as to the information in the Prospectus under "Description of Capital Stock--Common Stock") and the penultimate paragraph of Exhibit A hereto and (B) Sachnoff & Weaver, Ltd., special counsel to the U.S. Underwriters, together with signed or reproduced copies of such letter for each of the other U.S. Underwriters with respect to matters set forth in the penultimate paragraph of Exhibit A hereto. In giving such opinion such counsel may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of New York, the federal law of the United States and the General Corporation Law of the State of Delaware, upon the opinions of counsel satisfactory to the U.S. Representatives. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the Company and its subsidiaries and certificates of public officials. (e) Officers' Certificate. At Closing Time, there shall not have been, since the date hereof or since the respective dates as of which information is given in the Prospectuses, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, and the U.S. Representatives shall have received a certificate of the President or a Vice President of the Company and of the chief financial or chief accounting officer -20- of the Company, dated as of Closing Time, to the effect that (i) there has been no such material adverse change, (ii) the representations and warranties in Section 1(a) hereof are true and correct with the same force and effect as though expressly made at and as of Closing Time, (iii) the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to Closing Time, and (iv) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or, to the Company's, knowledge are contemplated by the Commission. (f) Certificate of Selling Shareholders. At Closing Time, the U.S. Representatives shall have received a certificate of each of the Shareholder Representatives Attorney-in-Fact on behalf of the Selling Shareholders, dated as of Closing Time, to the effect that (i) the representations and warranties of each Selling Shareholder contained in Section 1(b) hereof are true and correct in all respects with the same force and effect as though expressly made at and as of Closing Time and (ii) each Selling Shareholder has complied in all material respects with all agreements and all conditions on its part to be performed under this Agreement at or prior to Closing Time. (g) Accountant's Comfort Letter. At the time of the execution of this Agreement, the U.S. Representatives shall have received from each of Ernst & Young LLP and KPMG Audit Plc a letter dated such date, in form and substance satisfactory to the U.S. Representatives, together with signed or reproduced copies of such letters for each of the other U.S. Underwriters containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectuses. (h) Bring-down Comfort Letter. At Closing Time, the Representatives shall have received from each of Ernst & Young LLP and KPMG Audit Plc a letter, dated as of Closing Time, to the effect that they reaffirm the statements made in the letters furnished pursuant to subsection (e) of this Section, except that the specified date referred to shall be a date not more than three business days prior to Closing Time. (i) Approval of Listing. At Closing Time, the Securities shall have been approved for listing on the New York Stock Exchange, subject only to official notice of issuance. (j) Lock-up Agreements. At the date of this Agreement, the U.S. Representatives shall have received an agreement substantially in the form of Exhibit B hereto signed by the persons listed on Schedule D hereto. (k) Purchase of Initial International Securities. Contemporaneously with the purchase by the U.S. Underwriters of the Initial U.S. Securities under this Agreement, the International Managers shall have purchased the Initial International Securities under the International Purchase Agreement. (l) Conditions to Purchase of U.S. Option Securities. In the event that the U.S. Underwriters exercise their option provided in Section 2(b) hereof to purchase all or any portion of -21- the U.S. Option Securities, the representations and warranties of the Company contained herein and the statements in any certificates furnished by the Company or any subsidiary of the Company hereunder shall be true and correct as of each Date of Delivery and, at the relevant Date of Delivery, the U.S. Representatives shall have received: (i) Officers' Certificate. A certificate, dated such Date of --------------------- Delivery, of the President or a Vice President of the Company and of the chief financial or chief accounting officer of the Company confirming that the certificate delivered at the Closing Time pursuant to Section 5(d) hereof remains true and correct as of such Date of Delivery. (ii) Certificate of Selling Shareholders. A certificate, dated ----------------------------------- such Date of Delivery, of the Shareholder Representatives on behalf of each Selling Shareholder confirming that the certificate delivered at Closing Time pursuant to Section 5(f) remains true and correct as of such Date of Delivery. (iii) Opinion of Counsel for Company. The favorable opinion of ------------------------------ each of Edward W. Gray, Jr., Senior Vice President and General Counsel of the Company, David M. Sherbin, Associate General Counsel of the Company, and Cleary, Gottlieb, Steen & Hamilton, counsel for the Company, each in form and substance satisfactory to counsel for the U.S. Underwriters, dated such Date of Delivery, relating to the U.S. Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(b) hereof. (iv) Opinion of Counsel for the Selling Shareholders. The ----------------------------------------------- favorable opinion of Katten Muchin & Zavis, counsel for the Selling Shareholders, in form and substance satisfactory to counsel for the U.S. Underwriters, dated such Date of Delivery, relating to the Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(c) hereof. (v) Opinion of Counsel for U.S. Underwriters. The favorable ---------------------------------------- opinion of each of Sidley & Austin, counsel for the U.S. Underwriters, and Sachnoff & Weaver, Ltd., special counsel for the U.S. Underwriters, dated such Date of Delivery, relating to the U.S. Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(c) hereof. (vi) Bring-down Comfort Letter. A letter from Ernst & Young LLP ------------------------- and from KPMG Audit plc, each, in form and substance satisfactory to the U.S. Representatives and dated such Date of Delivery, substantially in the same form and substance as the letter furnished to the U.S. Representatives pursuant to Section 5(f) hereof, except that the "specified date" in the letter furnished pursuant to this paragraph shall be a date not more than five days prior to such Date of Delivery. -22- (m) Additional Documents. At Closing Time and at each Date of Delivery, counsel for the U.S. Underwriters shall have been furnished with such documents and opinions as they may require for the purpose of enabling them to pass upon the issuance and sale of the Securities as herein contemplated, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company in connection with the issuance and sale of the Securities as herein contemplated shall be satisfactory in form and substance to the U.S. Representatives and counsel for the U.S. Underwriters. (n) Termination of Agreement. If any condition specified in this Section shall not have been fulfilled when and as required to be fulfilled, this Agreement, or, in the case of any condition to the purchase of U.S. Option Securities on a Date of Delivery which is after the Closing Time, the obligations of the several U.S. Underwriters to purchase the relevant Option Securities, may be terminated by the U.S. Representatives by notice to the Company and to the Selling Shareholders at any time at or prior to Closing Time or such Date of Delivery, as the case may be, and such termination shall be without liability of any party to any other party except as provided in Section 4 and except that Sections 1, 6, 7 and 8 shall survive any such termination and remain in full force and effect. SECTION 6. Indemnification. --------------- (a) Indemnification of U.S. Underwriters. The Company agrees to indemnify and hold harmless each U.S. Underwriter and each person, if any, who controls any U.S. Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act to the extent and in the manner set forth in clauses (i), (ii) and (iii) below. In addition, each Selling Shareholder, severally and not jointly, agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact included in any preliminary prospectus or the Prospectuses (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such -23- alleged untrue statement or omission; provided that (subject to Section 6(d) below) any such settlement is effected with the written consent of the Company; and (iii) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by Merrill Lynch), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above; provided, however, that this indemnity agreement shall not apply to any loss, - -------- ------- liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by any U.S. Underwriter through the U.S. Representatives expressly for use in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the U.S. Prospectus (or any amendment or supplement thereto); and provided further that the Company will not be liable to an U.S. Underwriter with - -------- ------- respect to any preliminary prospectus to the extent that the Company shall sustain the burden of proving that any such loss, liability, claim, damage or expense resulted from the fact that such U.S. Underwriter failed to send or give, at or prior to the Closing Date, a copy of the U.S. Prospectus, as then amended or supplemented if: (i) the Company has previously furnished copies thereof (sufficiently in advance of the Closing Date to allow for distribution by the Closing Date) to the U.S. Underwriters and the loss, liability, claim, damage or expense of such Underwriter resulted from an untrue statement or omission of a material fact contained in or omitted from the preliminary prospectus which was corrected in the U.S. Prospectus as, if applicable, amended or supplemented prior to the Closing Date and such U.S. Prospectus was required by law to be delivered at or prior to the written confirmation of sale to such person and (ii) such failure to give or send such U.S. Prospectus by the Closing Date to the party or parties asserting such loss, liability, claim, damage or expense would have constituted the sole defense to the claim asserted by such person; and provided further, that this indemnity agreement, in so far as it -------- ------- relates to indemnification by Selling Shareholders, shall not apply to any loss, liability, claim, damage or expense arising out of any untrue statement or omission or alleged untrue statement or omission except to the extent such untrue statement or omission or alleged untrue statement or omission relates (A) to written information furnished to the Company by or on behalf of any Selling Shareholder expressly for use in the Registration Statement (or any amendment thereto) or any preliminary prospectus or U.S. Prospectus (or any amendment or supplement thereto) or (B) to information relating to Fel-Pro. (b) Indemnification of Company, Directors and Officers and Selling Shareholders. Each U.S. Underwriter severally agrees to indemnify and hold harmless the Company, its directors, each of its officers who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, and each Selling Shareholder, against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration -24- Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary U.S. prospectus or the U.S. Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by such U.S. Underwriter through the U.S. Representatives expressly for use in the Registration Statement (or any amendment thereto) or such preliminary prospectus or the U.S. Prospectus (or any amendment or supplement thereto). (c) Actions against Parties; Notification. Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. In the case of parties indemnified pursuant to Section 6(a) above, counsel to the indemnified parties shall be selected by Merrill Lynch, and, in the case of parties indemnified pursuant to Section 6(b) above, counsel to the indemnified parties shall be selected by the Company. An indemnifying party may participate at its own expense in the defense of any such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 6 or Section 7 hereof (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (d) Settlement without Consent if Failure to Reimburse. If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 6(a)(ii) effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. (e) Limitation on Selling Shareholders' Indemnification. Without limiting the full extent of (i) the Company's agreement to indemnify each U.S. Underwriter (and controlling persons thereof, if any) as herein provided, (ii) the liability of the Company with respect to the breach by the Company of any representation, warranty or covenant contained in this Agreement (or in any certificate of the -25- Company delivered pursuant hereto) and (iii) the liability for any Selling Shareholder with respect to the breach by such Selling Shareholder of any representation, warranty or covenant contained in Section 1 of this Agreement (or in any certificate of such Selling Shareholder delivered pursuant hereto), notwithstanding anything contained in this Agreement to the contrary, each Selling Shareholder shall be liable under (A) the indemnification agreement contained in Section 6(a) of this Agreement or (B) the contribution provisions contained in Section 7 of this Agreement, only for an amount not exceeding, in the aggregate, the net proceeds received by such Selling Shareholder from the sale of Securities hereunder. The Company and the Selling Shareholders may agree, as among themselves and without limiting the rights of the U.S. Underwriters and controlling persons under this Agreement, as to the respective amounts of such liability for which each of them shall be responsible. SECTION 7. Contribution. If the indemnification provided for in ------------ Section 6 hereof is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Shareholders on the one hand and the U.S. Underwriters on the other hand from the offering of the Securities pursuant to this Agreement or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Selling Shareholders on the one hand and of the U.S. Underwriters on the other hand in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Shareholders on the one hand and the U.S. Underwriters on the other hand in connection with the offering of the U.S. Securities pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the U.S. Securities pursuant to this Agreement (before deducting expenses) received by the Company and the Selling Shareholders and the total underwriting discount received by the U.S. Underwriters, in each case as set forth on the cover of the U.S. Prospectus, or, if Rule 434 is used, the corresponding location on the Term Sheet, bear to the aggregate initial public offering price of the U.S. Securities as set forth on such cover. The relative fault of the Company and the Selling Shareholders on the one hand and the U.S. Underwriters on the other hand shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or the Selling Shareholders or by the U.S. Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Selling Shareholders and the U.S. Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if the U.S. Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this -26- Section 7. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 7 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission. Notwithstanding the provisions of this Section 7, no U.S. Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the U.S. Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such U.S. Underwriter has otherwise been required to pay by reason of any such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7, each person, if any, who controls a U.S. Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as such U.S. Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Company. The U.S. Underwriters' respective obligations to contribute pursuant to this Section 7 are several in proportion to the number of Initial U.S. Securities set forth opposite their respective names in Schedule A hereto and not joint. SECTION 8. Representations, Warranties and Agreements to Survive ----------------------------------------------------- Delivery. All representations, warranties and agreements contained in this - -------- Agreement or in certificates of officers of the Company or any of its subsidiaries or the Selling Shareholders submitted pursuant hereto, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of any U.S. Underwriter or controlling person, or by or on behalf of the Company or the Selling Shareholders, and shall survive delivery of the Securities to the U.S. Underwriters. SECTION 9. Termination of Agreement. ------------------------ (a) Termination; General. The U.S. Representatives may terminate this Agreement, by notice to the Company and the Selling Shareholders, at any time at or prior to Closing Time (i) if there has been, since the time of execution of this Agreement or since the respective dates as of which information is given in the U.S. Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, or (ii) if there has occurred any material adverse change in the financial markets in the United States or the international financial markets, any outbreak of hostilities or escalation thereof or other calamity or crisis or any change or development involving a prospective change in national or -27- international political, financial or economic conditions, in each case the effect of which is such as to make it, in the judgment of the U.S. Representatives, impracticable to market the Securities or to enforce contracts for the sale of the Securities, or (iii) if trading in any securities of the Company has been suspended or materially limited by the Commission or the New York Stock Exchange, or if trading generally on the New York Stock Exchange has been suspended or materially limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by any of said exchanges or by such system or by order of the Commission, the National Association of Securities Dealers, Inc. or any other governmental authority, or (iv) if a banking moratorium has been declared by either Federal or New York authorities. (b) Liabilities. If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Section 4 hereof, and provided further that Sections 1, 6, 7 and 8 shall survive such termination and remain in full force and effect. SECTION 10. Default by One or More of the U.S. Underwriters. If one ----------------------------------------------- or more of the U.S. Underwriters shall fail at Closing Time or a Date of Delivery to purchase the Securities which it or they are obligated to purchase under this Agreement (the "Defaulted Securities"), the U.S. Representatives shall have the right, within 24 hours thereafter, to make arrangements for one or more of the non-defaulting U.S. Underwriters, or any other underwriters, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms herein set forth; if, however, the U.S. Representatives shall not have completed such arrangements within such 24-hour period, then: (a) if the number of Defaulted Securities does not exceed 10% of the number of U.S. Securities to be purchased on such date, each of the non- defaulting U.S. Underwriters shall be obligated, severally and not jointly, to purchase the full amount thereof in the proportions that their respective underwriting obligations hereunder bear to the underwriting obligations of all non-defaulting U.S. Underwriters, or (b) if the number of Defaulted Securities exceeds 10% of the number of U.S. Securities to be purchased on such date, this Agreement or, with respect to any Date of Delivery which occurs after the Closing Time, the obligation of the U.S. Underwriters to purchase and of the Company to sell the Option Securities to be purchased and sold on such Date of Delivery shall terminate without liability on the part of any non-defaulting U.S. Underwriter. No action taken pursuant to this Section shall relieve any defaulting U.S. Underwriter from liability in respect of its default. In the event of any such default which does not result in a termination of this Agreement or, in the case of a Date of Delivery which is after the Closing Time, which does not result in a termination of the obligation of the U.S. Underwriters to purchase and the Company to sell the relevant U.S. Option Securities, as the case may be, either the U.S. Representatives or the Company -28- shall have the right to postpone Closing Time or the relevant Date of Delivery, as the case may be, for a period not exceeding seven days in order to effect any required changes in the Registration Statement or Prospectus or in any other documents or arrangements. As used herein, the term "U.S. Underwriter" includes any person substituted for a U.S. Underwriter under this Section 10. SECTION 11. Default by One or More of the Selling Shareholder(s) or ------------------------------------------------------- the Company. (a) If a Selling Shareholder shall fail at Closing Time to sell and - ----------- deliver the number of Securities which such Selling Shareholder or Selling Shareholders are obligated to sell hereunder, and the remaining Selling Shareholder(s) do not exercise the right hereby granted to increase, pro rata or otherwise, the number of Securities to be sold by them hereunder to the total number to be sold by all Selling Shareholders as set forth in Schedule A-2 hereto, then the U.S. Underwriters may, at the option of the U.S. Representatives, by notice from the U.S. Representatives to the Company and the non-defaulting Selling Shareholder(s), either (a) terminate this Agreement without any liability on the fault of any non-defaulting party except that the provisions of Sections 1, 4, 6, 7 and 8 shall remain in full force and effect or (b) elect to purchase the Securities which the non-defaulting Selling Shareholder(s) and the Company have agreed to sell hereunder. No action taken pursuant to this Section 11 shall relieve any Selling Shareholder so defaulting from liability, if any, in respect of such default. In the event of a default by any Selling Shareholder as referred to in this Section 11, each of the U.S. Representatives, the Company and the non-defaulting Selling Shareholder(s) shall have the right to postpone Closing Time or Date of Delivery for a period not exceeding seven days in order to effect any required change in the Registration Statement or Prospectus or in any other documents or arrangements. (b) If the Company shall fail at Closing Time to sell and deliver the number of Securities that it is obligated to sell hereunder, then this Agreement shall terminate without any liability on the part of any non-defaulting party except that the provisions of Sections 1, 4, 6, 7 and 8 shall remain in full force and effect. No action taken pursuant to this Section 11 shall relieve the Company from liability, if any, in respect of such default. SECTION 12. Notices. All notices and other communications hereunder ------- shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the U.S. Underwriters shall be directed to the U.S. Representatives at North Tower, World Financial Center, New York, New York 10281-1201, attention of .; and notices to the Company shall be directed to it at 26555 Northwestern Highway, Southfield, Michigan 48034, attention of General Counsel; and notices to the Selling Shareholder(s) shall be directed to ., attention of .. SECTION 13. Parties. This Agreement shall each inure to the benefit of ------- and be binding upon the U.S. Underwriters, the Company and the Selling Shareholders and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the U.S. Underwriters, the Company and the Selling Shareholders and their respective successors and the controlling persons and officers and directors -29- referred to in Sections 6 and 7 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the U.S. Underwriters, the Company and the Selling Shareholders and their respective successors, and said controlling persons and officers and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No purchaser of Securities from any U.S. Underwriter shall be deemed to be a successor by reason merely of such purchase. SECTION 14. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY ---------------------- AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME. SECTION 15. Effect of Headings. The Article and Section headings herein ------------------ and the Table of Contents are for convenience only and shall not affect the construction hereof. -30- If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company and the Shareholder Representatives for the Selling Shareholders a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement between the U.S. Underwriters and the Company and the Selling Shareholders in accordance with its terms. Very truly yours, FEDERAL-MOGUL CORPORATION By _________________________________ Name: Title: [Selling Shareholders] By:________________________________________ [Name] As Shareholder Representative acting on behalf of the Selling Shareholders listed above [Selling Shareholders] By:________________________________________ [Name] As Shareholder Representative acting on behalf of the Selling Shareholders listed above [Selling Shareholders] By:________________________________________ [Name] As Shareholder Representative acting on behalf of the Selling Shareholders listed above -31- CONFIRMED AND ACCEPTED, as of the date first above written: MERRILL LYNCH & CO. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED BEAR, STEARNS & CO., INC. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION MORGAN STANLEY & CO., INC. SMITH BARNEY INC. SCHRODER & CO. INC. By: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By _________________________________ Authorized Signatory For themselves and as U.S. Representatives of the other U.S. Underwriters named in Schedule A hereto. SCHEDULE A
Name of U.S. Underwriter Number of ------------------------ Initial U.S. Securities ------------ Merrill Lynch, Pierce, Fenner & Smith Incorporated...................................... Bear, Stearns & Co., Inc.................................. Donaldson, Lufkin & Jenrette Securities Corporation............................ Morgan Stanley & Co., Inc................................. Smith Barney Inc.......................................... Schroder & Co. Inc........................................ ------------ Total..................................................... ============
Sch A-1 SCHEDULE A-2
Number of Initial U.S. Maximum Number of U.S. Securities to be Sold Option Securities to be Sold ---------------------- ---------------------------- Federal-Mogul Corporation [Selling Shareholders] --------- --------- Total..................... =============== ===============
Sch A-2 SCHEDULE B FEDERAL-MOGUL CORPORATION ____________ Shares of Common Stock (Without Par Value) 1. The initial public offering price per share for the Securities, determined as provided in said Section 2, shall be $.. 2. The purchase price per share for the U.S. Securities to be paid by the several U.S. Underwriters shall be $., being an amount equal to the initial public offering price set forth above less $. per share; provided that the purchase price per share for any U.S. Option Securities purchased upon the exercise of the over-allotment option described in Section 2(b) shall be reduced by an amount per share equal to any dividends or distributions declared by the Company and payable on the Initial U.S. Securities but not payable on the U.S. Option Securities. Sch B-1 SCHEDULE C [List of subsidiaries to come.] Sch C-1 [SCHEDULE D] [List of persons and entities subject to lock-up] Federal-Mogul Corporation Richard A. Snell Alan C. Johnson Paul R. Lederer Thomas W. Ryan Wilhelm A. Schmelzer Frank Tomes Sch D-1 Exhibit A FORM OF OPINION OF COMPANY'S COUNSEL TO BE DELIVERED PURSUANT TO SECTION 5(b) [To be agreed] A-1 Exhibit A-2 FORM OF OPINION OF COUNSEL FOR THE SELLING SHAREHOLDER(S) TO BE DELIVERED PURSUANT TO SECTION 5(c) i. No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency, domestic or foreign (other than under the 1933 Act and the 1933 Act Regulations, which have been obtained, or as may be required under the securities or blue sky laws of the various states, as to which we need express no opinion) is necessary or required to be obtained by the Selling Shareholders for the performance by the Selling Shareholders of their obligations under the U.S. Purchase Agreement, the International Purchase Agreement or the Power of Attorney and Custody Argeement, or in connection with the offer, sale and delivery of the Securities. ii. Each Power of Attorney and Custody Agreement has been duly executed and delivered by the respective Selling Shareholder(s) named therein and constitutes the legal, valid and binding agreement of such Selling Shareholder. iii. Each of the U.S. Purchase Agreement and the International Purchase Agreement has been duly authorized, executed and delivered by or on behalf of each Selling Shareholder. iv. The Shareholder Representatives have been duly authorized by the Selling Shareholders to deliver shares of Series E Preferred Stock for conversion into Conversion Shares and direct the Company to deliver the Conversion Shares on behalf of the Selling Shareholders in accordance with the terms of the U.S. Purchase Agreement and the International Purchase Agreement. v. The execution, delivery and performance of the U.S. Purchase Agreement, the International Purchase Agreement and the Power of Attorney and Custody Agreement and the sale and delivery of the Securities and the consummation of the transactions contemplated in the U.S. Purchase Agreement, the International Purchase Agreement and in the Registration Statement and compliance by the Selling Shareholder(s) with its obligations under the U.S. Purchase Agreement and the International Purchase Agreement have been duly authorized by all necessary action on the part of the Selling Shareholder(s) and do not and will not, whether with or without A-2 the giving of notice or passage of time or both, conflict with or constitute a breach of, or default under or result in the creation or imposition of any tax, lien, charge or encumbrance upon the Securities nor will such action result in any violation of the provisions of the charter or by-laws or other organizational or governing instrucments of the Selling Shareholders, if applicable, or any law, administrative regulation, judgment or order of any government, government instrumentality or court or any administrative or court decree having jurisdiction over such Selling Shareholder or any of its properties. vi. To the best of our knowledge, each Selling Shareholder has valid and marketable title to the shares of Series E Stock to be converted into Conversion Shares to be sold by such Selling Shareholder pursuant to the U.S. Purchase Agreement and the International Purchase Agreement, free and clear of any pledge, lien, security interest, claim, equity or encumbrance of any kind, and has full right, power and authority to sell, transfer and deliver such Securities pursuant to the U.S. Purchase Agreement and the International Purchase Agreement. By delivery of a certificate or certificates therefor such Selling Shareholder will transfer to the Underwriters who have purchased such Securities pursuant to the U.S. Purchase Agreement and the International Purchase Agreement (without notice of any defect in the title of such Selling Shareholder and who are otherwise bona fide purchasers for purposes of the Uniform Commercial Code) valid and marketable title to such Securities, free and clear of any pledge, lien, security interest, charge, claim, equity or encumbrance of any kind. A-3 [FORM OF LOCK-UP FROM DIRECTORS, OFFICERS OR OTHER STOCKHOLDERS PURSUANT TO SECTION 5(J)] Exhibit B ., 1998 MERRILL LYNCH & CO. Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bear, Stearns & Co., Inc. Donaldson, Lufkin & Jenrette Securities Corporation Morgan Stanley & Co., Inc. Smith Barney Inc. Schroder & Co. Inc. as U.S. Representatives of the several U.S. Underwriters to be named in the within-mentioned U.S. Purchase Agreement c/o Merrill Lynch & Co. Merrill Lynch, Pierce, Fenner & Smith Incorporated North Tower World Financial Center New York, New York 10281-1209 Re: Proposed Public Offering by Federal-Mogul Corporation ----------------------------------------------------- Dear Sirs: The undersigned, a stockholder and an officer and/or director of Federal- Mogul Corporation, a Michigan corporation (the "Company"), understands that Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and Bear, Stearns & Co., Inc., Donaldson, Lufkin & Jenrette Securities Corporation, Morgan Stanley & Co., Inc., Smith Barney Inc. and Schroder & Co. Inc. proposes to enter into a U.S. Purchase Agreement (the "U.S. Purchase Agreement") with the Company providing for the public offering of shares (the "Securities") of the Company's common stock, without par value (the "Common Stock"). In recognition of the benefit that such an offering will confer upon the undersigned as a stockholder and an officer and/or director of the Company, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned agrees with each underwriter to be named in the U.S. Purchase Agreement that, during a period of . days from the date of the U.S. Purchase Agreement, the undersigned will not, without the prior written consent of Merrill Lynch, directly or indirectly, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer any shares of the Company's Common Stock or any securities convertible into or exchangeable or B-1 exercisable for Common Stock, whether now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition, or file any registration statement under the Securities Act of 1933, as amended, with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequences of ownership of the Common Stock, whether any such swap or transaction is to be settled by delivery of Common Stock or other securities, in cash or otherwise. Very truly yours, Signature:___________________________ Name:________________________________ EX-1.3 4 FORM OF INTERNATIONAL PURCHASE AGREEMENT EXHIBIT 1.3 ________________________________________________________________________________ ________________________________________________________________________________ FEDERAL-MOGUL CORPORATION (a Michigan corporation) _________ Shares of Common Stock INTERNATIONAL PURCHASE AGREEMENT Dated: June ., 1998 ________________________________________________________________________________ ________________________________________________________________________________ TABLE OF CONTENTS
PAGE ---- SECTION 1. Representations and Warranties.................................................................. 4 (a) Representations and Warranties by the Company................................................... 4 (i) Compliance with Registration Requirements....................................................... 4 (ii) Incorporated Documents.......................................................................... 5 (iii) Independent Accountants......................................................................... 5 (iv) Financial Statements............................................................................ 5 (v) No Material Adverse Change in Business.......................................................... 6 (vi) Good Standing of the Company.................................................................... 6 (vii) Good Standing of Subsidiaries................................................................... 6 (viii) Capitalization.................................................................................. 7 (ix) Authorization of Agreement............................................................. 7 (x) Authorization and Description of Securities............................................ 7 (xi) Absence of Defaults and Conflicts...................................................... 7 (xii) Absence of Labor Dispute............................................................... 8 (xiii) Absence of Proceedings................................................................. 8 (xiv) Accuracy of Exhibits................................................................... 8 (xv) Possession of Intellectual Property.................................................... 9 (xvi) Absence of Further Requirements........................................................ 9 (xvii) Possession of Licenses and Permits..................................................... 9 (xviii) Title to Property...................................................................... 9 (xix) [Intentionally Omitted.] ...................................................................... 10 (xx) Investment Company Act................................................................. 10 (xxi) Environmental Laws..................................................................... 10 (b) Representations and Warranties by the Selling Shareholders...................................... 11 (i) Accurate Disclosure............................................................ 11 (ii) Authorization of Agreements.................................................... 11 (iii) Good and Marketable Title...................................................... 12 (iv) Due Execution of Power of Attorney and Custody Agreement....................... 12 (v) Absence of Manipulation........................................................ 12 (vi) Absence of Further Requirements................................................ 13 (vii) Restriction on Sale of Securities.............................................. 13 (viii) Certificates Suitable for Transfer............................................. 13 (ix) No Association with NASD....................................................... 13 (c) Officer's Certificates.......................................................................... 14 (d) Selling Shareholders' Certificates.............................................................. 14 SECTION 2. Sale and Delivery to International Managers; Closing............................................ 14 (a) Initial Securities..................................................................... 14 (b) Option Securities...................................................................... 14 (c) Payment................................................................................ 15 (d) Denominations; Registration............................................................ 15
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PAGE ---- SECTION 3. Covenants of the Company....................................................................... 16 (a) Compliance with Securities Regulations and Commission Requests........................ 16 (b) Filing of Amendments.................................................................. 16 (c) Delivery of Registration Statements................................................... 16 (d) Delivery of Prospectuses.............................................................. 17 (e) Continued Compliance with Securities Laws............................................. 17 (f) Blue Sky Qualifications............................................................... 17 (g) Earnings Statement.................................................................... 18 (h) Use of Proceeds....................................................................... 18 (i) Listing............................................................................... 18 (j) Restriction on Sale of Securities..................................................... 18 (k) Reporting Requirements................................................................ 18 SECTION 4. Payment of Expenses............................................................................ 18 (a) Expenses.......................................................................................... 18 (b) Termination of Agreement.............................................................. 19 SECTION 5. Conditions of International Managers' Obligations.............................................. 19 (a) Effectiveness of Registration Statement........................................................ 19 (b) Opinion of Counsel for Company................................................................. 20 (c) Opinion of Counsel for the Selling Shareholders....................................... 20 (d) Opinion of Counsel for International Managers......................................... 20 (e) Officers' Certificate................................................................. 20 (f) Certificate of Selling Shareholders................................................... 21 (g) Accountant's Comfort Letter........................................................... 21 (h) Bring-down Comfort Letter............................................................. 21 (i) Approval of Listing................................................................... 21 (j) Lock-up Agreements.................................................................... 21 (k) Purchase of Initial U.S. Securities................................................... 21 (l) Conditions to Purchase of International Option Securities............................. 21 (i) Officers' Certificate................................................................. 22 (ii) Certificate of Selling Shareholders................................................... 22 (iii) Opinion of Counsel for Company........................................................ 22 (iv) Opinion of Counsel for the Selling Shareholders....................................... 22 (v) Opinion of Counsel for International Managers......................................... 22 (vi) Bring-down Comfort Letter............................................................. 22 (m) Additional Documents.................................................................. 22 (n) Termination of Agreement.............................................................. 23 SECTION 6. Indemnification................................................................................ 23 (a) Indemnification of International Managers............................................. 23 (b) Indemnification of Company, Directors and Officers and Selling Shareholders.......................................................................... 24
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PAGE ---- (c) Actions against Parties; Notification.......................................................... 25 (d) Settlement without Consent if Failure to Reimburse............................................. 25 (e) Limitation on Selling Shareholders Indemnification............................................. 25 SECTION 7. Contribution................................................................................... 26 SECTION 8. Representations, Warranties and Agreements to Survive Delivery................................. 27 SECTION 9. Termination of Agreement....................................................................... 27 (a) Termination; General........................................................................... 27 (b) Liabilities. ................................................................................. 28 SECTION 10. Default by One or More of the International Managers........................................... 28 SECTION 11. Default by One or More of the Selling Shareholder(s) or the Company............................ 28 SECTION 12. Notices........................................................................................ 29 SECTION 13. Parties........................................................................................ 29 SECTION 14. GOVERNING LAW AND TIME......................................................................... 30 SECTION 15. Effect of Headings............................................................................. 30 SCHEDULES Schedule A - List of Underwriters......................................................... Sch A-1 Schedule A-2 - Initial International Securities and International Option Securities..................................................................... Sch A-2-1 Schedule B - Federal-Mogul................................................................ Sch B-1 Schedule C - List of Subsidiaries......................................................... Sch C-1 Schedule D - List of Persons subject to Lock-up........................................... Sch D-1 EXHIBITS Exhibit A - Form of Opinion of Company's Counsel.......................................... A-1 Exhibit A-2 - Form of Opinion of Selling Shareholders' Counsel............................ A 2-1 Exhibit B - Form of Lock-up Letter........................................................ B-1
iii Draft of June 1, 1998 FEDERAL-MOGUL Corporation (a Michigan corporation) _________ Shares of Common Stock (Without Par Value) INTERNATIONAL PURCHASE AGREEMENT -------------------------------- June ., 1998 MERRILL LYNCH INTERNATIONAL Bear, Stearns International Limited Morgan Stanley & Co. International Limited Smith Barney Inc. Donaldson, Lufkin & Jenrette International J. Henry Schroder & Co. Limited ABN AMRO Rothschild Credit Lyonnais Securities Kleinwort Benson Limited as Lead Managers of the several International Managers c/o Merrill Lynch International Ropemaker Place 25 Ropemaker Street London EC2Y 9LY England Ladies and Gentlemen: Federal-Mogul Corporation, a Michigan corporation (the "Company"), and the shareholders listed on Schedule A-2 hereto (the "Selling Shareholders"), confirm their respective agreements with Merrill Lynch International ("Merrill Lynch") and each of the other international underwriters named in Schedule A hereto (collectively, the "International Managers", which term shall also include any underwriter substituted as hereinafter provided in Section 10 hereof), for whom Merrill Lynch, Bear, Stearns International Limited, Morgan Stanley & Co. International Limited, Smith Barney Inc., Donaldson, Lufkin & Jenrette International, J. Henry Schroder & Co. Limited, ABN AMRO Rothschild, Credit Lyonnais Securities and Kleinwort Benson Limited are acting as representatives (in such capacity, the "Lead Managers"), with respect to (i) the sale by the Company and the Selling 1 Shareholders, severally and not jointly, and the purchase by the International Managers, acting severally and not jointly, of the respective numbers of shares of Common Stock, without par value, of the Company ("Common Stock") as set forth in said Schedules A and A-1 (which, with respect to the Selling Shareholders, reflect shares of Common Stock to be issued upon conversion of shares of Series E Mandatory Exchangeable Preferred Stock ("Series E Stock")), and (ii) the grant by the Company and the Selling Shareholders to the International Managers, acting severally and not jointly, of the option described in Section 2(b) hereof to purchase all or any part of _________ additional shares of Common Stock to cover over-allotments, if any. The aforesaid _________ shares of Common Stock (the "Initial International Securities") to be purchased by the International Managers and all or any part of the _________ shares of Common Stock subject to the option described in Section 2(b) hereof (the "International Option Securities") are hereinafter called, collectively, the "International Securities". It is understood that the Company and the Selling Shareholders are concurrently entering into an agreement dated the date hereof (the "U.S. Purchase Agreement") providing for the offering by the Company of an aggregate of _________ shares of Common Stock (the "Initial U.S. Securities") through arrangements with certain underwriters in the United States and Canada (the "U.S. Underwriters") for which Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bear, Stearns International Limited, Morgan Stanley & Co. International Limited, Smith Barney Inc., Donaldson, Lufkin & Jenrette International. J. Henry Schroder & Co. Limited, ABN AMRO Rothschild, Credit Lyonnais Securities and Kleinwort Benson Limited are acting as representatives (the "U.S. Representatives") and the grant by the Company and the Selling Shareholders to the U.S. Underwriters, acting severally and not jointly, of an option to purchase all or any part of the U.S. Underwriters' pro rata portion of up to _________ additional shares of Common Stock solely to cover overallotments, if any (the "U.S. Option Securities" and, together with the International Option Securities, the "Option Securities"). The Initial U.S. Securities and the U.S. Option Securities are hereinafter called the "U.S. Securities". It is understood that the Company and the Selling Shareholders are not obligated to sell and the International Managers are not obligated to purchase, any Initial International Securities unless all of the Initial U.S. Securities are contemporaneously purchased by the U.S. Underwriters. The International Managers and the U.S. Underwriters are hereinafter collectively called the "Underwriters", the Initial International Securities and the Initial U.S. Securities are hereinafter collectively called the "Initial Securities", and the International Securities, and the U.S. Securities are hereinafter collectively called the "Securities". The Underwriters will concurrently enter into an Intersyndicate Agreement of even date herewith (the "Intersyndicate Agreement") providing for the coordination of certain transactions among the Underwriters under the direction of Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (in such capacity, the "Global Coordinator"). The Company and the Selling Shareholders understand that the International Managers propose to make a public offering of the International Securities as soon as the Lead Managers deem advisable after this Agreement has been executed and delivered. 2 The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-3 (No. 333-50413) and pre- effective amendments nos. 1 and 2 thereto covering the registration of the Securities under the Securities Act of 1933, as amended (the "1933 Act"), including the related preliminary prospectus or prospectuses. Promptly after execution and delivery of this Agreement, the Company will either (i) prepare and file a prospectus in accordance with the provisions of Rule 430A ("Rule 430A") of the rules and regulations of the Commission under the 1933 Act (the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of the 1933 Act Regulations or (ii) if the Company has elected to rely upon Rule 434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a "Term Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). Two forms of prospectus are to be used in connection with the offering and sale of the Securities: one relating to the International Securities (the "Form of International Prospectus") and one relating to the U.S. Securities (the "Form of U.S. Prospectus"). The Form of International Prospectus is identical to the Form of U.S. Prospectus, except for the front cover and back cover pages and the information under the caption "Underwriting". The information included in any such prospectus or in any such Term Sheet, as the case may be, that was omitted from such registration statement at the time it became effective but that is deemed to be part of such registration statement at the time it became effective (a) pursuant to paragraph (b) of Rule 430A is referred to as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is referred to as "Rule 434 Information." Each Form of International Prospectus and Form of U.S. Prospectus used before such registration statement became effective, and any prospectus that omitted, as applicable, the Rule 430A Information or the Rule 434 Information, that was used after such effectiveness and prior to the execution and delivery of this Agreement, is herein called a "preliminary prospectus." Such registration statement, including the exhibits thereto, schedules thereto, if any, and the documents incorporated by reference therein pursuant to Item 12 of Form S-3 under the 1933 Act, at the time it became effective and including the Rule 430A Information and the Rule 434 Information, as applicable, is herein called the "Registration Statement." Any registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b) Registration Statement," and after such filing the term "Registration Statement" shall include the Rule 462(b) Registration Statement. The final Form of International Prospectus and the final Form of U.S. Prospectus, including the documents incorporated by reference therein pursuant to Item 12 of Form S-3 under the 1933 Act, in the forms first furnished to the Underwriters for use in connection with the offering of the Securities are herein called the "International Prospectus" and the "U.S. Prospectus," respectively, and collectively, the "Prospectuses." If Rule 434 is relied on, the terms "International Prospectus" and "U.S. Prospectus" shall refer to the preliminary International Prospectus dated _____, 1998 and preliminary U.S. Prospectus dated ____, 1998, respectively, each together with the applicable Term Sheet and all references in this Agreement to the date of such Prospectuses shall mean the date of the applicable Term Sheet. For purposes of this Agreement, all references to the Registration Statement, any preliminary prospectus, the International Prospectus, the U.S. Prospectus or any Term Sheet or any amendment or supplement to any of the foregoing shall be deemed to include the copy filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval system ("EDGAR"). All references in this Agreement to financial statements and schedules and other information which is "contained," "included" or "stated" in the Registration Statement, any preliminary prospectus (including the Form of U.S. Prospectus and Form of International Prospectus) or the Prospectuses 3 (or other references of like import) shall be deemed to mean and include all such financial statements and schedules and other information which is incorporated by reference in the Registration Statement, any preliminary prospectus (including the Form of U.S. Prospectus and Form of International Prospectus) or the Prospectuses, as the case may be; and all references in this Agreement to amendments or supplements to the Registration Statement, any preliminary prospectus or the Prospectuses shall be deemed to mean and include the filing of any document under the Securities Exchange Act of 1934 (the "1934 Act") which is incorporated by reference in the Registration Statement, such preliminary prospectus or the Prospectuses, as the case may be. SECTION 1. Representations and Warranties. ------------------------------ (a) Representations and Warranties by the Company. The Company represents and warrants to each International Manager as of the date hereof, as of the Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery (if any) referred to in Section 2(b) hereof, and agrees with each International Manager, as follows: (i) Compliance with Registration Requirements. The Company meets the ----------------------------------------- requirements for use of Form S-3 under the 1933 Act. Each of the Registration Statement and any Rule 462(b) Registration Statement has become effective under the 1933 Act and no stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the 1933 Act and no proceedings for that purpose have been instituted or are pending or, to the knowledge of the Company, are contemplated by the Commission, and any request on the part of the Commission for additional information has been complied with. At the respective times the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendments thereto became effective and at the Closing Time (and, if any International Option Securities are purchased, at the Date of Delivery), the Registration Statement, the Rule 462(b) Registration Statement and any amendments and supplements thereto complied and will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations and did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. Neither of the Prospectuses nor any amendments or supplements thereto, at the time the Prospectuses or any amendments or supplements thereto were issued and at the Closing Time (and, if any International Option Securities are purchased, at the Date of Delivery), included or will include an untrue statement of a material fact or omitted or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If Rule 434 is used, the Company will comply with the requirements of Rule 434. The representations and warranties in this subsection shall not apply to statements in or omissions from the Registration Statement or the International Prospectus made in reliance upon and in conformity with information furnished to the Company in writing by any International Manager through the Lead Managers expressly for use in the Registration Statement or the International Prospectus. 4 Each preliminary prospectus and the prospectuses filed as part of the Registration Statement as originally filed or as part of any amendment thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so filed in all material respects with the 1933 Act Regulations and each preliminary prospectus and the Prospectuses delivered to the Underwriters for use in connection with this offering was identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (ii) Incorporated Documents. The documents incorporated or deemed to ---------------------- be incorporated by reference in the Registration Statement and the Prospectuses, at the time they were or hereafter are filed with the Commission, complied and will comply in all material respects with the requirements of the 1934 Act and the rules and regulations of the Commission thereunder (the "1934 Act Regulations"), and, when read together with the other information in the Prospectuses, at the time the Registration Statement became effective, at the time the Prospectuses were issued and at the Closing Time (and, if any International Option Securities are purchased, at the Date of Delivery), did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. (iii) Independent Accountants. The accountants who certified the ----------------------- financial statements and supporting schedules included in the Registration Statement are independent public accountants as required by the 1933 Act and the 1933 Act Regulations. (iv) Financial Statements. The financial statements of the Company -------------------- and its consolidated subsidiaries included in the Registration Statement and the Prospectuses, together with the related schedules and notes, as well as those financial statements, schedules and notes of any other entity included therein, present fairly the financial position of the Company and its consolidated subsidiaries, or such other entity, as the case may be, at the dates indicated and the statement of operations, shareholders' equity and cash flows of the Company and its consolidated subsidiaries, or such other entity, as the case may be, for the periods specified; said financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods involved except as disclosed therein, except that financial statements of T&N plc ("T&N") have been prepared in conformity with U.K. GAAP applied on a consistent basis throughout the periods involved except as disclosed therein. The supporting schedules, if any, included in the Registration Statement present fairly in accordance with GAAP, or U.K. GAAP with respect to T&N supporting schedules, the information required to be stated therein. The selected financial data and the summary financial information included in the Prospectuses present fairly the information shown therein and have been compiled on a basis consistent with that of the audited financial statements included in the Registration Statement and the Prospectuses. The pro forma financial statements and the related notes thereto included in the Registration Statement and the Prospectuses present fairly the information shown therein, have been prepared in accordance with the Commission's rules and guidelines with respect to pro forma financial statements and have been properly compiled on the bases described therein, and the assumptions used in the preparation thereof are reasonable and the 5 adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein. (v) No Material Adverse Change in Business. Since the respective -------------------------------------- dates as of which information is given in the Registration Statement and the Prospectuses, except as otherwise stated therein, (A) there has been no material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business (a "Material Adverse Effect"), (B) there have been no transactions entered into by the Company or any of its subsidiaries, other than those in the ordinary course of business, which are material with respect to the Company and its subsidiaries considered as one enterprise, and (C) except for regular quarterly dividends on the Common Stock in amounts per share that are consistent with past practice or with the Company's new dividend policy summarized in the Prospectuses under the caption "Price Range of Common Stock and Dividends" and dividends on the Company's outstanding preferred stock in the ordinary course, there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of its capital stock. (vi) Good Standing of the Company. The Company has been duly ---------------------------- organized and is validly existing as a corporation in good standing under the laws of the state of Michigan and has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and to enter into and perform its obligations under this Agreement; and the Company is duly qualified as a foreign corporation to transact business and is in good standing in each other jurisdiction (including foreign jurisdictions) in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect. (vii) Good Standing of Subsidiaries. Each "significant subsidiary" ----------------------------- of the Company (as such term is defined in Rule 1-02 of Regulation S-X) (each a "Subsidiary" and, collectively, the "Subsidiaries") has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction (including foreign jurisdictions) in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect; except as otherwise disclosed in the Registration Statement, all of the issued and outstanding capital stock of each such Subsidiary has been duly authorized and validly issued, is fully paid and non-assessable and greater than 90% of such capital stock is owned by the Company, directly or through subsidiaries, and to the extent such capital stock is owned by the Company it is owned free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; none of the outstanding shares of capital stock of any Subsidiary was issued in violation of the preemptive or similar rights of any securityholder of such Subsidiary. The only subsidiaries of the 6 Company are (a) the subsidiaries listed on Schedule C hereto and (b) certain other subsidiaries which, considered in the aggregate as a single subsidiary, do not constitute a "significant subsidiary" as defined in Rule 1-02 of Regulation S-X. (viii) Capitalization. The authorized, issued and outstanding capital -------------- stock of the Company is as set forth in the Prospectuses in the column entitled "Actual" under the caption "Capitalization" (except for subsequent issuances, if any, pursuant to this Agreement or the U.S. Purchase Agreement, pursuant to reservations, agreements or employee benefit plans referred to in the Prospectuses or pursuant to the exercise of convertible securities or options referred to in the Prospectuses). The shares of issued and outstanding capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable, and the Securities to be issued upon conversion of shares of Series E Stock held by such Selling Shareholders and to be sold to the Underwriters hereunder and under the International Purchase Agreement ("Conversion Shares") have been duly authorized and will be, prior to the Closing Time and at each Time of Delivery (if any), as applicable, duly authorized and validly issued and fully paid and non-assessable; none of the outstanding shares of capital stock of the Company was issued, and none of the Conversion Shares will be issued, in violation of the preemptive or other similar rights of any securityholder of the Company; as of the Closing Time and each Date of Delivery (if any), as applicable, shares of Series E Stock shall have been duly and validly converted into the appropriate number of Conversion Shares. (ix) Authorization of Agreement. This Agreement and the U.S. -------------------------- Purchase Agreement have been duly authorized, executed and delivered by the Company. (x) Authorization and Description of Securities. The Securities to ------------------------------------------- be purchased by the International Managers and the U.S. Underwriters from the Company have been duly authorized for issuance and sale to the International Managers pursuant to this Agreement and the U.S. Underwriters pursuant to the U.S. Purchase Agreement, respectively, and, when issued and delivered by the Company pursuant to this Agreement and the U.S. Purchase Agreement, respectively, against payment of the consideration set forth herein and in the U.S. Purchase Agreement, respectively, will be validly issued, fully paid and non-assessable; the Common Stock conforms to all statements relating thereto contained in the Prospectuses and such description conforms in all material respects to the rights set forth in the instruments defining the same; no holder of the Securities will be subject to personal liability by reason of being such a holder; and the issuance of the Securities is not subject to the preemptive or other similar rights of any securityholder of the Company. (xi) Absence of Defaults and Conflicts. Neither the Company nor any --------------------------------- of its subsidiaries is in violation of its charter or by-laws or in default in the performance or observance of any obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company or any of its subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or any subsidiary is subject (collectively, "Agreements and Instruments") except for such defaults that would not result in a Material Adverse Effect; and the execution, delivery and 7 performance of this Agreement and the U.S. Purchase Agreement and the consummation of the transactions contemplated in this Agreement, in the U.S. Purchase Agreement and in the Registration Statement (including the issuance and sale of the Securities and the use of the proceeds from the sale of the Securities as described in the Prospectuses under the caption "Use of Proceeds") and compliance by the Company with its obligations under this Agreement and the U.S. Purchase Agreement have been duly authorized by all necessary corporate action and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined below) (except to the extent described in the Prospectuses under the caption "Description of Certain Indebtedness--Repayments and Refinancings") under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any subsidiary pursuant to, the Agreements and Instruments (except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not result in a Material Adverse Effect), nor will such action result in any violation of the provisions of the charter or by-laws of the Company or any subsidiary or any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any subsidiary or any of their assets, properties or operations. As used herein, a "Repayment Event" means any event or condition which gives the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder's behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company or any subsidiary. (xii) Absence of Labor Dispute. No labor dispute with the employees ------------------------ of the Company or any subsidiary exists or, to the knowledge of the Company, is imminent which may reasonably be expected to result in a Material Adverse Effect. (xiii) Absence of Proceedings. There is no action, suit, proceeding, ---------------------- inquiry or investigation before or brought by any court or governmental agency or body, domestic or foreign, now pending, or, to the knowledge of the Company, threatened, against or affecting the Company or any subsidiary, which is required to be disclosed in the Registration Statement (other than as disclosed therein), or which might reasonably be expected to result in a Material Adverse Effect, or which might reasonably be expected to materially and adversely affect the consummation of the transactions contemplated by this Agreement and the U.S. Purchase Agreement or the performance by the Company of its obligations hereunder or thereunder; the aggregate of all pending legal or governmental proceedings to which the Company or any subsidiary is a party or of which any of their respective properties, assets or operations is the subject which are not described in the Registration Statement, including ordinary routine litigation incidental to the business, could not reasonably be expected to result in a Material Adverse Effect. (xiv) Accuracy of Exhibits. There are no contracts or documents -------------------- which are required to be described in the Registration Statement, the Prospectuses or the documents incorporated by reference therein or to be filed as exhibits thereto which have not been so described and filed as required. 8 (xv) Possession of Intellectual Property. The Company and its ----------------------------------- subsidiaries own or possess, or can acquire on reasonable terms, adequate patents, patent rights, licenses, inventions, copyrights, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, trade names or other intellectual property (collectively, "Intellectual Property") necessary to carry on the business now operated by them, except where the failure to own or possess or otherwise be able to acquire such Intellectual Property would not result in a Material Adverse Effect, and neither the Company nor any of its subsidiaries has received any notice or is otherwise aware of any infringement of or conflict with asserted rights of others with respect to any Intellectual Property or of any facts or circumstances which would render any Intellectual Property invalid or inadequate to protect the interest of the Company or any of its subsidiaries therein, and which infringement or conflict (if the subject of any unfavorable decision, ruling or finding) or invalidity or inadequacy, singly or in the aggregate, would result in a Material Adverse Effect. (xvi) Absence of Further Requirements. No filing with, or ------------------------------- authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency, domestic or foreign, is necessary or required for the performance by the Company of its obligations hereunder, in connection with the offering, issuance or sale of the Securities by the Company under this Agreement and the U.S. Purchase Agreement or the consummation by the Company of the transactions contemplated by this Agreement and the U.S. Purchase Agreement, except such as have been already obtained or as may be required under the 1933 Act or the 1933 Act Regulations and foreign or state securities or blue sky laws. (xvii) Possession of Licenses and Permits. The Company and its ---------------------------------- subsidiaries possess such permits, licenses, approvals, consents and other authorizations (collectively, "Governmental Licenses") issued by the appropriate federal, state, local or foreign regulatory agencies or bodies necessary to conduct the business now operated by them; the Company and its subsidiaries are in compliance with the terms and conditions of all such Governmental Licenses, except where the failure so to comply would not, singly or in the aggregate, have a Material Adverse Effect; all of the Governmental Licenses are valid and in full force and effect, except when the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not have a Material Adverse Effect; and neither the Company nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification of any such Governmental Licenses which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Effect. (xviii) Title to Property. The Company and its subsidiaries have ----------------- good and marketable title to all real property owned by the Company and its subsidiaries which is material to the business of the Company and its subsidiaries taken as a whole and good title to all other properties owned by them which is material to the business of the Company and its subsidiaries taken as a whole , in each case, free and clear of all mortgages, pledges, liens, security interests, claims, restrictions or encumbrances of any kind except such as (a) are 9 described in the Prospectuses or (b) do not, singly or in the aggregate, materially affect the value of such property and do not interfere with the use made and proposed to be made of such property by the Company or any of its subsidiaries; and all of the leases and subleases material to the business of the Company and its subsidiaries, considered as one enterprise, and under which the Company or any of its subsidiaries holds properties described in the Prospectuses, are in full force and effect, and neither the Company nor any subsidiary has any notice of any material claim of any sort that has been asserted by anyone adverse to the rights of the Company or any subsidiary under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company or such subsidiary to the continued possession of the leased or subleased premises under any such lease or sublease. (xix) [Intentionally Omitted.] (xx) Investment Company Act. The Company is not, and upon the ---------------------- issuance and sale of the Securities as herein contemplated and the application of the net proceeds therefrom as described in the Prospectuses will not be, an "investment company" or an entity "controlled" by an "investment company" as such terms are defined in the Investment Company Act of 1940, as amended (the "1940 Act"). (xxi) Environmental Laws. Except as described in the Registration ------------------ Statement and except as would not, singly or in the aggregate, result in a Material Adverse Effect, (A) neither the Company nor any of its subsidiaries is in violation of any federal, state, local or foreign statute, law, rule, regulation, ordinance, code, policy or rule of common law or any judicial or administrative interpretation thereof, including any judicial or administrative order, consent, decree or judgment, relating to pollution or protection of human health, the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including, without limitation, laws and regulations relating to the release or threatened release of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum or petroleum products (collectively, "Hazardous Materials") or to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials (collectively, "Environmental Laws"), (B) the Company and its subsidiaries have all permits, authorizations and approvals required under any applicable Environmental Laws and are each in compliance with their requirements, (C) there are no pending or, to the Company's knowledge, threatened administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, investigation or proceedings relating to any Environmental Law against the Company or any of its subsidiaries and (D) there are no events or circumstances that might reasonably be expected to form the basis of an order for clean-up or remediation, or an action, suit or proceeding by any private party or governmental body or agency, against or affecting the Company or any of its subsidiaries relating to Hazardous Materials or any Environmental Laws. (xxii) Registration Rights. There are no persons with registration ------------------- rights or other similar rights to have any securities registered pursuant to the Registration Statement or otherwise registered by the Company under the 1933 Act, except for persons who are Selling 10 Shareholders or other shareholders described in the Prospectus as having registration rights. Each Selling Shareholder has validly and effectively exercised such Selling Shareholder's rights to require registration of Conversion Shares because of the filing of the Registration Statement and the consummation of the transactions contemplated by this Agreement and the U.S. Purchase Agreement and each Selling Shareholder, with respect to any securities of the Company other than Conversion Shares, and each other holder of any security of the Company that has any right to require registration of shares of Common Stock or any other security of the Company because of the filing of the Registration Statement or consummation of the transactions contemplated by this Agreement or the U.S. Purchase Agreement, has validly and effectively waived such rights. (b) Representations and Warranties by the Selling Shareholders and Covenants of the Selling Shareholders. Each Selling Shareholder severally and not jointly represents and warrants to each International Manager as of the date hereof, as of the Closing Time, and as of each Date of Delivery (if any) referred to in Section 2(b) hereof, and agrees with each International Manager, as follows: (i) Accurate Disclosure. [With respect to Kenneth Lehman and David ------------------- Weinberg: the representations and warranties of the Company contained in Section 1(a) hereof, insofar as they relate to Fel-Pro, Incorporated and the affiliated companies purchased together with Fel-Pro Incorporated by Federal-Mogul (collectively "Fel-Pro") or information about Fel-Pro at or prior to the Company's acquisition thereof, are true and correct.] Each Selling Shareholder has reviewed and is familiar with the Registration Statement and the Prospectuses and neither the Prospectuses nor any amendments or supplements thereto include any untrue statement of a material fact with respect to such Selling Shareholder [and, with respect to Kenneth Lehman and David Weinberg, Fel-Pro] or omits to state a material fact with respect to such Selling Shareholder [and, with respect to Kenneth Lehman and David Weinberg, Fel-Pro] necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. (ii) Authorization of Agreements. Such Selling Shareholder has the --------------------------- full right, power and authority to enter into this Agreement, the U.S. Purchase Agreement and a Power of Attorney and Custody Agreement (in each case, a "Power of Attorney and Custody Agreement") and to sell and cause to be delivered the Securities to be sold by such Selling Shareholder hereunder and thereunder. The execution and delivery of this Agreement, the U.S. Purchase Agreement and the Power of Attorney and Custody Agreement and the sale and delivery of the Securities to be sold by such Selling Shareholder and the consummation of the transactions contemplated herein and therein and compliance by such Selling Shareholder with its obligations hereunder and thereunder have been duly authorized, if necessary, by such Selling Shareholder and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default under, or result in the creation or imposition of any lien, charge or encumbrance upon the Securities to be sold by such Selling Shareholder nor will such action result in any violation of the provisions of the charter or by-laws or other organizational or governing instrument of such Selling Shareholder, if applicable, or any applicable law, statute, rule, regulation, 11 judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over such Selling Shareholder or any of its properties. (iii) Good and Marketable Title. Such Selling Shareholder has good ------------------------- and marketable title to the shares of Series E Stock to be converted into Conversion Shares and sold by such Selling Shareholder pursuant hereto and the U.S. Purchase Agreement, free and clear of any security interest, mortgage pledge, lien, claim, equity or encumbrance, and at the Closing Time and at each applicable Time of Delivery (if any), upon delivery of such Securities and payment of the purchase price therefor as herein contemplated, assuming due authorization and valid issuance of the Conversion Shares by the Company and assuming each such International Manager has no notice of any adverse claim, each of the International Managers will receive good and marketable title to the Securities purchased by it from such Selling Shareholder, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity, except for any lien created by such International Manager. (iv) Due Execution of Power of Attorney and Custody Agreement. Such -------------------------------------------------------- Selling Shareholder has duly executed and delivered, in the form heretofore furnished to the Representatives, the Power of Attorney and Custody Agreement with ________________, _______________ or _______________ as attorney-in-fact and custodian (each a "Shareholder Representative"); the Shareholder Representatives are authorized to take such actions as are necessary to validly and effectively exercise such Selling Shareholder's rights to require registration of Conversion Shares and to waive any such rights with respect to any other securities of the Company, to take such actions as are necessary to validly effectuate the conversion of shares of Series E Stock held by such Selling Shareholder into Conversion Shares, to direct the Company to deliver the Securities to be sold by such Selling Shareholder hereunder and under the U.S. Purchase Agreement and to accept payment therefor; and each Shareholder Representative is authorized to execute and deliver this Agreement and the U.S. Purchase Agreement and the certificate referred to in Section 5(f) or that may be required pursuant to Section 5(l) on behalf of such Selling Shareholder, to sell to the Underwriters the Securities to be sold by such Selling Shareholder hereunder and under the U.S. Purchase Agreement, to determine the purchase price to be paid by the International Managers to such Selling Shareholder, as provided in Section 2(a) hereof, to authorize the delivery of the Securities to be sold by such Selling Shareholder hereunder and under the U.S. Purchase Agreement, to accept payment therefor, and otherwise to act on behalf of such Selling Shareholder in connection with this Agreement and under the U.S. Purchase Agreement. (v) Absence of Manipulation. Such Selling Shareholder has not ----------------------- taken, and will not take, directly or indirectly, any action which is designed to or which has constituted or which might reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Securities. (vi) Absence of Further Requirements. No filing with, or ------------------------------- authorization, approval, consent, order, registration, qualification or decree of, any court or governmental authority or agency, domestic or foreign, is necessary or required for the performance by such Selling Shareholder of its obligations hereunder, under the U.S. Purchase Agreement or in the Power 12 of Attorney and Custody Agreement, or in connection with the offering or sale of the Securities hereunder or under the U.S. Purchase Agreement or the consummation of the transactions contemplated by this Agreement except such as may have been previously been made or obtained or as may be required under the 1933 Act or the 1933 Act Regulations or state securities laws. (vii) Restriction on Sale of Securities. During a period of 90 days --------------------------------- from the date of the Prospectuses, such Selling Shareholder will not, without the prior written consent of the Global Coordinator, (i) directly or indirectly offer, pledge, sell, contract to sell, sell any options or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any share of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or file any registration statement under the 1933 Act with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequences of ownership of the Common Stock, whether any such swap or transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to the Securities to be sold under this Agreement of the U.S. Purchase Agreement. (viii) Certificates Suitable for Transfer. Certificates representing ---------------------------------- shares of Series E Stock to be converted into at least the maximum number of Conversion Shares to be sold by such Selling Shareholder to the Underwriters hereunder and under the U.S. Purchase Agreement, in suitable form for transfer by delivery or accompanied by duly executed instruments of transfer or assignment in blank with signatures guaranteed, have been placed in custody with such Selling Shareholder's Shareholder Representative with irrevocable conditional instructions to deliver such certificates to the Company for conversion into Conversion Shares to be delivered to the Underwriters pursuant to this Agreement and the U.S. Purchase Agreement. (ix) No Association with NASD. Neither such Selling Shareholder nor ------------------------ any of its affiliates directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, or has any other association with (within the meaning of Article I, Section 1(m) of the By-laws of the National Association of Securities Dealers, Inc.), any member firm of the National Association of Securities Dealers, Inc. (x) Registration Rights. Such Selling Shareholder has validly and ------------------- effectively exercised such Selling Shareholder's rights to require registration of Conversion Shares because of the filing of the Registration Statement and the consummation of the transaction contemplated by this Agreement and the U.S. Purchase Agreement and such Selling Shareholder has not, and will not, exercise any other right to require registration of shares of Common Stock or any other security of the Company (other than Conversion Shares) because of the filing of the Registration Statement or consummation of the transactions contemplated by this Agreement or the U.S. Purchase Agreement. 13 (c) Officer's Certificates. Any certificate signed by any officer of the Company or any of its subsidiaries delivered to the Global Coordinator, the Lead Managers or to counsel for the International Managers shall be deemed a representation and warranty by the Company to each International Manager as to the matters covered thereby. (d) Selling Shareholders' Certificates. Any certificate signed by or on behalf of a Selling Shareholder delivered to the Global Coordinator, the Lead Managers or to counsel for the International Managers shall be deemed a representation and warranty by such Selling Shareholder to each International Manager as to the matters covered thereby. SECTION 2. Sale and Delivery to International Managers; Closing. ---------------------------------------------------- (a) Initial Securities. On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company and each Selling Shareholder, severally and not jointly, agree to sell to each International Manager, severally and not jointly, and each International Manager, severally and not jointly, agrees to purchase from the Company and each Selling Shareholder, at the price per share set forth in Schedule B, that proportion of the number of Initial International Securities set forth in Schedule A-2 opposite the name of the Company or such Selling Shareholder, as the case may be, which the number of Initial International Securities set forth in Schedule A opposite the name of such International Manager, plus any additional number of Initial International Securities which such International Manager may become obligated to purchase pursuant to the provisions of Section 10 hereof, bears to the total number of Initial International Securities, subject, in each case, to such adjustments among the International Managers as the Lead Managers in their sole discretion shall make to eliminate any sales or purchases of fractional securities. (b) Option Securities. In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company and the Selling Shareholders, acting severally and not jointly, hereby grant an option to the International Managers, severally and not jointly, to purchase up to an additional _________ shares of Common Stock at the price per share set forth in Schedule B, less an amount per share equal to any dividends or distributions declared by the Company and payable on the Initial International Securities but not payable on the International Option Securities. The option hereby granted will expire 30 days after the date hereof and may be exercised in whole or in part from time to time only for the purpose of covering over-allotments which may be made in connection with the offering and distribution of the Initial International Securities upon notice by the Global Coordinator to the Company and the Selling Shareholders setting forth the number of International Option Securities as to which the several International Managers are then exercising the option and the time and date of payment and delivery for such International Option Securities. Any such time and date of delivery for the International Option Securities (a "Date of Delivery") shall be determined by the Global Coordinator, but shall not be later than seven full business days after the exercise of said option, nor in any event prior to the Closing Time, as hereinafter defined. If the option is exercised as to all or any portion of the International Option Securities, each of the International Managers, acting severally and not jointly, will purchase that proportion of the total number of International Option Securities then being 14 purchased which the number of Initial International Securities set forth in Schedule A opposite the name of such International Manager bears to the total number of Initial International Securities, subject in each case to such adjustments as the Global Coordinator in its discretion shall make to eliminate any sales or purchases of fractional shares. (c) Payment. Payment of the purchase price for, and delivery of certificates for, the Initial Securities shall be made at the offices of Sidley & Austin, One First National Plaza, Chicago, IL 60603, or at such other place as shall be agreed upon by the Global Coordinator and the Company, at 9:00 A.M. (Eastern time) on the third (fourth, if the pricing occurs after 4:30 P.M. (Eastern time) on any given day) business day after the date hereof (unless postponed in accordance with the provisions of Section 10), or such other time not later than ten business days after such date as shall be agreed upon by the Global Coordinator and the Company (such time and date of payment and delivery being herein called "Closing Time"). In addition, in the event that any or all of the International Option Securities are purchased by the International Managers, payment of the purchase price for, and delivery of certificates for, such International Option Securities shall be made at the above-mentioned offices, or at such other place as shall be agreed upon by the Global Coordinator and the Company, on each Date of Delivery as specified in the notice from the Global Coordinator to the Company. Payment shall be made to the Company and the Selling Shareholders by wire transfer of immediately available funds to bank accounts designated by the Company and the Shareholder Representatives pursuant to each Selling Shareholder's Power of Attorney and Custody Agreement, as the case may be, against delivery to the Lead Managers for the respective accounts of the International Managers of certificates for the International Securities to be purchased by them. It is understood that each International Manager has authorized the Lead Managers, for its account, to accept delivery of, receipt for, and make payment of the purchase price for, the Initial International Securities and the International Option Securities, if any, which it has agreed to purchase. Merrill Lynch, individually and not as representative of the International Managers, may (but shall not be obligated to) make payment of the purchase price for the Initial International Securities or the International Option Securities, if any, to be purchased by any International Manager whose funds have not been receive by the Closing Time or the relevant Date of Delivery, as the case may be, but such payment shall not relieve such International Manager from its obligations hereunder. (d) Denominations; Registration. Certificates for the Initial International Securities and the International Option Securities, if any, shall be in such denominations and registered in such names as the Lead Managers may request in writing at least one full business day before the Closing Time or the relevant Date of Delivery, as the case may be. The certificates for the Initial International Securities and the International Option Securities, if any, will be made available for examination and packaging by the Lead Managers in The City of New York not later than 10:00 A.M. (Eastern time) on the business day prior to the Closing Time or the relevant Date of Delivery, as the case may be. SECTION 3. Covenants of the Company. The Company covenants with each ------------------------ International Manager as follows: 15 (a) Compliance with Securities Regulations and Commission Requests. The Company, subject to Section 3(b), will comply with the requirements of Rule 430A or Rule 434, as applicable, and, during the period in which the Prospectuses are required to be delivered in connection with the sales of the Common Stock purchased pursuant to this Agreement, will notify the Global Coordinator immediately, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement shall become effective, or any supplement to the Prospectuses or any amended Prospectuses shall have been filed, (ii) of the receipt of any comments from the Commission, (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectuses or for additional information, and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any preliminary prospectus, or of the suspension of the qualification of the Securities for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes. The Company will promptly effect the filings necessary pursuant to Rule 424(b) and will take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Company will make every reasonable effort to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible moment. (b) Filing of Amendments. The Company will, during the period in which the Prospectuses are required by the 1933 Act to be delivered in connection with sales of the Common Stock purchased pursuant to this Agreement, give the Global Coordinator notice of its intention to file or prepare any amendment to the Registration Statement (including any filing under Rule 462(b)), any Term Sheet or any amendment, supplement or revision to either the prospectus included in the Registration Statement at the time it became effective or to the Prospectuses, whether pursuant to the 1933 Act, the 1934 Act or otherwise, will furnish the Global Coordinator with copies of any such documents a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file or use any such document to which the Global Coordinator or counsel for the International Managers shall reasonably object. (c) Delivery of Registration Statements. The Company has furnished or will deliver to the Lead Managers and counsel for the International Managers, without charge, signed copies of the Registration Statement as originally filed and of each amendment thereto (including exhibits filed therewith or incorporated by reference therein and documents incorporated or deemed to be incorporated by reference therein) and signed copies of all consents and certificates of experts, and will also deliver to the Lead Managers, without charge, a conformed copy of the Registration Statement as originally filed and of each amendment thereto (without exhibits) for each of the International Managers. The copies of the Registration Statement and each amendment thereto furnished to the International Managers will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. 16 (d) Delivery of Prospectuses. The Company has delivered to each International Manager, without charge, as many copies of each preliminary prospectus as such International Manager reasonably requested, and the Company hereby consents to the use of such copies for purposes permitted by the 1933 Act. The Company will furnish to each International Manager, without charge, during the period when the International Prospectus is required to be delivered under the 1933 Act or the 1934 Act, such number of copies of the International Prospectus (as amended or supplemented) as such International Manager may reasonably request. The International Prospectus and any amendments or supplements thereto furnished to the International Managers will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T. (e) Continued Compliance with Securities Laws. The Company will comply with the 1933 Act and the 1933 Act Regulations and the 1934 Act and the 1934 Act Regulations so as to permit the completion of the distribution of the Securities as contemplated in this Agreement, the U.S. Purchase Agreement and in the Prospectuses. If at any time when a prospectus is required by the 1933 Act to be delivered in connection with sales of the Securities, any event shall occur or condition shall exist as a result of which it is necessary, in the opinion of counsel for the International Managers or for the Company, to amend the Registration Statement or amend or supplement any Prospectus in order that the Prospectuses will not include any untrue statements of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, or if it shall be necessary, in the opinion of such counsel, at any such time to amend the Registration Statement or amend or supplement any Prospectus in order to comply with the requirements of the 1933 Act or the 1933 Act Regulations, the Company will promptly prepare and file with the Commission, subject to Section 3(b), such amendment or supplement as may be necessary to correct such statement or omission or to make the Registration Statement or the Prospectuses comply with such requirements, and the Company will furnish to the International Managers such number of copies of such amendment or supplement as the International Managers may reasonably request. (f) Blue Sky Qualifications. The Company will use its best efforts, in cooperation with the International Managers, to qualify the Securities for offering and sale under the applicable securities laws of such states and other jurisdictions (domestic or foreign) as the Global Coordinator may designate and to maintain such qualifications in effect for a period of not less than one year from the later of the effective date of the Registration Statement and any Rule 462(b) Registration Statement; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject. In each jurisdiction in which the Securities have been so qualified, the Company will file such statements and reports as may be required by the laws of such jurisdiction to continue such qualification in effect for a period of not less than one year from the effective date of the Registration Statement and any Rule 462(b) Registration Statement. 17 (g) Earnings Statement. The Company will timely file such reports pursuant to the 1934 Act as are necessary in order to make generally available to its securityholders as soon as practicable an earnings statement for the purposes of, and to provide the benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act. (h) Use of Proceeds. The Company will use the net proceeds received by it from the sale of the Securities in the manner specified in the Prospectuses under "Use of Proceeds". (i) Listing. The Company will use its best efforts to effect the listing of the Securities on the New York Stock Exchange. (j) Restriction on Sale of Securities. During a period of 90 days from the date of the Prospectuses, the Company will not, without the prior written consent of the Global Coordinator, (i) directly or indirectly, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any share of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or file any registration statement under the 1933 Act with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Stock, whether any such swap or transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (A) the Securities to be sold hereunder or under the U.S. Purchase Agreement, (B) any shares of Common Stock issued by the Company upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof and referred to in the Prospectuses or the documents incorporated therein by reference (as of the date of the Prospectuses), (C) any shares of Common Stock issued or options to purchase Common Stock granted pursuant to existing employee benefit plans of the Company referred to in the Prospectuses or the documents incorporated therein by reference (as of the date of the Prospectuses), (D) any shares of Common Stock issued pursuant to any non-employee director stock plan or dividend reinvestment plan, (E) any securities issued as consideration for or to otherwise finance an acquisition of capital stock or assets of a business, provided that the recipient of any such securities agrees in -------- ---- writing to be bound by the restrictions set forth in this Section 3(j) or (F) [cover trust preferred securities and Series E Stock]. (k) Reporting Requirements. The Company, during the period when the Prospectuses are required to be delivered under the 1933 Act or the 1934 Act, will file all documents required to be filed with the Commission pursuant to the 1934 Act within the time periods required by the 1934 Act and the 1934 Act Regulations. SECTION 4. Payment of Expenses. (a) Expenses. The Company will pay all ------------------- expenses incident to the performance of its obligations under this Agreement, including (i) the preparation, printing and filing of the Registration Statement (including financial statements and exhibits) as originally filed and of each amendment thereto, (ii) the preparation, printing and delivery to the Underwriters of this Agreement, any Agreement among Underwriters and such other documents as 18 may be required in connection with the offering, purchase, sale, issuance or delivery of the Securities, (iii) the preparation, issuance and delivery of the certificates for the Securities to the Underwriters, including any stock or other transfer taxes and any stamp or other duties payable upon the sale, issuance or delivery of the Securities to the Underwriters and the transfer of the Securities between the U.S. Underwriters and the International Managers, (iv) the fees and disbursements of the Company's counsel, accountants and other advisors, (v) the qualification of the Securities under securities laws in accordance with the provisions of Section 3(f) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection therewith and in connection with the preparation of the Blue Sky Survey and any supplement thereto, (vi) the printing and delivery to the Underwriters of copies of each preliminary prospectus, any Term Sheets and of the Prospectuses and any amendments or supplements thereto, (vii) the preparation, printing and delivery to the Underwriters of copies of the Blue Sky Survey and any supplement thereto, (viii) the fees and expenses of any transfer agent or registrar for the Securities (ix) the filing fees incident to, and the reasonable fees and disbursements of counsel to the Underwriters in connection with, the review by the National Association of Securities Dealers, Inc. (the "NASD") of the terms of the sale of the Securities and (x) the fees and expenses incurred in connection with the listing of the Securities on the New York Stock Exchange. (b) Termination of Agreement. If this Agreement is terminated by the Lead Managers in accordance with the provisions of Section 5 or Section 9(a)(i) hereof, the Company shall reimburse the International Managers for all of their out-of-pocket expenses, including the reasonable fees and disbursements of counsel for the International Managers. SECTION 5. Conditions of International Managers' Obligations. The obligations of the several International Managers hereunder are subject to the accuracy of the representations and warranties of the Company and the Selling Shareholders contained in Section 1 hereof or in certificates of any officer of the Company or any subsidiary of the Company or on behalf of any Selling Shareholder delivered pursuant to the provisions hereof, to the performance by the Company of its covenants and other obligations hereunder, and to the following further conditions: (a) Effectiveness of Registration Statement. The Registration Statement, including any Rule 462(b) Registration Statement, has become effective and at Closing Time no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act or proceedings therefor initiated or threatened by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of counsel to the International Managers. A prospectus containing the Rule 430A Information shall have been filed with the Commission in accordance with Rule 424(b) (or a post-effective amendment providing such information shall have been filed and declared effective in accordance with the requirements of Rule 430A) or, if the Company has elected to rely upon Rule 434, a Term Sheet shall have been filed with the Commission in accordance with Rule 424(b). (b) Opinion of Counsel for Company. At Closing Time, the Lead Managers shall have received the favorable opinion, dated as of Closing Time, of each of David M. Sherbin, Associate 19 General Counsel of the Company and Cleary, Gottlieb, Steen & Hamilton, counsel for the Company, each in form and substance satisfactory to counsel for the International Managers, together with signed or reproduced copies of such letter for each of the other International Managers to the effect set forth in Exhibit A hereto and to such further effect as counsel to the International Managers may reasonably request. (c) Opinion of Counsel for the Selling Shareholders. At Closing Time, the Lead Managers shall have received the favorable opinion, dated as of Closing Time, of Katten Muchin & Zavis, counsel for the Selling Shareholders, in form and substance satisfactory to counsel for the International Managers, together with signed or reproduced copies of such letter for each of the other International Managers to the effect set forth in Exhibit A-2 hereto and to such effect as counsel to the International Managers may reasonably request. (d) Opinion of Counsel for International Managers. At Closing Time, the Lead Managers shall have received the favorable opinion, dated as of Closing Time, of each of (A) Sidley & Austin, counsel for the International Managers, together with signed or reproduced copies of such letter for each of the other International Managers with respect to the matters set forth in clauses (i), (ii), (v), (vi) (solely as to preemptive or other similar rights arising by operation of law or under the charter or by-laws of the Company), (viii) through (x), inclusive, (xiii), (xv) (solely as to the information in the Prospectus under "Description of Capital Stock--Common Stock") and the penultimate paragraph of Exhibit A hereto and (B) Sachnoff & Weaver, Ltd., special counsel to the International Managers, together with signed or reproduced copies of such letter for each of the other International Managers with respect to the matters set forth in the penultimate paragraph of Exhibit A hereto. In giving such opinion such counsel may rely, as to all matters governed by the laws of jurisdictions other than the law of the State of New York, the federal law of the United States and the General Corporation Law of the State of Delaware, upon the opinions of counsel satisfactory to the Lead Managers. Such counsel may also state that, insofar as such opinion involves factual matters, they have relied, to the extent they deem proper, upon certificates of officers of the Company and its subsidiaries and certificates of public officials. (e) Officers' Certificate. At Closing Time, there shall not have been, since the date hereof or since the respective dates as of which information is given in the Prospectuses, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, and the Lead Managers shall have received a certificate of the President or a Vice President of the Company and of the chief financial or chief accounting officer of the Company, dated as of Closing Time, to the effect that (i) there has been no such material adverse change, (ii) the representations and warranties in Section 1(a) hereof are true and correct with the same force and effect as though expressly made at and as of Closing Time, (iii) the Company has complied with all agreements and satisfied all conditions on its part to be performed or satisfied at or prior to Closing Time, and (iv) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or, to the Company's knowledge, are contemplated by the Commission. 20 (f) Certificate of Selling Shareholders. At Closing Time, the Lead Managers shall have received a certificate of each of the Shareholder Representatives on behalf of the Selling Shareholders, dated as of Closing Time, to the effect that (i) the representations and warranties of each Selling Shareholder contained in Section 1(b) hereof are true and correct with the same force and effect as though expressly made at and as of Closing Time and (ii) each Selling Shareholder has complied with all agreements and all conditions on its part to be performed under this Agreement at or prior to Closing Time. (g) Accountant's Comfort Letter. At the time of the execution of this Agreement, the Lead Managers shall have received from each of Ernst & Young LLP and KPMG Audit Plc a letter dated such date in form and substance satisfactory to the Lead Managers, together with signed or reproduced copies of such letters for each of the other International Managers containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectuses. (h) Bring-down Comfort Letter. At Closing Time, the Lead Managers shall have received from each of Ernst & Young LLP and KPMG Audit Plc a letter, dated as of Closing Time, to the effect that they reaffirm the statements made in the letter furnished pursuant to subsection (e) of this Section, except that the specified date referred to shall be a date not more than three business days prior to Closing Time. (i) Approval of Listing. At Closing Time, the Securities shall have been approved for listing on the New York Stock Exchange, subject only to official notice of issuance. (j) Lock-up Agreements. At the date of this Agreement, the Lead Managers shall have received an agreement substantially in the form of Exhibit B hereto signed by the persons listed on Schedule D hereto. (k) Purchase of Initial U.S. Securities. Contemporaneously with the purchase by the International Managers of the Initial International Securities under this Agreement, the U.S. Underwriters shall have purchased the Initial U.S. Securities under the U.S. Purchase Agreement. (l) Conditions to Purchase of International Option Securities. In the event that the International Managers exercise their option provided in Section 2(b) hereof to purchase all or any portion of the International Option Securities, the representations and warranties of the Company contained herein and the statements in any certificates furnished by the Company or any subsidiary of the Company hereunder shall be true and correct as of each Date of Delivery and, at the relevant Date of Delivery, the Lead Managers shall have received: (i) Officers' Certificate. A certificate, dated such Date of --------------------- Delivery, of the President or a Vice President of the Company and of the chief financial or chief accounting officer of the Company confirming that the certificate delivered at the 21 Closing Time pursuant to Section 5(d) hereof remains true and correct as of such Date of Delivery. (ii) Certificate of Selling Shareholders. A certificate, dated ----------------------------------- such Date of Delivery, of the Shareholder Representatives on behalf of each Selling Shareholder confirming that the certificate delivered at Closing Time pursuant to Section 5(f) remains true and correct as of such Date of Delivery. (iii) Opinion of Counsel for Company. The favorable opinion of ------------------------------ each of Edward W. Gray, Jr., Senior Vice President and General Counsel of the Company, David M. Sherbin, Associate General Counsel of the Company, and Cleary, Gottlieb, Steen & Hamilton, counsel for the Company, each in form and substance satisfactory to counsel for the International Managers, dated such Date of Delivery, relating to the International Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(b) hereof. (iv) Opinion of Counsel for the Selling Shareholders. The favorable ----------------------------------------------- opinion of Katten Muchin & Zavis, counsel for the Selling Shareholders, in form and substance satisfactory to counsel for the International Managers, dated such Date of Delivery, relating to the Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(c) hereof. (v) Opinion of Counsel for International Managers. The favorable --------------------------------------------- opinion of each of Sidley & Austin, counsel for the International Managers, and Sachnoff & Weaver Ltd., Special Counsel for the International Managers dated such Date of Delivery, relating to the International Option Securities to be purchased on such Date of Delivery and otherwise to the same effect as the opinion required by Section 5(c) hereof. (vi) Bring-down Comfort Letter. A letter from Ernst & Young LLP ------------------------- and from KPMG Audit Plc, each in form and substance satisfactory to the Lead Managers and dated such Date of Delivery, substantially in the same form and substance as the letter furnished to the Lead Managers pursuant to Section 5(f) hereof, except that the "specified date" in the letter furnished pursuant to this paragraph shall be a date not more than five days prior to such Date of Delivery. (m) Additional Documents. At Closing Time and at each Date of Delivery counsel for the International Managers shall have been furnished with such documents and opinions as they may require for the purpose of enabling them to pass upon the issuance and sale of the Securities as herein contemplated, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company in connection with the issuance and sale of the Securities as herein contemplated shall be satisfactory in form and substance to the Lead Managers and counsel for the International Managers. 22 (n) Termination of Agreement. If any condition specified in this Section shall not have been fulfilled when and as required to be fulfilled, this Agreement, or, in the case of any condition to the purchase of International Option Securities on a Date of Delivery which is after the Closing Time, the obligations of the several International Managers to purchase the relevant Option Securities may be terminated by the Lead Managers by notice to the Company and to the Selling Shareholders at any time at or prior to Closing Time or such Date of Delivery, as the case may be, and such termination shall be without liability of any party to any other party except as provided in Section 4 and except that Sections 1, 6, 7 and 8 shall survive any such termination and remain in full force and effect. SECTION 6. Indemnification. --------------- (a) Indemnification of International Managers. The Company agrees to indemnify and hold harmless each International Manager and each person, if any, who controls any International Manager within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act to the extent and in the manner set forth in clauses (i), (ii) and (iii) below. In addition, each Selling Shareholder, severally and not jointly, agrees to indemnify and hold harmless each International Manager and each person, if any, who controls any International Manager within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact included in any preliminary prospectus or the Prospectuses (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided that (subject to Section 6(d) below) any such settlement is effected with the written consent of the Company; and (iii) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by Merrill Lynch), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under (i) or (ii) above; 23 provided, however, that this indemnity agreement shall not apply to any loss, - -------- ------- liability, claim, damage or expense to the extent arising out of any untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by any International Manager through the Lead Managers expressly for use in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary prospectus or the International Prospectus (or any amendment or supplement thereto); and provided further that the Company will not be liable to an -------- ------- International Manager with respect to any preliminary prospectus to the extent that the Company shall sustain the burden of proving that any such loss, liability, claim, damage or expense resulted from the fact that such International Manager failed to send or give, at or prior to the Closing Date, a copy of the International Prospectus, as then amended or supplemented if: (i) the Company has previously furnished copies thereof (sufficiently in advance of the Closing Date to allow for distribution by the Closing Date) to the International Managers and the loss, liability, claim, damage or expense of such International Manager resulted from an untrue statement or omission of a material fact contained in or omitted from the preliminary prospectus which was corrected in the International Prospectus as, if applicable, amended or supplemented prior to the Closing Date and such International Prospectus was required by law to be delivered at or prior to the written confirmation of sale to such person and (ii) such failure to give or send such International Prospectus by the Closing Date to the party or parties asserting such loss, liability, claim, damage or expense would have constituted the sole defense to the claim asserted by such person; and provided further, that this indemnity -------- ------- agreement, in so far as it relates to indemnification by Selling Shareholders, shall not apply to any loss, liability, claim, damage or expense arising out of any untrue statement or omission or alleged untrue statement or omission except to the extent that said untrue statement or omission or alleged untrue statement or omission relates (A) to written information furnished to the Company by or on behalf of any Selling Shareholder expressly for use in the Registration Statement (or any amendment thereto) or any preliminary prospectus or International Prospectus (or any amendment or supplement thereto) or (B) to information relating to Fel-Pro. (b) Indemnification of Company, Directors and Officers and Selling Shareholders. Each International Manager severally agrees to indemnify and hold harmless the Company, its directors, each of its officers who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, and each Selling Shareholder, against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto), including the Rule 430A Information and the Rule 434 Information, if applicable, or any preliminary international prospectus or the International Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by such International Manager through the Lead Managers expressly for use in the Registration Statement (or any amendment thereto) or such preliminary prospectus or the International Prospectus (or any amendment or supplement thereto). (c) Actions against Parties; Notification. Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party 24 shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. In the case of parties indemnified pursuant to Section 6(a) above, counsel to the indemnified parties shall be selected by Merrill Lynch, and, in the case of parties indemnified pursuant to Section 6(b) above, counsel to the indemnified parties shall be selected by the Company. An indemnifying party may participate at its own expense in the defense of any such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 6 or Section 7 hereof (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (d) Settlement without Consent if Failure to Reimburse. If at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 6(a)(ii) effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. (e) Limitation on Selling Shareholders Indemnification. Without limiting the full extent of (i) the Company's agreement to indemnify each International Manager (and controlling persons thereof, if any) as herein provided, (ii) the liability of the Company with respect to the breach by the Company of any representation, warranty or covenant contained in this Agreement (or in any certificate of the Company delivered pursuant hereto) and (iii) the liability for any Selling Shareholder with respect to the breach by such Selling Shareholder of any representation, warranty or covenant contained in Section 1 of this Agreement (or in any certificate of such Selling Shareholder delivered pursuant hereto), notwithstanding anything contained in this Agreement to the contrary, each Selling Shareholder shall be liable under (A) the indemnification agreement contained in Section 6(a) of this Agreement or (B) the contribution provisions contained in Section 7 of this Agreement, only for an amount not exceeding, in the aggregate, the net proceeds received by such Selling Shareholder from the sale of Securities hereunder. The Company and the Selling Shareholders may agree, as among themselves and without limiting the rights of the International Managers and controlling persons under this Agreement, as to the respective amounts of such liability for which each of them shall be responsible. 25 SECTION 7. Contribution. If the indemnification provided for in ------------ Section 6 hereof is for any reason unavailable to or insufficient to hold harmless an indemnified party in respect of any losses, liabilities, claims, damages or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount of such losses, liabilities, claims, damages and expenses incurred by such indemnified party, as incurred, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Selling Shareholders on the one hand and the International Managers on the other hand from the offering of the Securities pursuant to this Agreement or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Selling Shareholders on the one hand and of the International Managers on the other hand in connection with the statements or omissions which resulted in such losses, liabilities, claims, damages or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Shareholders on the one hand and the International Managers on the other hand in connection with the offering of the International Securities pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the International Securities pursuant to this Agreement (before deducting expenses) received by the Company and the Selling Shareholders and the total underwriting discount received by the International Managers, in each case as set forth on the cover of the International Prospectus, or, if Rule 434 is used, the corresponding location on the Term Sheet, bear to the aggregate initial public offering price of the International Securities as set forth on such cover. The relative fault of the Company and the Selling Shareholders on the one hand and the International Managers on the other hand shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or the Selling Shareholders or by the International Managers and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Selling Shareholders and the International Managers agree that it would not be just and equitable if contributions pursuant to this Section 7 were determined by pro rata allocation (even if the International Managers were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 7. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 7 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission. Notwithstanding the provisions of this Section 7, no International Manager shall be required to contribute any amount in excess of the amount by which the total price at which the International Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such International Managers has otherwise been required to pay by reason of any such untrue or alleged untrue statement or omission or alleged omission. 26 No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 7, each person, if any, who controls an International Manager within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as such International Manager, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Company. The International Managers' respective obligations to contribute pursuant to this Section 7 are several in proportion to the number of Initial International Securities set forth opposite their respective names in Schedule A hereto and not joint. SECTION 8. Representations, Warranties and Agreements to Survive ----------------------------------------------------- Delivery. All representations, warranties and agreements contained in this - -------- Agreement or in certificates of officers of the Company or any of its subsidiaries or the Selling Shareholders submitted pursuant hereto, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of any International Manager or controlling person, or by or on behalf of the Company or the Selling Shareholders, and shall survive delivery of the Securities to the International Managers. SECTION 9. Termination of Agreement. ------------------------ (a) Termination; General. The Lead Managers may terminate this Agreement, by notice to the Company and the Selling Shareholders, at any time at or prior to Closing Time (i) if there has been, since the time of execution of this Agreement or since the respective dates as of which information is given in the International Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, or (ii) if there has occurred any material adverse change in the financial markets in the United States or the international financial markets, any outbreak of hostilities or escalation thereof or other calamity or crisis or any change or development involving a prospective change in national or international political, financial or economic conditions, in each case the effect of which is such as to make it, in the judgment of the Lead Managers, impracticable to market the Securities or to enforce contracts for the sale of the Securities, or (iii) if trading in any securities of the Company has been suspended or materially limited by the Commission or the New York Stock Exchange, or if trading generally on the New York Stock Exchange has been suspended or materially limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by any of said exchanges or by such system or by order of the Commission, the National Association of Securities Dealers, Inc. or any other governmental authority, or (iv) if a banking moratorium has been declared by either Federal or New York authorities. (b) Liabilities. If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Section 4 hereof, and provided further that Sections 1, 6, 7 and 8 shall survive such termination and remain in full force and effect. 27 SECTION 10. Default by One or More of the International Managers. If one ---------------------------------------------------- or more of the International Managers shall fail at Closing Time or a Date of Delivery to purchase the Securities which it or they are obligated to purchase under this Agreement (the "Defaulted Securities"), the Lead Managers shall have the right, within 24 hours thereafter, to make arrangements for one or more of the non-defaulting International Managers, or any other underwriters, to purchase all, but not less than all, of the Defaulted Securities in such amounts as may be agreed upon and upon the terms herein set forth; if, however, the Lead Managers shall not have completed such arrangements within such 24-hour period, then: (a) if the number of Defaulted Securities does not exceed 10% of the number of International Securities to be purchased on such date, each of the non-defaulting International Managers shall be obligated, severally and not jointly, to purchase the full amount thereof in the proportions that their respective underwriting obligations hereunder bear to the underwriting obligations of all non-defaulting International Managers, or (b) if the number of Defaulted Securities exceeds 10% of the number of International Securities to be purchased on such date, this Agreement or, with respect to any Date of Delivery which occurs after the Closing Time, the obligation of the International Managers to purchase and of the Company to sell the Option Securities to be purchased and sold on such Date of Delivery shall terminate without liability on the part of any non-defaulting International Manager. No action taken pursuant to this Section shall relieve any defaulting International Manager from liability in respect of its default. In the event of any such default which does not result in a termination of this Agreement or, in the case of a Date of Delivery which is after the Closing Time, which does not result in a termination of the obligation of the International Managers to purchase and the Company to sell the relevant International Option Securities, as the case may be, either the Lead Managers or the Company shall have the right to postpone Closing Time or the relevant Date of Delivery, as the case may be, for a period not exceeding seven days in order to effect any required changes in the Registration Statement or Prospectus or in any other documents or arrangements. As used herein, the term "International Manager" includes any person substituted for an International Manager under this Section 10. SECTION 11. Default by One or More of the Selling Shareholder(s) or the ----------------------------------------------------------- Company. (a) If any Selling Shareholder shall fail at Closing Time to sell and - ------- deliver the number of Securities which such Selling Shareholder or Selling Shareholders are obligated to sell hereunder, and the remaining Selling Shareholder(s) do not exercise the right hereby granted to increase, pro rata or otherwise, the number of Securities to be sold by them hereunder to the total number to be sold by all Selling Shareholders as set forth in Schedule A-2 hereto, then the International Managers may, at the option of the Lead Managers, by notice from the Lead Managers to the Company and the non-defaulting Selling Shareholder(s), either (a) terminate this Agreement without any liability on the fault of any non-defaulting party except that the provisions of Section 1, 4, 6, 7 and 8 shall remain in full force and effect or (b) elect to purchase the Securities which the non-defaulting Selling Shareholder(s) and 28 the Company have agreed to sell hereunder. No action taken pursuant to this Section 11 shall relieve any Selling Shareholder so defaulting from liability, if any, in respect of such default. In the event of default by any Selling Shareholder as referred to in this Section 11, each of the Lead Managers, the Company and the non-defaulting Selling Shareholder(s) shall have the right to postpone Closing Time or Date of Delivery for a period not exceeding seven days in order to effect any required change in the Registration Statement or Prospectus or in any other documents or arrangements. (b) If the Company shall fail at Closing Time to sell and deliver the number of Securities that it is obligated to sell hereunder, then this Agreement shall terminate without any liability on the part of any non-defaulting party except that the provisions of Sections 1, 4, 6, 7 and 8 shall remain in full force and effect. No action taken pursuant to this Section 11 shall relieve the Company from liability, if any, in respect of such default. SECTION 12. Notices. All notices and other communications hereunder ------- shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the International Managers shall be directed to the Lead Managers at North Tower, World Financial Center, New York, New York 10281-1201, attention of .; and notices to the Company shall be directed to it at 26555 Northwestern Highway, Southfield, Michigan 48034, attention of General Counsel; and notices to the Selling Shareholder(s) shall be directed to ., attention .. SECTION 13. Parties. This Agreement shall each inure to the benefit of ------- and be binding upon the International Managers, the Company and the Selling Shareholders and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the International Managers, the Company and the Selling Shareholders and their respective successors and the controlling persons and officers and directors referred to in Sections 6 and 7 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the International Managers, the Company and the Selling Shareholders and their respective successors, and said controlling persons and officers and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No purchaser of Securities from any International Manager shall be deemed to be a successor by reason merely of such purchase. SECTION 14. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY ---------------------- AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EXCEPT AS SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME. SECTION 15. Effect of Headings. The Article and Section headings herein ------------------ and the Table of Contents are for convenience only and shall not affect the construction hereof. 29 If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company and the Shareholder Representatives for the Selling Shareholders a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement between the International Managers and the Company and the Selling Shareholders in accordance with its terms. Very truly yours, FEDERAL-MOGUL By_________________________________________ Name: Title: [Selling Shareholders] By:________________________________________ [Name] As Shareholder Representative acting on behalf of the Selling Shareholders listed above [Selling Shareholders] By:________________________________________ [Name] As Shareholder Representative acting on behalf of the Selling Shareholders listed above [Selling Shareholders] By:________________________________________ [Name] As Shareholder Representative acting on behalf of the Selling Shareholders listed above 30 CONFIRMED AND ACCEPTED, as of the date first above written: MERRILL LYNCH INTERNATIONAL Bear, Stearns International Limited. Morgan Stanley & Co. International Limited Smith Barney Inc. Donaldson, Lufkin & Jenrette International J. Henry Schroder & Co. Limited ABN AMRO Rothschild Credit Lyonnais Securities Kleinwort Benson Limited By: MERRILL LYNCH INTERNATIONAL By ________________________________ Authorized Signatory For themselves and as Lead Managers of the other International Managers named in Schedule A hereto. 31 SCHEDULE A Number of Initial International Name of International Manager Securities ----------------------------- ---------- Merrill Lynch International......................... Bear, Stearns International Limited Morgan Stanley & Co. International Limited Smith Barney Inc. Donaldson, Lufkin & Jenrette International J. Henry Schroder & Co. Limited & Co................ ABN AMRO Rothschild Credit Lyonnais Securities Kleinwort Benson Limited ----------- Total............................................... ============== Sch A-1 SCHEDULE A-2
Number of Initial International Maximum Number of International Securities to be Sold Option Securities to Be Sold ------------------------------- ------------------------------- Federal-Mogul Corporation [Selling Shareholders] ------- ------- Total...................... ============ ===========
Sch A-2-1 SCHEDULE B FEDERAL-MOGUL _________ Shares of Common Stock (Without Par Value) 1. The initial public offering price per share for the Securities, determined as provided in said Section 2, shall be $.. 2. The purchase price per share for the International Securities to be paid by the several International Managers shall be $., being an amount equal to the initial public offering price set forth above less $. per share; provided that the purchase price per share for any International Option Securities purchased upon the exercise of the over-allotment option described in Section 2(b) shall be reduced by an amount per share equal to any dividends or distributions declared by the Company and payable on the Initial International Securities but not payable on the International Option Securities. Sch B-1 SCHEDULE C [List of subsidiaries to come.] Sch C-1 SCHEDULE D List of persons and entities subject to lock-up Federal-Mogul Corporation Richard A. Snell Alan C. Johnson Paul R. Lederer Thomas W. Ryan Wilhelm A. Schmelzer Frank Tomes Sch D-1 Exhibit A FORM OF OPINION OF COMPANY'S COUNSEL TO BE DELIVERED PURSUANT TO SECTION 5(b) [To be agreed] A-1 Exhibit A-2 FORM OF OPINION OF COUNSEL FOR THE SELLING SHAREHOLDER(S) TO BE DELIVERED PURSUANT TO SECTION 5(c) i No filing with, or authorization, approval, consent, license, order, registration, qualification or decree of, any court or governmental authority or agency, domestic or foreign (other than under the 1933 Act and the 1933 Act Regulations, which have been obtained, or as may be required under the securities or blue sky laws of the various states, as to which we need express no opinion) is necessary or required to be obtained by the Selling Shareholders for the performance by the Selling Shareholders of their obligations under the U.S. Purchase Agreement, the International Purchase Agreement or the Power of Attorney and Custody Agreement, or in connection with the offer, sale and delivery of the Securities. ii Each Power of Attorney and Custody Agreement has been duly executed and delivered by the respective Selling Shareholder(s) named therein and constitutes the legal, valid and binding agreement of such Selling Shareholder. iii Each of the U.S. Purchase Agreement and the International Purchase Agreement has been duly authorized, executed and delivered by or on behalf of each Selling Shareholder. iv The Shareholder Representatives have been duly authorized by the Selling Shareholders to deliver shares of Series E Preferred Stock for conversion into Conversion Shares and direct the Company to deliver the Conversion Shares on behalf of the Selling Shareholders in accordance with the terms of the U.S. Purchase Agreement and the International Purchase Agreement. v The execution, delivery and performance of the U.S. Purchase Agreement, the International Purchase Agreement and the Power of Attorney and Custody Agreement and the sale and delivery of the Securities and the consummation of the transactions contemplated in the U.S. Purchase Agreement, the International Purchase Agreement and in the Registration Statement and compliance by the Selling Shareholder(s) with its obligations under the U.S. Purchase Agreement and the International Purchase Agreement have been duly authorized by all necessary action on the part of the Selling Shareholder(s) and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default under or result in the creation or imposition of any tax, lien, charge or encumbrance upon the Securities nor will such action result in any violation of the provisions of the charter or by-laws or other organizational or governing instrument of the Selling Shareholders, if applicable, or any law, administrative regulation, judgment or A-2-1 order of any government, government instrumentality or court or any administrative or court decree having jurisdiction over such Selling Shareholder or any of its properties. vi To the best of our knowledge, each Selling Shareholder has valid and marketable title to the shares of Series E Stock to be converted into Conversion Shares to be sold by such Selling Shareholder pursuant to the U.S. Purchase Agreement and the International Purchase Agreement, free and clear of any pledge, lien, security interest, claim, equity or encumbrance of any kind, and has full right, power and authority to sell, transfer and deliver such Securities pursuant to the U.S. Purchase Agreement and the International Purchase Agreement. By delivery of a certificate or certificates therefor such Selling Shareholder will transfer to the Underwriters who have purchased such Securities pursuant to the U.S. Purchase Agreement and the International Purchase Agreement (without notice of any defect in the title of such Selling Shareholder and who are otherwise bona fide purchasers for purposes of the Uniform Commercial Code) valid and marketable title to such Securities, free and clear of any pledge, lien, security interest, charge, claim, equity or encumbrance of any kind. A-2-2 [FORM OF LOCK-UP FROM DIRECTORS, OFFICERS OR OTHER STOCKHOLDERS PURSUANT TO SECTION 5(J)] Exhibit B ., 1998 MERRILL LYNCH INTERNATIONAL Bear, Stearns International Limited Morgan Stanley & Co. International Limited Smith Barney Inc. Donaldson, Lufkin & Jenrette International J. Henry Schroder & Co. Limited ABN AMRO Rothschild Credit Lyonnais Securities Kleinwort Benson Limited as Lead Managers of the several International Managers c/o Merrill Lynch International Ropemaker Place 25 Ropemaker Street London EC24 9L4 England B-1 Re: Proposed Public Offering by Federal-Mogul Corporation ----------------------------------------------------- Dear Sirs: The undersigned, a stockholder and an officer and/or director of Federal- Mogul Corporation, a Michigan corporation (the "Company"), understands that Merrill Lynch International ("Merrill Lynch") and Bear, Stearns International Limited, Morgan Stanley & Co. International Limited, Smith Barney Inc., Donaldson, Lufkin & Jenrette International, J. Henry Schroder & Co. Limited, ABN AMRO Rothschild, Credit Lyonnais Securities and Kleinwort Benson Limited propose(s) to enter into an International Purchase Agreement (the "International Purchase Agreement") with the Company providing for the public offering of shares (the "Securities") of the Company's common stock, without par value (the "Common Stock"). In recognition of the benefit that such an offering will confer upon the undersigned as a stockholder and an officer and/or director of the Company, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned agrees with each underwriter to be named in the International Purchase Agreement that, during a period of . days from the date of the International Purchase Agreement, the undersigned will not, without the prior written consent of Merrill Lynch, directly or indirectly, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer any shares of the Company's Common Stock or any securities convertible into or exchangeable or exercisable for Common Stock, whether now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition, or file any registration statement under the Securities Act of 1933, as amended, with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Stock, whether any such swap or transaction is to be settled by delivery of Common Stock or other securities, in cash or otherwise. Very truly yours, Signature: _____________________________ Name: ________________________ B-2 EX-3.2 5 AMENDMENT TO RESTATED ARTICLES OF INCORPORATION EXHIBIT 3.2 - ------------------------------------------------------------------------------- MICHIGAN DEPARTMENT OF CONSUMER AND INDUSTRY SERVICES CORPORATION, SECURITIES AND LAND DEVELOPMENT BUREAU - ------------------------------------------------------------------------------- Date Received (FOR BUREAU USE ONLY) - ---------------------------------------- - ---------------------------------------- ======================================== Name Jennifer Evans - ---------------------------------------- Address 26555 Northwestern Highway - ---------------------------------------- City State Zip Code Southfield MI 48034 EFFECTIVE DATE: ======================================== ------------------------------------- Document will be returned to the name and address you enter above CERTIFICATE OF AMENDMENT TO THE ARTICLES OF INCORPORATION For use by Domestic Profit Corporations (Please read information and instructions on the last page) Pursuant to the provisions of Act 284, Public Acts of 1972 (profit corporations), or Act 162, Public Acts of 1982 (nonprofit corporations), the undersigned corporation executes the following Certificate: - ------------------------------------------------------------------------------- 1. The present name of the corporation is: Federal-Mogul Corporation ---------------------- 2. The identification number assigned by the Bureau is: 142-176 ---------------------- 3. The location of its registered office is: 26555 Northwestern Highway Southfield , Michigan 48034 - ------------------------------------------------------------------------------- (Street Address) (Zip Code) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 4. Article III of the Articles of Incorporation is hereby amended to read as follows: A.1. The total number of shares of stock which the Corporation shall have the authority to issue is as follows: 260,000,000 shares of Common Stock, no par value (Common Stock); and 5,000,000 shares of Preferred Stock (Preferred Stock). [Except as set forth herein, Article 3 remains unchanged.] - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 5. (For amendments adopted by unanimous consent of Incorporators before the first meeting of the board of directors or trustees.) The foregoing amendment to the Articles of Incorporation was duly adopted on the ________day of _________, 19__, in accordance with the provisions of the Act by the unanimous consent of the incorporator(s) before the first meeting of the Board of Directors or Trustees. Signed this_________day of_________, 19__. ----------------------------------- --------------------------------------- (Signature) (Signature) ----------------------------------- --------------------------------------- (Type or Print Name) (Type or Print Name) ----------------------------------- --------------------------------------- (Signature) (Signature) ----------------------------------- --------------------------------------- (Type or Print Name) (Type or Print Name) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 6. (For profit corporations, and for nonprofit corporations whose articles state the corporation is organized on a stock or on a membership basis.) The foregoing amendment to the Articles of Incorporation was duly adopted on the 20th day of May, 1998 by the shareholders if a profit corporation, or by the shareholders or members if a nonprofit corporation (check one of the following) [X] at a meeting. The necessary votes were cast in favor of the amendment. [_] by written consent of the shareholders or members having not less than the minimum number of votes required by statute in accordance with Section 407(1) and (2) of the Act if a nonprofit corporation, or Section 407(1) of the Act if a profit corporation. Written notice to shareholders or members who have not consented in writing has been given. (Note: Written consent by less than all of the shareholders or members is permitted only if such provision appears in the Articles of Incorporation.) [_] by written consent of all the shareholders or members entitled to vote in accordance with section 407(3) of the Act if a nonprofit corporation, or Section 407(2) of the Act if a profit corporation. Signed this 20th day of May, 1998. By /s/ Edward W. Gray, Jr. ------------------------------------------ (Signature of President, Vice President, Chairperson, Vice Chairperson) Edward W. Gray, Jr. Senior Vice President --------------------------------------------- (Type or Print Name) (Type or Print Title) - -------------------------------------------------------------------------------- EX-5 6 OPINION OF DAVID M. SHERBIN, ESQ EXHIBIT 5 [FEDERAL-MOGUL CORPORATION LETTERHEAD] June 3, 1998 Federal-Mogul Corporation 26555 Northwestern Highway Southfield, Michigan 48034 Ladies and Gentlemen: I am Associate General Counsel of Federal-Mogul Corporation, a Michigan corporation (the "Company"), and in that capacity I am familiar with the Articles of Incorporation and the By-Laws of the Company, as amended, and with its corporate proceedings and records, including the minutes of meetings of its Board of Directors and of Committees of its Board of Directors. I refer to the filing by the Company with the Securities and Exchange Commission (the "Commission") of a Registration Statement on Form S-3 (Registration No. 333-50413) (the "Registration Statement"), relating to (i) shares of common stock of the Company ("Common Stock"), (ii) shares of preferred stock of the Company ("Preferred Stock") and (iii) debt securities of the Company, which may be senior debt securities (the "Senior Debt Securities") or subordinated debt securities (the "Subordinated Debt Securities," together with the Senior Debt Securities, the "Debt Securities"). The Common Stock, Preferred Stock and Debt Securities are referred to herein collectively as the "Offered Securities." The Common Stock to be sold will include Common Stock to be issued and sold by the Company ("Company Shares") and Common Stock to be sold by Selling Shareholders named in the Registration Statement upon conversion into Common Stock of shares of the Series E Mandatory Exchangeable Preferred Stock ("Series E Stock") currently held by them ("Secondary Shares"). The Offered Securities being registered under the Registration Statement, together with securities registered under a previously filed registration statement (Registration No. 33-54717), will have an aggregate initial offering price of up to $2,577,343,750 or the equivalent thereof in foreign currencies or composite currencies and will be offered on a continued or delayed basis pursuant to the provisions of Rule 415 under the Securities Act of 1933, as amended (the "Act"). The Common Stock will be issued pursuant to the Articles of Incorporation, as amended. The Preferred Stock will be issued pursuant to a Certificate of Designations (the "Certificate of Designations") relating to a particular series of Preferred Stock. Unless otherwise provided in any prospectus supplement forming a part of the Registration Statement relating to a particular series of Debt Securities, the Senior Debt Securities will be issued under an Indenture (the "Senior Indenture") to be entered into between the Company and The Bank of New York, as Trustee, and the Subordinated Debt Securities will be issued under an Indenture (the "Subordinated Indenture") to be entered into between the Company and The Bank of New York, as Trustee. I have reviewed the originals or copies certified or otherwise identified to my satisfaction of all such corporate records of the Company and such other instruments and other certificates of public officials, officers and representatives of the Company and such other persons, and I have made such investigations of law, as I have deemed appropriate as a basis for the opinions expressed below. In rendering the opinions expressed below, I have assumed the authenticity of all documents submitted to me as originals and the conformity to the originals of all documents submitted to me as copies. In addition, I have assumed and have not verified the accuracy as to factual matters of each document I have reviewed. Based upon the foregoing, and assuming that (i) the Registration Statement and any amendments thereto (including post-effective amendments) will have become effective and comply with all applicable laws at the time the Offered Securities are offered or issued as contemplated by the Registration Statement; (ii) a prospectus supplement and/or pricing supplement will have been prepared or filed with the Commission describing the Offered Securities offered thereby and will comply with all applicable laws; (iii) all Offered Securities will be issued and sold in compliance with applicable federal and state laws and in the manner stated in the Registration Statement and the appropriate prospectus supplement and/or pricing supplement; (iv) any definitive purchase, underwriting or similar agreement and any other necessary agreement with respect to any Offered Securities offered or issued will have been duly authorized and validly executed and delivered by the parties thereto; (vi) the Offered Securities will be sold and delivered at the price and in accordance with the terms of such agreement and as set forth in the Registration Statement and the prospectus supplement(s) and/or pricing supplement(s) referred to therein; (vii) the Company will authorize the offering and issuance of the Offered Securities and the terms and conditions thereof and will take any other appropriate additional corporate action; and (viii) certificates representing the Offered Securities will have been duly executed and delivered and, to the extent required, authenticated, I am of the opinion that: 1. The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Michigan. 2. The Company Shares will, upon issuance against payment therefor in the manner described in the Registration Statement, be validly issued, fully paid and nonassessable. 3. The Secondary Shares have been duly authorized by such necessary corporate action of the Company and upon issuance of the Secondary Shares to the Selling Shareholders upon conversion of the Series E Stock pursuant to the Certificate of Designations therefor, will be validly issued, fully paid and nonassessable. 2 4. The shares of Preferred Stock will, upon issuance against payment therefor, be validly issued, fully paid and nonassessable. 5. The Debt Securities to be issued under either the Senior Indenture or the Subordinated Indenture, assuming the (i) due qualification of the Trustee and the applicable Indenture under the Trust Indenture Act of 1939 and (ii) due authorization, execution and delivery of the applicable Indenture by the Trustee, such Debt Securities will, upon issuance against payment therefor, be legal, valid and binding obligations of the Company and will be entitled to the benefits of the applicable Indenture. Insofar as my opinion relates to the validity, binding effect or enforceability of any agreement or obligation of the Company, it is subject to applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar laws affecting creditors' rights generally from time to time in effect and subject to general principles of equity, regardless of whether such is considered in a proceeding in equity or at law. The foregoing opinions are limited to the federal laws of the United States of America and the law of the State of Michigan. I hereby consent to the use of my name in the prospectuses and prospectus supplements constituting a part of the Registration Statement under the heading "Legal Matters" as counsel for the Company who has passed upon the legality of the Common Stock, Preferred Stock and the Debt Securities being registered by the Registration Statement and as having prepared this opinion, and to the use of this opinion as a part (Exhibit 5) of the Registration Statement. In giving such consent, I do not thereby admit that I am within the category of persons whose consent is required under Section 7 of the Act or the Rules and Regulations of the Commission thereunder. Sincerely, /s/ David M. Sherbin -------------------------- David M. Sherbin, Esq. Associate General Counsel 3 EX-12.1 7 RATIO OF EARNINGS TO FIXED CHARGES Exhibit 12.1 FEDERAL-MOGUL CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (unaudited) (In thousands except for ratios)
Three months ended Year ended December 31, March 31, --------------------------------------------------- 1998 1997 1996 1995 1994 1993 ------------ ---- ---- ---- ---- ---- Fixed charges: Interest expense $15,500 $ 32,000 $ 42,600 $37,300 $ 21,200 $25,900 Estimated interest portion of rents 5,363 9,700 11,267 11,333 8,300 7,033 Amortization of debt issuance expense 200 1,288 1,827 1,803 1,053 1,090 ------- -------- --------- ------- -------- ------- Total fixed charges $21,063 $ 42,988 $ 55,694 $50,436 $ 30,553 $34,023 Earnings: Earnings before fixed charges $ 1,600 $ 99,500 $(228,700) $(3,300) $102,100 $57,600 Fixed charges 21,063 42,988 55,694 50,436 30,553 34,023 ------- -------- --------- ------- -------- ------- Adjusted earnings $22,663 $142,488 $(173,006) $47,136 $132,653 $91,623 Ratio of Earnings to Fixed Charges 1.076 3.315 (3.106) 0.935 4.342 2.693 ======= ======== ========= ======= ======== =======
EX-12.2 8 RATIO OF EARNINGS TO COMBINED FIXED CHARGES Exhibit 12.2 FEDERAL-MOGUL CORPORATION COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (unaudited) (In thousands except ratios)
Three months ended Year ended December 31, March 31, ---------------------------------------------------- 1998 1997 1996 1995 1994 1993 ------------ ---- ---- ---- ---- ---- Fixed charges: Interest expense $15,500 $ 32,000 $ 42,600 $37,300 $ 21,200 $ 25,900 Distributions on preferred stock 2,510 10,450 16,336 16,714 17,182 15,410 Estimated interest portion of rents 5,363 9,700 11,267 11,333 8,300 7,033 Amortization of debt issuance expense 200 1,288 1,827 1,803 1,053 1,090 ------- -------- --------- ------- -------- -------- Total fixed charges $23,573 $ 53,438 $ 72,030 $67,150 $ 47,735 $ 49,433 Earnings: Earnings before fixed charges $ 1,600 $ 99,500 $(228,700) $(3,300) $102,100 $ 57,600 Fixed charges 23,573 53,438 72,030 67,150 47,735 49,433 ------- -------- --------- ------- -------- -------- Adjusted earnings $25,173 $152,938 $(156,670) $63,850 $149,835 $107,033 Ratio of Earnings to Fixed Charges and Preferred Stock Dividends 1.068 2.862 (2.175) 0.951 3.139 2.165 ======= ======== ========= ======= ======== ========
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