-----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, KI5i7ibyAczQWsjyntz47eQqBqh9U4EOzcRlaTgKMFtoTUfG43tzydl1MHl9qM6p yZ2+EtFZ1WXNuyk7QD91cQ== 0001045969-01-000325.txt : 20010326 0001045969-01-000325.hdr.sgml : 20010326 ACCESSION NUMBER: 0001045969-01-000325 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010323 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: 10-K SEC ACT: SEC FILE NUMBER: 001-01511 FILM NUMBER: 1577345 BUSINESS ADDRESS: STREET 1: 26555 NORTHWESTERN HGWY CITY: SOUTHFIELD STATE: MI ZIP: 48034 BUSINESS PHONE: 2483547700 10-K 1 0001.txt FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 Commission File Number: 1-1511 ---------------- FEDERAL-MOGUL CORPORATION (Exact name of Registrant as specified in its charter) Michigan 38-0533580 (State or other jurisdiction of (IRS Employer I.D. No.) incorporation or organization) 26555 Northwestern Highway Southfield, Michigan 48034 (Address of principal executive (Zip code) offices) Registrant's telephone number including area code: (248) 354-7700 Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange Title of each class on which registered ------------------- --------------------- Common Stock and Rights to Purchase New York Stock Exchange Preferred Shares
Securities registered pursuant to Section 12(g) of the Act: None. Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. The aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $218.5 million as of March 21, 2001 based on the reported last sale price as published for the New York Stock Exchange-- Composite Transactions for such date. The Registrant had 70,619,319 shares of common stock outstanding as of March 21, 2001. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement for its 2000 Annual Meeting of Shareholders filed with the Securities and Exchange Commission pursuant to Regulation 14A in April 2001, are incorporated by reference in Part III (Items 10, 11, 12 and 13) of this Report. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- FORWARD-LOOKING STATEMENTS Certain statements contained or incorporated in this Annual Report on Form 10-K, 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, estimates and statements regarding plans, objectives and expectations of Federal-Mogul and its management, including, without limitation, plans to implement the previously announced restructuring initiatives relating to manufacturing and warehouse facilities and the Company's six global initiatives (Aftermarket Rationalization, Facility Rationalization, Shared Services, Constraint Management, Supply Chain Management and Investment Strategy,), plans to address the issues related to the conversion to the Euro, and the scope of the effect of T&N, Abex and Wagner asbestos liabilities. 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, fluctuation in demand for both original equipment and replacement components in the automotive, heavy-duty vehicular and industrial markets, as well as certain global and regional economic conditions, including, without limitation, the effects of world wide currency fluctuations, asbestos 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. i PART I Item 1. Business. Overview Federal-Mogul Corporation founded in 1899 and incorporated in Michigan in 1924 (referred to herein as "Federal-Mogul" or the "Company"), is an automotive parts manufacturer providing innovative solutions and systems to global customers in the automotive, small engine, heavy-duty and industrial markets. The Company manufactures engine bearings, pistons, piston pins, rings, cylinder liners, camshafts, sintered products, sealing systems, fuel systems, wipers, lighting, ignition, brake, friction and chassis products. The Company's principal customers include many of the world's original equipment ("OE") manufacturers of such vehicles and industrial products. The Company also manufactures and supplies its products and related parts to the aftermarket. The Company has pursued a growth strategy focusing on its core competencies of manufacturing and engineering by concentrating efforts and resources on core business segments that will provide long-term growth. Federal-Mogul has made a commitment to expand its manufactured products to offer OE customers systems and modules. The Company also intends to expand the global reach of its manufacturing operations to follow the expansion of OE manufacturers into South America, Eastern Europe and the Asian markets. The Company intends to couple its expansion of OE business in new geographic markets with follow-on aftermarket sales. 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. The following table sets forth the Company's net sales by operating segment and geographic region as a percentage of total net sales:
Year Ended December 31, -------------- 2000 1999 1998 ---- ---- ---- Net Sales by Operating Segment: Americas/Asia Pacific.......................................... 67% 67% 59% Europe/Africa.................................................. 33% 32% 38% Divested Activities............................................ -- 1% 3% ---- ---- ---- 100% 100% 100% ==== ==== ==== Year Ended December 31, -------------- 2000 1999 1998 ---- ---- ---- Net Sales by Geographic Region: United States.................................................. 61% 61% 52% Canada......................................................... 2% 2% 2% Mexico......................................................... 3% 2% 3% ---- ---- ---- Total North America.......................................... 66% 65% 57% ---- ---- ---- United Kingdom................................................. 8% 8% 12% Germany........................................................ 14% 10% 11% France......................................................... 5% 5% 7% Italy.......................................................... 3% 4% 4% Other Europe................................................... 1% 4% 4% ---- ---- ---- Total Europe................................................. 31% 31% 38% ---- ---- ---- Rest of World.................................................... 3% 4% 5% ---- ---- ---- 100% 100% 100% ==== ==== ====
1 Operating Segments The Company's integrated operations are conducted under two operating segments generally corresponding to geographic regions: Americas/Asia Pacific and Europe/Africa. The Americas/Asia Pacific segment includes the operations of North and South America, Asia, Australia and India. The products within this segment consist of: powertrain systems products which include engine bearings, large bearings, pistons, piston pins, rings, cylinder liners, connecting rods, camshafts and sintered products; sealing system products which include dynamic seals and gaskets; visibility products which include lighting products and wiper blades; system protection products; brake and friction products; chassis products; ignition products; and fuel system components. These products are marketed under the brand names Federal-Mogul(R), Champion(R), Anco(R), Moog(R), Sealed Power(R), Wagner(R), Abex(R), Fel-Pro(R), National(R), Mather(R), Blazer(R), Belden(R), Carter(R), Weyburn-Bartel(R), Sintertech(R), Precision(R), PowerPath(R), STS(R), Redi-Seal(R), Redi-Sleeve(R), Unipiston(R), Zanxx(R), Signal-Stat(R) and Bentley-Harris(R). The Europe/Africa segment includes the operations of Europe and Africa. The products within this segment consist of: power cylinder systems which include engine bearings, large bearings, pistons, piston pins, rings, cylinder liners; sintered and camshaft products which include valve components, transmission components and camshafts components; sealing system products which include dynamic seals and gaskets; visibility and ignition products which include wiper blades and ignition components; and friction products. These products are marketed under the brand names Federal-Mogul(R), Champion(R), Moog(R), Nural(R), Glyco(R), AE(R), Goetze(R), Payen(R), Ferodo(R), Brico(R), Sintertech(R) and Bentley-Harris(R). Customers The Company markets its products to many of the world's major OE manufacturers. Federal-Mogul also manufactures and supplies its products and related parts to aftermarket customers for each category of equipment described above. Among Federal-Mogul's largest customers are Autozone, BMW, Carquest, Caterpillar, Cummins, DaimlerChrysler, Fiat, Ford/Jaguar/Volvo, General Motors, NAPA, Ozark, Peugeot/PSA, Renault and Volkswagen/Audi. Original Equipment The Company supplies OE customers with a wide variety of precision engineered parts including engine bearings, large bearings, pistons, piston pins, rings, cylinder liners, connecting rods, camshafts, sintered products sealing systems, fuel systems, wipers, lighting, ignition, brake, friction and chassis products. The Company manufactures essentially all of the products that it sells to OE customers. The Company's OE customers consist primarily of automotive and heavy-duty vehicle customers as well as industrial equipment manufacturers, agricultural, off-highway, marine, railroad, high performance and industrial applications. The Company has well-established relationships with substantially all major North American and European automotive OE manufacturers. Aftermarket Federal-Mogul's 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 the Company's aftermarket operations. Research and Development The Company's expertise in engineering and research and development ensures that the latest technologies, processes and materials are considered in solving problems for customers and bringing new, innovative products 2 to market. Federal-Mogul provides its customers with real-time engineering capabilities and design development in their home countries. Technological activities are conducted at the Company's major research centers in Burscheid, Germany; Plymouth, Michigan; Skokie, Illinois; Ann Arbor, Michigan; Toledo, Ohio; Cawston, England; Bad Camberg, Germany and Wiesbaden, Germany. Each of the Company's operating units is engaged in various engineering, research and development efforts working closely with customers to develop custom solutions unique to their needs. Total expenditures for research and development activities were approximately $128 million in 2000, $128 million in 1999 and $85 million in 1998. Recent Divestitures In 2000, the Company sold its OCS filter business, its minority interest in a German OE operation, its Greek aftermarket operation, one of its US sintered products operations and its India sintered products operation. In the aggregate, these businesses had approximately $28.5 million in sales in 1999 and employed approximately 675 people. The total proceeds were $66.6 million. The company did not record significant gains or losses on these transactions, individually or in the aggregate. Raw Materials and Suppliers The Company purchases various raw materials for use in its manufacturing processes. The principal raw materials purchased include steel, aluminum, copper and nickel. In addition, the Company purchases parts manufactured by other manufacturers for sale in the aftermarket. The Company has not experienced any shortages of raw materials or finished parts and normally does not carry inventories of raw materials or finished parts in excess of those reasonably required to meet its production and shipping schedules. In 2000, no outside supplier of the Company provided products that accounted for more than 5% of the Company's net sales. Employee Relations As of December 31, 2000, the Company had approximately 50,000 full-time employees, of which approximately 23,000 were employed in the United States. Various unions represent approximately 33% of the Company's United States hourly employees and approximately 60% of the Company's foreign hourly employees. Most of the Company's unionized manufacturing facilities have their own contract with its own expiration date, and as a result, no contract expiration date affects more than one facility. The Company believes its labor relations to be good. Environmental Regulations The Company'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 environmental control activities did not have a material impact on the Company's financial position or results of operations in 2000 and are not expected to have a material impact on the Company's financial position or results of operations in 2001 or 2002. Backlog The majority of the Company'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, the Company generally purchases products from more than one source. The Company expects to be capable of handling the anticipated 2001 sales volumes. Intellectual Property The Company is committed to protecting its technology investments and market share through an active and growing international patent portfolio. The international patent portfolio is composed of a large number of foreign and U.S. patents and pending patent applications that relate to a wide variety of products and processes. 3 In the aggregate, the Company's international patent portfolio is of material importance to its business. However, the Company 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. Competition The global vehicular parts business is highly competitive. The Company 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, technology, delivery, customer service and the breadth of products offered by a given supplier. The Company is meeting these competitive challenges by more efficiently integrating its manufacturing and distribution operations and expanding its product coverage within its core businesses. Item 2. Properties. Federal-Mogul's world headquarters is located in Southfield, Michigan, which is leased pursuant to a sale/leaseback arrangement. The principal manufacturing and other physical properties of the Company at December 31, 2000, are listed below. All properties are owned in fee simple except where otherwise noted. At December 31, 2000, the Company had 295 manufacturing/technical centers, distribution and sales and administration office facilities worldwide. Approximately 26% of the facilities are leased, the majority of which are distribution, sales and administration offices. The Company owns the remainder of the facilities.
North Rest of Type of Facility America Europe World Total ---------------- ------- ------ ------- ----- Manufacturing/Technical Centers.............. 85 98 35 218 Distribution................................. 16 23 7 46 Sales and Administration Offices............. 7 22 2 31 --- --- --- --- Total...................................... 108 143 44 295 === === === ===
The facilities range in size from approximately 1,700 square feet to 1,143,000 square feet. Management believes substantially all of the Company's facilities are in good condition and that it has sufficient capacity to meet its current and expected manufacturing and distribution needs. No facility is materially underutilized, except for those being sold or closed in the normal course of business. Item 3. Legal Proceedings ASBESTOS LIABILITY AND LEGAL PROCEEDINGS T&N Asbestos Litigation In the United States, the Company's United Kingdom subsidiary, T&N Ltd., and two United States 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 Ltd. is also subject to asbestos-disease litigation, to a lesser extent, in the United Kingdom and France. 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 claims may be made nor the expenditures which may ultimately arise therefrom. In addition, there are a number of factors that could impact the settlement costs into the future, including but not limited to: changes in the legal environment; possible insolvency of co-defendants; and establishment of an acceptable administrative (non-litigation) claims resolution mechanism. In the fourth quarter of 2000, the Company increased its estimate of asbestos-related liability for the T&N Companies by $751 million and recorded a related insurance recoverable asset of $577 million. The revision in 4 the estimate of probable asbestos-related liability principally resulted from a study performed by an econometric firm that specializes in these types of matters. The revised liability (approximately $1.6 billion) represents the Company's estimate for claims currently pending and those which can be reasonably estimated to be asserted in a future period. The Company believes that these claims will be paid over the next 12 years. In arriving at the revised liability for the T&N Companies, assumptions have been made regarding the total number of claims anticipated to be received in the future period, the typical cost of settlement (which is sensitive to the industry in which the plaintiff claims exposure, the alleged disease type and the jurisdiction in which the action is being brought), the rate of receipt of claims, the settlement strategy in dealing with outstanding claims and the timing of settlements. While management believes that the liability and receivable recorded are appropriate for anticipated losses arising from asbestos-related claims against the T&N Companies for the period covered, given the nature and complexity of the factors affecting the estimated liability and potential insurance recovery the actual liability and insurance recovery may differ. No assurance can be given that the T&N Companies will not be subject to material additional liabilities and significant additional litigation relating to asbestos for the period covered. In the event that such liabilities exceed the amounts recorded by the Company or the remaining insurance coverage, the Company's results of operations, business, liquidity and financial condition could be materially adversely affected. The ultimate liability for all pending and future claims is highly uncertain due to the difficulty of forecasting the numerous variables that can affect the liability. The Company does not believe it can reasonably determine the ultimate liability as the level of uncertainty is too great to provide for reasonable estimation of the number of future claims, the nature of such claims and the cost to resolve them. As additional experience is gained regarding claims or other new information becomes available regarding the potential liability, the Company will reassess its potential liability and revise the estimates as appropriate. Accordingly it is reasonably possible that the ultimate losses from asbestos-related claims will be greater than amounts recorded. T&N Ltd. is a defendant in approximately 63,000 pending personal injury claims as of December 31, 2000. During 2000, approximately 39,000 new claims naming T&N Ltd. were received. The two United States subsidiaries are defendants in approximately 111,000 pending personal injury claims as of December 31, 2000. During 2000, approximately 41,000 new claims naming the two United States subsidiaries were received. A number of years ago, T&N Ltd. appointed the Center for Claims Resolution ("CCR") as exclusive representative in relation to all asbestos-related personal injury claims made against the T&N Companies in the United States. The CCR has provided to its member companies a litigation defense, claims- handling and administration service in respect to United States asbestos- related disease claims. Pursuant to the CCR Producer Agreement, T&N Ltd. was entitled to appoint a representative as one of the five voting directors on the CCR's Board of Directors. Also pursuant to that agreement, members of the CCR contributed towards indemnity payments in each claim in which the member is named. Contributions to such indemnity payments were calculated on a case by case basis according to sharing agreements among the CCR's members. Effective January 18, 2000, the two United States subsidiaries appointed a law firm specializing in asbestos matters as their litigation defense, claims handling and administrative service provider. Indemnity and defense obligations incurred while members of the CCR are continuing to be honored. This change was intended to create greater economic and defense efficiencies for the two companies. The T&N Companies have entered into $250 million of surety to meet CCR collateral requirements for past obligations. The surety has a declining balance and is effective through February 24, 2004. The membership of the CCR has decreased in the past year for both voluntary and involuntary reasons. One instance involved the termination of a member by the CCR board. That former member had refused to provide required surety for agreed to settlements made while a member. The CCR has tried to recover the funds owed; however, the former member has since filed for bankruptcy and recovery is therefore uncertain. Another member has terminated its participation due to its determination that, as a trust, it lacked sufficient assets to commit to 5 any new settlements. This member has also asserted that it is entitled to certain reimbursements which the CCR does not believe to be appropriate. Additionally, a third member had filed for bankruptcy in December 2000. Any additional cost to the remaining CCR members, net of the security provided, is uncertain. The Company however has provided for its best estimate of the impact of these events. The T&N Companies could experience an increase in liability if there are any future negative developments in these areas. Certain codefendant companies (both members and nonmembers of the CCR) have recently filed for reorganization under Chapter 11 of the Federal Bankruptcy Code. As a consequence, litigation against them (with some exceptions) has been stayed or restricted. Due to the uncertainties involved, the long-term effect of these proceedings on the Company's current and future exposure cannot be determined. In February 2001, the CCR and its members significantly amended its indemnity naming and services agreement. The CCR indemnity naming formula has been replaced with a provision that, for all claims settled on or after February 1, 2001, CCR members would be directly responsible for payment of their own indemnity obligations. The amendments will allow CCR members to choose the services they wish to continue receiving from the CCR. T&N Ltd. plans to continue with the CCR for claims handling and administrative services. However, T&N Ltd. has appointed an outside law firm specializing in asbestos matters to handle its litigation defense. In 1996, T&N Ltd. purchased for the T&N Companies a (Pounds)500 million layer of insurance which will be triggered should the aggregate costs of claims filed after June 30, 1996, where the exposure occurred prior to that date, exceed (Pounds)690 million. The Company now believes that the aggregate cost of claims filed after June 30, 1996 will exceed the trigger point. The Company believes based on its review of the insurance policy and its advice from outside counsel, that it is probable that the T&N Companies will be entitled to receive payment from the reinsurers for the cost of claims in excess of the trigger point of the insurance. Based on this assessment, the Company recorded an insurance recoverable asset under the T&N policy of $577 million in the fourth quarter of 2000. The Company has reviewed the financial viability and legal obligations of the three reinsurance companies involved and has concluded that there is little risk of the reinsurers not being able to meet their obligation to pay, once the claims filed after June 30, 1996 exceed the (Pounds)690 million trigger point. The Company does not expect to reach the trigger point of the insurance or begin to collect on this insurance recoverable for the next several years. The US claims' costs applied against this policy are converted at a fixed exchange rate of $1.69/(Pounds). As such, if the market exchange rate is less then $1.69/(Pounds), the Company will effectively have a discount from 100% recovery on claims made with the insurance companies. At December 31, 2000, the $577 million insurance recoverable asset is net of an exchange rate discount of $68 million. The ultimate exposure of the T&N companies with respect to claims will depend upon the extent to which the insurance described above will be available to cover such claims, the amount paid for indemnity and defense, changes in the legal environment and other factors. Abex and Wagner Asbestos Litigation Former businesses of Cooper Automotive, primarily Abex and Wagner, are involved as defendants in numerous court actions in the United States alleging personal injury from exposure to asbestos or asbestos-containing products, mainly involving friction products. Abex is a defendant in approximately 23,000 pending claims as of December 31, 2000. During 2000, approximately 14,700 new claims naming this defendant were received. Wagner is a defendant in approximately 17,300 claims as of December 31, 2000. During 2000, approximately 6,700 new claims naming this defendant were received. In 1998, the Company acquired the capital stock of a former Cooper Automotive entity resulting in the assumption by a Company subsidiary of contractual liability, under certain circumstances, for all claims pending and to be filed in the future alleging exposure to certain Wagner automotive and industrial friction products and for all claims filed after August 29, 1998, alleging exposure to certain Abex (non-railroad and non-aircraft) friction products. In the fourth quarter of 2000, the Company decreased its estimate of probable asbestos- related liability by $127 million, which was accompanied by an approximately equivalent reduction in the insurance recoverable asset. The revised estimate of probable 6 asbestos-related liability principally resulted from a study performed by an econometric firm that specializes in these types of matters. The revised liability (approximately $253 million) represents the Company's estimate for claims currently pending and those which can be reasonably estimated to be asserted in a future period. The Company believes that these claims will be paid over the next 12 years. In arriving at the revised liability for Abex and Wagner, assumptions have been made regarding the number of claims anticipated to be received in the future period, the typical cost of settlement (which is sensitive to the alleged disease type and the jurisdiction in which the action is being brought), the rate of receipt of claims, and the timing of settlements. While management believes that the liability and receivable recorded for these claims are appropriate for anticipated losses arising from asbestos- related claims against Abex and Wagner for the covered period, given the nature and complexity of factors affecting the estimated liability and potential insurance recovery the actual liability and insurance recovery may differ. No assurance can be given that Abex and Wagner will not be subject to material additional liabilities and significant additional litigation relating to asbestos for the period covered. In the event that such liabilities exceed the amounts recorded by the Company or the remaining insurance coverage, the Company's results of operations, business, liquidity and financial condition could be materially adversely affected. The ultimate liability for all pending and future claims is highly uncertain due to the difficulty of forecasting the numerous variables that can affect the liability. The Company does not believe it can reasonably determine the ultimate liability as the level of uncertainty is too great to provide for reasonable estimation of the number of future claims, the nature of such claims, and the cost to resolve them. As additional experience is gained regarding claims or other new information becomes available regarding the potential liability, the Company will reassess its potential liability and revise the estimates as appropriate. Accordingly it is reasonably possible that the ultimate losses from asbestos-related claims will be greater than amounts recorded. Abex maintained product liability insurance coverage for most of the time that it manufactured products that contained asbestos. The subsidiary of the Company that may be liable for the post-August 1998 asbestos claims against Abex has the benefit of that insurance. Abex has been in litigation since 1982 with the insurance carriers of its primary layer of liability concerning coverage for asbestos claims. Abex also has substantial excess layer liability insurance coverage that, barring unforeseen insolvencies of excess carriers or other adverse events, should provide coverage for asbestos claims against Abex. The Company believes that based on its review of the insurance policies, the viability of the insurance carriers, and advice from outside legal counsel, it is probable that Abex will receive payments for a substantial majority of the cost of claims. Wagner also maintained product liability insurance coverage for some of the time that it manufactured products that contained asbestos. The subsidiary of the Company that may be liable for asbestos claims against Wagner has the benefit of that insurance. Primary layer liability insurance coverage for asbestos claims against Wagner is the subject of an agreement with Wagner's solvent primary carriers. The agreement provides for partial reimbursement of indemnity and defense costs for Wagner asbestos claims until exhaustion of aggregate limits. Wagner also has substantial excess layer liability insurance coverage which, barring unforeseen insolvencies of excess carriers or other adverse events, should provide coverage for asbestos claims against Wagner. The Company believes that based on its review of the insurance policies, the financial viability of the insurance carriers, and advice from outside legal counsel, it is probable that Wagner will receive payment for a portion of the cost of claims. Based on the probable conclusion of collection under the insurance policies, the Company has recorded a $188 million insurance recoverable asset related to the Abex and Wagner liability. Federal-Mogul and Fel-Pro Asbestos Litigation The Company also is sued in its own name as one of a large number of defendants in a number of lawsuits brought by claimants alleging injury due to exposure to asbestos. The Company's Fel-Pro subsidiary has also been named as a defendant in a number of product liability cases involving asbestos, primarily involving gasket or packing products. Fel-Pro is a defendant in approximately 31,000 pending claims as of December 31, 2000. 7 During 2000, approximately 3,400 new claims were filed. Over 30,000 of these claims have been transferred to a federal court where they reside subject to removal back into the tort system only if certain medical and product identification conditions are met. The Company is defending all such claims vigorously and believes that it and Fel-Pro have substantial defenses to liability and insurance coverage for defense and indemnity. While the outcome of litigation cannot be predicted with certainty, management believes that asbestos claims pending against the Company and Fel-Pro as of December 31, 2000, will not have a material effect on the Company's financial position. Aggregate of Asbestos Liability and Insurance Recoverable Asset The following is a summary of the asbestos liability and the insurance recoverable asset for 2000 (in millions of dollars):
T&N Abex & Companies Wagner Other Total --------- ------- ----- -------- Liability: Balance at December 31, 1999......... $1,104.2 $ 408.8 $ 2.3 $1,515.3 2000 provision adjustments......... 750.9 (127.2) 1.6 625.3 2000 payments...................... (323.8) (28.9) (1.0) (353.7) Other.............................. 25.0 -- -- 25.0 -------- ------- ----- -------- Balance at December 31, 2000......... $1,556.3 $ 252.7 $ 2.9 $1,811.9 ======== ======= ===== ======== Asset: Balance at December 31, 1999......... $ -- $ 325.9 $ -- $ 325.9 2000 provision adjustments......... 576.7 (135.8) -- 440.9 2000 proceeds...................... -- (2.2) -- (2.2) Other.............................. 6.5 -- -- 6.5 -------- ------- ----- -------- Balance at December 31, 2000......... $ 583.2 $ 187.9 $ -- $ 771.1 ======== ======= ===== ========
As of December 31, 2000, the Company has provided an aggregated liability for all of its subsidiaries and businesses with potential asbestos liability of approximately $1.8 billion for claims currently pending and those which can be reasonably expected to be asserted in a future period. The Company believes that these claims will be paid over the next 12 years. Of this amount, the Company expects to incur asbestos payments of approximately $350 million over the next 12 months and has reflected this as a current liability. This estimate is based in part on recent and historical claims experience, medical information, the impact of changes in indemnity sharing within the CCR and the current legal environment. The Company cannot reasonably estimate a liability beyond the period encompassed in its estimates as the level of uncertainty is too great to provide for reasonable estimation of the number of future claims, the nature of such claims, or the cost to resolve them. The Company believes that it is probable that its subsidiaries with asbestos-related liabilities and related insurance policies, the T&N Companies, Abex, Wagner and Fel-Pro will collect the recorded aggregated insurance recoverable asset of $771 million. Other The Company is involved in various other legal actions and claims, directly and through its subsidiaries. The Company has been named in a class action lawsuit captioned In Re Federal-Mogul Corp. Securities Litigation, alleging violations by the Company of various federal securities laws. The Company believes that the claims contained in the suit are without merit and that it has meritorious defenses against the claims. The Company will vigorously defend itself against the suit and after taking into consideration legal counsel's evaluation of such actions, is of the opinion that the outcomes are not reasonably likely to have a material adverse effect on the Company's financial position, operating results or cash flows. 8 For information respecting lawsuits concerning environmental matters to which the Company is a party, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations--Litigation and Environmental Matters". There were no material legal proceedings terminated during the fourth quarter of 2000, other than the Owens-Illinois matter. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. The Company's common stock is listed on the New York Stock Exchange under the trading symbol FMO. The approximate number of shareholders of record of the Company's common stock at March 21, 2001 was 6,500. The following table sets forth the high and low sales prices of the Company's common stock for each calendar quarter as reported on the New York Stock Exchange-Composite Tape for the last two years:
2000 1999 ------------- ------------- Quarter High Low High Low ------- ------ ------ ------ ------ First......................................... $20.19 $12.25 $64.88 $40.63 Second........................................ $16.00 $ 9.44 $53.81 $41.94 Third......................................... $11.94 $ 5.25 $55.00 $23.38 Fourth........................................ $ 5.88 $ 1.75 $29.13 $17.56
The closing price of the Company's common stock as reported on the New York Stock Exchange-Composite Tape on March 21 2001 was $3.11. Quarterly dividends of $.0025 per common share were declared during each quarter of 2000 and 1999. The Company is prohibited, under its new Senior Credit Agreement, from paying dividends on its common stock, and therefore will not be declaring a dividend in 2001. 9 Item 6. Selected Financial Data The following table presents information from the Company's consolidated financial statements for the five years ended December 31, 2000. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations", and "Financial Statements and Supplemental Data".
2000 1999 1998 1997 1996 --------- --------- --------- --------- --------- (Millions of Dollars, Except Per Share Amounts) Consolidated Statement of Operations Data Net sales............... $ 6,013.2 $ 6,487.5 $ 4,468.7 $ 1,806.6 $ 2,032.7 Costs and expenses...... (6,244.5)(1) (6,006.2)(3) (4,266.9)(4) (1,703.7)(5) (2,258.0)(6) Other expense........... (31.0) (21.4) (16.3) (3.4) (3.4) Income tax (expense) benefit................ (19.2)(2) (180.9) (93.6) (27.5) 22.4 Earnings (loss) before extraordinary items and cumulative effect of change in accounting principle.............. (281.5) 279.0 91.9 72.0 (206.3) Extraordinary items -- loss on early retirement of debt, net of applicable income tax benefits........... -- (23.1) (38.2) (2.6) -- Cumulative effect of change in accounting for costs of start-up activities, net of applicable income tax benefit................ -- (12.7) -- -- -- --------- --------- --------- --------- --------- Net earnings (loss)..... $ (281.5) $ 243.2 $ 53.7 $ 69.4 $ (206.3) ========= ========= ========= ========= ========= Common Share Summary (Diluted) Average shares and equivalents outstanding (in thousands)......... 70,573 84,206 53,748 41,854 34,659 Earnings (loss) per share: Before extraordinary items and cumulative effect of change in accounting principle.. $ (4.02) $ 3.59 $ 1.67 $ 1.67 $ (6.20) Extraordinary items -- loss on early retirement of debt, net of applicable income tax benefits... -- (.28) (.71) (.06) -- Cumulative effect of change in accounting for costs of start-up activities, net of applicable income tax benefit............... -- (.15) -- -- -- --------- --------- --------- --------- --------- Net earnings (loss) per share.................. $ (4.02) $ 3.16 $ .96 $ 1.61 $ (6.20) ========= ========= ========= ========= ========= Dividends declared per share.................. $ .01 $ .01 $ .1275 $ .48 $ .48 ========= ========= ========= ========= ========= Consolidated Balance Sheet Data Total assets............ $10,255.0 $ 9,945.2 $ 9,940.1 $ 1,802.1 $ 1,455.2 Short-term debt (7)..... 147.8 190.8 211.0 28.6 280.1 Long-term debt.......... 3,559.7 3,020.0 3,130.7 273.1 209.6 Company-obligated mandatorily redeemable preferred securities of Subsidiary trust holding solely convertible subordinated debentures of the Company......... 575.0 575.0 575.0 575.0 -- Shareholders' equity.... 1,550.2 2,075.2 1,986.2 369.3 318.5 Other Financial Information Net cash provided from (used by) operating activities............. $ (154.5) $ 562.4 $ 325.5 $ 215.7 $ 149.0 Expenditures for property, plant, equipment and other long-term assets....... 313.3 395.2 228.5 49.7 54.2 Depreciation and amortization expense... 374.4 354.9 228.0 51.5 61.9
- ------------------ (1) Includes a $135.7 million restructuring charge, a $75.4 million charge for adjustments of assets held for sale and other long-lived assets to fair value and a $184.4 million charge related to asbestos. (2) Includes a $60.0 million charge for providing deferred tax asset valuation allowances. (3) Includes a $46.9 million charge for integration costs and a $7.9 million charge for adjustment of assets held for sale and other long-lived assets to fair value. (4) Includes a $7.3 million net restructuring charge, a $19.0 million net charge for adjustment of assets held for sale and other long-lived assets to fair value, an $18.6 million charge for purchased in-process research and development, a $22.4 million charge for integration costs and a $13.3 million net gain related to the British pound currency option and forward contract. (5) Includes a $1.1 million net restructuring credit, a $2.4 million charge for adjustment of assets held for sale and other long-lived assets to fair value, a $1.6 million credit for reengineering and other related charges, and a $10.5 million charge related to the British pound currency option and forward contract. (6) Includes a $57.6 million restructuring charge, a $151.3 million charge for adjustment of assets held for sale and other long-lived assets to fair value, and $11.4 million relating to reengineering and other related charges. (7) Includes current maturities of long-term debt (see Note 6 to the Consolidated Financial Statements). 10 MANAGEMENT'S DISCUSSION AND ANALYSIS Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Federal-Mogul Corporation (the "Company") is an automotive parts manufacturer providing innovative solutions and systems to global customers in the automotive, small engine, heavy-duty and industrial markets. The Company manufactures engine bearings, pistons, piston pins, rings, cylinder liners, camshafts, sintered products, sealing systems, fuel systems, wipers, lighting, ignition, brake, friction and chassis products. The Company's principal customers include many of the world's original equipment ("OE") manufacturers of such vehicles and industrial products. The Company also manufactures and supplies its products and related parts to the aftermarket. Results of Operations Net Sales Sales by operating segment were:
2000 1999 1998 ------ ------ ------ (Millions of Dollars) Americas/Asia Pacific.................................. $4,057 $4,330 $2,629 Europe/Africa.......................................... 1,940 2,072 1,686 Divested Activities.................................... 16 86 154 ------ ------ ------ Total................................................ $6,013 $6,488 $4,469 ====== ====== ======
Americas/Asia Pacific Sales decreased 6% from 1999 to 2000 primarily due to the continued depression in the heavy-duty truck market and the machine tool business which decreased sales 2%, and branch closures and consolidation in the aftermarket which decreased sales by 3%. Net sales were also impacted by difficulties in the first six months of 2000 with the Company's central warehouse system, the elimination of year-end sales incentives, the loss of a major aftermarket customer in mid-1999 and the effects of foreign exchange on South American, Canadian and Mexican operations. These decreases were partially offset by net new business recorded in 2000. Sales increased 65% from 1998 to 1999 primarily due to the full year effect of the 1998 acquisitions of Cooper Automotive, T&N and Fel-Pro, the 1999 acquisition of Crane Technologies and net new business recorded in 1999, partially offset by lower aftermarket sales. Sales in the aftermarket were impacted by an overall decrease in the engine parts market size due to improved OE quality and the 1999 bankruptcy of a major customer in the North American aftermarket. Europe/Africa Sales decreased 6% from 1999 to 2000 primarily due to the effects of foreign exchange from European operations which decreased sales by 12% and the Company's divestitures of its heat transfer and Bertolotti businesses in the second and third quarter of 1999, respectively, and its OCS Filter business in the second quarter of 2000 which decreased sales by 3%. These decreases were partially offset by the full-year effect of the 1999 acquisition of the piston division of Alcan Deutschland, GmbH (Alcan) and net new business recorded during 2000. Sales increased 23% from 1998 to 1999 primarily due to the full-year effect of the 1998 acquisitions of T&N and Cooper Automotive, the 1999 acquisition of Alcan and net new business recorded during 1999. These increases were partially offset by aftermarket sales decreases. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued Gross Margin Gross margin as a percentage of net sales was 23.6% in 2000 compared to 27.4% in 1999. Management attributes the decrease from 1999 to 2000 to lower sales volumes as mentioned above, changes in OE/aftermarket mix, the effects of foreign exchange, and certain productivity and inflationary issues. OE sales represented 56% of total sales in 1999 compared to 57% in 2000. Gross margin was also impacted by adjustments for inventory and other product- related items. Gross margin as a percentage of net sales was 27.4% in 1999 compared to 26.4% in 1998. Management attributes this increase to cost controls and the divestiture of under-performing assets, partially offset by productivity issues in the camshafts operations. Selling, General and Administrative Expense Selling, general and administrative expenses ("SG&A") as a percentage of net sales were 14.0% in 2000 compared to 13.1% in 1999. Management attributes this increase to lower sales as discussed above, and the fact that the majority of the Company's SG&A costs are fixed over the short term. As such the Company was not able to reduce these costs on a level commensurate with the sales volume decline. The Company also experienced increasing employee benefit costs, remediation of environmental items and professional fees related to special studies. While this percentage has increased, overall costs have remained relatively flat. Selling, general and administrative expenses as a percentage of net sales decreased to 13.1% in 1999 compared to 14.3% in 1998. Management attributes this decrease to the benefits of prior restructuring actions and the realization of combined efficiencies from the T&N, Cooper Automotive and Fel- Pro acquisitions. Purchased In-Process Research and Development Charge In connection with the T&N acquisition, 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 for which technological feasibility had not been established and the in-process technology had no future alternative uses. Rationalization of Acquired Businesses In connection with the T&N, Cooper Automotive and Fel-Pro acquisitions in 1998, the Company recognized $216.8 million as acquired liabilities related to the rationalization and integration of acquired businesses. The rationalization reserves provided for $180.0 million in relocation and severance costs and $36.8 million in exit costs, and were recorded as a component of goodwill in the purchase price allocation. The components of the integration plan included closure of certain manufacturing facilities worldwide; relocation of highly manual manufacturing product lines to more suitable locations; consolidation of overlapping manufacturing, technical and sales facilities and joint ventures; consolidation of overlapping aftermarket warehouses; consolidation of aftermarket marketing and customer support functions; and streamlining of administrative, sales, marketing and product engineering staffs worldwide. The Company paid $10.7 million and $72.2 million related to these rationalization reserves in 2000 and 1999, respectively. Also during 1999, the Company made adjustments to reduce the rationalization reserves, with an offsetting amount to goodwill, of $47.9 million. These adjustments related to the finalization of rationalization plans. As of December 31, 2000, remaining rationalization reserves were $18.0 million, primarily relating to the closure of several Powertrain Systems facilities in Europe and the consolidation of aftermarket warehouses in Europe. These costs are expected to be paid in 2001. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued Restructuring Charges (Credits) In 2000, the Board of Directors of the Company approved, and the Company has begun to implement, a global restructuring plan. The primary purposes of this plan are to improve the Company's cost structure and reduce non- productive assets. The significant activities that are part of the 2000 plan are as follows: Consolidation of European Operations: The Company has developed plans to take advantage of opportunities to achieve synergies in and consolidate activities of its European operations. As part of these plans, four of its manufacturing facilities will be closed or consolidated, and the operations that were being performed within these facilities will be moved to other European locations. The Company will achieve a net reduction of approximately 1,350 employees, comprised of 1,800 reductions associated with facility closings, offset by 450 new hires in new or expanded facilities. Consolidation of North American and South American Operations: The Company has implemented a plan to consolidate certain manufacturing, distribution and administrative functions in North and South America. As a result of these plans the Company will close or consolidate 36 facilities, and the operations that were being performed within these facilities will be moved to other North American and South American locations. The Company will achieve a net reduction of approximately 1,500 employees, comprised of 2,950 reductions associated with facility closings, offset by 1,450 new hires required for new or expanded facilities. In 2000, the Company recognized $135.7 million of restructuring charges related to severance and exit costs. Employee severance costs of $105.8 million and exit costs of $29.9 million resulted from the planned closure of certain North American aftermarket branch warehouses and distribution centers; consolidation of the Company's heavy-wall bearings business; the closure of Australian and Taiwanese sales, administrative, and distribution facilities; the consolidation of certain administrative and human resource functions in Europe; reorganization of the America's friction business; closure of one of the Company's European R&D centers, consolidation of an administrative facility at the Company's Ohio ignition facility and various other programs in North America, South America and Europe. As part of the 2000 restructuring plan approximately 1,400 employees were severed and 30 facilities were closed or consolidated. In 2000, the Company paid $46.8 million for employee severance costs and $4.2 million for exit costs against the 2000 reserves. Management anticipates an annualized EBIT benefit of $75 million as a result of these actions beginning in 2002. Also during 2000, the Company began implementing a program to focus on six global initiatives aimed at improving the operation efficiency of the business (the "SGI's"). The SGI's are grouped into six strategic actions: Aftermarket Rationalization, Facility Rationalization, Shared Services, Constraint Management, Supply Chain Management and Investment Strategy. Included in the above restructuring charge were severance and exit costs of $19.4 million, primarily related to the Aftermarket and Facility Rationalizations. During 2001 management expects to refine this program and may incur additional restructuring charges. As such, the aggregate annualized EBIT benefits of these actions have not been determined. In 1999, the Company recognized $13.2 million of restructuring charges related to severance and exit costs. Employee severance costs of $11.1 million resulted from terminations in certain European operations of the Company, employees at the Company's Milan, Michigan plant, and certain executive severances. The severance costs were based on the estimated amounts that will be paid to the affected employees pursuant to the Company's workforce reduction policies and certain governmental regulations. Total headcount reductions were approximately 250 employees. Exit costs of $2.1 million were related to the closing of the Company's Milan plant and French bearing operations. These actions were substantially completed in 2000. In 2000, the Company paid $5.5 million for employee severance costs and $1.9 million for exit costs against the 1999 reserves. Also in 1999, the Company recognized $13.2 million of reversals of restructuring charges recorded in previous years. These reversals resulted primarily from lower than expected employee severance costs principally associated with the reduction of the aftermarket sales force and consolidation of certain operations in the Americas. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued In 1998, as a result of the T&N, Cooper Automotive and Fel-Pro acquisitions, the Company recognized $16.3 million of restructuring charges related to restructuring the Company's operations in place prior to these acquisitions. The restructuring charges were primarily for employee severance costs, which resulted from planned terminations in various business operations of the Company. In 2000, the Company paid $3.1 million in severance costs against the 1998 reserves. Also in 1998, the Company recognized restructuring credits of $9.0 million for a reversal of charges recorded in previous years. The Company was able to sell, rather than liquidate, its retail operations in Puerto Rico, causing this reversal. Adjustment of Assets Held for Sale and Other Long-Lived Assets to Fair Value In 2000, the Company recorded a $75.4 million charge primarily associated with the actions of the 2000 restructuring program. Included in this charge are the write-down of assets to their fair value for the closure of aftermarket branch warehouses and distribution centers, the Company's Ohio administrative facility, a European R&D center and certain facilities associated with the reorganization of the America's friction business. In 1999, the Company sold its subsidiary, Bertolotti Pietro e Figli, S.r.l. (Bertolotti), an Italian aftermarket operation. In 1998, the Company recognized a $19.0 million charge primarily associated with their writedown of Bertolotti's assets to their estimated fair value. In 1999, the Company recognized an additional $7.9 million loss associated with the writedown of Bertolotti's assets to their fair value resulting from the sale. Offsetting the loss was a tax benefit of $7.9 million resulting from the sale. Asbestos Charge In 2000, the Company recorded a $184.4 million charge consisting of approximately a $625.3 million increase in the Company's asbestos liability, which was partially offset by a $440.9 million increase in the Company's asbestos-related insurance recoverable. These charges and insurance recoveries were primarily based on an actuarial study the Company commissioned during 2000 (see Litigation and Environmental Matters). Integration Costs The Company recognized $46.9 million and $22.4 million of integration costs in 1999 and 1998, respectively, in connection with the acquisitions of T&N, Cooper Automotive and Fel-Pro. These expenses included one-time items such as brand integration, costs to pack and move productive inventory and fixed assets from one location to another and costs to change the identity of entities acquired. There were no integration costs in 2000. Interest Expense Interest expense increased $15.8 million in 2000 to $289.3 million. The increase is primarily attributable to the full-year effect of the 1999 bond issue and higher amounts outstanding on the Company's multi-currency revolver during 2000. Interest expense increased $69.5 million in 1999 to $273.5 million. The increase is primarily attributable to the full-year effect of the issuance of new debt to finance the acquisitions of Cooper Automotive and other businesses, offset slightly by debt reductions from cash flow generated from operations and the Company's increased accounts receivable securitizations. Interest Income Interest income remained flat from 1999 to 2000. Interest income decreased $6.0 million in 1999 to $4.6 million. The decrease in interest income is due to the Company using the proceeds of the Company-obligated mandatorily redeemable preferred securities for the purchase of T&N and improved cash management. 14 MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued Net Gain on British Pound 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. 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 had recognized a net loss of $10.5 million on the transaction. In January 1998, the Company settled the option and recognized an additional loss of $17.3 million. 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 approximately $2.45 billion. As a result of favorable fluctuations in the British pound/United States dollar exchange rate during the contract period, the Company recognized a $30.6 million gain. The Company entered into the above transaction to serve as an economic hedge for the purchase of T&N. However, this transaction did not qualify for hedge accounting under US GAAP, and therefore is reflected in the consolidated statement of operations caption "Net gain on British pound forward contract." Income Taxes The effective tax rates for 2000, 1999 and 1998 were (7.3)%, 39.3% and 50.5%, respectively. The effective tax rates differ from statutory rates due to changes in valuation allowances, rate variances and changes for certain state and foreign jurisdictions, and non-deductible goodwill. The Company increased its valuation allowance by $60.0 million for foreign tax credits and other deferred tax assets that it concluded will not be realized. Tax expense differs from current income taxes payable due to timing differences, which for the last three years were significantly affected by asbestos payments. The Company expects that future income tax expense will be greater than current income taxes payable primarily due to the effect of asbestos payments. At December 31, 2000, the Company had deferred tax assets of $1,079.1 million, net of a valuation allowance of $219.6 million, and deferred tax liabilities of $1,032.6 million. The Company evaluates the necessity for a valuation allowance on deferred tax assets by taxing jurisdiction. In all countries except the US and the UK, the deferred tax liabilities are greater than the net deferred tax assets, and they generally reverse in similar periods. In the US and UK, the Company has deferred tax assets of $1,100.2 million, net of related valuation allowances of $165.7 million and deferred tax liabilities of approximately $943.4 million. The deferred tax assets in the UK and US relate primarily to net operating loss carryforwards of $193 million, asbestos liabilities of $552 million and accruals for employee benefits of $167 million. The net operating losses in the UK have no expiration date, and the net operating losses in the US expire in various amounts through 2020. In addition, the deferred taxes related to employee benefits and asbestos become deductible as paid over the next 30 and 12 years, respectively. Realization of the deferred tax assets in the US and UK are dependent in part upon the reversal of deferred tax liabilities but also on future taxable income. Future taxable income is dependent upon a number of factors including, but not limited to, sufficient levels of earnings before income taxes and the amount and timing of asbestos payments. Based on consideration of historical and future earnings before income taxes, the Company believes it is more likely than not that the deferred tax assets, beyond those specifically reserved, will be realized. The Company will evaluate its deferred taxes and related valuation allowances quarterly. If at any time the Company believes that current or future taxable income will not support the basis for recognizing the benefit of the deferred tax assets, valuation allowances will be provided accordingly. Extraordinary Items As a result of certain financing transactions (see Liquidity and Capital Resources), the Company incurred extraordinary losses on the early retirement of debt of $23.1 million and $38.2 million, net of related tax benefits of $13.5 million and $19.9 million, in 1999 and 1998, respectively. 15 MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued Cumulative Effect of Change in Accounting Principle In 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-5, Reporting the Costs of Start-Up Activities. SOP 98-5 was effective January 1, 1999 and requires that start-up costs capitalized prior to January 1, 1999 be written off and any future start-up costs be expensed as incurred. The Company adopted SOP 98-5 on January 1, 1999 and subsequently wrote off, as a cumulative effect of change in accounting principle, the unamortized balance of start-up costs totaling $12.7 million, net of applicable income tax benefits of $6.8 million, in the quarter ended March 31, 1999. Effect of Accounting Pronouncements Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", was issued by the Financial Accounting Standards Board ("FASB") in June 1998. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. In June 2000, the FASB issued SFAS No. 138, which amends and clarifies certain guidance in SFAS No. 133. The Company has implemented the appropriate systems and processes to adopt these statements effective January 1, 2001. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. For fair-value hedge transactions, the fair value of the derivative instrument will generally be offset in the income statement by changes in the hedged item's fair value. For cashflow hedge transactions, the fair value of the derivative instrument will be reported in other comprehensive income. The ineffective portion of all hedges will be recognized in current-period earnings. The statements provide for the recognition of a cumulative adjustment for an accounting change, as of the date of adoption. The Company estimates that it will record a net-of-tax cumulative-effect-type loss of approximately $350,000 in accumulated other comprehensive income to recognize at fair value all derivative instruments that will be designated as cashflow hedges. The adjustment to current earnings for fair value hedges is not material. The adoption of this standard will also impact assets and liabilities on the balance sheet. In October 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities--a Replacement of SFAS No. 125." This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities. This statement is effective for accounts receivable securitization programs entered into after March 2001. The Company's current accounts receivable securitization program expires June 2001 and is not required to comply with the new accounting provisions of SFAS No. 140. The expanded disclosure requirements of SFAS No. 140 are provided in Note 7 of the Consolidated Financial Statements. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements". SAB No. 101 provides guidance on applying generally accepted accounting principles to the recognition, presentation and disclosure of revenue in financial statements. The implementation of SAB No. 101 in the fourth quarter of 2000 did not have a significant impact on the Company's financial position or its results of operations and is not expected to have a significant impact on an ongoing basis. In November 2000, the Emerging Issues Task Force ("EITF") of the FASB reached consensus on issue No. 00-14, Accounting for Certain Sales Incentives. The EITF addresses the recognition, measurement and income statement classification for sales incentives offered voluntarily by a vendor without charge to customers that can be used in, or are exercisable by customers as a result of a single transaction. EITF No. 00-14 is required to be applied beginning April 1, 2001. The effect of the adoption has not been finalized, however the Company believes that the adoption will not have a material impact on its financial statements. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued Liquidity and Capital Resources Cash Flow Used by Operating Activities Cash flow used by operating activities was $154.5 million in 2000. Among the factors impacting operating cash flows were payments related to asbestos of $351.4 million and restructuring and rationalization reserves of $72.2 million, a decrease in accounts payable of $175.4 million, and a decrease in other current liabilities and assets of $114.4 million. These usages were partially offset by decreases in accounts receivable and inventory of $38.1 million and $40.7 million, respectively. Cash Flow Used by Investing Activities Cash flow used by investing activities was $244.3 million in 2000. The Company made capital expenditures of $313.3 million to implement process improvements, increase manufacturing capacity, information technology and new product introductions. These cash flows were offset by proceeds of $66.6 million from the divestiture of several businesses. The Company anticipates that 2001 capital expenditures, exclusive of acquisitions and investments in affiliates, will be approximately $365 million. The Company expects that funding for these expenditures will be from operations and external sources as required. Cash Flow Provided from Financing Activities Cash flow provided from financing activities was $441.5 million in 2000, primarily arising from proceeds of $689.0 million from the issuance of long- term debt, offset by principal payments on long-term debt of $145.3 million and a repurchase of accounts receivable under securitization of $62.1 million. In June 2000, the Company entered into a new $420 million accounts receivable securitization agreement replacing the existing $450 million agreement. The facility's maturity date is June 28, 2001. In December 2000, the Company modified certain provisions of the existing facility; however, the amount and maturity remained the same. In December 2000, the Company executed its fourth amended and restated credit agreement, ("Senior Credit Agreements"). The Senior Credit Agreements provide for an additional term loan of $150 million and a senior secured revolving credit facility of $200 million. In addition to the pledge of capital stock described below, the Company provided collateral in the form of a pledge of its domestic inventories, domestic accounts receivable not otherwise sold under securitizations, domestic plant, equipment and real property, and its domestic intellectual property. This increased the Company's borrowing limits under the Senior Credit Agreements to $2.1 billion. The Company had $1.45 billion outstanding under these Senior Credit Agreements as of December 31, 2000, which are due from 2001 to 2005 with an average interest rate of 8.15%. In January 2001, the Company borrowed $150 million on its new term loan. In March 2001, the Company amended its Senior Credit Agreement to modify certain covenants. The Company has pledged 100% of the capital stock of certain United States subsidiaries, 65% of capital stock of certain foreign subsidiaries and certain intercompany loans to secure the Senior Credit Agreements of the Company. Certain of such pledges also extend to the Notes, Medium-Term Notes and Senior Notes. In addition, certain subsidiaries of the Company have guaranteed the senior debt (refer to Note 18, "Consolidating Condensed Financial Information of Guarantor Subsidiaries"). The agreement relating to the facilities described above contains restrictive covenants. The more significant of these covenants are requirements for the maintenance of consolidated net worth; a consolidated leverage ratio; cash flow coverage; limitations on the early retirement of debt; additional borrowings; and payment of common 17 MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued dividends. The agreement includes a provision which would result in all of the unpaid principal and accrued interest of the facilities becoming due immediately upon a change of control in ownership of the Company. During 2000, the Company experienced a decline in the public credit ratings of its bonds. As a result of the decline in its credit ratings, the Company expects to incur substantially higher costs of financing for the foreseeable future as compared to prior years should it attempt any capital market activity. The Company's ability to obtain cash adequate to fund its needs depends generally on the results of its operations, restructuring initiatives, amounts and timing of asbestos payments and the availability of financing. Management believes that cash flow from operations, in conjunction with borrowings from its existing credit agreements, will be sufficient to meet current debt service requirements, fund capital expenditures in the future and meet its asbestos obligations. In the long term, the Company believes that the benefits from the recently announced restructuring and SGI programs and changes to its asbestos strategy along with financing available under its Senior Credit Agreements and any future credit agreements will provide adequate long-term cash flows. However, there can be no assurance in this regard or that the terms available for any future financing, if required, would be favorable to the Company. Also certain obligations, particularly asbestos obligations, can be impacted by factors outside the Company's control. A significant increase in such obligations or asbestos claims, could impair the Company's liquidity. Asbestos Liability and Legal Proceedings T&N Asbestos Litigation In the United States, the Company's United Kingdom subsidiary, T&N Ltd., and two United States 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 Ltd. is also subject to asbestos-disease litigation, to a lesser extent, in the United Kingdom and France. 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 claims may be made nor the expenditures which may ultimately arise therefrom. In addition, there are a number of factors that could impact the settlement costs into the future, including but not limited to: changes in the legal environment; possible insolvency of co-defendants; and establishment of an acceptable administrative (non-litigation) claims resolution mechanism. In the fourth quarter of 2000, the Company increased its estimate of asbestos-related liability for the T&N Companies by $751 million and recorded a related insurance recoverable asset of $577 million. The revision in the estimate of probable asbestos-related liability principally resulted from a study performed by an econometric firm that specializes in these types of matters. The revised liability (approximately $1.6 billion) represents the Company's estimate for claims currently pending and those which can be reasonably estimated to be asserted in a future period. The Company believes that these claims will be paid over the next 12 years. In arriving at the revised liability for the T&N Companies, assumptions have been made regarding the total number of claims anticipated to be received in the future period, the typical cost of settlement (which is sensitive to the industry in which the plaintiff claims exposure, the alleged disease type and the jurisdiction in which the action is being brought), the rate of receipt of claims, the settlement strategy in dealing with outstanding claims and the timing of settlements. While management believes that the liability and receivable recorded are appropriate for anticipated losses arising from asbestos-related claims against the T&N Companies for the period covered, given the nature and complexity of the factors affecting the estimated liability and potential insurance recovery the actual liability and insurance recovery may differ. No assurance can be given that the T&N Companies will not be subject to material additional liabilities and significant additional litigation relating to asbestos for the period covered. In 18 MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued the event that such liabilities exceed the amounts recorded by the Company or the remaining insurance coverage, the Company's results of operations, business, liquidity and financial condition could be materially adversely affected. The ultimate liability for all pending and future claims is highly uncertain due to the difficulty of forecasting the numerous variables that can affect the liability. The Company does not believe it can reasonably determine the ultimate liability as the level of uncertainty is too great to provide for reasonable estimation of the number of future claims, the nature of such claims and the cost to resolve them. As additional experience is gained regarding claims or other new information becomes available regarding the potential liability, the Company will reassess its potential liability and revise the estimates as appropriate. Accordingly it is reasonably possible that the ultimate losses from asbestos-related claims will be greater than amounts recorded. T&N Ltd. is a defendant in approximately 63,000 pending personal injury claims as of December 31, 2000. During 2000, approximately 39,000 new claims naming T&N Ltd. were received. The two United States subsidiaries are defendants in approximately 111,000 pending personal injury claims as of December 31, 2000. During 2000, approximately 41,000 new claims naming the two United States subsidiaries were received. A number of years ago, T&N Ltd. appointed the Center for Claims Resolution ("CCR") as exclusive representative in relation to all asbestos-related personal injury claims made against the T&N Companies in the United States. The CCR has provided to its member companies a litigation defense, claims- handling and administration service in respect to United States asbestos- related disease claims. Pursuant to the CCR Producer Agreement, T&N Ltd. was entitled to appoint a representative as one of the five voting directors on the CCR's Board of Directors. Also pursuant to that agreement, members of the CCR contributed towards indemnity payments in each claim in which the member is named. Contributions to such indemnity payments were calculated on a case by case basis according to sharing agreements among the CCR's members. Effective January 18, 2000, the two United States subsidiaries appointed a law firm specializing in asbestos matters as their litigation defense, claims handling and administrative service provider. Indemnity and defense obligations incurred while members of the CCR are continuing to be honored. This change was intended to create greater economic and defense efficiencies for the two companies. The T&N Companies have entered into $250 million of surety to meet CCR collateral requirements for past obligations. The surety has a declining balance and is effective through February 24, 2004. The membership of the CCR has decreased in the past year for both voluntary and involuntary reasons. One instance involved the termination of a member by the CCR board. That former member had refused to provide required surety for agreed to settlements made while a member. The CCR has tried to recover the funds owed; however, the former member has since filed for bankruptcy and recovery is therefore uncertain. Another member has terminated its participation due to its determination that, as a trust, it lacked sufficient assets to commit to any new settlements. This member has also asserted that it is entitled to certain reimbursements which the CCR does not believe to be appropriate. Additionally, a third member had filed for bankruptcy in December 2000. Any additional cost to the remaining CCR members, net of the security provided, is uncertain. The Company however has provided for its best estimate of the impact of these events. The T&N Companies could experience an increase in liability if there are any future negative developments in these areas. Certain codefendant companies (both members and nonmembers of the CCR) have recently filed for reorganization under Chapter 11 of the Federal Bankruptcy Code. As a consequence, litigation against them (with some exceptions) has been stayed or restricted. Due to the uncertainties involved, the long-term effect of these proceedings on the Company's current and future exposure cannot be determined. In February 2001, the CCR and its members significantly amended its indemnity naming and services agreement. The CCR indemnity naming formula has been replaced with a provision that, for all claims settled on or after February 1, 2001, CCR members would be directly responsible for payment of their own indemnity 19 MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued obligations. The amendments will allow CCR members to choose the services they wish to continue receiving from the CCR. T&N Ltd. plans to continue with the CCR for claims handling and administrative services. However, T&N Ltd. has appointed an outside law firm specializing in asbestos matters to handle its litigation defense. In 1996, T&N Ltd. purchased for the T&N Companies a (Pounds)500 million layer of insurance which will be triggered should the aggregate costs of claims filed after June 30, 1996, where the exposure occurred prior to that date, exceed (Pounds)690 million. The Company now believes that the aggregate cost of claims filed after June 30, 1996 will exceed the trigger point. The Company believes based on its review of the insurance policy and its advice from outside counsel, that it is probable that the T&N Companies will be entitled to receive payment from the reinsurers for the cost of claims in excess of the trigger point of the insurance. Based on this assessment, the Company recorded an insurance recoverable asset under the T&N policy of $577 million in the fourth quarter of 2000. The Company has reviewed the financial viability and legal obligations of the three reinsurance companies involved and has concluded that there is little risk of the reinsurers not being able to meet their obligation to pay, once the claims filed after June 30, 1996 exceed the (Pounds)690 million trigger point. The Company does not expect to reach the trigger point of the insurance or begin to collect on this insurance recoverable for the next several years. The US claims' costs applied against this policy are converted at a fixed exchange rate of $1.69/(Pounds). As such, if the market exchange rate is less then $1.69/(Pounds), the Company will effectively have a discount from 100% recovery on claims made with the insurance companies. At December 31, 2000, the $577 million insurance recoverable asset is net of an exchange rate discount of $68 million. The ultimate exposure of the T&N companies with respect to claims will depend upon the extent to which the insurance described above will be available to cover such claims, the amount paid for indemnity and defense, changes in the legal environment and other factors. Abex and Wagner Asbestos Litigation Former businesses of Cooper Automotive, primarily Abex and Wagner, are involved as defendants in numerous court actions in the United States alleging personal injury from exposure to asbestos or asbestos-containing products, mainly involving friction products. Abex is a defendant in approximately 23,000 pending claims as of December 31, 2000. During 2000, approximately 14,700 new claims naming this defendant were received. Wagner is a defendant in approximately 17,300 claims as of December 31, 2000. During 2000, approximately 6,700 new claims naming this defendant were received. In 1998, the Company acquired the capital stock of a former Cooper Automotive entity resulting in the assumption by a Company subsidiary of contractual liability, under certain circumstances, for all claims pending and to be filed in the future alleging exposure to certain Wagner automotive and industrial friction products and for all claims filed after August 29, 1998, alleging exposure to certain Abex (non-railroad and non-aircraft) friction products. In the fourth quarter of 2000, the Company decreased its estimate of probable asbestos- related liability by $127 million, which was accompanied by an approximately equivalent reduction in the insurance recoverable asset. The revised estimate of probable asbestos-related liability principally resulted from a study performed by an econometric firm that specializes in these types of matters. The revised liability (approximately $253 million) represents the Company's estimate for claims currently pending and those which can be reasonably estimated to be asserted in a future period. The Company believes that these claims will be paid over the next 12 years. In arriving at the revised liability for Abex and Wagner, assumptions have been made regarding the number of claims anticipated to be received in the future period, the typical cost of settlement (which is sensitive to the alleged disease type and the jurisdiction in which the action is being brought), the rate of receipt of claims, and the timing of settlements. While management believes that the liability and receivable recorded for these claims are appropriate for anticipated losses arising from asbestos- related claims against Abex and Wagner for the covered period, given the nature and complexity of factors affecting the estimated liability and potential insurance recovery the actual 20 MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued liability and insurance recovery may differ. No assurance can be given that Abex and Wagner will not be subject to material additional liabilities and significant additional litigation relating to asbestos for the period covered. In the event that such liabilities exceed the amounts recorded by the Company or the remaining insurance coverage, the Company's results of operations, business, liquidity and financial condition could be materially adversely affected. The ultimate liability for all pending and future claims is highly uncertain due to the difficulty of forecasting the numerous variables that can affect the liability. The Company does not believe it can reasonably determine the ultimate liability as the level of uncertainty is too great to provide for reasonable estimation of the number of future claims, the nature of such claims, and the cost to resolve them. As additional experience is gained regarding claims or other new information becomes available regarding the potential liability, the Company will reassess its potential liability and revise the estimates as appropriate. Accordingly it is reasonably possible that the ultimate losses from asbestos-related claims will be greater than amounts recorded. Abex maintained product liability insurance coverage for most of the time that it manufactured products that contained asbestos. The subsidiary of the Company that may be liable for the post-August 1998 asbestos claims against Abex has the benefit of that insurance. Abex has been in litigation since 1982 with the insurance carriers of its primary layer of liability concerning coverage for asbestos claims. Abex also has substantial excess layer liability insurance coverage that, barring unforeseen insolvencies of excess carriers or other adverse events, should provide coverage for asbestos claims against Abex. The Company believes that based on its review of the insurance policies, the viability of the insurance carriers, and advice from outside legal counsel, it is probable that Abex will receive payments for a substantial majority of the cost of claims. Wagner also maintained product liability insurance coverage for some of the time that it manufactured products that contained asbestos. The subsidiary of the Company that may be liable for asbestos claims against Wagner has the benefit of that insurance. Primary layer liability insurance coverage for asbestos claims against Wagner is the subject of an agreement with Wagner's solvent primary carriers. The agreement provides for partial reimbursement of indemnity and defense costs for Wagner asbestos claims until exhaustion of aggregate limits. Wagner also has substantial excess layer liability insurance coverage which, barring unforeseen insolvencies of excess carriers or other adverse events, should provide coverage for asbestos claims against Wagner. The Company believes that based on its review of the insurance policies, the financial viability of the insurance carriers, and advice from outside legal counsel, it is probable that Wagner will receive payment for a portion of the cost of claims. Based on the probable conclusion of collection under the insurance policies, the Company has recorded a $188 million insurance recoverable asset related to the Abex and Wagner liability. Federal-Mogul and Fel-Pro Asbestos Litigation The Company also is sued in its own name as one of a large number of defendants in a number of lawsuits brought by claimants alleging injury due to exposure to asbestos. The Company's Fel-Pro subsidiary has also been named as a defendant in a number of product liability cases involving asbestos, primarily involving gasket or packing products. Fel-Pro is a defendant in approximately 31,000 pending claims as of December 31, 2000. During 2000, approximately 3,400 new claims were filed. Over 30,000 of these claims have been transferred to a federal court where they reside subject to removal back into the tort system only if certain medical and product identification conditions are met. The Company is defending all such claims vigorously and believes that it and Fel-Pro have substantial defenses to liability and insurance coverage for defense and indemnity. While the outcome of litigation cannot be predicted with certainty, management believes that asbestos claims pending against the Company and Fel-Pro as of December 31, 2000, will not have a material effect on the Company's financial position. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued Aggregate of Asbestos Liability and Insurance Recoverable Asset The following is a summary of the asbestos liability and the insurance recoverable asset for 2000 (in millions of dollars):
T&N Abex & Companies Wagner Other Total --------- ------- ----- -------- Liability: Balance at December 31, 1999............... $1,104.2 $ 408.8 $ 2.3 $1,515.3 2000 provision adjustments............... 750.9 (127.2) 1.6 625.3 2000 payments............................ (323.8) (28.9) (1.0) (353.7) Other.................................... 25.0 -- -- 25.0 -------- ------- ----- -------- Balance at December 31, 2000............... $1,556.3 $ 252.7 $ 2.9 $1,811.9 ======== ======= ===== ======== Asset: Balance at December 31, 1999............... $ -- $ 325.9 $ -- $ 325.9 2000 provision adjustments............... 576.7 (135.8) -- 440.9 2000 proceeds............................ -- (2.2) -- (2.2) Other.................................... 6.5 -- -- 6.5 -------- ------- ----- -------- Balance at December 31, 2000............... $ 583.2 $ 187.9 $ -- $ 771.1 ======== ======= ===== ========
As of December 31, 2000, the Company has provided an aggregated liability for all of its subsidiaries and businesses with potential asbestos liability of approximately $1.8 billion for claims currently pending and those which can be reasonably expected to be asserted in a future period. The Company believes that these claims will be paid over the next 12 years. Of this amount, the Company expects to incur asbestos payments of approximately $350 million over the next 12 months and has reflected this as a current liability. This estimate is based in part on recent and historical claims experience, medical information, the impact of changes in indemnity sharing within the CCR and the current legal environment. The Company cannot reasonably estimate a liability beyond the period encompassed in its estimates as the level of uncertainty is too great to provide for reasonable estimation of the number of future claims, the nature of such claims, or the cost to resolve them. The Company believes that it is probable that its subsidiaries with asbestos-related liabilities and related insurance policies, the T&N Companies, Abex, Wagner and Fel-Pro will collect the recorded aggregated insurance recoverable asset of $771 million. Environmental Matters The Company is a defendant in lawsuits filed, or the recipient of administrative orders issued, in various jurisdictions pursuant to the federal Comprehensive Environmental Response Compensation and Liability Act of 1980 (CERCLA) or other similar federal or state environmental laws. These laws require responsible parties to pay for cleaning up contamination resulting from hazardous wastes which were discharged into the environment by them or by others to which they sent such wastes for disposition. In addition, the Company has been notified by the United States Environmental Protection Agency and various state agencies that it may be a potentially responsible party (PRP) under such law 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. At most of the sites that are likely to be costliest to clean up, which are often current or former commercial waste disposal facilities to which numerous companies sent waste, the Company's exposure is expected to be limited. Despite the joint and several liability which might be imposed on the Company under CERCLA and some of the other laws pertaining to these sites, 22 MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued the Company's share of the total waste has generally been small. The other companies which also sent wastes, often numbering in the hundreds or more, generally include large, solvent publicly-owned companies, and in most such situations the government agencies and courts have imposed liability in some reasonable relationship to contribution of waste. 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 reserve was approximately $67.9 million and $74.5 million at December 31, 2000 and 1999, respectively. The 2000 decrease was primarily attributable to remediation payments made during 2000. Management believes that such accruals will be adequate to cover the Company's estimated liability for its exposure in respect to such matters. Market Risk In the normal course of business, the Company is subject to market exposure from changes in foreign exchange rates, interest rates and raw material prices. To manage a portion of these inherent risks, the Company purchases various derivative financial instruments and commodity futures contracts. The Company does not hold or issue derivative financial instruments for trading purposes. Foreign Currency Risk The Company is subject to the risk of changes in foreign currency exchange rates due to its operations in foreign jurisdictions. The Company manufactures and sells its products in North America, South America, Asia, Europe and Africa. As a result, the Company's financial results could be significantly affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which the Company distributes its products. The Company's operating results are primarily exposed to changes in exchange rates between the US dollar and European currencies. As currency exchange rates change, translation of the statements of operations of the Company's international businesses into United States dollars affects year-over-year comparability of operating results. The Company does not generally hedge operating translation risks because cash flows from international operations are generally reinvested locally. Changes in foreign currency exchange rates are generally reported as a component of stockholders' equity for the Company's foreign subsidiaries reporting in local currencies and as a component of income for its foreign subsidiaries using the US dollar as the functional currency. The Company's equity was reduced by $245.6 million and $149.7 million during 2000 and 1999, respectively, primarily due to cumulative translation adjustments resulting from the strong US dollar. As of December 31, 2000 and 1999, the Company's net current assets (defined as current assets less current liabilities) subject to foreign currency translation risk were $356.0 million and $187.4 million, respectively. The potential decrease in net current assets from a hypothetical 10% adverse change in quoted foreign currency exchange rates would be approximately $35.6 million and $18.7 million respectively. The sensitivity analysis presented assumes a parallel shift in foreign currency exchange rates. Exchange rates rarely move in the same direction. This assumption may overstate the impact of changing exchange rates on individual assets and liabilities denominated in a foreign currency. The Company manages certain aspects of its foreign currency activities and larger transactions through the use of foreign currency options or forward contracts. The Company generally tries to utilize natural hedges within its foreign currency activities, including the matching of revenues and costs. The unrealized gains and losses on the Company's foreign currency transactions were immaterial at December 31, 2000 and 1999. All currency forward option contracts will expire within the next twelve months. 23 MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued Interest Rate Risk The Company's variable interest expense is sensitive to changes in the general level of United States interest rates. Most of the Company's interest expense is fixed through long-term borrowings to mitigate the impact of such potential exposure. The following table provides information about the Company's financial instruments that are sensitive to changes in interest rates. The table presents principal cash flows and related weighted-average interest rates by expected maturity dates. Weighted-average variable rates are based upon spot rate observations as of the reporting date. Interest Rate Sensitivity Principal Amount by Expected Maturity As of December 31, 2000 (Millions of Dollars)
Fair Value at December 31, 2001 2002 2003 2004 2005 Thereafter Total 2000 ----- ------ ------ ------ ------ ---------- -------- ------------ Liabilities Long-term debt, including current portion Fixed rate.............. $44.5 $ 5.5 $ 20.5 $250.6 $ 15.0 $1,875.0 $2,211.1 $ 531.7 Average interest rate... 7.70% 7.68% 7.68% 7.68% 7.67% 7.68% 7.68% Variable rate........... $87.2 $132.5 $134.5 $940.9 $183.5 $ 1.7 $1,480.3 $1,480.3 Average interest rate... 8.13% 8.12% 8.14% 8.13% 8.68% 7.43% 8.20%
Interest Rate Sensitivity Principal Amount by Expected Maturity As of December 31, 1999 (Millions of Dollars)
Fair Value at December 31, 2000 2001 2002 2003 2004 Thereafter Total 1999 ----- ------ ------ ------ ------ ---------- -------- ------------ Liabilities Long-term debt, including current portion Fixed rate.............. $33.0 $ 44.8 $ 5.8 $ 20.9 $250.5 $1,885.0 $2,240.0 $2,040.0 Average interest rate... 7.71% 7.70% 7.70% 7.68% 7.68% 7.69% 7.69% Variable rate........... $57.8 $111.6 $118.7 $134.5 $261.5 $ 186.7 $ 870.8 $ 870.8 Average interest rate... 7.32% 7.37% 7.38% 7.37% 7.36% 7.43% 7.37%
Commodity Price Risk The Company is dependent upon the supply of certain raw materials in the production process and has entered into firm purchase commitments for copper, aluminum alloy, high-grade aluminum, lead and nickel. The Company uses forward contracts to hedge against the changes in certain specific commodity prices of the purchase commitments outstanding. As of December 31, 2000, the net unrealized losses for commodity contracts were immaterial. 24 Item 8. Financial Statements and Supplemental Data CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, ---------------------------- 2000 1999 1998 -------- -------- -------- (Millions of Dollars, Except Per Share Amounts) Net sales........................................ $6,013.2 $6,487.5 $4,468.7 Cost of products sold............................ 4,595.9 4,709.1 3,290.2 -------- -------- -------- Gross margin................................... 1,417.3 1,778.4 1,178.5 Selling, general and administrative expenses..... 844.6 848.9 640.8 Amortization of goodwill and other intangible assets.......................................... 123.6 127.2 83.8 Purchased in-process research and development charge.......................................... -- -- 18.6 Restructuring charges............................ 135.7 -- 7.3 Adjustment of assets held for sale and other long-lived assets to fair value................. 75.4 7.9 19.0 Asbestos charge.................................. 184.4 -- -- Integration costs................................ -- 46.9 22.4 Interest expense................................. 289.3 273.5 204.0 Interest income.................................. (4.3) (4.6) (10.6) International currency exchange (gains) losses... (0.1) (2.7) 4.7 Net gain on British pound forward contract....... -- -- (13.3) Other expense, net............................... 31.0 21.4 16.3 -------- -------- -------- Earnings (loss) before income taxes, extraordinary items and cumulative effect of change in accounting principle.............. (262.3) 459.9 185.5 Income tax expense............................... 19.2 180.9 93.6 -------- -------- -------- Earnings (loss) before extraordinary items and cumulative effect of change in accounting principle........................ (281.5) 279.0 91.9 Extraordinary items--loss on early retirement of debt, net of applicable income tax benefits..... -- 23.1 38.2 Cumulative effect of change in accounting for costs of start-up activities, net of applicable income tax benefit.............................. -- 12.7 -- -------- -------- -------- Net earnings (loss).......................... (281.5) 243.2 53.7 Preferred dividends, net of related tax benefit.. 2.0 2.4 3.6 -------- -------- -------- Net Earnings (Loss) Available for Common Shareholders.................................... $ (283.5) $ 240.8 $ 50.1 ======== ======== ======== Earnings (Loss) Per Common Share: Basic Earnings (loss) before extraordinary items and cumulative effect of change in accounting principle..................................... $ (4.02) $ 3.96 $ 1.84 Extraordinary items--loss on early retirement of debt, net of applicable income tax benefits...................................... -- (.34) (.80) Cumulative effect of change in accounting for costs of start-up activities, net of applicable income tax benefit.............................. -- (.18) -- -------- -------- -------- Net Earnings (Loss) Available for Common Shareholders................................ $ (4.02) $ 3.44 $ 1.04 ======== ======== ======== Diluted Earnings (loss) before extraordinary items and cumulative effect of change in accounting principle..................................... $ (4.02) $ 3.59 $ 1.67 Extraordinary items--loss on early retirement of debt, net of applicable income tax benefits...................................... -- (.28) (.71) Cumulative effect of change in accounting for costs of start-up activities, net of applicable income tax benefit................. -- (.15) -- -------- -------- -------- Net Earnings (Loss) Available for Common Shareholders................................ $ (4.02) $ 3.16 $ .96 ======== ======== ========
See accompanying Notes to Consolidated Financial Statements. 25 CONSOLIDATED BALANCE SHEETS
December 31, ------------------- 2000 1999 --------- -------- (Millions of Dollars) ASSETS Cash and equivalents...................................... $ 107.2 $ 64.5 Accounts receivable....................................... 512.8 514.6 Investment in accounts receivable securitization.......... 229.1 232.2 Inventories............................................... 808.6 883.6 Deferred taxes............................................ 284.0 128.1 Prepaid expenses and income tax benefits.................. 195.1 203.5 --------- -------- Total Current Assets.................................. 2,136.8 2,026.5 Property, plant and equipment, net........................ 2,388.8 2,503.7 Goodwill, net............................................. 3,303.1 3,547.8 Other intangible assets, net.............................. 746.4 796.3 Asbestos-related insurance recoverable.................... 771.1 325.9 Other noncurrent assets................................... 908.8 745.0 --------- -------- Total Assets.......................................... $10,255.0 $9,945.2 ========= ======== LIABILITIES AND SHAREHOLDERS' EQUITY Short-term debt, including current portion of long-term debt..................................................... $ 147.8 $ 190.8 Accounts payable.......................................... 431.9 621.9 Accrued compensation...................................... 157.8 182.9 Restructuring and rationalization reserves................ 107.9 46.0 Current portion of asbestos liability..................... 350.0 180.0 Interest payable.......................................... 94.4 79.0 Other accrued liabilities................................. 414.0 482.0 --------- -------- Total Current Liabilities............................. 1,703.8 1,782.6 Long-term debt............................................ 3,559.7 3,020.0 Long-term portion of asbestos liability................... 1,461.9 1,335.3 Postemployment benefits................................... 637.6 661.9 Other accrued liabilities................................. 709.3 454.9 Minority interest in consolidated subsidiaries............ 57.5 40.3 Company-obligated mandatorily redeemable preferred securities of subsidiary trustholding solely convertible subordinated debentures of the Company(1)................ 575.0 575.0 Shareholders' Equity: Series C ESOP preferred stock........................... 38.1 41.5 Common stock............................................ 352.5 352.1 Additional paid-in capital.............................. 1,778.6 1,782.4 Retained earnings (accumulated deficit)................. (113.5) 170.3 Unearned ESOP compensation.............................. -- (7.9) Accumulated other comprehensive loss.................... (504.7) (262.1) Other................................................... (0.8) (1.1) --------- -------- Total Shareholders' Equity............................ 1,550.2 2,075.2 --------- -------- Total Liabilities and Shareholders' Equity............ $10,255.0 $9,945.2 ========= ========
- ------------------ (1) The sole assets of the Trust are convertible subordinated debentures of Federal-Mogul with an aggregate principal amount of $575.0 million, which bear interest at a rate of 7% per annum and mature on December 1, 2027. Upon repayment of the subordinated debentures, the Company-obligated mandatorily redeemable preferred securities of subsidiary trust will be mandatorily redeemed. See accompanying Notes to Consolidated Financial Statements. 26 CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, ----------------------------- 2000 1999 1998 ------- --------- --------- (Millions of Dollars) Cash Provided From (Used By) Operating Activities Net earnings (loss)............................ $(281.5) $ 243.2 $ 53.7 Adjustments to reconcile net earnings (loss) to net cash provided from (used by) operating activities: Depreciation and amortization................. 374.4 354.9 228.0 Purchased in-process research and development charge....................................... -- -- 18.6 Restructuring charges......................... 135.7 -- 7.3 Adjustment of assets held for sale and other long-lived assets to fair value.............. 75.4 7.9 19.0 Asbestos charge............................... 184.4 -- -- Loss on early retirement of debt.............. -- 36.6 58.1 Cumulative effect of change in accounting principle.................................... -- 19.5 -- Vesting of restricted stock................... 0.8 1.4 0.7 Postemployment benefits....................... (9.1) (18.8) 10.9 (Increase) decrease in accounts receivable.... 38.1 (33.4) 37.5 Decrease in inventories....................... 40.7 117.2 55.9 Increase (decrease) in accounts payable....... (175.4) 149.7 5.4 Changes in other current liabilities and other current assets............................... (114.4) (57.0) (2.4) Payments against restructuring and rationalization reserves..................... (72.2) (80.6) (78.0) Payments against asbestos liability........... (351.4) (178.2) (89.2) ------- --------- --------- Net Cash Provided From (Used By) Operating Activities.................................. (154.5) 562.4 325.5 Cash Provided From (Used By) Investing Activities Expenditures for property, plant and equipment and other long-term assets, net................................... (313.3) (395.2) (228.5) Proceeds from sales of businesses.............. 66.6 53.3 53.4 Proceeds from sale of options.................. -- -- 39.1 Business acquisitions, net of cash acquired.... -- (371.2) (4,225.2) Other.......................................... 2.4 -- -- ------- --------- --------- Net Cash Used By Investing Activities........ (244.3) (713.1) (4,361.2) Cash Provided From (Used By) Financing Activities Issuance of common stock....................... -- 1.2 1,382.2 Proceeds from issuance of long-term debt....... 689.0 2,123.0 6,197.5 Principal payments on long-term debt........... (145.3) (2,251.5) (3,927.6) Increase (decrease) in short-term debt......... (25.9) (3.0) 0.5 Fees paid for debt issuance and other securities.................................... (4.6) (25.5) (76.6) Fees for early retirement of debt.............. -- -- (27.4) Sale (repurchase) of accounts receivable under securitization................................ (62.1) 304.3 42.6 Dividends...................................... (4.0) (4.3) (10.4) Other.......................................... (5.6) (6.2) (9.3) ------- --------- --------- Net Cash Provided From Financing Activities.. 441.5 138.0 3,571.5 ------- --------- --------- Increase (Decrease) in Cash and Equivalents.. 42.7 (12.7) (464.2) Cash and equivalents at beginning of year....... 64.5 77.2 541.4 ------- --------- --------- Cash and Equivalents at End of Year.......... $ 107.2 $ 64.5 $ 77.2 ======= ========= =========
See accompanying Notes to Consolidated Financial Statements. 27 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Series C Retained Accumulated ESOP Series D & E Additional Earnings Unearned Other Preferred Preferred Common Paid-In (Accumulated ESOP Comprehensive Stock Stock Stock Capital Deficit) Compensation Loss Other Total --------- ------------ ------ ---------- ------------ ------------ ------------- ----- -------- (Millions of Dollars) Balance at January 1, 1998.. $49.0 -- $201.0 $ 332.6 $(123.6) $(21.8) $ (65.7) $(2.2) $ 369.3 Net earnings.......... 53.7 53.7 Currency translation.. (36.7) (36.7) Other................. (3.6) (3.6) -------- Total Comprehensive Income.............. 13.4 Issuance of Series E preferred stock...... $ 225.0 225.0 Issuance of stock..... (92.3) 135.8 1,338.4 (0.3) 1,381.6 Retirement of Series C ESOP preferred stock................ (4.6) (4.6) Amortization of unearned ESOP compensation......... 6.7 6.7 Dividends............. (10.4) (10.4) Preferred dividend tax benefits............. 5.2 5.2 ----- ------- ------ -------- ------- ------ ------- ----- -------- Balance at December 31, 1998.. 44.4 132.7 336.8 1,665.8 (69.9) (15.1) (106.0) (2.5) 1,986.2 Net earnings.......... 243.2 243.2 Currency translation.. (149.7) (149.7) Other................. (6.4) (6.4) -------- Total Comprehensive Income.............. 87.1 Conversion of Series E preferred stock...... (132.7) 15.2 117.5 -- Issuance of stock, net.................. 0.1 (1.1) 1.4 0.4 Retirement of Series C ESOP preferred stock................ (2.9) (2.9) Amortization of unearned ESOP compensation......... 7.2 7.2 Dividends............. (1.3) (3.0) (4.3) Preferred dividend tax benefits............. 1.5 1.5 ----- ------- ------ -------- ------- ------ ------- ----- -------- Balance at December 31, 1999.. 41.5 -- 352.1 1,782.4 170.3 (7.9) (262.1) (1.1) 2,075.2 Net loss.............. (281.5) (281.5) Currency translation.. (245.6) (245.6) Other................. 3.0 3.0 -------- Total Comprehensive Loss................ (524.1) Issuance of stock, net.................. 0.4 (0.7) 0.3 -- Retirement of Series C ESOP Preferred stock................ (3.4) (3.1) (6.5) Amortization of unearned ESOP compensation......... 7.9 7.9 Dividends............. (4.0) (4.0) Preferred dividend tax benefits............. 1.7 1.7 ----- ------- ------ -------- ------- ------ ------- ----- -------- Balance at December 31, 2000.. $38.1 $ -- $352.5 $1,778.6 $(113.5) $ -- $(504.7) $(0.8) $1,550.2 ===== ======= ====== ======== ======= ====== ======= ===== ========
See accompanying Notes to Consolidated Financial Statements. 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Accounting Policies Organization: Federal-Mogul is an automotive parts manufacturer providing innovative solutions and systems to global customers in the automotive, small engine, heavy-duty and industrial markets. The Company manufactures engine bearings, pistons, piston pins, rings, cylinder liners, camshafts, sintered products, sealing systems, fuel systems, wipers, lighting, ignition, brake, friction and chassis products. The Company's principal customers include many of the world's original equipment ("OE") manufacturers of such vehicles and industrial products. The Company also manufactures and supplies its products and related parts to the aftermarket. 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 48% and 50% of the inventory at December 31, 2000 and 1999, respectively. The remaining inventories are recorded using the first-in, first-out (FIFO) method. If inventories had been valued at current cost, amounts reported would have been increased by $40.5 million and $30.6 million as of December 31, 2000 and 1999, respectively. Inventory quantity reductions resulting in liquidations of certain LIFO inventory layers increased net earnings by $2.2 million, $3.2 million and $3.4 million ($.03, $.04 and $.06 per diluted share) in 2000, 1999 and 1998, respectively. At December 31, inventories consisted of the following:
2000 1999 ---------- ---------- (Millions of Dollars) Finished products................................. $ 545.8 $ 638.9 Work-in-process................................... 136.3 133.1 Raw materials..................................... 155.8 138.1 ---------- ---------- 837.9 910.1 Reserve for inventory valuation................... (29.3) (26.5) ---------- ---------- $ 808.6 $ 883.6 ========== ==========
Goodwill and Other Intangible Assets: At December 31, goodwill and other intangible assets, which result principally from acquisitions, consisted of the following:
Estimated Useful Life 2000 1999 ----------- -------- -------- (Millions of Dollars) Goodwill.................................. 40 years $3,557.6 $3,725.7 Accumulated amortization.................. (254.5) (177.9) -------- -------- Total Goodwill.......................... $3,303.1 $3,547.8 ======== ======== Trademarks................................ 40 years $ 418.1 $ 415.7 Developed technology...................... 12-30 years 337.1 368.1 Assembled workforce....................... 15 years 71.8 76.9 Other..................................... 5-20 years 27.1 14.4 -------- -------- 854.1 875.1 Accumulated amortization.................. (107.7) (78.8) -------- -------- Total Other Intangible Assets........... $ 746.4 $ 796.3 ======== ========
29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued Intangible assets are periodically reviewed for impairment indicators. If impairment indicators exist, an assessment of undiscounted future cash flows related to assets held for use or fair value for assets held for sale are evaluated accordingly. Intangible assets are amortized on a straight-line basis over their estimated useful lives. Impairment charges recorded in 2000, 1999 and 1998 related primarily to assets held for sale. Revenue Recognition: The Company recognizes revenue, estimated returns from product sales and related incentives when there is evidence of a sales agreement, the delivery of goods has occurred, the sales price is fixed or determinable and the collectibility of revenue is reasonably assured. The Company generally records sales upon shipment of product to customers and transfer of title under standard commercial terms. Shipping and Handling Costs: The Company recognizes shipping and handling costs as a component of cost of products sold in the statement of operations. Recoverable Customer Engineering and Tooling: Pre-production tooling and engineering costs that the Company will not own and that will be used in producing products under long-term supply arrangements are expensed as incurred unless the supply arrangement provides the Company the noncancelable right to use the tools or the reimbursement of such costs is contractually guaranteed by the customer. Pre-production tooling and engineering costs that are owned by the Company are capitalized as part of machinery and equipment. Research and Development and Advertising Costs: The Company expenses research and development costs as incurred. Research and development expense was $127.8 million, $128.0 million and $85.0 million for 2000, 1999 and 1998, respectively. Costs associated with advertising and promotion are expensed as incurred. Advertising and promotion expense was $68.6 million, $59.8 million and $45.9 million for 2000, 1999 and 1998, 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 component of accumulated other comprehensive income. Deferred taxes are not provided as the earnings of the subsidiaries are considered to be permanently reinvested. Environmental Liabilities: The Company recognizes environmental liabilities when a loss is probable and reasonably estimable. Such liabilities are generally not subject to insurance coverage. Engineering and legal specialists within the Company, based on current law and existing technologies, estimate each environmental obligation. 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 16, "Litigation and Environmental Matters"). The Company regularly evaluates and revises its estimates for environmental obligations based on expenditures against established reserves and the availability of additional information. Integration Costs: These are incremental direct costs associated with integrating material acquisitions and include such one-time items as brand integration, costs to pack and move productive inventory and fixed assets from one location to another, and costs to change the identity of entities acquired. Such costs are expensed as incurred. Derivative Financial Instruments: The Company has used interest rate lock agreements to synthetically manage the interest rate characteristics of certain outstanding debt to a more desirable fixed rate basis or to limit the Company's exposure to rising interest rates, and uses forward foreign exchange contracts to minimize and 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued lock the amount of currency payments for certain transactions that are denominated in certain foreign currencies, and forward contracts to hedge against the changes in certain specific commodity prices of the purchase commitments outstanding (collectively "derivative contracts"). Interest rate differentials to be paid or received as a result of settled interest rate lock agreements are accrued and recognized as an adjustment of interest expense related to the designated debt. Recorded amounts related to derivative contracts are included in other assets or liabilities. The fair values of interest rate lock agreements and forward contracts are not recognized in the financial statements. There were no interest rate locks outstanding at December 31, 2000, 1999 or 1998. Realized and unrealized gains or losses at the time of maturity, termination, sale or repayment of a derivative contract or designated item are recorded in a manner consistent with the original designation of the derivative in view of the nature of the termination, sale or repayment transaction. Amounts related to interest rate locks are deferred and amortized as an adjustment to interest expense over the original period of interest exposure, provided the designated liability continues to exist or is probable of occurring. Realized and unrealized changes in fair value of derivatives designated with items that no longer exist or are no longer probable of occurring are recorded as a component of the gain or loss arising from the disposition of the designated item. Comprehensive Income: The Company displays comprehensive income in the Consolidated Statements of Shareholders' Equity. At December 31, 2000, 1999 and 1998, accumulated other comprehensive loss consisted of $497.6 million, $252.0 million and $102.3 million of foreign currency translation adjustments, respectively, and $7.1 million, $10.1 million and $3.7 million of other comprehensive loss, primarily minimum pension funding, net of tax, respectively. 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 2000. Effect of Accounting Pronouncements: Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", was issued by the Financial Accounting Standards Board ("FASB") in June 1998. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. In June 2000, the FASB issued SFAS No. 138, which amends and clarifies certain guidance in SFAS No. 133. The Company has implemented the appropriate systems and processes to adopt these statements effective January 1, 2001. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. For fair- value hedge transactions, the fair value of the derivative instrument will generally be offset in the income statement by changes in the hedged item's fair value. For cashflow hedge transactions, the fair value of the derivative instrument will be reported in other comprehensive income. The ineffective portion of all hedges will be recognized in current-period earnings. The statements provide for the recognition of a cumulative adjustment for an accounting change, as of the date of adoption. The Company estimates that it will record a net-of-tax cumulative-effect-type loss of approximately $350,000 in accumulated other comprehensive income to recognize at fair value all derivative instruments that will be designated as cashflow hedges. The adjustment to current earnings for fair value hedges is not material. The adoption of this standard will also impact assets and liabilities on the balance sheet. In October 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities--a Replacement of SFAS No. 125." This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities. 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued This statement is effective for accounts receivable securitization programs entered into after March 2001. The Company's current accounts receivable securitization program expires June 2001 and is not required to comply with the new accounting provisions of SFAS No. 140. The expanded disclosure requirements of SFAS No. 140 are provided in Note 7. In November 2000, the Emerging Issues Task Force ("EITF") of the FASB reached consensus on issue No. 00-14, Accounting for Certain Sales Incentives. The EITF addresses the recognition, measurement and income statement classification for sales incentives offered voluntarily by a vendor without charge to customers that can be used in, or are exercisable by customers as a result of a single transaction. EITF No. 00-14 is required to be applied beginning April 1, 2001. The effect of the adoption has not been finalized, however the, Company believes that the adoption will not have a material impact on its financial statements. 2. Acquisitions of Businesses 1999 Acquisitions: In May 1999, the Company completed its acquisition of the piston division of Alcan Deutschland GmbH (Alcan) in Germany, a subsidiary of Alcan Aluminum Ltd. in Canada. The division manufactures pistons for passenger cars and commercial vehicles under the Nural brand name. The piston division employs approximately 1,100 people with 1998 annual sales of approximately $150 million. Also in January 1999, the Company completed its acquisition of certain manufacturing operations of Crane Technologies, Inc. (Crane) to increase its camshaft capacity. Its two plants, located in Orland, Indiana and Jackson, Michigan, employ approximately 230 people with 1998 annual sales of approximately $36 million. 1998 Acquisitions: T&N: In March 1998, the Company acquired T&N plc (T&N), a manufacturer of high technology engineered automotive components and industrial materials, based in Manchester, England for consideration (including direct costs of the acquisition) of approximately $2.4 billion. The Company also assumed cash of approximately $185 million and debt of approximately $745 million. 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 for which technological feasibility had not been established and the in-process technology had no future alternative uses. Cooper Automotive In October 1998, the Company acquired the automotive division of Cooper Industries, Inc. (Cooper Automotive), headquartered in St. Louis, Missouri, for initial consideration of approximately $1.9 billion. The Cooper Automotive purchase agreement included a price adjustment based upon acquired net assets, as defined in the agreement, under which the Company made additional cash payments of $154.9 million in 1999. Cooper is a leading supplier of aftermarket parts for repair and maintenance and serves OE automobile manufacturers worldwide. Fel-Pro In February 1998, the Company 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 gasket manufacturer headquartered in Skokie, Illinois, for a total consideration of approximately $722 million, which 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued included 1,030,326 shares of Federal-Mogul Series E Stock with an imputed value of $225 million and approximately $497 million in cash. Fel-Pro is a leading gasket manufacturer in the North American aftermarket and OE heavy- duty market. The 1999 and 1998 acquisitions have been accounted for as purchases and, accordingly, the total consideration was allocated to the acquired assets and assumed liabilities based on estimated fair values as of the acquisition dates. The consolidated statements of operations for the years ended December 31, 1999 and 1998 include the operating results of the acquired businesses, exclusive of the T&N Bearings Business and the Fel-Pro Chemical Business (refer to "Divestiture of Acquired Businesses" below) from their respective acquisition dates. Rationalization of Acquired Businesses In connection with the T&N, Cooper Automotive and Fel-Pro acquisitions in 1998 the Company recognized $216.8 million as acquired liabilities related to the rationalization and integration of acquired businesses. The rationalization reserves provided for $180.0 million in relocation and severance costs and $36.8 million in exit costs, and were recorded as a component of goodwill in the purchase price allocation. The components of the integration plan included closure of certain manufacturing facilities worldwide; relocation of highly manual manufacturing product lines to more suitable locations; consolidation of overlapping manufacturing, technical and sales facilities and joint ventures; consolidation of overlapping aftermarket warehouses; consolidation of aftermarket marketing and customer support functions; and streamlining of administrative, sales, marketing and product engineering staffs worldwide. The Company paid $10.7 million and $72.2 million related to these rationalization reserves in 2000 and 1999, respectively. Also during 1999, the Company made adjustments to reduce the rationalization reserves, with an offsetting amount to goodwill, of $47.9 million. These adjustments related to the finalization of rationalization plans. As of December 31, 2000, remaining rationalization reserves were $18.0 million, primarily relating to the closure of several Powertrain Systems facilities in Europe and the consolidation of aftermarket warehouses in Europe. These costs are expected to be paid in 2001. Divestitures of Acquired Businesses In connection with securing regulatory approvals for the acquisition of T&N, the Company executed an Agreement Containing Consent Order with the Federal Trade Commission on February 27, 1998. Pursuant to this agreement, the Company divested of the T&N Bearings Business and provided for independent management of those assets pending such divestiture. The agreement stipulated that the T&N Bearings Business be maintained as a viable, independent competitor of the Company and that the Company 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 December 1998, the Company sold the T&N Bearings Business, consisting of the Glacier Vandervell Bearings Group and the AE Clevite North American non- bearing aftermarket engine hard parts business, to Dana Corporation for $430 million. These proceeds were subsequently used to pay down debt. Furthermore, the Company realized additional net proceeds of approximately $13 million from the collection of receivables of the business sold. Prior to the sale of the T&N Bearings Business to Dana Corporation, a portion of the business was sold for approximately $12 million in August 1998. In July 1998, the Company sold the Fel-Pro Chemical Business to Loctite Corporation, a part of Henkel KGaA, a global specialist in applied chemistry headquartered in Dusseldorf, Germany, for $57 million. 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued Operating results for the T&N Bearings and Fel-Pro Chemical Businesses (which include interest expense of $30 million relating to the holding costs of the businesses) have been excluded from the consolidated statement of operations for the year ended December 31, 1998. Pro Forma Results The following unaudited pro forma financial information for the year ended December 31, 1998 assumes the T&N, Cooper Automotive and Fel-Pro acquisitions occurred as of January 1, 1998, 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, 1998 equity offerings 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, Cooper Automotive and Fel-Pro been consummated on the date indicated, nor are they necessarily indicative of the Company's future results of operations. Unaudited Pro Forma Financial Information (Millions of Dollars, Except Per Share Amounts)
For the Year Ended December 31, 1998 ------------ Net sales.................................................... $6,444.1 Net earnings................................................. $ 152.0 Earnings per share........................................... $ 2.12 Earnings per share assuming dilution......................... $ 1.95
3. Sales of Businesses In 2000, the Company sold its OCS filter business, its minority interest in a German OE operation, its Greek aftermarket operation, one of its US sintered products operations and its India sintered products operation. In the aggregate these businesses had approximately $28.5 million in sales in 1999 and employed approximately 675 people. The total proceeds were $66.6 million. The company did not record a significant gain or loss on these transactions, individually or in the aggregate. In 1999, the Company sold its subsidiary, Bertolotti Pietro e Figli, S.r.l. (Bertolotti), an Italian aftermarket operation. In 1998, the Company recognized a $19.0 million charge primarily associated with the writedown of Bertolotti's assets to their estimated fair value. In 1999, the Company recognized an additional $7.9 million loss associated with the writedown of Bertolotti's assets to their fair value resulting from the sale. Offsetting the loss was a tax benefit of $7.9 million resulting from the sale. Also during 1999, the Company sold its South African heat transfer business. The business had sales of approximately $56 million in 1998 in four South African locations and employed approximately 1,200 people. The Company did not realize a significant gain or loss on this transaction. In February 1998, the Company divested its minority interest in G. Bruss GmbH & Co. KG (Bruss), a German manufacturer of seals and gaskets. As part of the divestiture agreement, the Company increased its ownership to 100% in its Summerton, South Carolina gasket manufacturing plant. The Company received net proceeds of approximately $46 million related to the divestiture agreement and recognized a gain on the divestiture of $6.0 million. The gain on the divestiture is included as a component of other expense. 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued 4. Restructuring Charges In 2000, the Company recognized $135.7 million of restructuring charges related to severance and exit costs. Employee severance costs of $105.8 million and exit costs of $29.9 million resulted from the planned closure of certain North American aftermarket branch warehouses and distribution centers; consolidation of the Company's heavy-wall bearings business; the closure of certain Australian and Taiwanese sales, administrative and distribution facilities; the consolidation of certain administrative and human resource functions in Europe; reorganization of the America's friction business; closure of one of the Company's European R&D centers, consolidation of an administrative facility at the Company's Ohio ignition facility and various other programs in North America, South America and Europe. Net employee reductions are expected to be approximately 2,850 comprised of 4,750 reductions associated with facility closings offset by 1,900 new hires in new or expanded facilities. As part of the 2000 restructuring plan approximately 1,400 employees were severed and 30 facilities were closed or consolidated. In 2000, the Company recorded a $75.4 million charge primarily associated with the actions of the 2000 restructuring program. Included in this charge is a write-down of assets to their fair value for the closure of aftermarket branch warehouses and distribution centers, the Company's Ohio administrative facility, a European R&D center and certain facilities associated with the reorganization of the America's friction business. In 1999, the Company recognized $13.2 million of restructuring charges related to severance and exit costs. Employee severance costs of $11.1 million resulted from planned terminations in certain European operations of the Company, employees at the Company's Milan, Michigan plant, and certain executive severances. The severance costs were based on the estimated amounts that will be paid to the affected employees pursuant to the Company's workforce reduction policies and certain governmental regulations. Total headcount reductions are expected to be approximately 250 employees. Exit costs of $2.1 million were related to the closing of the Company's Milan plant and French bearing operations. As of December 31, 2000, approximately 250 employees were severed in connection with the 1999 restructuring plan. Also in 1999, the Company recognized $13.2 million of reversals of restructuring charges recorded in previous years. These reversals resulted primarily from lower than expected employee severance costs principally associated with the reduction of the aftermarket sales force and consolidation of certain operations in the Americas. In 1998, as a result of the T&N, Cooper Automotive and Fel-Pro acquisitions, the Company recognized $16.3 million of restructuring charges related to restructuring the Company's operations in place prior to these acquisitions. The restructuring charges were primarily for employee severance costs, which resulted from terminations in various business operations of the Company. The severance costs were based on the amounts paid to the affected employees pursuant to the Company's workforce reduction policies and certain foreign governmental regulations. Also in 1998, the Company recognized restructuring credits of $9.0 million for a reversal of charges recorded in previous years. The Company was able to sell, rather than liquidate, its retail operations in Puerto Rico, causing this reversal. 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued The following is a summary of restructuring charges and related activity for 2000, 1999 and 1998 (in millions of dollars):
Restructuring Provision ------------------------------------------------------------------ 1995-1997 1998 1999 2000 --------------- --------------- --------------- --------------- Severance Exit Severance Exit Severance Exit Severance Exit Total --------- ----- --------- ----- --------- ----- --------- ----- ------ Balance of restructuring reserves at January 1, 1998................... $22.2 $14.8 $ 37.0 1998 restructuring charges............... -- -- $16.0 $ 0.3 16.3 Adjustment to restructuring reserves.............. (4.6) (4.4) -- -- (9.0) ----- ----- ----- ----- ------ 1998 restructuring charges (net).......... (4.6) (4.4) 16.0 0.3 7.3 Payments against restructuring reserves............... (7.2) (5.9) (3.3) -- (16.4) ----- ----- ----- ----- ------ Balance of restructuring reserves at December 31, 1998............... 10.4 4.5 12.7 0.3 27.9 1999 restructuring charges............... $11.1 $ 2.1 13.2 Adjustment to restructuring reserves.............. (4.0) (2.9) (6.1) (0.2) -- -- (13.2) ----- ----- ----- ----- ----- ----- ------ 1999 restructuring charges (net).......... (4.0) (2.9) (6.1) (0.2) 11.1 2.1 -- Payments and charges against restructuring Reserves............... (6.4) (1.6) (0.8) (0.1) (3.1) (0.2) (12.2) ----- ----- ----- ----- ----- ----- ------ Balance of restructuring reserves at December 31, 1999............... -- -- 5.8 -- 8.0 1.9 15.7 2000 restructuring charges................ $105.8 $29.9 135.7 Payments and charges against restructuring Reserves............... (3.1) (5.5) (1.9) (46.8) (4.2) (61.5) ----- ----- ----- ----- ----- ----- ------ ----- ------ Balance of restructuring reserves at December 31, 2000............... $ -- $ -- $ 2.7 $ -- $ 2.5 $ -- $ 59.0 $25.7 $ 89.9 ===== ===== ===== ===== ===== ===== ====== ===== ======
5. British Pound 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. 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 had recognized a net loss of $10.5 million on the transaction. In January 1998, the Company settled the option and recognized an additional loss of $17.3 million. 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 approximately $2.45 billion. As a result of favorable fluctuations in the British pound/United States dollar exchange rate during the contract period, the Company recognized a $30.6 million gain. The Company entered into the above transaction to serve as an economic hedge for the purchase of T&N. However, this transaction did not qualify for hedge accounting under US GAAP, and therefore is reflected in the consolidated statement of operations caption "Net gain on British pound forward contract" . 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued 6. Debt Long-term debt at December 31 consists of the following:
2000 1999 -------- -------- (Millions of Dollars) Senior Credit Agreements: Term loans.............................................. $ 706.0 $ 750.0 Multi-currency revolving credit facility................ 744.5 65.0 Notes due 2004 -- 7.5%, issued in 1998.................... 249.7 249.6 Notes due 2006 -- 7.75%, issued in 1998................... 399.9 399.9 Notes due 2006 -- 7.375%, issued in 1999.................. 398.8 398.6 Notes due 2009 -- 7.5%, issued in 1999.................... 597.9 597.6 Notes due 2010 -- 7.875%, issued in 1998.................. 349.3 349.2 Medium-term notes -- due between 2001 and 2005, average rate of 8.8%, issued in 1994 and 1995.................................. 84.0 104.0 Senior notes -- due in 2007, rate of 8.8%, issued in 1997..................................................... 124.7 124.7 ESOP obligation, average rate of 7.19%.................... -- 7.9 Other..................................................... 36.6 64.3 -------- -------- 3,691.4 3,110.8 Less current maturities included in short-term debt....... 131.7 90.8 -------- -------- $3,559.7 $3,020.0 ======== ========
In December 2000, the Company executed its fourth amended and restated credit agreement, ("Senior Credit Agreements"). The Senior Credit Agreements provide for an additional term loan of $150 million and a senior secured revolving credit facility of $200 million. In addition to the pledge of capital stock described below, the Company provided collateral in the form of a pledge of its domestic inventories, domestic accounts receivable not otherwise sold under securitizations, domestic plant, equipment and real property, and its domestic intellectual property. This increased the Company's borrowing limits under the Senior Credit Agreements to $2.1 billion. The Company had $1.45 billion outstanding under these Senior Credit Agreements as of December 31, 2000, which are due from 2001 to 2005 with an average interest rate of 8.15%. In January 2001, the Company borrowed $150 million on its new term loan. In March 2001, the Company amended its Senior Credit Agreements to modify certain covenants. The Company has pledged 100% of the capital stock of certain United States subsidiaries, 65% of capital stock of certain foreign subsidiaries and certain intercompany loans to secure the Senior Credit Agreements of the Company. Certain of such pledges also extend to the Notes, Medium-Term Notes and Senior Notes. In addition, certain subsidiaries of the Company have guaranteed the senior debt (refer to Note 18, "Consolidating Condensed Financial Information of Guarantor Subsidiaries"). The agreement relating to the facilities described above contains restrictive covenants. The more significant of these covenants are requirements for the maintenance of consolidated net worth; a consolidated leverage ratio; cash flow coverage; limitations on the early retirement of debt; additional borrowings; and payment of common dividends. The agreement includes a provision which would result in all of the unpaid principal and accrued interest of the facilities becoming due immediately upon a change of control in ownership of the Company. In February 1999, the Company entered into a $1.75 billion senior credit agreement at variable interest rates, which contained a $1.0 billion multicurrency revolving credit facility and two term loan components. As a result of these transactions, the Company recognized an extraordinary charge in the first quarter of 1999 of approximately $14.6 million, net of tax, related to the early extinguishment of debt. This financing arrangement was subsequently replaced with the 2000 Senior Credit Agreements. 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued In January 1999, the Company issued $1.0 billion of bonds with maturities ranging from seven to ten years, a weighted average yield of 7.53% and a weighted average coupon of 7.45%. Proceeds were used to repay borrowings under the previous Senior Credit Agreements. As a result of this transaction, the Company recognized an extraordinary charge in the first quarter of 1999 of approximately $8.5 million, net of tax, related to early extinguishment of debt. The proceeds from the 2004, 2006 and 2010 notes were used to repay amounts previously outstanding under the Senior Credit Agreements. Such repayments and other repayments resulting from the proceeds of equity offerings (refer to Note 9, "Capital Stock and Preferred Share Purchase Rights") and the early retirement of private placement debt assumed in the T&N acquisition and related make-whole payment resulted in the extraordinary loss on the early retirement of debt in 1998 of $38.2 million, net of applicable income tax benefits of $19.9 million. The ESOP obligation represented 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. Company contributions and dividends on the preferred shares held by the ESOP were used to meet semi-annual principal and interest obligations. The ESOP obligation was paid off fully in November 2000. The weighted average interest rate for the Company's short-term debt was approximately 6.88% and 7.42% as of December 31, 2000 and 1999, respectively. Aggregate maturities of long-term debt for each of the years following 2001 are, in millions: 2002 -- $138.0; 2003 -- $155.0; 2004 -- $1,191.5; 2005 -- $198.5; and thereafter $1,876.7. Interest paid in 2000, 1999 and 1998 was $273.9 million, $240.3 million and $173.4 million, respectively. 7. Financial Instruments Foreign Exchange Risk and Commodity Price Management 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 forward contract discussed in Note 5, the Company does not hold or issue derivative financial instruments for trading purposes. As of December 31, 2000, the Company has foreign exchange forward contracts principally for British pound exposures relating to the United States dollar and for Euro exposures relating to the United States dollar. The Company also has foreign exchange forward contracts for United States dollar exposure relating to the Canadian dollar and the Japanese Yen and British pound exposures relating to the Euro. At December 31, 2000, the unrealized gains or losses relating to these contracts were not material. The Company enters into copper, aluminum alloy, high grade aluminum, lead and nickel 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, aluminum and nickel. Under the agreements, the Company was committed to purchase approximately 4.8, 1.5, 1.9, 0.6 and 1.1 million pounds of copper, aluminum alloy, high-grade aluminum, lead, and nickel respectively. The net unrealized gain on these firm purchase commitments were not material. Deferred gains and losses are included in other assets and liabilities and recognized in operations when the future purchase, sale or payment (in the case of the asbestos liability) occurs, or at the point in time when the purchase, sale or payment is no longer expected to occur. 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued Accounts Receivable Securitization In June 2000, the Company entered into a new $420 million accounts receivable securitization agreement replacing the existing $450 million agreement. The facility's maturity date is June 28, 2001. In December 2000, the Company modified certain provisions of the existing facility; however the amount and maturity remained the same. In July 1999, the Company entered into a new $450 million accounts receivable securitization agreement replacing the existing $150 million agreement. The facility matured on June 28, 2000. Net proceeds were used to repay borrowings under the Senior Credit Agreements' multicurrency revolving credit facility. On an ongoing basis, the Company sells certain accounts receivable to Federal-Mogul Funding Corporation (FMFC), a special purpose wholly-owned subsidiary of the Company, which then sells such receivables, without recourse, to a financial conduit. Amounts excluded from the balance sheets under these arrangements were $348.1 million and $410.1 million at December 31, 2000 and 1999, respectively. The Company's retained interest in the accounts receivable sold to FMFC is included in the consolidated balance sheet caption "Investment in Accounts Receivable Securitization". For the years ended December 31, 2000 and 1999, the Company, at the point of sale, assumed a discount rate of 1.6% and .75%, respectively. The following table summarizes the cash flow movements between the FMFC and the Company:
2000 1999 -------- -------- (Millions of Dollars) Proceeds from accounts receivable sales............. $3,773.8 $4,010.3 Servicing fees received............................. 3.8 3.2 Loss on sales of accounts receivable................ (58.8) (27.7) Payments received on investment in accounts receivable......................................... 251.9 252.6
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 $66.5 million and $69.3 million at December 31, 2000 and 1999, respectively, is based upon the expected collectibility of trade accounts receivable. Fair Value of Financial Instruments The carrying amounts of certain financial instruments such as cash and equivalents, accounts receivable, investment in accounts receivable securitization, accounts payable and short-term debt approximate their fair values. The carrying amounts and estimated fair values of the Company's long- term debt, including the current portion were $3,691.4 million and $2,012.0 million, respectively, at December 31, 2000. The carrying amounts and estimated fair values of the Company's long-term debt, including the current portion were $3,110.8 million and $2,910.8 million, respectively, at December 31, 1999. The fair value of the long-term debt is estimated using discounted cash flow analysis and the Company's current incremental borrowing rates and credit ratings for similar types of arrangements. 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued 8. Property, Plant and Equipment Property, plant and equipment are stated at cost and include expenditures that 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, 2000, 1999 and 1998, was $248.4 million, $221.4 million and $144.2 million, respectively. At December 31, property, plant and equipment consisted of the following:
Estimated Useful Life 2000 1999 ----------- -------- -------- (Millions of Dollars) Land...................................... -- $ 121.8 $ 145.7 Buildings and building improvements....... 24-40 years 503.5 496.1 Machinery and equipment................... 3-12 years 2,442.2 2,402.9 -------- -------- 3,067.5 3,044.7 Accumulated depreciation.................. (678.7) (541.0) -------- -------- $2,388.8 $2,503.7 ======== ========
Future minimum payments under noncancelable operating leases with initial or remaining terms of more than one year are, in millions: 2001 -- $35.0; 2002 - -- $29.7; 2003 -- $23.1; 2004 -- $21.0, 2005 -- $19.5 and thereafter $52.0. Total rental expense under operating leases for the years ended December 31, 2000, 1999 and 1998 was $54.0 million, $52.6 million and $46.5 million, respectively, exclusive of property taxes, insurance and other occupancy costs generally payable by the Company. 9. Capital Stock and Preferred Share Purchase Rights The Company's articles of incorporation authorize the issuance of 260,000,000 shares of common stock, of which 70,619,319 shares, 70,422,525 shares and 67,233,216 shares were outstanding at December 31, 2000, 1999 and 1998, respectively. In December 1998, the Company completed an equity offering of 14.1 million shares of common stock. The net proceeds from the sale of the common stock of $781.2 million were used to reduce the Senior Credit Agreements associated with the acquisition of Cooper Automotive. In June 1998, the Company issued 12.7 million shares of common stock, including 2.1 million shares which were converted from Series E Stock. The net proceeds from the sale of the common stock of $592 million were used to prepay the entire outstanding principal amount under the Senior Subordinated Credit Agreement and partially repay the Senior Credit Agreement. In February 1998, in connection with the Fel-Pro acquisition, the Company issued 1,030,326 shares Series E Stock with an imputed value of $225 million. The shares of Series E Stock were exchangeable into shares of the Company's common stock at a rate of five shares of common stock per share of Series E Stock. In conjunction with the June 1998 common stock offering described above, the Company converted 422,581 shares of Series E Stock into approximately 2.1 million shares of common stock. On February 24, 1999, the remaining 607,745 shares of the Company's Series E Stock were exchanged into shares of the Company's common stock. 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued The Series C ESOP Convertible Preferred Stock shares of stock are used to fund a portion of the Company's matching contributions within the Salaried Employees' Investment Program. 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 preferred shares have a guaranteed price of $63.75/share. There were 597,691, 701,758 and 724,644 shares of Series C ESOP preferred stock outstanding at December 31, 2000, 1999 and 1998, respectively. The Series C ESOP preferred shares pay dividends at a rate of 7.5%. The Company repurchased and retired 101,010, 28,549 and 38,295 Series C ESOP preferred shares valued at $6.5 million, $2.9 million and $4.6 million during 2000, 1999 and 1998, respectively. All of the repurchases represent plan distributions or fund transfers for participants in the plan. The charge to operations for the cost of the ESOP was $5.8 million in 2000, $5.5 million in 1999 and $5.2 million in 1998. The Company made cash contributions to the plan of $8.3 million in 2000, $8.2 million in 1999 and $8.2 million in 1998, including preferred stock dividends of $3.1 million in 2000, $3.4 million in 1999 and $3.6 million in 1998. ESOP shares are released as principal and interest on the debt is paid. The ESOP Trust used the preferred dividends not allocated to employees to make principal and interest payments on the debt which was repaid in 2000. 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 shareholders' equity in the period declared. The number of allocated shares and suspense shares held by the ESOP were 597,691 and none at December 31, 2000, 621,088 and 80,670 at December 31, 1999 and 563,995 and 160,649 at December 31, 1998, respectively. There were no committed-to-be-released shares at December 31, 2000, 1999 and 1998. Any repurchase of the ESOP shares is strictly at the option of the Company. The Company's common stock is subject to a Rights Agreement under which each share has attached to it a Right to purchase one one-thousandth of a share of a new series of Preferred Stock, at a price of $250 per Right. In the event an entity acquires or attempts to acquire 10% (20% in the case of an institutional investor) or more of the then outstanding shares, each Right would entitle the holder to purchase a number of shares of common stock pursuant to a formula contained in the Agreement. These Rights will expire on April 30, 2009, but may be redeemed at a price of $.01 per Right at any time prior to a public announcement that the above event has occurred. The Board may amend the Rights at any time without shareholder approval. 10. Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Convertible Subordinated Debentures of the Company In December 1997, the Company'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 the Company. The TCP Securities represent an undivided interest in the Affiliate's assets, with a liquidation preference of $50 per security. Distributions 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 statements 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 became 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. 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued 11. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share (in millions, except per share data):
2000 1999 1998 -------- ------ ----- Numerator: Net earnings (loss)................................. $ (281.5) $243.2 $53.7 Extraordinary items -- loss on early retirement of debt, net of applicable tax benefits............... -- 23.1 38.2 Cumulative effect of change in accounting for costs of start-up activities, net of applicable income tax benefit........................................ -- 12.7 -- -------- ------ ----- Earnings (loss) before extraordinary items and cumulative effect of change in accounting principle.......................................... (281.5) 279.0 91.9 Series C preferred dividend requirement............. (2.0) (2.2) (2.3) Series E preferred dividend requirement............. -- (0.2) (1.3) -------- ------ ----- Numerator for basic earnings (loss) per share -- income available to common shareholders before extraordinary items and cumulative effect of change in accounting principle............................ $ (283.5) $276.6 $88.3 Effect of dilutive securities: Series C preferred dividend requirement............ -- 2.2 2.3 Series E preferred dividend requirement............ -- 0.2 1.3 Minority interest -- preferred securities of an affiliate......................................... -- 25.4 -- Additional required ESOP contribution.............. -- (2.2) (2.1) -------- ------ ----- Numerator for diluted earnings (loss) per share -- income available to common shareholders after assumed conversions, before extraordinary items and cumulative of effect change in accounting principle.......................................... $ (283.5) $302.2 $89.8 Numerator for basic earnings (loss) per share -- income available to common shareholders After extraordinary items and cumulative effect of change in accounting principle............................ $ (283.5) $240.8 $50.1 Numerator for diluted earnings (loss) per share -- income available to common Shareholders after extraordinary items and cumulative effect of change in accounting Principle............................ $ (283.5) $266.4 $51.6 Denominator: Denominator for basic earnings per share -- weighted average shares..................................... 70.5 69.8 48.1 Effect of dilutive securities: Dilutive stock options outstanding................. -- 0.5 0.8 Nonvested stock.................................... -- 0.1 0.1 Conversion of Series C preferred stock............. -- 1.4 1.5 Conversion of Series E preferred stock............. -- 0.5 3.2 Conversion of Company-obligated mandatorily redeemable preferred securities................... -- 11.2 -- Contingently issuable shares of common stock....... -- 0.7 -- -------- ------ ----- Dilutive potential common shares.................... -- 14.4 5.6 -------- ------ ----- Denominator for dilutive earnings per share -- adjusted weighted average shares and assumed conversions........................................ 70.5 84.2 53.7 ======== ====== ===== Basic earnings (loss) per share before extraordinary items and cumulative effect of change in accounting principle............................................ $ (4.02) $ 3.96 $1.84 ======== ====== ===== Basic earnings (loss) per share after extraordinary items and cumulative effect of change in accounting principle............................................ $ (4.02) $ 3.44 $1.04 ======== ====== ===== Diluted earnings (loss) per share before extraordinary items and cumulative effect of change in accounting principle............................................ $ (4.02) $ 3.59 $1.67 ======== ====== ===== Diluted earnings (loss) per share after extraordinary items and cumulative effect of change in accounting principle............................................ $ (4.02) $ 3.16 $ .96 ======== ====== =====
42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued For additional disclosures regarding the Series C and Series E preferred stock, the employee stock options and non-vested stock shares, refer to Note 9, "Capital Stock and Preferred Share Purchase Rights", and Note 12, "Incentive Stock Plans". 12. 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 six months to five years after their date of grant, as determined by the Board of Directors at the time of grant. At December 31, 2000, there were 1,215,689 shares available for future grants under the plans. The total compensation cost that has been charged to operations for vesting of restricted stock awards was $0.8 million, $1.4 million and $0.7 million in 2000, 1999 and 1998, 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 Statement of Financial Accounting Standards No. 123 (SFAS 123) Accounting for Stock Based Compensation, the Company's net earnings, in millions, and earnings per share would have been adjusted to the pro forma amounts indicated below:
2000 1999 1998 -------- ------ ----- (Millions of Dollars, Except Per Share Amounts) Net earnings (loss) as reported................... $ (281.5) $243.2 $53.7 Pro forma......................................... $ (296.4) $230.3 $48.3 Basic earnings (loss) per share as reported....... $ (4.02) $ 3.44 $1.04 Pro forma......................................... $ (4.24) $ 3.27 $ .93 Diluted earnings (loss) per share as reported..... $ (4.02) $ 3.16 $ .96 Pro forma......................................... $ (4.24) $ 3.01 $ .86
Pro forma information regarding net income and earnings per share is required by SFAS 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 2000, 1999 and 1998, respectively: risk-free interest rates of 5.0%, 6.2% and 6.2%; dividend yields of 0.03%, 0.03% and 0.2%; volatility factors of the expected market price of the Company's common stock of 75.2%, 48.0% and 30.1% 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. The weighted-average fair value and the total number (in millions) of options granted was $7.13, $16.81 and $22.36, and 0.3, 2.7 and 1.1 for 2000, 1999 and 1998 respectively. The weighted-average fair value and total number (in millions) of nonvested stock awards granted was $11.56 and $53.52 and 0.1 and 0.1 for 2000 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued and 1998, respectively. There were no stock awards granted in 1999. All options and stock awards that are not vested at December 31, 2000, vest solely on employees rendering additional service. The following table summarizes the activity relating to the Company's incentive stock plans:
Weighted- Number of Average Shares Price ------------- --------- (In Millions) Outstanding at January 1, 1998.................... 2.2 $26.46 Options/stock granted........................... 1.2 57.94 Options exercised/stock vested.................. (0.5) 21.85 Options/stock lapsed or canceled................ (0.1) 31.49 ---- ------ Outstanding at December 31, 1998.................. 2.8 $40.50 Options granted................................. 2.7 33.85 Options exercised/stock vested.................. (0.1) 25.98 Options/stock lapsed or canceled................ (0.3) 41.86 ---- ------ Outstanding at December 31, 1999.................. 5.1 $37.14 Options/stock granted........................... 0.4 10.58 Options/stock lapsed or canceled................ (1.2) 33.47 ---- ------ Outstanding at December 31, 2000.................. 4.3 $35.61 ==== ====== Options exercisable at December 31, 2000........ 1.5 $37.55 ==== ====== Options exercisable at December 31, 1999........ 0.9 $31.04 ==== ====== Options exercisable at December 31, 1998........ 0.6 $30.11 ==== ======
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, 2000:
Weighted-Average ---------------- Outstanding Options Remaining Range Awards Exercisable Price Life ----- ----------- ----------- ------ --------- (In Millions) Options: $1.97 - $14.56................. 0.4 -- $10.46 5.0 years $14.57 - $26.50................ 1.4 0.5 $20.94 2.9 years $26.51 - $47.25................ 1.7 0.5 $43.33 2.5 years $47.26 - $70.69................ 0.7 0.5 $58.84 3.0 years Nonvested stock................ 0.1 -- --- --- Total........................ 4.3 1.5 === ===
13. Postemployment Benefits The Company sponsors several defined benefit pension plans (Pension Benefits) and health care and life insurance benefits (Other Benefits) for certain employees and retirees around the world. The Company funds the Pension Benefits based on the funding requirements of federal and international laws and regulations in advance of benefit payments and the Other Benefits as benefits are provided to the employees. 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued Components of net periodic benefit cost for the year ended December 31:
United States Plans International Plans ------------------------------------------- ------------------------- Pension Benefits Other Benefits Pension Benefits ---------------------- ------------------- ------------------------- 2000 1999 1998 2000 1999 1998 2000 1999 1998 ------ ------ ------ ----- ----- ----- ------- ------- ------- (Millions of Dollars) Service cost............ $ 29.7 $ 26.4 $ 16.4 $ 3.1 $ 4.7 $ 4.4 $ 21.9 $ 26.8 $ 26.7 Interest cost........... 54.7 51.0 29.9 33.3 31.0 19.2 116.9 112.0 100.7 Expected return on plan assets................. (85.4) (79.8) (48.1) -- -- -- (166.6) (144.8) (123.6) Net amortization and deferral............... (6.1) (3.0) (4.3) (1.1) (2.7) (0.6) (2.6) 9.2 -- Settlement and curtailment loss (gains)........... 0.6 0.1 1.6 -- (12.5) -- (0.4) (3.1) -- ------ ------ ------ ----- ----- ----- ------- ------- ------- Net periodic (benefit) cost................... $ (6.5) $ (5.3) $ (4.5) $35.3 $20.5 $23.0 $ (30.8) $ 0.1 $ 3.8 ====== ====== ====== ===== ===== ===== ======= ======= =======
Change in benefit obligation:
International United States Plans Plans ------------------------------ ------------------ Pension Other Benefits Benefits Pension Benefits -------------- -------------- ------------------ 2000 1999 2000 1999 2000 1999 ------ ------ ------ ------ -------- -------- (Millions of Dollars) Benefit obligation at beginning of year......... $728.9 $718.8 $424.9 $468.9 $2,060.2 $2,099.3 Service cost............... 29.7 26.4 3.1 4.7 21.9 26.8 Interest cost.............. 54.7 51.0 33.3 31.0 116.9 112.0 Acquisitions/divestitures.. -- -- -- 2.9 -- (0.2) Employee contributions..... -- -- -- -- 6.6 9.3 Benefits paid.............. (60.9) (60.2) (39.0) (39.6) (137.5) (139.9) Plan amendments............ 13.9 24.7 -- -- -- -- Actuarial (gains) and losses and changes in actuarial Assumptions..... (20.4) (31.8) 32.1 (28.5) (47.6) 19.8 Settlements and curtailments.............. (1.2) -- -- (12.5) (0.4) (3.3) Prior service cost......... -- -- -- (2.0) -- -- Currency translation adjustment................ -- -- -- -- (154.6) (63.6) ------ ------ ------ ------ -------- -------- Benefit obligation at end of year................... $744.7 $728.9 $454.4 $424.9 $1,865.5 $2,060.2 ====== ====== ====== ====== ======== ========
45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued Change in plan assets:
International United States Plans Plans -------------------------------------- ------------------ Pension Benefits Other Benefits Pension Benefits ------------------ ------------------ ------------------ 2000 1999 2000 1999 2000 1999 -------- -------- -------- -------- -------- -------- (Millions of Dollars) Fair value of plan assets at beginning of year................... $ 805.6 $ 775.4 $ -- $ -- $2,185.0 $2,034.5 Actual return on plan assets................. 99.6 83.9 -- -- 186.0 325.3 Company contributions... 10.7 6.5 -- -- 16.2 19.1 Benefits paid........... (60.9) (60.2) -- -- (137.5) (139.9) Settlements and curtailments........... (2.5) -- -- -- -- -- Currency translation adjustment............. -- -- -- -- (165.7) (54.0) -------- -------- -------- -------- -------- -------- Fair value of plan assets at end of year.. $ 852.5 $ 805.6 $ -- $ -- $2,084.0 $2,185.0 ======== ======== ======== ======== ======== ======== Funded status of the plan................... $ 107.8 $ 76.7 $ (454.4) $ (424.9) $ 218.5 $ 124.8 Unrecognized net asset at transition.......... 0.1 0.3 -- -- -- -- Unrecognized net actuarial (gain) loss.. (83.4) (60.9) 13.2 (19.5) (115.1) (46.3) Unrecognized prior service cost........... 48.7 40.0 (1.8) (2.4) -- -- -------- -------- -------- -------- -------- -------- Prepaid (accrued) benefit cost........... $ 73.2 $ 56.1 $ (443.0) $ (446.8) $ 103.4 $ 78.5 ======== ======== ======== ======== ======== ======== Weighted-average assumptions as of December 31: International United States Plans Plans -------------------------------------- ------------------ Pension Benefits Other Benefits Pension Benefits ------------------ ------------------ ------------------ 2000 1999 2000 1999 2000 1999 -------- -------- -------- -------- -------- -------- (Millions of Dollars) Discount rate........... 8% 7.75% 8% 7.75% 6.75% 6.25-6.5% Expected return on plan assets................. 10% 10% -- -- 8.5% 6.5-8.5% Rate of compensation increase............... 5% 4-4.75% -- -- 2.5-4.4% 3-4.4%
Amounts applicable to the Company's pension plans with accumulated benefit obligations in excess of plan assets are as follows:
United States International Plans Plans -------------- ----------------- 2000 1999 2000 1999 ------ ------ -------- ------- (Millions of Dollars) Projected benefit obligation.......... $ 28.6 $362.8 $ 154.5 $ 157.4 Accumulated benefit obligation........ 25.0 359.1 151.3 156.9 Fair value of plan assets............. -- 336.8 0.3 0.2 Amounts recognized in the balance sheet consist of: Pension Benefits Other Benefits -------------- ----------------- 2000 1999 2000 1999 ------ ------ -------- ------- (Millions of Dollars) Prepaid (accrued) benefit cost........ $176.6 $134.6 $ (443.0) $(446.8) Accrued benefit liability............. (22.2) (20.5) -- -- Intangible asset...................... 17.5 7.2 -- -- Minimum pension liability............. 3.1 10.1 -- -- ------ ------ -------- ------- Net amount recognized................. $175.0 $131.4 $ (443.0) $(446.8) ====== ====== ======== =======
46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued At December 31, 2000, the assumed annual health care cost trend used in measuring the APBO approximated 7.7%, declining to 7.5% in 2001 and to an ultimate annual rate of 5.5% estimated to be achieved in 2011. Increasing the assumed cost trend rate by 1% each year would have increased the APBO by approximately 9.7% and 9.5% at December 31, 2000 and 1999, respectively. Aggregate service and interest costs would have increased by approximately 10.2%, 10.4% and 13.3% for 2000, 1999 and 1998, respectively. During 2000, the Company consolidated all domestic qualified defined benefit plans into one plan, the Federal Mogul Corporation Pension Plan. As a result, the consolidated plan assets exceed the accumulated benefit obligation for qualified plans, all future pension obligations will be provided through the assets of this plan. During 1999, the Company curtailed retiree healthcare benefits for approximately 4,000 employees. As a result, the Company reduced its postretirement liability and recognized a one-time benefit of approximately $8.0 million, net of applicable taxes. 14. 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, extraordinary items and cumulative effect of change in accounting principle consisted of the following:
2000 1999 1998 -------- ------ ------ (Millions of Dollars) Domestic........................................ $ (125.6) $237.8 $ 86.6 International................................... (136.7) 222.1 98.9 -------- ------ ------ $ (262.3) $459.9 $185.5 ======== ====== ====== Significant components of the provision for income taxes (tax benefit) are as follows: 2000 1999 1998 -------- ------ ------ (Millions of Dollars) Current: Federal....................................... $ -- $ 49.3 $(12.1) State and local............................... 8.5 11.6 10.0 International................................. 14.9 45.7 65.4 -------- ------ ------ Total current............................... 23.4 106.6 63.3 Deferred: Federal....................................... 19.6 29.2 33.0 State and local............................... (1.1) (2.1) 2.1 International................................. (22.7) 47.2 (4.8) -------- ------ ------ Total deferred.............................. (4.2) 74.3 30.3 -------- ------ ------ $ 19.2 $180.9 $ 93.6 ======== ====== ======
47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued The reconciliation of income taxes computed at the United States federal statutory tax rate to income tax expense is:
2000 1999 1998 ------- ------ ------ (Millions of Dollars) Income taxes at United States statutory rate...... $ (91.8) $161.0 $ 64.9 Tax effect from: State income taxes.............................. 7.4 9.5 7.9 Foreign tax rate changes........................ (18.7) -- -- Foreign operations, net of foreign tax credits.. 29.3 6.4 5.6 Goodwill amortization........................... 28.6 28.1 19.7 Valuation allowance, foreign tax credit......... 38.4 (13.0) -- Valuation allowance, other...................... 25.1 (8.4) -- Purchased in-process research and development... -- -- 6.5 Sale of international retail/wholesale operations..................................... -- (4.7) (11.5) Tax credits and other........................... 0.9 2.0 0.5 ------- ------ ------ $ 19.2 $180.9 $ 93.6 ======= ====== ====== The following table summarizes the Company's total provision for income taxes/(tax benefit) by component: 2000 1999 1998 ------- ------ ------ (Millions of Dollars) Income tax expense................................ $ 19.2 $180.9 $ 93.6 Extraordinary items and cumulative effect of change in accounting principle................... -- (20.3) (19.8) T&N Bearings divestiture.......................... -- -- 56.1 Allocated to equity: Currency translation............................ (12.9) -- 15.3 Preferred dividends............................. (1.0) (1.2) (1.2) Incentive stock plans........................... -- (0.3) (3.9) Investment securities........................... 0.5 (0.1) -- Pension......................................... (4.7) (4.5) 0.2 ------- ------ ------ $ 1.1 $154.5 $140.3 ======= ====== ======
48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued Significant components of the Company's deferred tax assets and liabilities as of December 31 are as follows:
2000 1999 --------- ------- (Millions of Dollars) Deferred tax assets: Asbestos............................................. $ 551.7 $ 522.9 Tax credits.......................................... 137.7 140.0 Postemployment benefits.............................. 166.6 178.2 Net operating loss carryforwards of international subsidiaries........................................ 247.1 103.0 Other temporary differences.......................... 195.6 158.9 --------- ------- Total deferred tax assets.......................... 1,298.7 1,103.0 Valuation allowance for deferred tax assets............ (219.6) (156.1) --------- ------- Net deferred tax assets.............................. 1,079.1 946.9 Deferred tax liabilities: Fixed asset basis differences........................ (306.8) (351.1) Intangible asset basis differences................... (268.1) (289.5) Asbestos insurance................................... (255.1) (123.8) Deferred gains....................................... (118.8) (130.0) Pensions............................................. (83.8) (33.3) --------- ------- Total deferred tax liabilities..................... (1,032.6) (927.7) --------- ------- $ 46.5 $ 19.2 ========= =======
Deferred tax assets and liabilities are recorded in the consolidated balance sheets as follows:
2000 1999 ---------- ---------- (Millions of Dollars) Assets: Deferred tax asset.............................. $ 284.0 $ 128.1 Other noncurrent assets......................... 322.4 174.2 Liabilities: Other current accrued liabilities............... (5.8) (24.3) Other long-term accrued liabilities............. (554.1) (258.8) ---------- ---------- $ 46.5 $ 19.2 ========== ==========
Income taxes paid in 2000, 1999 and 1998 were $46.0 million, $87.5 million and $34.7 million, respectively. The 2000 provision includes the estimated U.S. federal income tax effects of retained earnings of subsidiaries expected to be distributed to the Company. No provision was made with respect to $546 million of undistributed earnings at December 31, 2000, since these earnings are considered by the Company to be permanently reinvested. 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. At December 31, 2000, the Company has $411 million in net operating loss carryforwards in the United Kingdom with no expiration date or valuation allowance. Also, the Company has $180 million of additional foreign net operating loss carryforwards with a full valuation allowance and various expiration dates. Included in 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued the previous amounts are $157 million of net operating loss carryforwards acquired with the purchases of T&N, Cooper Automotive and Fel-Pro. A valuation allowance was recorded on $84 million of these purchased net operating loss carryforwards, and to the extent such benefits are ever realized, such benefits will be recorded as a reduction of goodwill. 15. Operations By Industry Segment and Geographic Area The segment information has been restated to reflect the internal reorganization changes in 2000. The Company is a global manufacturer with two reportable segments: Americas/Asia Pacific, which includes the operations of North and South America, Asia and Australia; and Europe/Africa, which includes the operations of Europe and Africa. Divested Activities include the historical operating results and assets of certain divested operations in South Africa, Italy, the UK, the US and India. Each segment manufactures and distributes products in the following product groups: powertrain systems; sealing systems, visibility and system protection products; and brake, chassis, ignition and fuel products. The Company has not aggregated individual product segments within these reportable segments. The accounting policies of the segments are the same as described in Note 1 "Summary of Accounting Policies." The accounting policies of the business segments are consistent with those described in the summary of significant accounting policies. The Company evaluates segment performance based on several factors, including both Operational EBIT and Economic Value Added (EVA). Operational EBIT is defined as earnings before interest, income taxes, extraordinary items and certain nonrecurring items such as certain acquisition-related adjustments and integration costs associated with new acquisitions. Operational EBIT for each segment is shown below, as it is most consistent with the measurement principles used in measuring the corresponding amounts in the consolidated financial statements.
Operational Net Sales EBIT -------------------- -------------- 2000 1999 1998 2000 1999 1998 ------ ------ ------ ---- ---- ---- (Millions of Dollars) Americas/Asia Pacific.................... $4,057 $4,330 $2,629 $341 $607 $327 Europe/Africa............................ 1,940 2,072 1,686 117 220 170 Divested Activities...................... 16 86 154 1 8 5 ------ ------ ------ ---- ---- ---- Total.................................. $6,013 $6,488 $4,469 $459 $835 $502 ====== ====== ====== ==== ==== ====
2000 1999 1998 ----- ----- ----- (Millions of Dollars) Reconciliation: Total segments operational EBIT....................... $ 459 $ 835 $ 502 Net interest and other financing costs................ (326) (309) (233) Restructuring, impairment and other special charges... (395) (8) (20) Acquisition-related costs............................. -- (58) (63) ----- ----- ----- Earnings (loss) before income taxes, extraordinary items and cumulative effect of change in accounting principle.......................................... $(262) $ 460 $ 186 ===== ===== =====
50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
Depreciation Capital and Total Assets Expenditures Amortization -------------- -------------- -------------- 2000 1999 2000 1999 1998 2000 1999 1998 ------- ------ ---- ---- ---- ---- ---- ---- (Millions of Dollars) Americas/Asia Pacific........... $ 6,397 $6,701 $182 $259 $109 $225 $191 $131 Europe/Africa................... 3,858 3,226 131 135 118 149 163 96 Divested Activities............. -- 18 -- 1 2 -- 1 1 ------- ------ ---- ---- ---- ---- ---- ---- Total......................... $10,255 $9,945 $313 $395 $229 $374 $355 $228 ======= ====== ==== ==== ==== ==== ==== ====
The following table shows net sales by external customer and product group:
Net Sales -------------------- 2000 1999 1998 ------ ------ ------ (Millions of Dollars) Powertrain Systems.................................... $2,330 $2,459 $2,107 Sealing Systems, Visibility and Systems Protection Products............................................. 1,776 1,876 1,252 Brake, Chassis, Ignition and Fuel Products............ 1,907 2,153 1,110 ------ ------ ------ Total............................................... $6,013 $6,488 $4,469 ====== ====== ====== Original Equipment.................................... $3,449 $3,627 $2,407 Aftermarket........................................... 2,564 2,861 2,062 ------ ------ ------ Total............................................... $6,013 $6,488 $4,469 ====== ====== ======
The following table shows geographic information as of December 31:
Net Property, Plant and Net Sales Equipment -------------------- ------------- 2000 1999 1998 2000 1999 ------ ------ ------ ------ ------ United States.......................... $3,685 $3,922 $2,345 $1,231 $1,492 United Kingdom......................... 501 533 516 324 305 Germany................................ 812 630 478 366 344 France................................. 272 303 327 117 79 Other.................................. 743 1,100 803 351 284 ------ ------ ------ ------ ------ Total................................ $6,013 $6,488 $4,469 $2,389 $2,504 ====== ====== ====== ====== ======
16. Litigation and Environmental Matters ASBESTOS LIABILITY AND LEGAL PROCEEDINGS T&N Asbestos Litigation In the United States, the Company's United Kingdom subsidiary, T&N Ltd., and two United States 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 Ltd. is also subject to asbestos-disease litigation, to a lesser extent, in the United Kingdom and France. 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 claims may be made nor the expenditures which may ultimately arise therefrom. In addition, there are a number of factors that could impact the settlement costs into the future, including but not limited to: changes in the legal environment; possible insolvency of co-defendants; and establishment of an acceptable administrative (non-litigation) claims resolution mechanism. 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued In the fourth quarter of 2000, the Company increased its estimate of asbestos-related liability for the T&N Companies by $751 million and recorded a related insurance recoverable asset of $577 million. The revision in the estimate of probable asbestos-related liability principally resulted from a study performed by an econometric firm that specializes in these types of matters. The revised liability (approximately $1.6 billion) represents the Company's estimate for claims currently pending and those which can be reasonably estimated to be asserted in a future period. The Company believes that these claims will be paid over the next 12 years. In arriving at the revised liability for the T&N Companies, assumptions have been made regarding the total number of claims anticipated to be received in the future period, the typical cost of settlement (which is sensitive to the industry in which the plaintiff claims exposure, the alleged disease type and the jurisdiction in which the action is being brought), the rate of receipt of claims, the settlement strategy in dealing with outstanding claims and the timing of settlements. While management believes that the liability and receivable recorded are appropriate for anticipated losses arising from asbestos-related claims against the T&N Companies for the period covered, given the nature and complexity of the factors affecting the estimated liability and potential insurance recovery the actual liability and insurance recovery may differ. No assurance can be given that the T&N Companies will not be subject to material additional liabilities and significant additional litigation relating to asbestos for the period covered. In the event that such liabilities exceed the amounts recorded by the Company or the remaining insurance coverage, the Company's results of operations, business, liquidity and financial condition could be materially adversely affected. The ultimate liability for all pending and future claims is highly uncertain due to the difficulty of forecasting the numerous variables that can affect the liability. The Company does not believe it can reasonably determine the ultimate liability as the level of uncertainty is too great to provide for reasonable estimation of the number of future claims, the nature of such claims and the cost to resolve them. As additional experience is gained regarding claims or other new information becomes available regarding the potential liability, the Company will reassess its potential liability and revise the estimates as appropriate. Accordingly it is reasonably possible that the ultimate losses from asbestos-related claims will be greater than amounts recorded. T&N Ltd. is a defendant in approximately 63,000 pending personal injury claims as of December 31, 2000. During 2000, approximately 39,000 new claims naming T&N Ltd. were received. The two United States subsidiaries are defendants in approximately 111,000 pending personal injury claims as of December 31, 2000. During 2000, approximately 41,000 new claims naming the two United States subsidiaries were received. A number of years ago, T&N Ltd. appointed the Center for Claims Resolution ("CCR") as exclusive representative in relation to all asbestos-related personal injury claims made against the T&N Companies in the United States. The CCR has provided to its member companies a litigation defense, claims- handling and administration service in respect to United States asbestos- related disease claims. Pursuant to the CCR Producer Agreement, T&N Ltd. was entitled to appoint a representative as one of the five voting directors on the CCR's Board of Directors. Also pursuant to that agreement, members of the CCR contributed towards indemnity payments in each claim in which the member is named. Contributions to such indemnity payments were calculated on a case by case basis according to sharing agreements among the CCR's members. Effective January 18, 2000, the two United States subsidiaries appointed a law firm specializing in asbestos matters as their litigation defense, claims handling and administrative service provider. Indemnity and defense obligations incurred while members of the CCR are continuing to be honored. This change was intended to create greater economic and defense efficiencies for the two companies. The T&N Companies have entered into $250 million of surety to meet CCR collateral requirements for past obligations. The surety has a declining balance and is effective through February 24, 2004. The membership of the CCR has decreased in the past year for both voluntary and involuntary reasons. One instance involved the termination of a member by the CCR board. That former member had refused to provide 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued required surety for agreed to settlements made while a member. The CCR has tried to recover the funds owed; however, the former member has since filed for bankruptcy and recovery is therefore uncertain. Another member has terminated its participation due to its determination that, as a trust, it lacked sufficient assets to commit to any new settlements. This member has also asserted that it is entitled to certain reimbursements which the CCR does not believe to be appropriate. Additionally, a third member had filed for bankruptcy in December 2000. Any additional cost to the remaining CCR members, net of the security provided, is uncertain. The Company however has provided for its best estimate of the impact of these events. The T&N Companies could experience an increase in liability if there are any future negative developments in these areas. Certain codefendant companies (both members and nonmembers of the CCR) have recently filed for reorganization under Chapter 11 of the Federal Bankruptcy Code. As a consequence, litigation against them (with some exceptions) has been stayed or restricted. Due to the uncertainties involved, the long-term effect of these proceedings on the Company's current and future exposure cannot be determined. In February 2001, the CCR and its members significantly amended its indemnity naming and services agreement. The CCR indemnity naming formula has been replaced with a provision that, for all claims settled on or after February 1, 2001, CCR members would be directly responsible for payment of their own indemnity obligations. The amendments will allow CCR members to choose the services they wish to continue receiving from the CCR. T&N Ltd. plans to continue with the CCR for claims handling and administrative services. However, T&N Ltd. has appointed an outside law firm specializing in asbestos matters to handle its litigation defense. In 1996, T&N Ltd. purchased for the T&N Companies a (Pounds)500 million layer of insurance which will be triggered should the aggregate costs of claims filed after June 30, 1996, where the exposure occurred prior to that date, exceed (Pounds)690 million. The Company now believes that the aggregate cost of claims filed after June 30, 1996 will exceed the trigger point. The Company believes based on its review of the insurance policy and its advice from outside counsel, that it is probable that the T&N Companies will be entitled to receive payment from the reinsurers for the cost of claims in excess of the trigger point of the insurance. Based on this assessment, the Company recorded an insurance recoverable asset under the T&N policy of $577 million in the fourth quarter of 2000. The Company has reviewed the financial viability and legal obligations of the three reinsurance companies involved and has concluded that there is little risk of the reinsurers not being able to meet their obligation to pay, once the claims filed after June 30, 1996 exceed the (Pounds)690 million trigger point. The Company does not expect to reach the trigger point of the insurance or begin to collect on this insurance recoverable for the next several years. The US claims' costs applied against this policy are converted at a fixed exchange rate of $1.69/(Pounds). As such, if the market exchange rate is less then $1.69/(Pounds), the Company will effectively have a discount from 100% recovery on claims made with the insurance companies. At December 31, 2000, the $577 million insurance recoverable asset is net of an exchange rate discount of $68 million. The ultimate exposure of the T&N companies with respect to claims will depend upon the extent to which the insurance described above will be available to cover such claims, the amount paid for indemnity and defense, changes in the legal environment and other factors. Abex and Wagner Asbestos Litigation Former businesses of Cooper Automotive, primarily Abex and Wagner, are involved as defendants in numerous court actions in the United States alleging personal injury from exposure to asbestos or asbestos-containing products, mainly involving friction products. Abex is a defendant in approximately 23,000 pending claims as of December 31, 2000. During 2000, approximately 14,700 new claims naming this defendant were received. Wagner is a defendant in approximately 17,300 claims as of December 31, 2000. During 2000, approximately 6,700 new claims naming this defendant were received. In 1998, the Company acquired the capital stock of a former Cooper Automotive entity resulting in the assumption by a Company subsidiary of contractual 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued liability, under certain circumstances, for all claims pending and to be filed in the future alleging exposure to certain Wagner automotive and industrial friction products and for all claims filed after August 29, 1998, alleging exposure to certain Abex (non-railroad and non-aircraft) friction products. In the fourth quarter of 2000, the Company decreased its estimate of probable asbestos-related liability by $127 million, which was accompanied by an approximately equivalent reduction in the insurance recoverable asset. The revised estimate of probable asbestos-related liability principally resulted from a study performed by an econometric firm that specializes in these types of matters. The revised liability (approximately $253 million) represents the Company's estimate for claims currently pending and those which can be reasonably estimated to be asserted in a future period. The Company believes that these claims will be paid over the next 12 years. In arriving at the revised liability for Abex and Wagner, assumptions have been made regarding the number of claims anticipated to be received in the future period, the typical cost of settlement (which is sensitive to the alleged disease type and the jurisdiction in which the action is being brought), the rate of receipt of claims, and the timing of settlements. While management believes that the liability and receivable recorded for these claims are appropriate for anticipated losses arising from asbestos- related claims against Abex and Wagner for the covered period, given the nature and complexity of factors affecting the estimated liability and potential insurance recovery the actual liability and insurance recovery may differ. No assurance can be given that Abex and Wagner will not be subject to material additional liabilities and significant additional litigation relating to asbestos for the period covered. In the event that such liabilities exceed the amounts recorded by the Company or the remaining insurance coverage, the Company's results of operations, business, liquidity and financial condition could be materially adversely affected. The ultimate liability for all pending and future claims is highly uncertain due to the difficulty of forecasting the numerous variables that can affect the liability. The Company does not believe it can reasonably determine the ultimate liability as the level of uncertainty is too great to provide for reasonable estimation of the number of future claims, the nature of such claims, and the cost to resolve them. As additional experience is gained regarding claims or other new information becomes available regarding the potential liability, the Company will reassess its potential liability and revise the estimates as appropriate. Accordingly it is reasonably possible that the ultimate losses from asbestos-related claims will be greater than amounts recorded. Abex maintained product liability insurance coverage for most of the time that it manufactured products that contained asbestos. The subsidiary of the Company that may be liable for the post-August 1998 asbestos claims against Abex has the benefit of that insurance. Abex has been in litigation since 1982 with the insurance carriers of its primary layer of liability concerning coverage for asbestos claims. Abex also has substantial excess layer liability insurance coverage that, barring unforeseen insolvencies of excess carriers or other adverse events, should provide coverage for asbestos claims against Abex. The Company believes that based on its review of the insurance policies, the viability of the insurance carriers, and advice from outside legal counsel, it is probable that Abex will receive payments for a substantial majority of the cost of claims. Wagner also maintained product liability insurance coverage for some of the time that it manufactured products that contained asbestos. The subsidiary of the Company that may be liable for asbestos claims against Wagner has the benefit of that insurance. Primary layer liability insurance coverage for asbestos claims against Wagner is the subject of an agreement with Wagner's solvent primary carriers. The agreement provides for partial reimbursement of indemnity and defense costs for Wagner asbestos claims until exhaustion of aggregate limits. Wagner also has substantial excess layer liability insurance coverage which, barring unforeseen insolvencies of excess carriers or other adverse events, should provide coverage for asbestos claims against Wagner. The Company believes that based on its review of the insurance policies, the financial viability of the insurance carriers, and advice from outside legal counsel, it is probable that Wagner will receive payment for a portion of the cost of claims. Based on the probable conclusion of collection under the insurance policies, the Company has recorded a $188 million insurance recoverable asset related to the Abex and Wagner liability. 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued Federal-Mogul and Fel-Pro Asbestos Litigation The Company also is sued in its own name as one of a large number of defendants in a number of lawsuits brought by claimants alleging injury due to exposure to asbestos. The Company's Fel-Pro subsidiary has also been named as a defendant in a number of product liability cases involving asbestos, primarily involving gasket or packing products. Fel-Pro is a defendant in approximately 31,000 pending claims as of December 31, 2000. During 2000, approximately 3,400 new claims were filed. Over 30,000 of these claims have been transferred to a federal court where they reside subject to removal back into the tort system only if certain medical and product identification conditions are met. The Company is defending all such claims vigorously and believes that it and Fel-Pro have substantial defenses to liability and insurance coverage for defense and indemnity. While the outcome of litigation cannot be predicted with certainty, management believes that asbestos claims pending against the Company and Fel-Pro as of December 31, 2000, will not have a material effect on the Company's financial position. Aggregate of Asbestos Liability and Insurance Recoverable Asset The following is a summary of the asbestos liability and the insurance recoverable asset for 2000 (in millions of dollars):
T&N Abex & Companies Wagner Other Total --------- ------- ----- -------- Liability: Balance at December 31, 1999.......... $1,104.2 $ 408.8 $ 2.3 $1,515.3 2000 provision adjustments.......... 750.9 (127.2) 1.6 625.3 2000 payments....................... (323.8) (28.9) (1.0) (353.7) Other............................... 25.0 -- -- 25.0 -------- ------- ----- -------- Balance at December 31, 2000.......... $1,556.3 $ 252.7 $ 2.9 $1,811.9 ======== ======= ===== ======== Asset: Balance at December 31, 1999.......... $ -- $ 325.9 $ -- $ 325.9 2000 provision adjustments.......... 576.7 (135.8) -- 440.9 2000 proceeds....................... -- (2.2) -- (2.2) Other............................... 6.5 -- -- 6.5 -------- ------- ----- -------- Balance at December 31, 2000.......... $ 583.2 $ 187.9 $ -- $ 771.1 ======== ======= ===== ========
As of December 31, 2000, the Company has provided an aggregated liability for all of its subsidiaries and businesses with potential asbestos liability of approximately $1.8 billion for claims currently pending and those which can be reasonably expected to be asserted in a future period. The Company believes that these claims will be paid over the next 12 years. Of this amount, the Company expects to incur asbestos payments of approximately $350 million over the next 12 months and has reflected this as a current liability. This estimate is based in part on recent and historical claims experience, medical information, the impact of changes in indemnity sharing within the CCR and the current legal environment. The Company cannot reasonably estimate a liability beyond the period encompassed in its estimates as the level of uncertainty is too great to provide for reasonable estimation of the number of future claims, the nature of such claims, or the cost to resolve them. The Company believes that it is probable that its subsidiaries with asbestos-related liabilities and related insurance policies, the T&N Companies, Abex, Wagner and Fel-Pro will collect the recorded aggregated insurance recoverable asset of $771 million. 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued Environmental Matters The Company is a defendant in lawsuits filed, or the recipient of administrative orders issued, in various jurisdictions pursuant to the federal Comprehensive Environmental Response Compensation and Liability Act of 1980 (CERCLA) or other similar federal or state environmental laws. These laws require responsible parties to pay for cleaning up contamination resulting from hazardous wastes which were discharged into the environment by them or by others to which they sent such wastes for disposition. In addition, the Company has been notified by the United States Environmental Protection Agency and various state agencies that it may be a potentially responsible party (PRP) under such law 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. At most of the sites that are likely to be costliest to clean up, which are often current or former commercial waste disposal facilities to which numerous companies sent waste, the Company's exposure is expected to be limited. Despite the joint and several liability which might be imposed on the Company under CERCLA and some of the other laws pertaining to these sites, the Company's share of the total waste has generally been small. The other companies which also sent wastes, often numbering in the hundreds or more, generally include large, solvent publicly-owned companies, and in most such situations the government agencies and courts have imposed liability in some reasonable relationship to contribution of waste. 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 reserve was approximately $67.9 million and $74.5 million at December 31, 2000 and 1999, respectively. The 2000 decrease was primarily attributable to remediation payments made during 2000. Management believes that such accruals will be adequate to cover the Company's estimated liability for its exposure in respect to such matters. 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued 17. Quarterly Financial Data (Unaudited)
First(1) Second Third(2) Fourth(3) Year -------- --------- -------- --------- -------- (Millions of Dollars, Except Per Share Amounts) Year ended December 31, 2000: Net sales................... $1,643.7 $1,593.2 $1,427.9 $1,348.4 $6,013.2 Gross margin................ 433.3 410.4 338.7 234.9 1,417.3 Net earnings (loss)......... 13.9 49.9 (7.6) (337.7) (281.5) Diluted earnings (loss) per share...................... .18 .65 (.12) (4.80) (4.02) Stock price High........................ $ 20.19 $ 16.00 $ 11.94 $ 5.88 Low......................... $ 12.25 $ 9.44 $ 5.25 $ 1.75 Dividend per share.......... $ .0025 $ .0025 $ .0025 $ .0025 First(4) Second(5) Third(6) Fourth(7) Year -------- --------- -------- --------- -------- (Millions of Dollars, Except Per Share Amounts) Year ended December 31, 1999: Net sales................... $1,642.2 $1,687.1 $1,583.9 $1,574.3 $6,487.5 Gross margin................ 449.5 482.6 441.2 405.1 1,778.4 Earnings before extraordinary items and cumulative effect of change in accounting principle.... 61.4 87.3 70.1 60.2 279.0 Extraordinary items -- loss on early retirement of debt, net of applicable income tax benefit......... 23.1 -- -- -- 23.1 Cumulative effect of change in accounting for costs of start-up activities, net of applicable income tax benefit.................... 12.7 -- -- -- 12.7 Net earnings................ 25.6 87.3 70.1 60.2 243.2 Diluted earnings per share.. .38 1.11 .91 .79 3.16 Stock price High........................ $ 64.88 $ 53.81 $ 55.00 $ 29.13 Low......................... $ 40.63 $ 41.94 $ 23.38 $ 17.56 Dividend per share.......... $ .0025 $ .0025 $ .0025 $ .0025
- ------------------ (1) Includes a $68.7 million charge for restructuring and a $10.0 million charge for adjustment of assets held for sale and other long-lived assets to fair value. (2) Includes an $8.6 million charge for restructuring and a $4.6 million charge for adjustment of assets held for sale and other long-lived assets to fair value. (3) Includes a $58.4 million charge for restructuring, a $60.8 million charge for adjustments of assets held for sale and other long-lived assets to fair value, a $184.4 million charge related to asbestos and a $60.0 million charge for certain deferred tax valuation allowances. (4) Includes $10.1 million of integration costs. (5) Includes $13.3 million of integration costs. (6) Includes $13.2 million of integration costs and a $7.9 million charge for adjustment of assets held for sale and other long-lived assets to fair value. (7) Includes $10.3 million of integration costs. 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued 18. Consolidating Condensed Financial Information of Guarantor Subsidiaries Certain subsidiaries of the Company (as listed below, collectively the "Guarantor Subsidiaries") have guaranteed fully and unconditionally, on a joint and several basis, the obligation to pay principal and interest under the Company's Senior Credit Agreements. Federal-Mogul Venture Corporation Federal-Mogul Dutch Holdings Inc. Federal-Mogul Global Properties Federal-Mogul UK Holdings Inc. Inc. F-M UK Holdings Limited Carter Automotive Company Federal-Mogul Global Inc. Federal-Mogul Worldwide Inc. T&N Industries, Inc. Federal-Mogul Ignition Company Federal-Mogul Powertrain Federal-Mogul Products, Inc. Federal-Mogul Aviation, Inc. The Company issued notes in 1999 and 1998 which are guaranteed by the Guarantor Subsidiaries. The Guarantor Subsidiaries also guarantee the Company's previously existing publicly registered Medium-term notes and Senior notes. T&N Industries, Inc. and Federal-Mogul Powertrain, Inc. are wholly owned subsidiaries of the Company and were incorporated in 1998 with the acquisition of T&N. These subsidiaries became guarantors as a result of the Company's fourth amended and restated Senior Credit Agreement (Note 6). The 1999 and 1998 statements have been restated to include the entities since their acquisition date within the Guarantor Subsidiaries. In lieu of providing separate audited financial statements for the Guarantor Subsidiaries, the Company has included the accompanying audited consolidating condensed financial statements based on the Company's understanding of the Securities and Exchange Commission's interpretation and application of Rule 3-10 of the Securities and Exchange Commission's Regulation S-X and Staff Accounting Bulletin 53. Management does not believe that separate financial statements of the Guarantor Subsidiaries are material to investors. Therefore, separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented. 58 FEDERAL-MOGUL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS December 31, 2000 (Millions of Dollars)
(Unconsolidated) ------------------------------------ Guarantor Non-Guarantor Parent Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------- ------------ ------------ Net sales............... $1,428.2 $2,188.9 $3,046.1 $(650.0) $6,013.2 Cost of products sold... 1,120.0 1,695.9 2,430.0 (650.0) 4,595.9 -------- -------- -------- ------- -------- Gross margin.......... 308.2 493.0 616.1 -- 1,417.3 Selling, general and administrative expenses............... 268.6 289.3 286.7 -- 844.6 Amortization of goodwill and other intangible assets................. 20.3 47.4 55.9 -- 123.6 Restructuring charge.... 44.7 28.3 62.7 -- 135.7 Adjustment of assets held for sale and other long-lived assets to fair value............. 24.1 35.5 15.8 -- 75.4 Asbestos charge......... 1.6 (19.8) 202.6 -- 184.4 Interest expense, net... 278.9 40.7 (34.6) -- 285.0 International currency exchange (gains) losses................. 0.4 0.2 (0.7) -- (0.1) Other expense (income), net.................... 96.9 (145.3) 79.4 -- 31.0 -------- -------- -------- ------- -------- Earnings (loss) before income taxes......... (427.3) 216.7 (51.7) -- (262.3) Income tax expense (benefit).............. (158.1) 145.5 31.8 -- 19.2 -------- -------- -------- ------- -------- Net earnings (loss) before equity in earnings (loss) of subsidiaries......... (269.2) 71.2 (83.5) -- (281.5) Equity in earnings (loss) of subsidiaries........... (12.3) 55.1 -- (42.8) -- -------- -------- -------- ------- -------- Net Earnings (loss)..... $ (281.5) $ 126.3 $ (83.5) $ (42.8) $ (281.5) ======== ======== ======== ======= ========
59 FEDERAL-MOGUL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS December 31, 1999 (Millions of Dollars)
(Unconsolidated) ------------------------------------ Guarantor Non-Guarantor Parent Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------- ------------ ------------ Net sales............... $1,540.3 $2,197.2 $3,195.1 $(445.1) $6,487.5 Cost of products sold... 1,099.8 1,626.5 2,427.9 (445.1) 4,709.1 -------- -------- -------- ------- -------- Gross margin.......... 440.5 570.7 767.2 -- 1,778.4 Selling, general and administrative expenses............... 331.7 252.6 264.6 -- 848.9 Amortization of goodwill and other intangible assets................. 6.7 50.9 69.6 -- 127.2 Adjustment of assets held for sale and other long-lived assets to fair value............. 7.9 -- -- -- 7.9 Integration costs....... 18.1 8.3 20.5 -- 46.9 Interest expense, net... 258.9 0.1 9.9 -- 268.9 International currency exchange (gains) losses................. (0.1) (0.2) (2.4) -- (2.7) Other expense (income), net.................... 52.3 (152.7) 121.8 -- 21.4 -------- -------- -------- ------- -------- Earnings (loss) before income taxes, extraordinary items and cumulative effect of change in accounting principle............ (235.0) 411.7 283.2 -- 459.9 Income tax expense (benefit).............. (87.0) 152.3 115.6 -- 180.9 -------- -------- -------- ------- -------- Earnings (loss) before extraordinary items and cumulative effect of change in accounting principle............ (148.0) 259.4 167.6 -- 279.0 Extraordinary item -- loss on early retirement of debt, net of applicable income tax benefit............ 23.1 -- -- -- 23.1 Cumulative effect of change in accounting for costs of start-up activities, net of applicable income tax.. 12.7 -- -- -- 12.7 -------- -------- -------- ------- -------- Net earnings (loss) before equity in earnings (loss) of subsidiaries......... (183.8) 259.4 167.6 -- 243.2 Equity in earnings (loss) of subsidiaries........... 427.0 269.5 -- (696.5) -- -------- -------- -------- ------- -------- Net Earnings............ $ 243.2 $ 528.9 $ 167.6 $(696.5) $ 243.2 ======== ======== ======== ======= ========
60 FEDERAL-MOGUL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS December 31, 1998 (Millions of Dollars)
(Unconsolidated) ------------------------------------ Guarantor Non-Guarantor Parent Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------- ------------ ------------ Net sales............... $1,285.7 $ 923.8 $2,409.8 $(150.6) $4,468.7 Cost of products sold... 907.8 683.9 1,849.1 (150.6) 3,290.2 -------- ------- -------- ------- -------- Gross margin.......... 377.9 239.9 560.7 -- 1,178.5 Selling, general and administrative expenses............... 293.9 121.9 225.0 -- 640.8 Amortization of goodwill and other intangible assets................. 21.5 19.6 42.7 -- 83.8 Purchased in-process research and development charge..... -- -- 18.6 -- 18.6 Restructuring charge.... 7.3 -- -- -- 7.3 Adjustment of assets held for sale and other long-lived assets to fair value............. 19.0 -- -- -- 19.0 Integration costs....... 5.5 -- 16.9 -- 22.4 Interest expense, net... 154.2 (106.8) 146.0 -- 193.4 International currency exchange losses........ 1.0 5.9 (2.2) -- 4.7 Net gain on British pound currency option and forward contract... (13.3) -- -- -- (13.3) Other expense (income), net.................... (1.4) (19.2) 36.9 -- 16.3 -------- ------- -------- ------- -------- Earnings (loss) before income taxes and extraordinary items.. (109.8) 218.5 76.8 -- 185.5 Income tax expense...... 20.6 80.8 (7.8) -- 93.6 -------- ------- -------- ------- -------- Net earnings (loss) before extraordinary item................. (130.4) 137.7 84.6 -- 91.9 Extraordinary items -- loss on early retirement of debt, net of applicable income tax benefits........... 19.3 -- 18.9 -- 38.2 -------- ------- -------- ------- -------- Net earnings (loss) before equity in earnings (loss) of subsidiaries (149.7) 137.7 65.7 -- 53.7 Equity in earnings (loss) of subsidiaries........... 203.4 82.9 -- (286.3) -- -------- ------- -------- ------- -------- Net Earnings............ $ 53.7 $ 220.6 $ 65.7 $(286.3) $ 53.7 ======== ======= ======== ======= ========
61 FEDERAL-MOGUL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING CONDENSED BALANCE SHEET December 31, 2000 (Millions of Dollars)
(Unconsolidated) ------------------------------------- Guarantor Non-Guarantor Parent Subsidiaries Subsidiaries Eliminations Consolidated --------- ------------ ------------- ------------ ------------ ASSETS Cash and equivalents.... $ 148.3 $ 10.9 $ (52.0) $ -- $ 107.2 Accounts receivable..... 22.4 -- 490.4 -- 512.8 Investment in accounts receivable securitization......... -- -- 229.1 -- 229.1 Inventories............. 137.9 299.2 371.5 -- 808.6 Deferred taxes.......... 196.7 -- 87.3 -- 284.0 Prepaid expenses and income tax benefits.... 49.4 53.0 92.7 -- 195.1 --------- -------- -------- --------- --------- Total Current Assets.. 554.7 363.1 1,219.0 -- 2,136.8 Property, plant and equipment.............. 270.4 887.2 1,231.2 -- 2,388.8 Goodwill................ 584.5 1,256.7 1,461.9 -- 3,303.1 Other intangible assets................. 39.8 406.2 300.4 -- 746.4 Investment in subsidiaries........... 6,186.0 2,871.6 -- (9,057.6) -- Intercompany accounts, net.................... (1,591.5) 1,787.5 (196.0) -- -- Asbestos-related insurance recoverable.. -- 194.4 576.7 -- 771.1 Other noncurrent assets................. 213.6 187.5 507.7 -- 908.8 --------- -------- -------- --------- --------- Total Assets.......... $ 6,257.5 $7,954.2 $5,100.9 $(9,057.6) $10,255.0 ========= ======== ======== ========= ========= LIABILITIES Short-term debt, including current portion of long-term debt................... $ 124.4 $ 3.0 $ 20.4 $ -- $ 147.8 Accounts payable........ 78.0 145.0 208.9 -- 431.9 Accrued compensation.... 31.8 27.6 98.4 -- 157.8 Restructuring and rationalization reserves............... 12.6 27.1 68.2 -- 107.9 Current portion of asbestos liability..... -- -- 350.0 -- 350.0 Interest payable........ 92.9 0.3 1.2 -- 94.4 Other accrued liabilities............ 34.8 73.9 305.3 -- 414.0 --------- -------- -------- --------- --------- Total Current Liabilities.......... 374.5 276.9 1,052.4 -- 1,703.8 Long-term debt.......... 3,534.0 7.6 18.1 -- 3,559.7 Long-term portion of asbestos liability..... -- 606.4 855.5 -- 1,461.9 Postemployment benefits............... 470.1 -- 167.5 -- 637.6 Other accrued liabilities............ 273.4 -- 435.9 -- 709.3 Minority interest in consolidated subsidiaries........... 55.3 2.2 -- -- 57.5 Company-obligated mandatorily redeemable preferred securities of subsidiary holding solely convertible subordinated debentures of the Company......... -- -- 575.0 -- 575.0 Shareholders' Equity.... 1,550.2 7,061.1 1,996.5 (9,057.6) 1,550.2 --------- -------- -------- --------- --------- Total Liabilities and Shareholders' Equity............... $ 6,257.5 $7,954.2 $5,100.9 $(9,057.6) $10,255.0 ========= ======== ======== ========= =========
62 FEDERAL-MOGUL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING CONDENSED BALANCE SHEET December 31, 1999 (Millions of Dollars)
(Unconsolidated) ------------------------------------- Guarantor Non-Guarantor Parent Subsidiaries Subsidiaries Eliminations Consolidated --------- ------------ ------------- ------------ ------------ ASSETS Cash and equivalents.... $ 54.1 $ 4.7 $ 5.7 $ -- $ 64.5 Accounts receivable..... 18.1 3.0 493.5 -- 514.6 Investment in accounts receivable securitization......... -- -- 232.2 -- 232.2 Inventories............. 187.9 302.0 393.7 -- 883.6 Deferred taxes.......... 40.0 74.7 13.4 -- 128.1 Prepaid expenses and income tax benefits.... 60.8 37.0 105.7 -- 203.5 --------- -------- -------- --------- -------- Total Current Assets.. 360.9 421.4 1,244.2 -- 2,026.5 Property, plant and equipment.............. 292.9 937.4 1,273.4 -- 2,503.7 Goodwill................ 558.4 1,242.3 1,747.1 -- 3,547.8 Other intangible assets................. 38.4 427.1 330.8 -- 796.3 Investment in subsidiaries........... 6,167.0 2,076.6 -- (8,243.6) -- Intercompany accounts, net.................... (1,752.6) 2,077.7 (325.1) -- -- Asbestos-related insurance recoverable.. -- 325.9 -- -- 325.9 Other noncurrent assets................. 233.2 51.0 460.8 -- 745.0 --------- -------- -------- --------- -------- Total Assets.......... $ 5,898.2 $7,559.4 $4,731.2 $(8,243.6) $9,945.2 ========= ======== ======== ========= ======== LIABILITIES Short-term debt, including current portion of long-term debt................... $ 127.7 $ 3.0 $ 60.1 $ -- $ 190.8 Accounts payable........ 152.8 206.2 262.9 -- 621.9 Accrued compensation.... 46.3 40.5 96.1 -- 182.9 Restructuring and rationalization reserves............... -- -- 46.0 -- 46.0 Current portion of asbestos liability..... -- -- 180.0 -- 180.0 Interest payable........ 78.1 0.4 0.5 -- 79.0 Other accrued liabilities............ 89.8 93.8 298.4 -- 482.0 --------- -------- -------- --------- -------- Total Current Liabilities.......... 494.7 343.9 944.0 -- 1,782.6 Long-term debt.......... 2,977.0 12.0 31.0 -- 3,020.0 Long-term portion of asbestos liability..... -- 780.4 554.9 -- 1,335.3 Postemployment benefits............... 188.0 -- 473.9 -- 661.9 Other accrued liabilities............ 157.2 140.4 157.3 -- 454.9 Minority interest in consolidated subsidiaries........... 6.1 -- 34.2 -- 40.3 Company-obligated mandatorily redeemable preferred securities of subsidiary holding solely convertible subordinated debentures of the Company......... -- -- 575.0 -- 575.0 Shareholders' Equity.... 2,075.2 6,282.7 1,960.9 (8,243.6) 2,075.2 --------- -------- -------- --------- -------- Total Liabilities and Shareholders' Equity............... $ 5,898.2 $7,559.4 $4,731.2 $(8,243.6) $9,945.2 ========= ======== ======== ========= ========
63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS December 31, 2000 (Millions of Dollars)
(Unconsolidated) ----------------------------------- Guarantor Non-Guarantor Parent Subsidiaries Subsidiaries Eliminations Consolidated ------- ------------ ------------- ------------ ------------ Net Cash Provided From (Used By) Operating Activities... $(154.9) $(58.5) $ 58.9 $ -- $(154.5) Expenditures for property, plant and equipment and other long-term assets....... (34.9) (109.7) (168.7) -- (313.3) Proceeds from sale of business investments... 0.8 -- 65.8 -- 66.6 Other................... -- -- 2.4 -- 2.4 ------- ------ ------ ------- ------- Net Cash Used By Investing Activities........... (34.1) (109.7) (100.5) -- (244.3) Proceeds from issuance of long-term debt...... 689.0 -- -- -- 689.0 Principal payments on long-term debt......... (132.0) (4.4) (8.9) -- (145.3) Increase (decrease) in short-term debt........ (3.3) -- (22.6) -- (25.9) Fees paid for debt issuance and other securities............. (4.6) -- -- -- (4.6) Change in intercompany accounts............... (201.1) 178.8 22.3 -- -- Sale of accounts receivable under securitization......... (62.1) -- -- -- (62.1) Dividends............... (4.0) -- -- -- (4.0) Other................... 1.3 -- (6.9) -- (5.6) ------- ------ ------ ------- ------- Net Cash Provided From (Used By) Financing Activities........... 283.2 174.4 (16.1) -- 441.5 ------- ------ ------ ------- ------- Net Increase (Decrease) in Cash... $ 94.2 $ 6.2 $(57.7) $ -- $ 42.7 ======= ====== ====== ======= =======
64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS December 31, 1999 (Millions of Dollars)
(Unconsolidated) ------------------------------------- Guarantor Non-Guarantor Parent Subsidiaries Subsidiaries Eliminations Consolidated --------- ------------ ------------- ------------ ------------ Net Cash Provided From (Used By) Operating Activities............. $ (254.3) $ 395.9 $ 420.8 $ -- $ 562.4 Expenditures for property, plant and equipment and other long-term assets....... (55.8) (164.0) (175.4) -- (395.2) Proceeds from sale of business investments... 3.9 -- 49.4 -- 53.3 Business acquisitions, net of cash acquired... (97.0) (27.1) (247.1) -- (371.2) --------- ------- ------- -------- --------- Net Cash Used By Investing Activities........... (148.9) (191.1) (373.1) -- (713.1) Issuance of common stock.................. 1.2 -- -- -- 1.2 Proceeds from issuance of long-term debt...... 2,123.0 -- -- -- 2,123.0 Principal payments on long-term debt......... (2,223.2) (7.8) (20.5) -- (2,251.5) Increase (decrease) in short-term debt........ 44.2 (11.7) (35.5) -- (3.0) Fees paid for debt issuance and other securities............. (25.5) -- -- -- (25.5) Change in intercompany accounts............... 216.1 (187.0) (29.1) -- -- Sale of accounts receivable under securitization......... 304.3 -- -- -- 304.3 Dividends............... (4.3) -- -- -- (4.3) Other................... (3.8) -- (2.4) -- (6.2) --------- ------- ------- -------- --------- Net Cash Provided From (Used By) Financing Activities........... 432.0 (206.5) (87.5) -- 138.0 --------- ------- ------- -------- --------- Net Increase (Decrease) in Cash... $ 28.8 $ (1.7) $ (39.8) $ -- $ (12.7) ========= ======= ======= ======== =========
65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS December 31, 1998 (Millions of Dollars)
(Unconsolidated) ------------------------------------- Guarantor Non-Guarantor Parent Subsidiaries Subsidiaries Eliminations Consolidated --------- ------------ ------------- ------------ ------------ Net Cash Provided From Operating Activities... $ 131.5 $ 156.0 $ 38.0 $ -- $ 325.5 Expenditures for property, plant and equipment and other long-term assets....... (37.4) (128.7) (62.4) -- (228.5) Proceeds from sale of business investments... 3.8 -- 49.6 -- 53.4 Proceeds from sale of options................ -- -- 39.1 -- 39.1 Business acquisitions, net of cash acquired... (2,369.7) -- (1,855.5) -- (4,225.2) --------- --------- --------- --------- --------- Net Cash Used By Investing Activities........... (2,403.3) (128.7) (1,829.2) -- (4,361.2) Issuance of common stock.................. 1,382.2 -- -- -- 1,382.2 Proceeds from issuance of long-term debt...... 6,197.5 -- -- -- 6,197.5 Principal payments on long-term debt......... (3,678.7) (0.3) (248.6) -- (3,927.6) Increase (decrease) in short-term debt........ 73.9 10.5 (83.9) -- 0.5 Fees paid for debt issuance and other securities............. (76.6) -- -- -- (76.6) Fees for early retirement of debt..... -- -- (27.4) -- (27.4) Change in intercompany accounts............... 16.4 (1,604.9) 1,588.5 -- -- Contributions paid to affiliates............. (2,150.1) (565.4) -- 2,715.5 -- Contributions received from affiliates........ -- 2,150.1 565.4 (2,715.5) -- Sale of accounts receivable under securitization......... 42.6 -- -- -- 42.6 Dividends............... (10.4) -- -- -- (10.4) Other................... (4.6) 0.5 (5.2) -- (9.3) --------- --------- --------- --------- --------- Net Cash Provided From (Used By) Financing Activities........... 1,792.2 (9.5) 1,788.8 -- 3,571.5 --------- --------- --------- --------- --------- Net Increase (Decrease) in Cash... $ (479.6) $ 17.8 $ (2.4) $ -- $ (464.2) ========= ========= ========= ========= =========
66 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING To Our Shareholders: The management of Federal-Mogul has the responsibility for preparing the accompanying financial statements and for their integrity and objectivity. The financial statements were prepared in accordance with generally accepted accounting principles generally accepted in the United States and include amounts based on the best estimates and judgments of management. Management also prepared the other financial information in this report and is responsible for its accuracy and consistency with the financial statements. Federal-Mogul has retained independent auditors, ratified by election by the shareholders, to audit the financial statements. Federal-Mogul maintains internal accounting control systems which are adequate to provide reasonable assurance that assets are safeguarded from loss or unauthorized use and which produce records adequate for preparation of financial information. The systems controls and compliance are reviewed by a program of internal audits. There are limits inherent in all systems of internal accounting control based on the recognition that the cost of such a system not exceed the benefits derived. We believe Federal-Mogul's system provides this appropriate balance. The Audit Committee of the Board of Directors, comprised of three outside directors, performs an oversight role related to financial reporting. The Committee periodically meets jointly and separately with the independent auditors, internal auditors and management to review their activities and reports and to take any action appropriate to their findings. At all times, the independent auditors have the opportunity to meet with the Audit Committee, without management representatives present, to discuss matters related to their audit. /s/ Frank E. Macher Frank E. Macher Chief Executive Officer /s/ Charles G. McClure Charles G. McClure Chief Operating Officer and President /s/ G. Michael Lynch G. Michael Lynch Executive Vice President and Chief Financial Officer 67 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, 2000 and 1999, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. 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 February 1, 2001 except for Note 6 as to which the date is March 22, 2001 68 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None PART III Item 10. Directors and Executive Officers of the Registrant. The information required by this item will appear (a) under the caption "Election of Directors" in the Company's definitive Proxy Statement dated April 2001 relating to its 2001 Annual Meeting of Shareholders (the "2001 Proxy Statement") (except for the information appearing under the caption "Compensation of Directors"), which information is incorporated herein by reference; (b) under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the 2000 Proxy Statement, which information is incorporated herein by reference; and (c) under the caption "Executive Officers of the Company" at the end of Part I of this Annual Report. Item 11. Executive Compensation. The information required by this item will appear under the caption "Executive Compensation" in the 2001 Proxy Statement (excluding the information appearing under the caption "Compensation Committee Report on Executive Compensation") and under the caption "Compensation of Directors" in the 2001 Proxy Statement, and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this item will appear under the caption "Information on Securities -- Directors' and Officers' Ownership of Stock" and "Ownership of Stock by Principal Owners" in the 2001 Proxy Statement and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. The information required by this item will appear under the caption "Certain Related Transactions" in the 2001 Proxy Statement and is incorporated herein by reference. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. (a) The following documents are filed as part of this report: 1. Financial Statements: Financial statements filed as part of this Annual Report on Form 10-K are listed under Part II, Item 8 hereof. 2. Financial Statement Schedules: Schedule II -- Valuation and Qualifying Accounts Financial Statements and Schedules Omitted: Schedules other than those listed above are omitted because they are not required or applicable under instructions contained in Regulation S-X or because the information called for is shown in the financial statements and notes thereto. 69 SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES (Millions of Dollars)
Column A Column B Column C Column D Column E - ------------------------- ---------- ------------------- ------------ --------- Additions ------------------- Charged Charged to Balance at to Costs Other Balance Beginning and Accounts-- Deductions-- at End Description of Period Expenses Describe Describe of Period - ------------------------- ---------- -------- ---------- ------------ --------- Year Ended December 31, 2000: Valuation allowance for trade receivable...... $ 69.3 0.7 -- 3.5(4) $ 66.5 Reserve for inventory valuation............. 26.5 5.8 -- 3.0(1) 29.3 Valuation allowance for deferred tax assets... 156.1 63.5 -- 219.6 Year Ended December 31, 1999: Valuation allowance for trade receivable...... 60.4 5.2 $ 5.1(3) 1.4(4) 69.3 Reserve for inventory valuation............. 24.9 1.6 26.5 Valuation allowance for deferred tax assets... 181.1 (2.5) 22.5(2) 156.1 Year Ended December 31, 1998: Valuation allowance for trade receivable...... 18.7 7.6 34.1(3) -- 60.4 Reserve for inventory valuation............. 15.1 1.6 8.2(3) -- 24.9 Valuation allowance for deferred tax assets... 44.4 3.9 132.8(5) -- 181.1
- ------------------ (1) Decrease due to $3.0 million of obsolete inventory. (2) Decrease due to a $21.4 million reduction of the valuation reserve which was reversed to the statement of operations and a $1.1 million utilization of pre-acquisition net operating loss carryforwards the effect of which reduces goodwill. (3) Amounts related to the acquisition of businesses. (4) Uncollectable accounts charged off net of recoveries. (5) Increase due to purchased foreign net operating loss carryforwards. 70 3. Exhibits: The Company will furnish upon request any of the following exhibits upon payment of the Company's reasonable expenses for furnishing such exhibit. 2.1 Purchase and Sale Agreement between Cooper Industries, Inc. and Federal-Mogul Corporation, dated August 17, 1998. (Incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed October 26, 1998.) 3.1 The Company's Restated Articles of Incorporation. (Incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1999. (the "1999 10- K") * 3.2 The Company's Bylaws, as amended. 4.1 Rights Agreement dated as of February 24, 1999, between the Company and The Bank of New York, as Rights Agent. (Incorporated by reference to Exhibit 4 to the Company's Current Report on Form 8-K filed February 25, 1999.) 4.2 Purchase Agreement for 10,000,000 Trust Convertible Preferred Securities of Federal-Mogul Financing Trust, dated as of November 24, 1997. (Incorporated by reference to Exhibit 4.6 to the Company's 1997 10-K.) 4.3 Registration Rights Agreement, dated as of December 1, 1997, by and among the Company, Federal-Mogul Financing Trust and Morgan Stanley & Co. Inc. as Initial Purchaser. (Incorporated by reference to Exhibit 4.7 to the Company's 1997 10-K.) 4.4 Indenture between Federal-Mogul Corporation and The Bank of New York, dated as of December 1, 1997, with respect to the Subordinated Debentures. (Incorporated by reference to Exhibit 4.8 to the Company's 1997 10-K.) 4.5 First Supplemental Indenture dated as of December 1, 1999 to the Indenture between Federal-Mogul Corporation and The Bank of New York, dated as of December 1, 1997, with respect to the Subordinated Debentures. (Incorporated by reference to Exhibit 4.9 to the Company's 1997 10-K.) 4.6 Indenture among Federal-Mogul Corporation and The Bank of New York, dated as of January 20, 1999. (Incorporated by reference to Exhibit 4.8 to the Company's 1998 10-K.) 4.7 First Supplemental Indenture dated as of December 29, 2000 to the Indenture dated as of January 20, 1999 among Federal-Mogul Corporation, certain subsidiaries as guarantors and The Bank of New York, as trustee. (Incorporated by reference to Exhibit 4.3 to the Company's January 17, 2001 8-K.) 4.8 Indenture among Federal-Mogul Corporation and Continental Bank, dated as of August 12, 1994. (Incorporated by reference to Exhibit 4.14 to the Company's Current Report on Form 8-K filed August 19, 1994.) * 4.9 First Supplemental Indenture dated as of July 8, 1998 to the Indenture dated as of August 12, 1994 among Federal-Mogul Corporation, certain subsidiaries as guarantors, and U.S. Bank Trust National Association (as successor to Continental Bank), as trustee. * 4.10 Second Supplemental Indenture dated as of October 9, 1998 to the Indenture dated as of August 12, 1994 among Federal-Mogul Corporation, certain subsidiaries as guarantors, and U.S. Bank Trust National Association (as successor to Continental Bank), as trustee. 4.11 Third Supplemental Indenture dated as of December 29, 2000 to the Indenture dated as of August 12, 1994 among Federal-Mogul Corporation, certain subsidiaries as guarantors, and U.S. Bank Trust National Association (as successor to Continental Bank), as trustee. 71 (Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K filed January 17, 2001. (the "January 17, 2001 8-K") 4.12 Indenture among Federal-Mogul Corporation and The Bank of New York, dated as of June 29, 1998. (Incorporated by reference to Exhibit 4.8 to the Company's 1999 10-K.) 4.13 First Supplemental Indenture dated as of June 30, 1998 to the Indenture dated as of June 29, 1998 among Federal-Mogul Corporation and The Bank of New York. (Incorporated by reference to Exhibit 4.9 to the Company's 1999 10-K.) * 4.14 Second Supplemental Indenture dated as of July 21, 1998 to the Indenture dated as of June 29, 1998 among Federal-Mogul Corporation and The Bank of New York. * 4.15 Third Supplemental Indenture dated as of October 9, 1998 to the Indenture dated as of June 29, 1998 among Federal-Mogul Corporation and The Bank of New York 4.16 Fourth Supplemental Indenture dated as of December 29, 2000 to the Indenture dated as of June 29, 1998 among Federal-Mogul Corporation, certain subsidiaries as guarantors and The Bank of New York, as trustee. (Incorporated by reference to Exhibit 4.2 to the Company's January 17, 2001 8-K.) 10.1 Federal-Mogul Corporation 1997 Amended and Restated Long-Term Incentive Plan, as adopted by the Shareholders of the Company on May 20, 1998. (Incorporated by reference to the Company's 1998 Definitive Proxy Statement on Form 14A.) 10.2 Amended and Restated Deferred Compensation Plan for Corporate Directors. (Incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for the year ended December 31, 1990 (the "1990 10-K".) 10.3 Supplemental Executive Retirement Plan, as amended. (Incorporated by reference to Exhibit 10.10 to the Company's 1992 10-K.) 10.4 Description of Umbrella Excess Liability Insurance for the Senior Management Team. (Incorporated by reference to Exhibit 10.11 to the Company's 1990 10-K.) 10.5 Federal-Mogul Corporation Non-Employee Director Stock Plan. (Incorporated by reference to Exhibit 4 to the Company's Registration Statement on Form S-8 (Registration No. 33-54301.) 10.6 Amended and Restated Declaration of Trust of Federal-Mogul Financing Trust, dated as of December 1, 1997. (Incorporated by reference to Exhibit 10.34 to the Company's 1997 10-K.) 10.7 Common Securities Guarantee Agreement, dated as of December 1, 1997, among the Company and Federal-Mogul Financing Trust. (Incorporated by reference to Exhibit 10.35 to the Company's 1997 10-K.) 10.8 Fourth Amended and Restated Credit Agreement dated as of December 29, 2000 among the Company, certain foreign subsidiaries, certain banks and other financial institutions and The Chase Manhattan Bank, as administrative agent. (Incorporated by reference to Exhibit 10.1 to the Company's January 17, 2001 8-K.) 10.9 Amended and Restated Domestic Subsidiary Guarantee dated as of December 29, 2000 by certain subsidiaries of the Company in favor of The Chase Manhattan Bank, as administrative agent. (Incorporated by reference to Exhibit 10.2 to the Company's January 17, 2001 8-K.) 10.10 Guarantee by F-M UK Holding Limited in favor of The Chase Manhattan Bank, as administrative agent. (Incorporated by reference to Exhibit 10.3 to the Company's January 17, 2001 8- K.) 72 10.11 Trust Agreement dated as of December 29, 2000 among the Company, certain subsidiaries and Wilmington Trust Company, as trustee. (Incorporated by reference to Exhibit 10.4 to the Company's January 17, 2001 8-K.) 10.12 Second Amended and Restated Trust Agreement dated as of December 29, 2000 among the Company, certain subsidiaries and First Union National Bank, as trustee. (Incorporated by reference to Exhibit 10.5 to the Company's January 17, 2001 8- K.) 10.13 Second Amended and Restated Trust Agreement dated as of December 29, 2000 among the Company, certain subsidiaries and ABN AMRO Trust Company (Jersey) Limited, as trustee, (Incorporated by reference to Exhibit 10.6 to the Company's January 17, 2001 8-K.) 10.14 Second Amended and Restated Domestic Pledge Agreement among the Company and certain subsidiaries in favor of First Union National Bank, as trustee. (Incorporated by reference to Exhibit 10.7 to the Company's January 17, 2001 8-K.) 10.15 Security Agreement dated as of December 29, 2000 by the Company and certain subsidiaries in favor of Wilmington Trust Company, as trustee. (Incorporated by reference to Exhibit 10.8 to the Company's January 17, 2001 8-K.) 10.16 Form of Mortgage or Deed of Trust prepared for execution by the Company or any applicable subsidiaries. (Incorporated by reference to Exhibit 10.9 to the Company's January17, 2001 8-K.) 10.17 Contract of Indemnity dated as of December 29, 2000 by the Company and certain subsidiaries with respect to a surety bond issued by Travelers Casualty & Surety Company of America. (Incorporated by reference to Exhibit 10.10 to the Company's January 17, 2001 8-K.) 10.18 Contract of Indemnity dated as of December 29, 2000 by the Company and certain subsidiaries with respect to a surety bond issued by Travelers Casualty & Surety Company of America. (Incorporated by reference to Exhibit 10.11 to the Company's January17, 2001 8-K.) 10.19 Contract of Indemnity dated as of December 29, 2000 by the Company and certain subsidiaries with respect to a surety bond issued by SAFECO Insurance Company of America. (Incorporated by reference to Exhibit 10.12 to the Company's January 17, 2001 8- K.) 10.20 Contract of Indemnity dated as of December 29, 2000 by the Company and certain subsidiaries with respect to a surety bond issued by National Fire Insurance Company of Hartford and Continental Casualty Company. (Incorporated by reference to Exhibit 10.13 to the Company's January 17, 2001 8-K.) *10.21 Fifth Amended and Restated Receivables Sale and Contribution Agreement, dated as of February 16, 2001, among the Company and Federal-Mogul Funding Corporation. *10.22 Sixth Amended and Restated Receivables Interest Purchase Agreement, dated as of February 16, 2001, in the amount of $450,000,000 among the Company, Federal-Mogul Funding Corporation, Falcon Asset Securitization Corporation and International Securitization Corporation. 10.23 Federal-Mogul Supplemental Key Executive Pension Plan dated January 1, 1999. (Incorporated by reference to Exhibit 10.11 to the Company's 1999 10-K.) *10.24 Employment Agreement dated as of January 10, 2001 and amended as of January 31, 2001, between the Company and Frank Macher. 73 *10.25 Change of Control Agreement dated January 10, 2001, between the Company and Frank Macher. *10.26 Employment Agreement dated as of January 10, 2001 and amended as of January 31, 2001, between the Company and Charles McClure. *10.27 Change of Control Agreement dated January 10, 2001, between the Company and Charles McClure. *10.28 Severance Agreement between the Company and Richard A. Snell, dated September 21, 2000. *21 Subsidiaries of the Registrant. *23.1 Consent of Ernst & Young LLP. *24 Powers of Attorney. - ------------------ * Filed Herewith (b) Reports on Form 8-K: On December 4, 2000 the Company filed a Current Report on Form 8-K to report the settlement of the litigation initiated against the Company by Owens-Illinois, Inc. (c) Separate financial statements of affiliates whose securities are pledged as collateral. 1) Financial statements of Federal-Mogul Products, Inc. and subsidiaries (formerly owned by Cooper Industries and the Moog Automotive division of Cooper Industries, Inc., its predecessor) including consolidated balance sheets as of December 31, 2000 and 1999, and the related statements of operations and comprehensive income and cash flows for the years ended December 31, 2000, 1999, the periods January 1, 1998 through October 9, 1998 and October 10, 1998 through December 31, 1998. 2) Financial statements of Federal-Mogul Ignition Company and subsidiaries (and the Cooper Automotive division of Cooper Industries, Inc., its predecessor) including consolidated balance sheets as of December 31, 2000 and 1999, and the related statements of operations and comprehensive income and cash flows for the years ended December 31, 2000 and 1999, the periods January 1, 1998 through October 9, 1998, and October 10, 1998 through December 31, 1998. 3) Financial statements of Federal-Mogul Aviation, Inc. (and Champion Aviation, Inc. a division of Cooper Industries, Inc., its predecessor) including consolidated balance sheets as of December 31, 2000 and 1999, and the related statements of operations and comprehensive income and cash flows for the years ended December 31, 2000, 1999 and the periods January 1, 1998 through October 9, 1998, and October 10, 1998 through December 31, 1998. 4) Financial statements of T&N Industries, Inc. and subsidiaries (and AE Goetze, Inc., its predecessor) including consolidated balance sheets as of December 31, 2000 and 1999, and the related statements of operations and comprehensive income and cash flows for the years ended December 31, 2000, 1999 and the periods January 1, 1998 through March 5, 1998, and March 6, 1998 through December 31, 1998. 5) Financial statements of Federal-Mogul Powertrain, Inc. and subsidiaries (and the AE Clevite Inc., its predecessor) including consolidated balance sheets as of December 31, 2000 and 1999, and the related statements of operations and comprehensive income and cash flows for the years ended December 31, 2000, 1999 and for the periods January 1, 1998 through March 5, 1998, and March 6, 1998 through December 31, 1998. 74 REPORT OF INDEPENDENT AUDITORS The Board of Directors Federal-Mogul Corporation We have audited the accompanying consolidated balance sheets of Federal- Mogul Products, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations and comprehensive income and cash flows for the years then ended, the period from October 10, 1998 through December 31, 1998 and for and the Moog Automotive Division of Cooper Industries (the Predecessor) for the period from January 1, 1998 through October 9, 1998. These financial statements are the responsibility of the respective 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 auditing standards generally accepted in the United States. 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 consolidated financial position of Federal-Mogul Products, Inc. and subsidiaries at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for the years then ended, the period from October 10, 1998 through December 31, 1998 and for the Predecessor for the period from January 1, 1998 through October 9, 1998, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Detroit, Michigan February 1, 2001 75 FEDERAL-MOGUL PRODUCTS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Millions of Dollars)
Predecessor ----------- Period from Period from October 10, January 1, Year Ended 1998 1998 December 31, through through -------------- December 31, October 9, 2000 1999 1998 1998 ------ ------ ------------ ----------- Net sales............................ $649.8 $724.2 $170.2 $666.7 Cost of products sold................ 485.0 521.6 120.1 458.8 Selling, general and administrative expenses............................ 102.7 119.5 28.5 106.4 Amortization expense................. 16.1 16.0 2.9 11.9 Restructuring charge................. 17.8 -- -- -- Adjustment of assets held for sale to fair value.......................... 30.8 -- -- -- Asbestos charge...................... 8.5 -- -- -- Integration costs.................... -- 3.5 -- -- Other expense, net................... 8.3 11.7 1.9 1.6 Interest expense..................... 20.0 20.1 15.1 -- ------ ------ ------ ------ Earnings (loss) before income taxes............................. (39.4) 31.8 1.7 88.0 Income taxes......................... (11.6) 15.1 1.0 38.4 ------ ------ ------ ------ Net earnings (loss).............. (27.8) 16.7 0.7 49.6 Components of Comprehensive Income (Loss): Minimum pension liability, net of tax............................... -- (4.2) -- -- Translation adjustments............ 7.8 -- (0.8) (1.6) ------ ------ ------ ------ Comprehensive Income (Loss)...... $(20.0) $ 12.5 $ (0.1) $ 48.0 ====== ====== ====== ======
See accompanying Notes to Consolidated Financial Statements. 76 FEDERAL-MOGUL PRODUCTS, INC. CONSOLIDATED BALANCE SHEETS (Millions of Dollars)
December 31, ----------------- 2000 1999 -------- -------- ASSETS Inventories.................................................. $ 156.6 $ 161.2 Other........................................................ 16.2 19.8 -------- -------- Total Current Assets..................................... 172.8 181.0 Property, plant and equipment, net........................... 249.4 254.0 Goodwill, net................................................ 418.0 412.5 Other intangibles, net....................................... 133.9 140.9 Asbestos-related insurance recoverable....................... 187.9 325.9 Other assets................................................. 27.5 47.9 -------- -------- Total Assets............................................. $1,189.5 $1,362.2 ======== ======== LIABILITIES AND NET PARENT INVESTMENT Accounts payable............................................. $ 73.6 $ 67.6 Accrued liabilities.......................................... 51.3 60.8 -------- -------- Total Current Liabilities................................ 124.9 128.4 Long-term portion of asbestos liability...................... 252.7 408.8 Other long-term liabilities.................................. 45.9 3.3 Net Parent Investment: Accumulated other comprehensive income..................... 2.8 (5.0) Intercompany transactions.................................. 763.2 826.7 -------- -------- Net Parent Investment.................................... 766.0 821.7 -------- -------- Total Liabilities and Net Parent Investment.............. $1,189.5 $1,362.2 ======== ========
See accompanying Notes to Consolidated Financial Statements. 77 FEDERAL-MOGUL PRODUCTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Millions of Dollars)
Predecessor ----------- Period from Period from October 10, January 1, Year Ended 1998 1998 December 31, through through -------------- December 31, October 9, 2000 1999 1998 1998 ------ ------ ------------ ----------- Cash flows from operating activities: Net earnings (loss)................ $(27.8) $ 16.7 $ 0.7 $ 49.6 Adjustments to reconcile to net cash provided by (used in) operating activities: Depreciation and amortization...... 41.7 41.0 10.1 29.8 Restructuring charge............... 17.8 -- -- -- Adjustment of assets held for sale and other long-lived assets to fair value........................ 30.8 -- -- -- Asbestos charge.................... 8.5 -- -- -- Changes in assets and liabilities: Accounts receivable.............. -- -- 16.7 (43.2) Inventories...................... 1.9 48.3 31.0 (18.7) Accounts payable................. (3.2) (40.5) (12.2) (28.6) Other assets and liabilities..... (16.9) (72.0) 0.5 (9.5) ------ ------ ------ ------ Net cash provided by (used in) operating activities.......... 52.8 (6.5) 46.8 (20.6) Cash flows from investing activities: Capital expenditures, net.......... (34.3) (34.3) -- (13.0) ------ ------ ------ ------ Net cash used in investing activities.................... (34.3) (34.3) -- (13.0) Cash flows from financing activities: Repayments of long-term debt....... -- (0.8) (0.3) (2.4) Transfers from (to) parent......... (18.5) 33.9 (40.6) 37.8 ------ ------ ------ ------ Net cash provided by (used in) financing activities.......... (18.5) 33.1 (40.9) 35.4 ------ ------ ------ ------ Increase (decrease) in cash.......... -- (7.7) 5.9 1.8 Cash, beginning of period...... -- 7.7 1.8 -- ------ ------ ------ ------ Cash, end of period............ $ -- $ -- $ 7.7 $ 1.8 ====== ====== ====== ======
See accompanying Notes to Consolidated Financial Statements. 78 FEDERAL-MOGUL PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1: Basis of Presentation The accompanying financial statements reflect the consolidated assets, liabilities and operations of Federal-Mogul Products, Inc. and its subsidiaries ("Products"). Products is a wholly owned subsidiary of Federal- Mogul Corporation ("Federal-Mogul"). Products' predecessor was previously known as the Moog Automotive Division of Cooper Industries, Inc., hereafter also referred to as "Predecessor". Federal-Mogul purchased the automotive divisions of Cooper, including Products, on October 9, 1998 for approximately $2.0 billion of which approximately $1.1 billion is attributable to Products. Products operates with financial and operational staff on a decentralized basis. Federal-Mogul provides certain centralized services for employee benefits administration, cash management, risk management, legal services, public relations, tax reporting and internal and external audit. Federal-Mogul bills Products for all such direct expenses incurred on its behalf. General expenses that are not directly attributable to the operations of Products have been allocated based on management's estimates, primarily driven by sales. Management believes that this allocation method is reasonable. The accompanying consolidated financial statements are presented as if Products had existed as an entity separate from its parent during the period presented and include the assets, liabilities, revenues and expenses that are directly related to Products' operations. Since the date of Federal-Mogul's acquisition of Products, the financial statements include the push-down of fair value adjustments to assets and liabilities, including goodwill, other intangible assets and property, plant and equipment and their related amortization and depreciation adjustments. Products' separate debt and related interest expense have been included in the consolidated financial statements. Because Products is fully integrated into its parent's cash management system, all of their cash requirements are provided by its parent and any excess cash generated by Products is transferred to its parent. Note 2: Summary of Significant Accounting Policies Principles of Consolidation: The consolidated financial statements include the accounts of Products, and its subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. 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. Inventories: Inventories are stated at the lower of cost or market. Prior to Federal-Mogul's acquisition of Products, cost was determined using the first-in, first-out ("FIFO") method. Subsequent to Federal-Mogul's acquisition of Products, cost is determined using the last-in, first-out method ("LIFO") for approximately 94% and 88% of the inventory at December 31, 2000 and 1999, respectively. The remaining inventories are recorded using FIFO. If inventories had been valued at current cost, amounts reported would have been increased by $5.3 million as of December 31, 2000. LIFO approximated cost at December 31, 1999. At December 31, inventories consisted of the following:
2000 1999 ------ ------ (Millions of Dollars) Raw materials............................................... $ 33.0 $ 30.4 Work-in-process............................................. 14.6 14.3 Finished goods.............................................. 109.0 116.5 ------ ------ $156.6 $161.2 ====== ======
79 FEDERAL-MOGUL PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Property, Plant and Equipment: Property, plant and equipment are stated at Federal-Mogul's cost. Depreciation is computed over the estimated useful lives of the related assets using primarily the straight-line method. This method is applied to assets, which in general have the following lives: buildings--10 to 40 years and machinery and equipment--3 to 12 years. At December 31, property, plant and equipment consisted of the following:
2000 1999 ------ ------ (Millions of Dollars) Property, plant and equipment: Land and land improvements.............................. $ 8.5 $ 11.4 Buildings............................................... 74.1 82.8 Machinery and equipment................................. 224.5 192.0 ------ ------ 307.1 286.2 Accumulated depreciation................................ (57.7) (32.2) ------ ------ $249.4 $254.0 ====== ======
Total rental expense under operating leases for the years ended December 31, 2000, 1999 and 1998 was $3.6 million, $4.8 million and $1.1 million, respectively, exclusive of property taxes, insurance and other occupancy costs generally payable by Products. Goodwill and Other Intangible Assets: At December 31, goodwill and other intangible assets, which result principally from acquisitions, consisted of the following:
Estimated Useful Life 2000 1999 ----------- ------ ------ (Millions of Dollars) Goodwill...................................... 40 years $442.5 $422.5 Accumulated amortization...................... (24.5) (10.0) ------ ------ 418.0 412.5 Trademarks.................................... 40 years 64.7 66.2 Developed technology.......................... 12-30 years 65.9 67.4 Assembled workforce........................... 15 years 12.4 13.3 Other......................................... 20 years 2.8 2.9 ------ ------ 145.8 149.8 Accumulated amortization...................... (11.9) (8.9) ------ ------ 133.9 140.9 ------ ------ Net Intangible Assets....................... $551.9 $553.4 ====== ======
Intangible assets are periodically reviewed for indicators of impairment. If indicators of impairment exist, an assessment of undiscounted future cash flows related to assets held for use or fair value for assets held for sale are evaluated accordingly. Intangible assets are amortized on a straight-line basis over their estimated useful lives. The 2000 impairment charge related to property, plant and equipment. There were no impairment charges in 1999. Revenue Recognition: Products recognizes revenue, estimated returns from product sales and related incentives when there is evidence of a sales agreement, the delivery of goods has occurred, the sales price is fixed or determinable and the collectibility of revenue is reasonably assured. Products generally records sales upon shipment of product to customers and transfer of title under standard commercial terms. 80 FEDERAL-MOGUL PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Recoverable Customer Engineering and Tooling: Pre-production tooling and engineering costs that Products will not own and that will be used in producing products under long-term supply arrangements are expensed as incurred unless the supply arrangement provides Products the noncancelable right to use the tools or the reimbursement of such costs is contractually guaranteed by the customer. Pre-production tooling and engineering costs that are owned by Products are capitalized as part of machinery and equipment. Shipping and Handling Costs: Products recognizes shipping and handling costs as a component of cost of products sold in the statement of operations. Net Parent Investment: The Net Parent Investment account reflects the balance of Products' historical earnings, intercompany amounts, income taxes accrued and deferred, postemployment liabilities, other transactions between Products and Federal-Mogul, foreign currency translations and equity pension adjustments. Currency Translation: Exchange adjustments related to international currency transactions are reflected in the consolidated statements of operations. Translation adjustments of Canadian subsidiaries for which the Canadian dollar is the functional currency are reflected in the consolidated financial statements as a component of accumulated other comprehensive income. Fair Value of Financial Instruments: The carrying amounts of certain financial instruments such as accounts payable approximate their fair value. Reclassifications: Certain items in the prior year financial statements have been reclassified to conform with the presentation used in 2000. Effect of Accounting Pronouncements: Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", was issued by the Financial Accounting Standards Board in June 1998. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. In June 2000, the FASB issued SFAS No. 138, which amends and clarifies certain guidance in SFAS No. 133. Products has implemented the appropriate systems and processes to adopt these statements effective January 1, 2001. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. For fair-value hedge transactions the fair value of the derivative instrument will generally be offset in the income statement by changes in the hedged item's fair value. For cashflow hedge transactions, the fair value of the derivative instrument will be reported in other comprehensive income. The ineffective portion of all hedges will be recognized in current-period earnings. The statements provide for the recognition of a cumulative adjustment for an accounting change, as of the date of adoption. The adoption of this FASB will not have a material impact on the financial position or the operating results of Products. In November 2000, the Emerging Issues Task Force ("EITF") of the FASB reached consensus on issue No. 00-14, Accounting for Certain Sales Incentives. The EITF addresses the recognition, measurement, and income statement classification for sales incentives offered voluntarily by a vendor without charge to customers that can be used in, or exercisable by a customers a result of a single transaction. The EITF is required to be applied beginning April 1, 2001. The effect of the adoption has not been finalized, however Products believes that the adoption will not have a material impact on its financial statements. Note 3: Acquisitions In November 2000, certain assets and liabilities were transferred to Products from another Federal-Mogul subsidiary, for an aggregate cost of $45.9 million, which approximated book value, in exchange for a note payable to the subsidiary (see Note 6). Note 4: Restructuring Charges In 2000, Products recognized a $17.8 million restructuring charge related to severance and exit costs. Employee severance costs of $13.9 million and exit costs of $3.9 million resulted primarily from the planned 81 FEDERAL-MOGUL PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) reorganization of the America's friction business. Net employee reductions are expected to be approximately 400 comprised of 1,200 reductions associated with facility closings offset by 800 new hires in new or expanded facilities. As of December 31, 2000 no facilities had been closed and no employees had been severed. Products expects to substantially complete this program in 2001. Also in 2000, Products recorded a $30.8 million charge for long-lived assets held for sale to fair value primarily associated with the actions of the 2000 restructuring program. Included in this charge is the write down of assets to their fair value for the closure of certain facilities associated with the reorganization of the America's friction business. Note 5: Commitments and Contingencies Asbestos Litigation Current businesses of Products, primarily Abex and Wagner, are involved as defendants in numerous court actions in the United States alleging personal injury from exposure to asbestos or asbestos-containing products, mainly involving friction products. Abex is a defendant in approximately 23,000 pending claims as of December 31, 2000. During 2000, approximately 14,700 new claims naming this defendant were received. Wagner is a defendant in approximately 17,300 claims as of December 31, 2000. During 2000, approximately 6,700 new claims naming this defendant were received. In 1998, Federal-Mogul acquired the capital stock of a former Cooper Automotive entity resulting in the assumption by Products of contractual liability, under certain circumstances, for all claims pending and to be filed in the future alleging exposure to certain Wagner automotive and industrial friction products and for all claims filed after August 29, 1998, alleging exposure to certain Abex (non-railroad and non-aircraft) friction products. In the fourth quarter of 2000, Products decreased its estimate of probable asbestos-related liability by $127 million, which was accompanied by an approximately equivalent reduction in the insurance recoverable asset. The revised estimate of probable asbestos-related liability principally resulted from a study performed by an econometric firm that specializes in these types of matters. The revised liability (approximately $253 million) represents Products' estimate for claims currently pending and those which can be reasonably estimated to be asserted in a future period. Products believes that these claims will be paid over the next 12 years. In arriving at the revised liability for Abex and Wagner, assumptions have been made regarding the number of claims anticipated to be received in the future period, the typical cost of settlement (which is sensitive to the alleged disease type and the jurisdiction in which the action is being brought), the rate of receipt of claims, and the timing of settlements. While management believes that the liability and receivable recorded for these claims are appropriate for anticipated losses arising from asbestos- related claims against Abex and Wagner for the covered period, given the nature and complexity of factors affecting the estimated liability and potential insurance recovery the actual liability and insurance recovery may differ. No assurance can be given that Abex and Wagner will not be subject to material additional liabilities and significant additional litigation relating to asbestos for the period covered. In the event that such liabilities exceed the amounts recorded by Products or the remaining insurance coverage, Products' results of operations, business, liquidity and financial condition could be materially adversely affected. The ultimate liability for all pending and future claims is highly uncertain due to the difficulty of forecasting the numerous variables that can affect the liability. Products does not believe it can reasonably determine the ultimate liability as the level of uncertainty is too great to provide for reasonable estimation of the number of future claims, the nature of such claims, and the cost to resolve them. As additional experience is gained regarding claims or other new information becomes available regarding the potential liability, Products will reassess its potential liability and revise the estimates as appropriate. Accordingly it is reasonably possible that the ultimate losses from asbestos-related claims will be greater than amounts recorded. Abex maintained product liability insurance coverage for most of the time that it manufactured products that contained asbestos. Products has the benefit of that insurance. Abex has been in litigation since 1982 with the insurance carriers of its primary layer of liability concerning coverage for asbestos claims. Abex also has 82 FEDERAL-MOGUL PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) substantial excess layer liability insurance coverage that, barring unforeseen insolvencies of excess carriers or other adverse events, should provide coverage for asbestos claims against Abex. Products believes that based on its review of the insurance policies, the viability of the insurance carriers, and advice from outside legal counsel, it is probable that Abex will receive payments for a substantial majority of the cost of claims. Wagner also maintained product liability insurance coverage for some of the time that it manufactured products that contained asbestos. Products has the benefit of that insurance. Primary layer liability insurance coverage for asbestos claims against Wagner is the subject of an agreement with Wagner's solvent primary carriers. The agreement provides for partial reimbursement of indemnity and defense costs for Wagner asbestos claims until exhaustion of aggregate limits. Wagner also has substantial excess layer liability insurance coverage which, barring unforeseen insolvencies of excess carriers or other adverse events, should provide coverage for asbestos claims against Wagner. Products believes that based on its review of the insurance policies, the financial viability of the insurance carriers, and advice from outside legal counsel, it is probable that Wagner will receive payment for a portion of the cost of claims. Based on the probable conclusion of collection under the insurance policies, Products has recorded a $188 million insurance recoverable asset related to the Abex and Wagner liability. Environmental Liabilities At December 31, 2000, Products had accruals of $5.1 million with respect to potential environmental liabilities, including $3.9 million classified as a long-term liability, based on Products' current estimate of the most likely amount of losses that it believes will be incurred. Environmental remediation costs are accrued based on estimates of known environmental remediation exposures. Such accruals are adjusted as information develops or circumstances change. Products has not discounted its environmental liability. While environmental liability accruals involve estimates that can have wide ranges of potential liability, Products has taken a proactive approach and has managed the costs in these areas over the years. Products does not believe that the nature of their products, production processes, or materials or other factors involved in the manufacturing process subject Products to unusual risks or exposures for environmental liability. Products' greatest exposure to inaccuracy in their estimates is with respect to the constantly changing definitions of what constitutes an environmental liability or an acceptable level of cleanup. Note 6: Long-Term Debt and Other Financing Arrangements Products' cash and indebtedness is managed by Federal-Mogul. The majority of the cash provided by or used by a particular division, including Products, is provided through this consolidated cash and debt management system. As a result, the amount of domestic cash or debt historically related to Products is not determinable. For purposes of Products' historical financial statements, identifiable debt was allocated to Products during each year with all of Products' positive or negative cash flows being treated as cash transferred to or from its parent. The specifically identifiable industrial revenue bonds (the "IRB") and specifically identifiable international debt was assigned to Products. Products has inter-company loans with Federal-Mogul in the amount of $278.9 million, which is included in the net parent investment balance for all years presented. In 2000, 1999 and 1998, Federal-Mogul charged interest on the inter-company loans based on the stated rate of 6.9%. In November 2000 Products issued a note payable to another subsidiary of Federal-Mogul for the transfer of certain assets and liabilities (see Note 3), in the amount of $45.9 million. Interest on this note is calculated at the stated rate of 6.154%. This note is included in Products balance sheet under the caption "Other Long-Term Liabilities". 83 FEDERAL-MOGUL PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For purposes of Products' historical financial statements, interest expense has been computed using the actual interest rate with respect to the IRB and Canadian short-term borrowings. Total interest related to long-term debt and short-term debt paid during 1999 and 1998 was $0.1 million and $0.5 million, respectively. There were no borrowings outstanding in 2000. Federal-Mogul has pledged 100% of Products' capital stock and also provided collateral in the form of a pledge of inventories, property, plant and equipment, real property and intellectual properties to secure certain outstanding debt of Federal-Mogul. In addition, Products has guaranteed fully and unconditionally, on a joint and several basis, the obligation to pay principal and interest under Federal-Mogul's Senior Credit Agreement and its publicly registered debt. Such pledges and guarantees have also been made by other subsidiaries of Federal-Mogul. Products participates in Federal-Mogul's accounts receivable securitization program. On an ongoing basis, Products sells certain accounts receivable to Federal-Mogul Funding Corporation ("FMFC"), a wholly owned subsidiary of Federal-Mogul, which then sells such receivables, without recourse, to a financial conduit. The transfers of these receivables are charged to the Net Parent Investment account. Products does not retain any interest in these receivables and the receivables are sold to FMFC at their carrying value. Note 7: Net Parent Investment Changes in net parent investment were as follows:
(Million of Dollars) Balance at January 1, 1998.................................. $852.4 Comprehensive income for the period January 1, 1999 through October 9, 1998.......................................... 48.0 Intercompany transactions, net............................ 53.1 ------ Balance at October 9, 1998.................................. $953.5 ====== Federal-Mogul initial investment in Products................ $833.2 Comprehensive loss for the period October 10, 1998 through December 31, 1998........................................ (0.1) Intercompany transactions, net............................ (22.6) ------ Balance at December 31, 1998................................ 810.5 Comprehensive income...................................... 12.5 Intercompany transactions, net............................ (1.3) ------ Balance at December 31, 1999................................ 821.7 Comprehensive loss........................................ (20.0) Intercompany transactions, net............................ (35.7) ------ Balance at December 31, 2000................................ $766.0 ======
The Company includes accumulated other comprehensive income in net parent investment. At December 31, 2000 accumulated other comprehensive income included $7.0 million of foreign currency translation adjustments and $(4.2) million of minimum pension funding. At December 31, 1999 accumulated other comprehensive income included $(0.8) million of foreign currency translation adjustments and $(4.2) million of minimum pension funding. Note 8: Income Taxes Products files a consolidated return with Federal-Mogul for U.S. federal income tax purposes. Federal income tax expense is calculated on a separate- return basis for financial reporting purposes. 84 FEDERAL-MOGUL PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Period Period October 10, January 1, 1998 1998 through through December 31, October 9, 2000 1999 1998 1998 ------ ----- ------------ ---------- (Millions of Dollars) Components of income tax expense (benefit): Current....................... $(15.0) $18.6 $1.0 $55.3 Deferred...................... 3.4 (3.5) -- (16.9) ------ ----- ---- ----- Income tax expense (benefit).. $(11.6) $15.1 $1.0 $38.4 ====== ===== ==== =====
A reconciliation between the statutory federal income tax rate and the effective tax rate is as follows:
Period Period October 10, January 1, 1998 1998 through through December 31, October 9, 2000 1999 1998 1998 ---- ---- ------------ ---------- U.S. Federal statutory rate.......... (35)% 35% 35% 35% State and local taxes................ -- 4 4 4 Nondeductible goodwill............... 6 8 24 5 Foreign / other...................... -- -- (6) -- --- --- --- --- Effective tax rate................... (29)% 47% 57% 44% === === === ===
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the related amounts used for income tax purposes. Significant components of the Company's net deferred tax asset are non-deductible accruals and amortization and depreciation timing differences.
2000 1999 ---------- ---------- (Millions of Dollars) Current deferred tax assets...................... $ 61.2 $ 75.5 Long-term deferred tax liabilities............... (85.3) (102.2) ---------- ---------- Net deferred tax liabilities..................... $ (24.1) $ (26.7) ========== ==========
As Products files a consolidated tax return with Federal-Mogul, the net deferred tax liability at December 31, 2000 and 1999 is a component of the net parent investment. Note 9: Pension Plans In 1998, prior to Federal-Mogul's acquisition of Products, the various pension plans of Products were merged into one plan of Cooper. As such, the related pension liabilities were recorded to net parent investment. This plan was assumed by Federal-Mogul in its acquisition of the automotive divisions of Cooper. This plan was required to be fully funded by Cooper prior to the acquisition by Federal-Mogul. During 2000, the company consolidated all domestic qualified defined benefit plans into one plan, the Federal-Mogul Corporation Pension Plan. For the year ended December 31, 2000, the charge to Products from Federal- Mogul was approximately $0.7 million. For the year ended December 31, 1999, the credit to Products from Federal-Mogul was approximately $1.0 million. During the period January 1, 1998 to October 9, 1998, the expense charged to Products by Cooper was $2.2 million. During the period October 10, 1998 to December 31, 1998, the credit to Products from Federal-Mogul was approximately $0.4 million. 85 FEDERAL-MOGUL PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The fully funded aggregated projected benefit obligation of $716.1 million was based upon a discount rate of 8%, and the fair value of the plan's assets was $852.5 million at December 31, 2000. Company contributions for 2000 and 1999 were $6.8 million and $0.5 million. Note 10: Postretirement Benefits Other Than Pensions As part of Cooper and subsequently Federal-Mogul, benefits provided to employees of Products under various postretirement plans other than pensions, all of which are unfunded, include retiree medical care, dental care, prescription drugs and life insurance, with medical care accounting for approximately 94% of the total. The majority of participants under such plans are retirees. The expense related to such plans approximated $1.8 million, $2.5 million, $1.7 million and $0.6 million, for 2000, 1999, the period January 1, 1998 to October 9, 1998, and the period October 10, 1998 to December 31, 1998, respectively. The unfunded projected benefit obligation of these plans aggregated approximately $34.6 million at December 31, 2000 based upon a discount rate of 7.75%. Note 11: Concentrations of Credit Risk and Other Products grants credit to their customers, which are primarily in the automotive industry. Credit risk with respect to trade receivables is generally diversified due to the large number of entities comprising Products' customer base and their dispersion across many different countries. Products performs periodic credit evaluations of their customers and generally does not require collateral. Products operates in a single business segment. Products manufactures and distributes brake friction materials and other products for use by the automotive aftermarket and in automobile assemblies. In addition, Products manufactures and distributes suspension, steering drive-line and brake system components and material for the automotive aftermarket. No single customer accounted for 10% or more of revenues in 2000, 1999 or 1998. All revenues and assets of Products reside in North America, principally in the United States. 86 REPORT OF INDEPENDENT AUDITORS The Board of Directors Federal-Mogul Corporation We have audited the accompanying consolidated balance sheets of Federal- Mogul Ignition Company and subsidiaries as of as of December 31, 2000 and 1999, and the related consolidated statements of operations and comprehensive income and cash flows for the years then ended, the period from October 10, 1998 through December 31, 1998 and for the Cooper Automotive Division of Cooper Industries (the Predecessor) for the period from January 1, 1998 through October 9, 1998. These financial statements are the responsibility of the respective 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 auditing standards generally accepted in the United States. 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 consolidated financial position of Federal-Mogul Ignition Company and subsidiaries at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for the years then ended, the period from October 10, 1998 through December 31, 1998 and for the Predecessor for the period from January 1, 1998 through October 9, 1998, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Detroit, Michigan February 1, 2001 87 FEDERAL-MOGUL IGNITION COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Millions of Dollars)
Predecessor ----------- Period from Period from October 10, January 1, Year Ended 1998 1998 December 31, through through -------------- December 31, October 9, 2000 1999 1998 1998 ------ ------ ------------ ----------- Net sales: Trade.............................. $846.5 $963.8 $233.1 $782.8 Affiliate.......................... 74.8 -- -- -- ------ ------ ------ ------ Total net sales.................. 921.3 963.8 233.1 782.8 Cost of products sold................ 701.2 687.6 169.1 589.7 Selling, general and administrative expenses............................ 141.6 124.8 40.1 100.6 Amortization expense................. 20.0 18.6 4.4 13.7 Integration costs.................... -- 5.0 -- -- Restructuring charge................. 15.9 -- -- -- Adjustment of assets held for sale fair value.......................... 4.9 -- -- -- Other expense, net................... 1.2 15.9 2.8 15.4 Interest expense..................... 32.9 34.3 15.1 1.5 ------ ------ ------ ------ Earnings before income taxes....... 3.6 77.6 1.6 61.9 Income taxes......................... 5.9 33.7 1.0 26.8 ------ ------ ------ ------ Net earnings (loss).............. (2.3) 43.9 0.6 35.1 Components of comprehensive income (loss): Minimum pension liability, net of tax............................... -- (4.1) -- -- Translation adjustments............ 15.7 (13.0) (2.4) 6.0 ------ ------ ------ ------ Comprehensive Income (Loss)...... $ 13.4 $ 26.8 $ (1.8) $ 41.1 ====== ====== ====== ======
See accompanying Notes to Consolidated Financial Statements 88 FEDERAL-MOGUL IGNITION COMPANY CONSOLIDATED BALANCE SHEETS (Millions of Dollars)
December 31, ------------------ 2000 1999 -------- -------- ASSETS Cash........................................................ $ 32.4 $ 3.3 Accounts receivable......................................... 36.3 49.5 Inventories................................................. 161.7 166.8 Other....................................................... 48.4 41.2 -------- -------- Total Current Assets.................................... 278.8 260.8 Property, plant and equipment, net.......................... 345.0 363.9 Goodwill, net............................................... 368.9 388.3 Other intangibles, net...................................... 249.1 260.9 Other assets................................................ 28.0 48.2 -------- -------- Total Assets............................................ $1,269.8 $1,322.1 ======== ======== LIABILITIES AND NET PARENT INVESTMENT Short-term debt............................................. $ -- $ 6.0 Accounts payable............................................ 73.8 84.4 Accrued compensation........................................ 15.9 7.3 Restructuring and rationalization reserves.................. 11.4 10.2 Accrued rebates and customer incentives..................... 8.6 12.4 Other accrued liabilities................................... 15.6 42.5 -------- -------- Total Current Liabilities............................... 125.3 162.8 Other long-term liabilities................................. 14.4 17.0 Net Parent Investment: Accumulated other comprehensive income.................... (3.8) (19.5) Intercompany transactions................................. 1,133.9 1,161.8 -------- -------- Net Parent Investment................................... 1,130.1 1,142.3 -------- -------- Total Liabilities and Net Parent Investment............. $1,269.8 $1,322.1 ======== ========
See accompanying Notes to Consolidated Financial Statements. 89 FEDERAL-MOGUL IGNITION COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (Millions of Dollars)
Predecessor ----------- Period from Period from October 10, January 1, Year Ended 1998 1998 December 31, through through -------------- December 31, October 9, 2000 1999 1998 1998 ------ ------ ------------ ----------- Cash flows from operating activities: Net earnings (loss)................ $ (2.3) $ 43.9 $ 0.6 $ 35.1 Adjustments to reconcile to net cash provided by (used in) operating activities: Depreciation and amortization...... 57.8 52.5 13.5 45.5 Restructuring charge............... 15.9 -- -- -- Adjustment of assets held for sale to fair value..................... 4.9 -- -- 1.0 Changes in assets and liabilities: Accounts receivable.............. 13.2 (10.8) (1.1) 12.4 Inventories...................... 5.1 46.2 4.8 (27.1) Accounts payable................. (10.6) (6.4) 29.1 (9.3) Other assets and liabilities..... 5.9 (33.3) (47.1) (0.8) ------ ------ ------ ------ Net cash provided by (used in) operating activities.......... 89.9 92.1 (0.2) 56.8 Cash flows from investing activities: Cash paid for acquired businesses.. -- (1.9) -- (8.5) Capital expenditures, net.......... (45.4) (30.1) (6.2) (29.4) ------ ------ ------ ------ Net cash used in investing activities.................... (45.4) (32.0) (6.2) (37.9) Cash flows from financing activities: Net short-term repayments.......... (6.0) -- (2.4) (33.1) Borrowings (repayments) of long- term debt......................... -- (10.8) (0.1) 0.3 Transfers from (to) parent......... (9.4) (59.1) (23.8) 58.2 ------ ------ ------ ------ Net cash provided by (used in) financing activities.......... (15.4) (69.9) (26.3) 25.4 ------ ------ ------ ------ Increase (decrease) in cash.......... 29.1 (9.8) (32.7) 44.3 Cash beginning of period....... 3.3 13.1 45.8 1.5 ------ ------ ------ ------ Cash end of period............. $ 32.4 $ 3.3 $ 13.1 $ 45.8 ====== ====== ====== ======
See accompanying Notes to Consolidated Financial Statements. 90 FEDERAL-MOGUL IGNITION COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Note 1: Basis of Presentation The accompanying financial statements reflect the consolidated assets, liabilities and operations of Federal-Mogul Ignition Company and its subsidiaries ("Ignition"). Ignition is a wholly owned subsidiary of Federal- Mogul Corporation ("Federal-Mogul"). Ignition's predecessor was previously known as the Cooper Automotive Division of Cooper Industries, Inc. hereafter also referred to as the "Predecessor". Federal-Mogul purchased the automotive divisions of Cooper, including Ignition, on October 9, 1998 for approximately $2.0 billion, of which approximately $986.0 million was attributable to Ignition. Ignition operates with financial and operations staff on a decentralized basis. Federal-Mogul provides (and Cooper had provided) certain centralized services for employee benefits administration, cash management, risk management, legal services, public relations, domestic tax reporting and internal and external audit. Federal-Mogul bills Ignition for all such direct expenses incurred on its behalf. General expenses that are not directly attributable to the operations of Ignition have been allocated based on management's estimates, primarily driven by sales. Management believes that this allocation method is reasonable. The accompanying consolidated financial statements are presented as if Ignition had existed as an entity separate from its parent during the period presented and include the assets, liabilities, revenues and expenses that are directly related to Ignition's operations. Since the date of Federal-Mogul's acquisition of Ignition, the financial statements include the push-down of fair value adjustments to assets and liabilities, including goodwill, other intangible assets and property, plant and equipment and their related amortization and depreciation adjustments. Ignition's separate debt and related interest expense have been included in the consolidated financial statements. Because Ignition is fully integrated into its parent's cash management system, all of their domestic cash requirements are provided by its parent and any excess cash generated by Ignition is transferred to the parent. Note 2: Summary of Significant Accounting Policies Principles of Consolidation: The consolidated financial statements include the accounts of Ignition, and its subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. 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 the accompanying notes. Actual results could differ from those estimates. Inventories: Inventories are carried at cost or, if lower, net realizable value. Prior to Federal-Mogul's acquisition of Ignition, cost was determined using the first-in, first-out ("FIFO") method. Subsequent to Federal-Mogul's acquisition of Ignition, cost is determined using the last-in, first-out method ("LIFO") for approximately 72% and 62% of the inventory at December 31, 2000 and 1999, respectively. The remaining inventories are recorded using FIFO. If inventories had been valued at current cost amounts reported would have been decreased by $2.7 million, as of December 31, 1999. LIFO approximated cost at December 31, 2000. At December 31, inventories consisted of the following:
2000 1999 ------ ------ (Millions of Dollars) Raw materials............................................. $ 43.3 $ 35.7 Work-in-process........................................... 42.0 38.8 Finished goods............................................ 80.4 92.3 ------ ------ 165.7 166.8 Reserve for inventory valuation........................... (4.0) -- ------ ------ $161.7 $166.8 ====== ======
91 FEDERAL-MOGUL IGNITION COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Property, Plant and Equipment: Property, plant and equipment are stated at Federal-Mogul's cost. Depreciation is provided over the estimated useful lives of the related assets using primarily the straight-line method. This method is applied to assets, which in general have the following lives: buildings--10 to 40 years; and machinery and equipment--3 to 12 years. At December 31, property, plant and equipment consisted of the following:
2000 1999 ------ ------ (Millions of Dollars) Property, plant and equipment: Land and land improvements.............................. $ 5.6 $ 12.1 Buildings............................................... 79.2 89.4 Machinery and equipment................................. 330.5 305.4 ------ ------ 415.3 406.9 Accumulated depreciation................................ (70.3) (43.0) ------ ------ $345.0 $363.9 ====== ======
Total rental expense under operating leases for the years ended December 31, 2000, 1999 and 1998 was $1.7 million, $3.2 million and $5.4 million, respectively, exclusive of property taxes, insurance and other occupancy costs generally payable by Ignition. Goodwill and Other Intangible Assets: At December 31, goodwill and other intangible assets, which result principally from acquisitions, consisted of the following:
Estimated Useful Life 2000 1999 ----------- ------ ------ (Millions of Dollars) Goodwill...................................... 40 years $390.4 $399.5 Accumulated amortization...................... (21.5) (11.2) ------ ------ 368.9 388.3 Trademarks.................................... 40 years 180.2 181.5 Developed technology.......................... 12-30 years 67.7 68.2 Assembled workforce........................... 15 years 18.8 20.2 Other......................................... 20 years 2.7 2.8 ------ ------ 269.4 272.7 Accumulated amortization...................... (20.3) (11.8) ------ ------ 249.1 260.9 ------ ------ Net Intangible Assets....................... $618.0 $649.2 ====== ======
Intangible assets are periodically reviewed for impairment indicators. If impairment indicators exist, an assessment of undiscounted future cash flows related to assets held for use or fair value for assets held for sale are evaluated accordingly. Intangible assets are amortized on a straight-line basis over their estimated useful lives. Impairment charges recorded in 2000 related primarily to assets held for sale. Net Parent Investment: The Net Parent Investment account reflects the balance of Ignition's historical earnings, intercompany amounts, income taxes accrued and deferred, postemployment liabilities, other transactions between Ignition and Federal-Mogul, foreign currency translations and equity pension adjustments. 92 FEDERAL-MOGUL IGNITION COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Revenue Recognition: Ignition recognizes revenue, estimated returns from product sales and related incentives when there is evidence of a sales agreement, the delivery of goods has occurred, the sales price is fixed or determinable and the collectibility of revenue is reasonably assured. Ignition generally records sales upon shipment of product to customers and transfer of title under standard commercial terms. Affiliate sales are transferred at cost. Recoverable Customer Engineering and Tooling: Pre-production tooling and engineering costs that Ignition will not own and that will be used in producing products under long-term supply arrangements are expensed as incurred unless the supply arrangement provides Ignition the noncancelable right to use the tools or the reimbursement of such costs is contractually guaranteed by the customer. Pre-production tooling and engineering costs that are owned by Ignition are capitalized as part of machinery and equipment. Shipping and Handling Costs: Ignition recognizes shipping and handling costs as a component of cost of products sold in the statement of operations. 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 foreign subsidiaries for which the United States dollar is not the functional currency are reflected in the consolidated financial statements as a component of accumulated other comprehensive income. Reclassifications: Certain items in the prior year financial statements have been reclassified to conform with the presentation used in 2000. Fair Value of Financial Instruments: The carrying amounts of certain financial instruments such as cash, accounts receivable, accounts payable and debt approximate their fair values. Effect of Accounting Pronouncements: Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", was issued by the Financial Accounting Standards Board in June 1998. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. In June 2000, the FASB issued SFAS No. 138, which amends and clarifies certain guidance in SFAS No. 133. Ignition has implemented the appropriate systems and processes to adopt these statements effective January 1, 2001. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. For fair-value hedge transactions the fair value of the derivative instrument will generally be offset in the income statement by changes in the hedged item's fair value. For cash-flow hedge transactions, the fair value of the derivative instrument will be reported in other comprehensive income. The ineffective portion of all hedges will be recognized in current-period earnings. The statements provide for the recognition of a cumulative adjustment for an accounting change, as of the date of adoption. The adoption of this FASB will not have a material impact on the financial position or the operating results of Ignition. In November 2000, the Emerging Issues Task Force ("EITF") of the FASB reached consensus on issue No. 00-14, Accounting for Certain Sales Incentives. The EITF addresses the recognition, measurement, and income statement classification for sales incentives offered voluntarily by a vendor without charge to customers that can be used in, or exercisable by a customers a result of a single transaction. The EITF is required to be applied beginning April 1, 2001. The effect of the adoption has not been finalized, however Ignition believes that the adoption will not have a material impact on its financial statements. Derivative Financial Instruments: On a recurring basis, foreign currency forward exchange contracts and commodity contracts are entered into to reduce risks of adverse changes in foreign exchange rates and commodity prices. All contracts are hedges of actual or anticipated transactions with the gain or loss on the contract recognized in the same period and in the same category of income or expense as the underlying hedged 93 FEDERAL-MOGUL IGNITION COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) transaction. Ignition did not enter into speculative derivative transactions or hedges of anticipated transactions unless there is a high probability the transactions will occur. Due to the short term of contracts and a restrictive policy, contract terminations or anticipated transactions that do not occur are rare and insignificant events that are accounted for through income in the period they occur. Note 3: Acquisitions Ignition completed one acquisition in 1999, which had an aggregate cost of $1.9 million, with $1.3 million of goodwill recorded. Ignition completed one acquisition in 1998, which had an aggregate cost of $8.5 million, with $5.5 of goodwill recorded. The operations of these businesses were not significant on a pro forma basis to historical operations of Ignition. The acquisitions have been accounted for as purchases and the results of the acquisitions are included in the consolidated statements of operations since the respective acquisition dates. Note 4: Restructuring In 2000, Ignition recognized a $15.9 million restructuring charge related to severance and exit costs. Employee severance costs of $10.4 million and exit costs of $5.5 million resulted from the planned closure of Australian and Taiwanese sales, administrative, and distribution facilities; consolidation of an administrative facility at Ignition's Ohio facility; consolidation of Ignition's Americas wiper and lighting businesses; and various other programs in Europe. Net employee reductions are expected to be approximately 165 comprised of 565 reductions associated with facility closings offset by 400 new hires in new or expanded facilities. As of December 31, 2000 180 employees had been severed. Ignition expects to substantially complete these actions in 2001. Also in 2000, Ignition recorded a $4.9 million charge for long-lived assets held for sale to fair value primarily associated with the planned closure of Australian and Taiwanese sales, administrative, and distribution facilities; and consolidation of an administrative facility at Ignition's Ohio facility Note 5: Commitments and Contingencies At December 31, 2000, Ignition had accruals of $11.8 million with respect to potential environmental liabilities, including $5.4 million classified as a long-term liability, based on Ignition's current estimate of the most likely amount of losses that it believes will be incurred. Environmental remediation costs are accrued based on estimates of known environmental remediation exposures. Such accruals are adjusted as information develops or circumstances change. The environmental liability accrual includes $3.8 million related to sites owned by Ignition and $8.0 million for retained environmental liabilities related to sites previously owned by Ignition and third-party sites where Ignition was a contributor. Third-party sites usually involve multiple contributors where Ignition's liability will be determined based on an estimate of Ignition's proportionate responsibility for the total cleanup. The amounts actually accrued for such sites are based on these estimates as well as an assessment of the financial capacity of the other potentially responsible parties. Ignition has not discounted its environmental liability. While the environmental liability involves estimates that can have wide ranges of potential liability, Ignition has taken a proactive approach and has managed environmental costs over the years. Ignition does not believe that the nature of their products, production processes, materials or other factors involved in the manufacturing process is subject to unusual risks or exposures for environmental liability. Ignition's greatest exposure to inaccuracy in their estimates is with respect to the constantly changing definitions of what constitutes an environmental liability or an acceptable level of cleanup. 94 FEDERAL-MOGUL IGNITION COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 6: Long-Term Debt and Other Financing Arrangements Ignition's cash and indebtedness is managed by Federal-Mogul. The majority of the cash provided by or used by a particular division, including Ignition's, is provided through this consolidated cash and debt management system. As a result, the amount of domestic cash or debt historically related to Ignition is not determinable. For purposes of Ignition's historical financial statements, identifiable debt was allocated to Ignition during each year with all of Ignition's positive or negative cash flows being treated as cash transferred to or from its parent. Ignition has an intercompany loan with Federal-Mogul in the amount of $508.0 million, which is included in the net parent investment balance at December 31, 2000 and 1999. In 2000, 1999 and 1998, Federal-Mogul charged interest on the intercompany loan based on the stated rate of 6.8%. For purposes of Ignition's historical financial statements, interest expense has been computed using the actual interest rate with respect to international short-term borrowings. Total interest related to short-term debt paid during 2000, 1999 and 1998 was $1.0 million, $0.8 million and $1.5 million, respectively. Federal-Mogul has pledged 100% of Ignition's capital stock and also provided collateral in the form of a pledge of inventories, property, plant and equipment, real property and intellectual properties to secure certain outstanding debt of Federal-Mogul. In addition, Ignition has guaranteed fully and unconditionally, on a joint and several basis, the obligation to pay principal and interest under Federal-Mogul's Senior Credit Agreement and its publicly registered debt. Such pledges and guarantees have also been made by other subsidiaries of Federal-Mogul. Ignition participates in Federal-Mogul's accounts receivable securitization program. On an ongoing basis, Ignition's domestic sells certain accounts receivable to Federal-Mogul Funding Corporation ("FMFC"), a wholly owned subsidiary of Federal-Mogul, which then sells such receivables, without recourse, to a financial conduit. The transfers of these receivables are charged to the net parent investment account. Ignition does not retain any interest in these receivables and the accounts receivable are sold to FMFC at their carrying value. Note 7: Net Parent Investment Changes in net parent investment were as follows:
(Millions of Dollars) Balance at January 1, 1998.................................. $1,097.1 Comprehensive income for the period January 1, 1998 through October 9, 1998.................................. 41.1 Intercompany transactions, net............................ 95.6 -------- Balance at October 9, 1998.................................. $1,233.8 ======== Federal-Mogul initial investment in Ignition................ $1,462.2 Comprehensive loss for the period October 10, 1998 through December 31, 1998........................................ (1.8) Intercompany transactions, net............................ (52.2) -------- Balance at December 31, 1998................................ 1,408.2 Comprehensive income...................................... 26.8 Intercompany transactions, net............................ (292.7) -------- Balance at December 31, 1999................................ 1,142.3 Comprehensive income...................................... 13.4 Intercompany transactions, net............................ (25.6) -------- Balance at December 31, 2000................................ $1,130.1 ========
95 FEDERAL-MOGUL IGNITION COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company includes accumulated other comprehensive income in Net Parent Investment. At December 31, 2000 accumulated other comprehensive income included $0.3 million of foreign currency translation adjustments and $(4.1) million of minimum pension funding. At December 31, 1999 accumulated other comprehensive income included $(15.4) million of foreign currency translation adjustments and $(4.1) million of minimum pension funding. Note 8: Income Taxes Ignition files a consolidated return with its parent for U.S. federal income tax purposes. Federal income tax expense is calculated on a separate- return basis for financial reporting purposes.
Period Period Year ended October 10, January 1, December 1998 1998 31, through through ------------ December 31, October 9, 2000 1999 1998 1998 ----- ----- ------------ ---------- (Millions of Dollars) Components of income tax expense (benefit): Current........................ $ 8.7 $37.7 $1.0 $ 43.8 Deferred....................... (2.8) (4.0) -- (17.0) ----- ----- ---- ------ Income tax expense............. $ 5.9 $33.7 $1.0 $ 26.8 ===== ===== ==== ======
Period Period October 10, January 1, Year ended 1998 1998 December 31, through through --------------- December 31, October 9, 2000 1999 1998 1998 ------ ------ ------------ ---------- Effective tax rate reconciliation: U.S. Federal statutory rate...................... 35% 35% 35% 35% State and local taxes...... 4 4 4 4 Nondeductible goodwill..... 75 5 50 8 Foreign / other............ 50 (1) (26) (4) ------ ------ --- --- Effective tax rate......... 164% 43% 63% 43% ====== ====== === ===
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the related amounts used for income tax purposes. Significant components of the Ignition net deferred tax asset are non-deductible accruals and amortization and depreciation timing differences.
2000 1999 ----------- ---------- (Millions of Dollars) Current deferred tax assets..................... $ 40.2 $ 35.6 Long term deferred tax liabilities.............. (100.8) (92.2) ----------- ---------- Net deferred tax liabilities.................... $ (60.6) $ (56.6) =========== ==========
As Ignition files a consolidated tax return with Federal-Mogul, the net deferred tax asset at December 31, 1999 and 1998 is a component of the net parent investment. 96 FEDERAL-MOGUL IGNITION COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 9: Pension Plans In 1998, prior to Federal-Mogul's acquisition of Ignition, the various pension plans of Ignition were merged into one plan of Cooper. As such, the related pension liabilities were recorded to net parent investment. This plan was assumed by Federal-Mogul in its acquisition of the automotive divisions of Cooper. This plan was required to be fully funded by Cooper prior to the acquisition by Federal-Mogul. In 2000, the company consolidated all domestic qualified defined benefit plans into one plan, the Federal Mogul Corporation Pension Plan. The credit to Ignition, as at December 31, 2000 was approximately $0.3 million. The credit to Ignition for the year ended December 31, 1999 was approximately $2.8 million. The expense charged to Ignition by Cooper during the period January 1, 1998 to October 9, 1998 was $7.3 million. The credit to Ignition from Federal-Mogul for the period October 10, 1998 to December 31, 1998 was $0.5 million. The fully funded aggregated projected benefit obligation of such domestic and international plans of $721.8 million and $61.5 million was based upon a discount rate of 8% and 6.75%. The fair value of the plan's assets at December 31, 2000 was $852.5 million and $68.5 million for domestic and international plans, respectively. Company contributions for 2000 were $7.5 million and $1.8 million for domestic and international plans, respectively. Note 10: Postretirement Benefits Other Than Pensions As part of Cooper and subsequently Federal-Mogul, benefits provided to employees of Ignition under various postretirement plans other than pensions, all of which are unfunded, include retiree medical care, dental care, prescription drugs and life insurance, with medical care accounting for approximately 94% of the total. The majority of participants under such plans are retirees. The expense related to such plans approximated $11.5 million, $11.8 million, $4.4 million, and $2.8 million for 2000, 1999, the period January 1, 1998 to October 9, 1998 and the period October 10, 1998 to December 31, 1998, respectively. The unfunded projected benefit obligation of these plans aggregated approximately $163.3 million at December 31, 2000, based upon a discount rate of 7.75% Note 11: Concentrations of Credit Risk and Other Ignition grants credit to their customers, which are primarily in the automotive industry. Credit risk with respect to trade receivables is generally diversified due to the large number of entities comprising Ignition's customer base and their dispersion across many different countries. Ignition performs periodic credit evaluations of their customers and generally does not require collateral. Ignition operates in a single business segment. Ignition manufactures and distributes spark plugs, wipe blades, lamps, and other products for use by the automotive aftermarket and in automobile assemblies. No single customer accounted for 10% or more of revenues in 2000, 1999 or 1998. Net sales to customers outside the United States, principally to European customers, were 19%, 20%, and 25% of the total net sales for the years ended December 31, 2000, 1999 and 1998 respectively. Note 12: Subsequent Event In 2001, Ignition elected to hold one of its wholly owned subsidiary for sale. The subsidiary had net sales of $68.6 million for the year ended December 31, 2000 and total assets of $113.7 million as of December 31, 2000. Net of tax, Ignition does not expect the gain or loss on the sale to be material. 97 REPORT OF INDEPENDENT AUDITORS The Board of Directors Federal-Mogul Corporation: We have audited the accompanying balance sheets of Federal-Mogul Aviation, Inc. as of December 31, 2000 and 1999 and the related statements of operations and cash flows for the years then ended, the period from October 10, 1998 through December 31, 1998 and for the Aviation Division of the Cooper Automotive Division of Cooper Industries (the Predecessor) for the period from January 1, 1998 through October 9, 1998. These financial statements are the responsibility of the respective 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 auditing standards generally accepted in the United States. 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 Federal-Mogul Aviation, Inc. at December 31, 2000 and 1999 and the results of its operations and its cash flows for the years then ended, the period from October 10, 1998 through December 31, 1998 and for the Predecessor for the period from January 1, 1998 through October 9, 1998, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Detroit, Michigan March 1, 2001 98 FEDERAL-MOGUL AVIATION, INC. STATEMENTS OF OPERATIONS (thousands of dollars)
Year Ended December 31, Predecessor --------------- ----------- October 10- January 1- December 31, October 9, 2000 1999 1998 1998 ------- ------- ------------ ----------- Net sales............................ $68,616 $64,584 $13,628 $47,034 Cost of products sold................ 41,392 38,977 8,641 30,298 Selling, general and administrative expenses............................ 7,146 7,228 1,380 5,446 Amortization expense................. 2,219 2,092 289 309 Other expense, net................... 1,986 1,858 1,618 12 ------- ------- ------- ------- Earnings before income taxes....... 15,873 14,429 1,700 10,969 Income taxes......................... 6,875 6,278 776 4,314 ------- ------- ------- ------- Net Earnings....................... $ 8,998 $ 8,151 $ 924 $ 6,655 ======= ======= ======= =======
See accompanying Notes to Financial Statements. 99 FEDERAL-MOGUL AVIATION, INC. BALANCE SHEETS (thousands of dollars)
December 31, ----------------- 2000 1999 -------- -------- ASSETS Cash........................................................ $ 1 $ 1 Other receivables........................................... 25 378 Inventories................................................. 10,805 11,454 Perishable tooling and supplies............................. 1,942 1,710 -------- -------- Total current assets...................................... 12,773 13,543 Property, plant and equipment, less accumulated depreciation............................................... 18,223 19,073 Goodwill, less accumulated amortization..................... 81,938 84,097 Other intangibles, less accumulated amortization............ 759 818 Other assets................................................ 6 51 -------- -------- Total Assets.............................................. $113,699 $117,582 ======== ======== LIABILITIES AND NET PARENT INVESTMENT Accounts payable............................................ $ 1,743 $ 4,598 Accrued compensation........................................ 90 125 Other accrued liabilities................................... 751 1,517 -------- -------- Total current liabilities................................. 2,584 6,240 Net parent investment....................................... 111,115 111,342 -------- -------- Total Liabilities and Net Parent Investment............... $113,699 $117,582 ======== ========
See accompanying Notes to Financial Statements. 100 FEDERAL-MOGUL AVIATION, INC. STATEMENTS OF CASH FLOWS (thousands of dollars)
Year Ended December 31, Predecessor ----------------- ----------- October 10 January 1 through through December 31, October 9, 2000 1999 1998 1998 ------- -------- ------------ ----------- Cash flows from operating activities: Net Earnings.................... $ 8,998 $ 8,151 $ 924 $ 6,655 Adjustments to reconcile to net cash provided by operating activities: Depreciation expense............ 1,509 1,286 519 2,122 Amortization expense............ 2,219 2,092 289 309 Changes in assets and liabilities: Other receivables............. 353 (378) 600 (1,618) Inventories................... 649 5,120 300 (4,883) Accounts payable and accrued liabilities.................. (3,621) 660 (795) (1,624) Other assets and liabilities, net.......................... (3) 523 -- 23 ------- -------- ------- ------- Net cash provided by operating activities....... 10,104 17,454 1,837 984 Cash flows from investing activities: Capital expenditures............ (879) (799) (275) (420) Cash flows from financing activities: Net inter-company activity with parent......................... (9,225) (16,655) (1,562) (564) ------- -------- ------- ------- Change in cash.................... -- -- -- -- Cash at beginning of period..................... 1 1 1 1 ------- -------- ------- ------- Cash at end of period....... $ 1 $ 1 $ 1 $ 1 ======= ======== ======= =======
See accompanying Notes to Financial Statements. 101 FEDERAL-MOGUL AVIATION, INC. NOTES TO FINANCIAL STATEMENTS Note 1: Basis of Presentation The accompanying financial statements reflect the assets, liabilities and operations of Federal-Mogul Aviation, Inc. ("Aviation"). Aviation is a wholly owned subsidiary of Federal-Mogul Corporation ("Federal-Mogul"). Aviation was previously an operating unit included in the Cooper Automotive Division of Cooper Industries, Inc. ("Cooper"). Federal-Mogul purchased the automotive divisions of Cooper, including Aviation, on October 9, 1998 Aviation operates with complete financial and operations staff on a decentralized basis. Its parent provides certain centralized services for employee benefits administration, cash management, risk management, legal services, public relations, domestic tax reporting and internal and external audit. Its parent bills Aviation for all direct costs incurred on behalf of Aviation. General corporate, accounting, tax, legal and other administrative costs that are not directly attributable to the operations of Aviation have been allocated to Aviation in the accompanying financial statements. The accompanying financial statements are presented as if Aviation had existed as an entity separate from its parent during the period presented and include the assets, liabilities, revenues and expenses that are directly related to Aviation's operations. Since the date of Federal-Mogul's acquisition of Aviation, the financial statements include the push-down of fair value adjustments to assets and liabilities, including goodwill, other intangible assets and property, plant and equipment and their related amortization and depreciation adjustments. Because Aviation is fully integrated into its parent's worldwide cash management system, all of their cash requirements are provided by its parent and any excess cash generated by Aviation is transferred to its parent. Aviation participates in Federal-Mogul's accounts receivable securitization program. On an ongoing basis, Aviation sells certain accounts receivable to Federal-Mogul Funding Corporation ("FMFC"), a wholly owned subsidiary of Federal-Mogul, which then sells such receivables, without recourse, to a financial conduit. The transfers of these receivables are charged to the net parent investment account. Aviation does not retain any interest in these receivables and the accounts receivable are sold at carrying value. Note 2: Summary of Significant Accounting Policies Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Inventories: Inventories are carried at cost or, if lower, net realizable value. Prior to Federal-Mogul's acquisition of Aviation, cost was determined using the first-in, first-out ("FIFO") method. Subsequent to Federal-Mogul's acquisition of Aviation, cost was determined using the last-in, first-out ("LIFO") method, which approximated FIFO for all years presented. At December 31, inventories consisted of the following (in thousands):
2000 1999 ------- ------- Raw materials............................................. $ 3,382 $ 3,067 Work-in-process........................................... 6,136 6,795 Finished goods............................................ 1,287 1,592 ------- ------- Net inventories....................................... $10,805 $11,454 ======= =======
102 FEDERAL-MOGUL AVIATION, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Revenue Recognition: Aviation recognizes revenues and the related customer incentives when there is evidence of a sales agreement, the delivery of the goods has occurred, the sales price is fixed or determinable and the ability to collect the revenue is reasonably assured. Aviation generally records revenue upon shipment of product to the customer, which coincides with the transfer of title under standard commercial terms. Research and Development Costs: Aviation expenses research and development costs when incurred. Research and development costs were $1.6 million and $1.9 million for the years ended December 31, 2000 and 1999 and $1.4 million and $0.4 million for the period from January 1, 1998 through October 9, 1998 and October 10, 1998 through December 31, 1998, respectively. Property, Plant and Equipment: Property, plant and equipment are stated at Federal-Mogul's cost. Depreciation is provided over the estimated useful lives of the related assets using the straight-line method, which in general are depreciated over the following lives: buildings--10 to 40 years and machinery and equipment-- 3 to 20 years. At December 31, property, plant and equipment consisted of the following (in thousands):
2000 1999 ------- ------- Property, plant and equipment: Land.................................................. $ 110 $ 110 Buildings............................................. 9,288 8,656 Machinery and equipment............................... 11,270 11,390 Construction-in-progress.............................. 869 722 ------- ------- 21,537 20,878 Accumulated depreciation.............................. (3,314) (1,805) ------- ------- $18,223 $19,073 ======= =======
Goodwill and Other Intangible Assets: At December 31, goodwill and other intangible assets, which resulted from Federal-Mogul's acquisition of Aviation, consisted of the following (in thousands):
Estimated Useful Life 2000 1999 ----------- ------- ------- Goodwill.................................... 40 years $86,406 $86,406 Accumulated amortization.................... (4,468) (2,309) ------- ------- Net goodwill................................ $81,938 $84,097 ======= ======= Assembled workforce......................... 15 years $ 891 $ 891 Accumulated amortization.................... (132) (73) ------- ------- Net assembled workforce..................... $ 759 $ 818 ======= =======
Intangible assets are periodically reviewed for impairment indicators. If impairment indicators exist, an assessment of undiscounted future cash flows related to assets held for use or fair value for assets held for sale are evaluated accordingly. Intangible assets are amortized on a straight-line basis over their estimated useful lives. Net Parent Investment: The Net Parent Investment account includes Aviation's historical earnings, intercompany amounts, income taxes deferred and payable, postemployment benefit liabilities and other transactions between Aviation and its parent. Fair Value of Financial Instruments: The carrying amounts of certain financial instruments such as other receivables and accounts payable approximate their fair value for all years presented. 103 FEDERAL-MOGUL AVIATION, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 3: Net Parent Investment Changes in net parent investment during the three years ended December 31, were as follows (in thousands):
Balance at January 1, 1998...................................... $ 42,904 Net inter-company transactions with parent.................... (1,927) Net income for period from January 1, 1998 to October 9, 1998......................................................... 6,655 -------- Balance at October 9, 1998...................................... $ 47,632 ======== Federal-Mogul's initial investment in Aviation.................. $ 81,979 Net inter-company transactions with parent.................... 1,290 Net income for period from October 10, 1998 to December 31, 1998......................................................... 924 -------- Balance at December 31, 1998.................................... 84,193 Net inter-company transactions with parent.................... 18,998 Net income.................................................... 8,151 -------- Balance at December 31, 1999.................................... 111,342 Net inter-company transactions with parent.................... (9,225) Net income.................................................... 8,998 -------- Balance at December 31, 2000.................................... $111,115 ========
Intercompany transactions are principally cash transfers and non-cash charges between Aviation and its parent. Aviation has an inter-company loan with Federal-Mogul in the amount of $30.5 million, which is included in the net parent investment balance at December 31, 2000, 1999 and 1998. In 2000, 1999 and 1998 Federal-Mogul charged interest on this balance based on the stated rate of 6.9%. Federal-Mogul has pledged 100% of Aviation's capital stock and also provided collateral in the form of a pledge of inventories, property, plant and equipment, real property and intellectual properties to secure certain outstanding debt of Federal-Mogul. In addition, Aviation has guaranteed fully and unconditionally, on a joint and several basis, the obligation to pay principal and interest under Federal-Mogul's Senior Credit Agreements and its publicly traded registered debt. Such pledges and guarantees have also been made by certain other subsidiaries of Federal-Mogul. Note 4: Income Taxes Aviation files a consolidated return with its parent for U.S. federal income tax purposes. Federal income tax expense is calculated on a separate- return basis for financial reporting purposes. A reconciliation between Aviation's statutory federal income tax rate and its effective tax rate is summarized below:
Period from Period from January 1, October 10, Year ended 1998 1998 December 31, through through --------------- October 9, December 31, 2000 1999 1998 1998 ------ ------ ----------- ------------ Effective tax rate reconciliation: U.S. Federal statutory rate..................... 35% 35% 35% 35% Non-deductible goodwill... 5 6 8 1 State and Local Taxes..... 3 3 3 3 ------ ------ --- --- Effective Tax Rate........ 43% 44% 46% 39% ====== ====== === ===
Deferred taxes and income taxes payable are a component of the net investment in parent. 104 FEDERAL-MOGUL AVIATION, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 5: Pension Plans In 1998, prior to Federal-Mogul's acquisition of Aviation, the various pension plans of Aviation were merged into one plan of Cooper. As such, the related pension liabilities were recorded to net parent investment. This plan was assumed by Federal-Mogul in its acquisition of the automotive divisions of Cooper. This plan was required to be fully funded by Cooper prior to the acquisition by Federal-Mogul. In 2000, Federal-Mogul consolidated all domestic qualified defined benefit plans into one plan, the Federal Mogul Corporation Pension Plan. The expense charged to Aviation was $0.2 million and $0.2 million for the years ended December 31, 2000 and 1999 and $0.3 million for the period from January 1, 1998 through October 8, 1998. There was no expense recorded for the period from October 9, 1998 through December 31, 1998. At December 31, 2000 and 1999, the plan's projected benefit obligation was $721.8 million and $345.6 million based on discount rates of 8% and 7.75%, and the fair value of plan assets were $852.5 million and $327.0 million, respectively. Note 6: Concentration of Credit Risk and Other Aviation grants credit to their customers, which are primarily in the aerospace industry. Credit risk with respect to trade receivables is generally diversified due to the large number of entities comprising Aviation's customer base. Aviation performs periodic credit evaluations of their customers and generally do not require collateral. Aviation operates in a single business segment, manufacturing primarily engine ignition systems and related parts for the aerospace industry. Aviation manufactures and distributes these products for use in the aerospace aftermarket and original equipment segments of the industry. Two distributors accounted for approximately 25% and 12%, 27% and 10%, and 31% and 11% of net sales for the years ended December 31, 2000, 1999 and 1998, respectively. No other customer accounted for 10% or more of revenues in 2000, 1999 or 1998. All of Aviation's operations are conducted in the United States. Net sales to customers outside the United States, principally to European customers, were 22%, 20%, and 22% of the total net sales for the years ended December 31, 2000, 1999 and 1998 respectively. Note 7: Subsequent Event In 2001, Federal-Mogul elected to hold Aviation for sale. 105 REPORT OF INDEPENDENT AUDITORS The Board of Directors Federal-Mogul Corporation We have audited the accompanying consolidated balance sheets of T&N Industries, Inc. and subsidiaries as of December 31, 2000 and 1999 and the related consolidated statements of operations and cash flows for the years then ended and the period from March 6, 1998 through December 31, 1998. 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 auditing standards generally accepted in the United States. 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 consolidated financial position of T&N Industries, Inc. and subsidiaries at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for the years then ended and for the period from March 6, 1998 through December 31, 1998 in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Detroit, Michigan March 22, 2001 106 T&N INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Millions of Dollars)
Period from March 6, Year ended 1998 December 31, through -------------- December 31, 2000 1999 1998 ------ ------ ------------ Net sales: Trade........................................... $827.1 $845.2 $593.1 Affiliate....................................... 30.3 33.9 12.5 ------ ------ ------ Total net sales............................... 857.4 879.1 605.6 Cost of products sold............................. 702.7 692.9 462.8 Selling, general and administrative expenses...... 77.9 70.4 62.3 Amortization expense.............................. 17.4 16.0 12.4 Asbestos insurance recoverable, net............... (28.3) -- -- Restructuring charges............................. 1.7 -- -- Other (income) expense, net....................... (0.9) (0.3) 5.0 Interest expense.................................. 40.8 40.9 33.3 ------ ------ ------ Earnings before income taxes.................... 46.1 59.2 29.8 Income taxes...................................... 24.1 28.6 16.0 ------ ------ ------ Net Earnings.................................. $ 22.0 $ 30.6 $ 13.8 ====== ====== ======
See accompanying Notes to Consolidated Financial Statements. 107 T&N INDUSTRIES, INC. CONSOLIDATED BALANCE SHEETS (Millions of Dollars)
December 31, ----------------- 2000 1999 -------- -------- ASSETS Cash........................................................ $ 2.8 $ 0.7 Accounts receivable......................................... 8.2 15.7 Inventories................................................. 42.9 44.0 Other....................................................... 8.7 7.1 -------- -------- Total Current Assets...................................... 62.6 67.5 Property, plant and equipment, net.......................... 430.3 440.8 Goodwill, net............................................... 567.8 559.0 Other intangible assets, net................................ 28.8 31.2 Other assets................................................ 68.8 13.3 -------- -------- Total Assets.............................................. $1,158.3 $1,111.8 ======== ======== LIABILITIES AND NET PARENT INVESTMENT Accounts payable............................................ $ 42.3 $ 93.5 Accrued compensation........................................ 17.4 24.0 Short-term debt, including current maturities of long-term debt....................................................... 3.0 2.3 Other accrued liabilities................................... 25.8 26.0 -------- -------- Total Current Liabilities................................. 88.5 145.8 Long-term debt.............................................. 7.4 12.0 Asbestos liability.......................................... 353.7 371.5 Minority interest in consolidated subsidiaries.............. 8.8 6.1 Net Parent Investment....................................... 699.9 576.4 -------- -------- Total Liabilities and Net Parent Investment............... $1,158.3 $1,111.8 ======== ========
See accompanying Notes to Consolidated Financial Statements. 108 T&N INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Millions of Dollars)
Period from March 6, Year ended 1998 December 31, through --------------- December 31, 2000 1999 1998 ------ ------- ------------ Cash flows from operating activities: Net earnings................................... $ 22.0 $ 30.6 $ 13.8 Adjustments to reconcile to net cash provided by (used in) operating activities: Depreciation and amortization.................. 57.1 53.7 36.8 Asbestos insurance recoverable, net............ (28.3) -- -- Changes in assets and liabilities: Accounts receivable.......................... (9.5) 5.6 6.1 Inventories.................................. (4.6) 11.0 (10.1) Accounts payable and accrued liabilities..... (50.3) 53.5 8.6 Other assets and liabilities, net............ (37.8) (29.5) (17.0) ------ ------- ------- Net cash provided by (used in) operating activities................................ (51.4) 124.9 38.2 Cash flows from investing activities: Business acquisitions, net of cash acquired.... -- (25.2) -- Capital expenditures, net...................... (53.9) (99.6) (121.1) ------ ------- ------- Net cash used in investing activities...... (53.9) (124.8) (121.1) Cash flows from financing activities: Repayments of long-term debt................... (3.9) (5.8) -- Transfers from (to) parent..................... 111.3 4.4 80.1 ------ ------- ------- Net cash provided by (used in) financing activities................................ 107.4 (1.4) 80.1 ------ ------- ------- Increase in cash................................. 2.1 (1.3) (2.8) Cash, beginning of period.................. 0.7 2.0 4.8 ------ ------- ------- Cash, end of period........................ $ 2.8 $ 0.7 $ 2.0 ====== ======= =======
See accompanying Notes to Consolidated Financial Statements. 109 T&N INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1: Basis of Presentation The accompanying financial statements reflect the consolidated assets, liabilities and operations of T&N Industries, Inc. and its subsidiaries ("T&N"). T&N is a wholly owned subsidiary of Federal-Mogul Corporation ("'Federal-Mogul"). Federal-Mogul purchased T&N plc. including T&N, on March 6, 1998 for approximately $2.4 billion of which approximately $666.1 million is attributable to T&N. The period from March 6, 1998 through December 31, 1998 is hereafter referred to as "1998". T&N operates with financial and operational staff on a decentralized basis. Federal-Mogul provides certain centralized services for employee benefits administration, cash management, risk management, legal services, public relations, domestic tax reporting and internal and external audit. Federal- Mogul bills T&N for all such direct expenses incurred on its behalf. General expenses that are not directly attributable to the operations of T&N have been allocated based on management's estimates, primarily driven by sales. Management believes that this allocation method is reasonable. The accompanying consolidated financial statements are presented as if T&N had existed as an entity separate from its parent during the period presented and includes the assets, liabilities, revenues and expenses that are directly related to T&N's operations. Since the date of Federal-Mogul's acquisition of T&N, the financial statements include the push-down of fair value adjustments to assets and liabilities, including goodwill, other intangible assets and property, plant and equipment and their related amortization and depreciation adjustments. T&N's separate debt and related interest expense have been included in the consolidated financial statements. Because T&N is fully integrated into its parent's cash management system, all of their cash requirements are provided by its parent and any excess cash generated by T&N is transferred to its parent. Note 2: Summary of Significant Accounting Policies Principles of Consolidation: The consolidated financial statements include the accounts of T&N, and its subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. 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 the accompanying notes. Actual results could differ from those estimates. Inventories: Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. At December 31, inventories consisted of the following:
2000 1999 ---------- ---------- (Millions of Dollars) Raw materials..................................... $ 14.0 $ 16.5 Work-in-process................................... 15.5 14.4 Finished goods.................................... 15.5 15.6 ---------- ---------- 45.0 46.5 Reserve for valuation of inventory................ (2.1) (2.5) ---------- ---------- $42.9 $ 44.0 ========== ==========
Property, Plant and Equipment: Property, plant and equipment are stated at Federal-Mogul's cost. Depreciation is computed over the estimated useful lives of the related assets using primarily the straight-line method. This method is applied to assets which in general have the following lives: buildings--10 to 40 years 110 T&N INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) and machinery and equipment--3 to 12 years. At December 31, property, plant and equipment consisted of the following:
2000 1999 ------ ------ (Millions of Dollars) Property, plant and equipment: Land and land improvements.............................. $ 3.8 $ 3.7 Buildings............................................... 73.4 82.8 Machinery and equipment................................. 451.3 414.6 ------ ------ 528.5 501.1 Accumulated depreciation................................ (98.2) (60.3) ------ ------ $430.3 $440.8 ====== ======
Total rental expense under operating leases for 2000, 1999 and 1998 was approximately $2.4 million, $1.2 million and $2.4 million, respectively, exclusive of property taxes, insurance and other occupancy costs generally payable by T&N. Goodwill and Other Intangible Assets: At December 31, goodwill and other intangible assets, which result principally from acquisitions, consisted of the following:
Estimated Useful Life 2000 1999 ----------- ---------- ---------- (Millions of Dollars) Goodwill.............................. 40 years $ 610.8 $ 589.2 Accumulated amortization.............. (43.0) (30.2) ---------- ---------- 567.8 559.0 Trademarks............................ 40 years 14.3 14.3 Developed technology.................. 12-30 years 6.6 6.6 Assembled workforce................... 15 years 10.8 12.2 ---------- ---------- 31.7 33.1 Accumulated amortization.............. (2.9) (1.9) ---------- ---------- 28.8 31.2 ---------- ---------- Net Intangible Assets............... $ 596.6 $590.2 ========== ==========
Intangible assets are periodically reviewed for impairment indicators. If impairment indicators exist, an assessment of undiscounted future cash flows related to assets held for use or fair value for assets held for sale are evaluated accordingly. There were no impairment charges during 2000 or 1999. Intangible assets are amortized on a straight-line basis over their estimated useful lives. Research and Development Costs: T&N expenses research and development costs as incurred. Research and development expense was approximately $6.7 million, $6.8 million and $12.0 million for 2000, 1999 and 1998, respectively. Net Parent Investment: The Net Parent Investment account reflects the balance of T&N historical earnings, intercompany debt (including the amounts recoverable under the T&N Ltd. asbestos insurance policy), income taxes accrued and deferred, postemployment liabilities, other transactions between T&N and Federal-Mogul and equity pension adjustments. 111 T&N INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Revenue Recognition: T&N recognizes revenue, estimated returns from product sales and related incentives when there is evidence of a sales agreement, the delivery of goods has occurred, the sales price is fixed or determinable and the collectibility of revenue is reasonably assured. T&N generally records sales upon shipment of product to customers and transfer of title under standard commercial terms. Affiliate sales are transferred at cost. Shipping and Handling Costs: T&N recognizes shipping and handling costs as a component of cost of products sold in the statement of operations. Recoverable Customer Engineering and Tooling: Pre-production tooling and engineering costs that T&N will not own and that will be used in producing products under long-term supply arrangements are expensed as incurred unless the supply arrangement provides T&N the noncancelable right to use the tools or the reimbursement of such costs is contractually guaranteed by the customer. Third party pre-production tooling and engineering costs that are owned by T&N are capitalized as part of machinery and equipment. Fair Value of Financial Instruments: The carrying amounts of certain financial instruments such as cash, accounts receivable and accounts payable approximate their fair value. Effect of Accounting Pronouncements: Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", was issued by the Financial Accounting Standards Board in June 1998. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. In June 2000, the FASB issued SFAS No. 138, which amends and clarifies certain guidance in SFAS No. 133. The Company has implemented the appropriate systems and processes to adopt these statements effective January 1, 2001. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. For fair-value hedge transactions the fair value of the derivative instrument will generally be offset in the income statement by changes in the hedged item's fair value. For cash flow hedge transactions, the fair value of the derivative instrument will be reported in other comprehensive income. The ineffective portion of all hedges will be recognized in current-period earnings. The statements provide for the recognition of a cumulative adjustment for an accounting change, as of the date of adoption. The adoption of this FASB will not have a material impact on the financial position or the operating results of T&N. Note 3: Business Sales and Acquisition In November 2000, T&N transferred certain assets and liabilities to another Federal-Mogul subsidiary, for an aggregate price of $45.9 million, which approximated book value, for which T&N received a note receivable in the amount of $45.9 million (see Note 4). In January 1999, T&N completed its acquisition of certain manufacturing operations of Crane Technologies, Inc. ("Crane"). Crane's two plants, located in Orland, Indiana and Jackson, Michigan, employ approximately 230 people with 1998 annual sales of approximately $36 million. T&N accounted for the Crane acquisition as a purchase and recorded $12.2 million of goodwill as a result of the acquisition. The results of operations of Crane are included in the consolidated statement of operations since the date of the acquisition. Note 4: Long-Term Debt and Other Financing Arrangements T&N's cash and indebtedness is managed by Federal-Mogul. The majority of the cash provided by or used by a particular division, including T&N, is provided through this consolidated cash and debt management system. 112 T&N INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As a result, the amount of cash or debt historically related to T&N is not determinable. For purposes of T&N' historical financial statements, identifiable debt was allocated to T&N during each year with all of T&N' positive or negative cash flows being treated as cash transferred to or from T&N. The specifically identifiable industrial revenue bonds (the "IRB") and specifically identifiable international debt was assigned to T&N. Federal-Mogul has allocated T&N a portion of the interest it incurred on the financing of T&N. Federal-Mogul allocated T&N $40.0 million of interest in 2000, 1999 and $33.3 million in 1998. Interest was calculated by allocating a portion of the amount Federal-Mogul borrowed to purchase T&N plc., Federal- Mogul allocated $666.1 million of the debt to T&N and calculated interest at a rate of 6%. In November 2000 T&N received a note receivable from another subsidiary of Federal-Mogul in exchange for the sale of certain assets and assume certain liabilities (see Note 3), in the amount of $45.9 million. Interest on this note is calculated at the stated rate of 6.154%. This note is included in T&N's balance sheet under the caption "Other Long-Term Assets". Federal-Mogul has pledged 100% of T&N's capital stock and also provided collateral in the form of a pledge of inventories, property, plant and equipment, real property and intellectual properties to secure certain outstanding debt of Federal-Mogul. In addition, T&N has guaranteed fully and unconditionally, on a joint and several basis, the obligation to pay principal and interest under Federal-Mogul's Senior Credit Agreement and its publicly registered debt. Such pledges and guarantees have also been made by other subsidiaries of Federal-Mogul. T&N participates in Federal-Mogul's accounts receivable securitization program. On an ongoing basis, T&N sells certain accounts receivable to Federal-Mogul Funding Corporation ("FMFC"), a wholly owned subsidiary of Federal-Mogul, which then sells such receivables, without recourse, to a financial conduit. The transfers of these receivables are charged to the Net Parent Investment account. T&N does not retain any interest in these receivables and the accounts receivable are sold to FMFC at their carrying value. Note 5: Commitments and Contingencies Asbestos Litigation Two of T&N's subsidiaries are among many defendants named in numerous court actions alleging personal injury resulting from exposure to asbestos or asbestos-containing products (the "Subsidiaries"). 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 claims may be made nor the expenditures which may ultimately arise therefrom. In addition, there are a number of factors that could impact the settlement costs into the future, including but not limited to: changes in the legal environment; possible insolvency of co-defendants; and establishment of an acceptable administrative (non-litigation) claims resolution mechanism. In the fourth quarter of 2000, T&N increased its estimate of asbestos- related liability for the Subsidiaries by $115.9 million and recorded a related insurance recoverable asset of $144.2 million. The revision in the estimate of probable asbestos-related liability principally resulted from a study performed by an econometric firm that specializes in these types of matters. The revised liability (approximately $353.7 million) represents T&N's estimate for claims currently pending and those which can be reasonably estimated to be asserted in a future period. T&N believes that these claims will be paid over the next 12 years. In arriving at the revised liability assumptions have been made regarding the total number of claims anticipated to be received in the future period, the typical cost of settlement (which is sensitive to the industry in which the plaintiff claims exposure, the alleged disease type and the jurisdiction in which the action is being brought), the rate of receipt of claims, the settlement strategy in dealing with outstanding claims and the timing of settlements. 113 T&N INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) While management believes that the liability and receivable recorded are appropriate for anticipated losses arising from asbestos-related claims against the Subsidiaries for the period covered, given the nature and complexity of the factors affecting the estimated liability and potential insurance recovery the actual liability and insurance recovery may differ. No assurance can be given that the Subsidiaries will not be subject to material additional liabilities and significant additional litigation relating to asbestos for the period covered. In the event that such liabilities exceed the amounts recorded by T&N or the remaining insurance coverage, T&N's results of operations, business, liquidity and financial condition could be materially adversely affected. The ultimate liability for all pending and future claims is highly uncertain due to the difficulty of forecasting the numerous variables that can affect the liability. T&N does not believe it can reasonably determine the ultimate liability as the level of uncertainty is too great to provide for reasonable estimation of the number of future claims, the nature of such claims and the cost to resolve them. As additional experience is gained regarding claims or other new information becomes available regarding the potential liability, T&N will reassess its potential liability and revise the estimates as appropriate. Accordingly it is reasonably possible that the ultimate losses from asbestos-related claims will be greater than amounts recorded. The Subsidiaries are defendants in approximately 111,000 pending personal injury claims as of December 31, 2000. During 2000, approximately 41,000 new claims naming the Subsidiaries were received. A number of years ago, T&N Ltd. appointed the Center for Claims Resolution ("CCR") as exclusive representative in relation to all asbestos-related personal injury claims made against the Subsidiaries. The CCR has provided to its member companies a litigation defense, claims-handling and administration service in respect to United States asbestos-related disease claims. Pursuant to the CCR Producer Agreement, T&N Ltd. was entitled to appoint a representative as one of the five voting directors on the CCR's Board of Directors. Also pursuant to that agreement, members of the CCR contributed towards indemnity payments in each claim in which the member is named. Contributions to such indemnity payments were calculated on a case by case basis according to sharing agreements among the CCR's members. Effective January 18, 2000, the Subsidiaries appointed a law firm specializing in asbestos matters as their litigation defense, claims handling and administrative service provider. Indemnity and defense obligations incurred while members of the CCR are continuing to be honored. This change was intended to create greater economic and defense efficiencies for the two companies. In 1996, T&N Ltd. purchased a (Pounds)500 million layer of insurance which will be triggered should the aggregate costs of claims filed against it and the Subsidiaries after June 30, 1996, where the exposure occurred prior to that date, exceed (Pounds)690 million. T&N Ltd. has allocated approximately 25% of the anticipated insurance recoveries from the aggregate liability of T&N Ltd. and its Subsidiaries. T&N Ltd. now believes that the aggregate cost of claims filed after June 30, 1996 will exceed the trigger point. T&N Ltd. believes based on its review of the insurance policy and its advice from outside counsel, that it is probable that it will be entitled to receive payment from the reinsurers for the cost of claims in excess of the trigger point of the insurance. Based on this assessment and the allocation agreement, T&N Ltd. recorded an insurance recoverable asset under the policy of $144.2 million in the fourth quarter of 2000. T&N has reviewed the financial viability and legal obligations of the three reinsurance companies involved and has concluded that there is little risk of the reinsurers not being able to meet their obligation to pay, once the claims filed after June 30, 1996 exceed the (Pounds)690 million trigger point. T&N, Ltd. does not expect to reach the trigger point of the insurance or begin to collect on this insurance recoverable for the next several years. The US claims' costs applied against this policy are converted at a fixed exchange rate of $1.69/(Pounds). As such, if the market exchange rate is less then $1.69/(Pounds), T&N, Ltd. will effectively have a discount from 100% recovery on claims made with the insurance companies. The ultimate exposure of the Subsidiaries with respect to claims will depend upon the extent to which the insurance described above will be available to cover such claims, the amount paid for indemnity and defense, changes in the legal environment and other factors. 114 T&N INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 6: Net Parent Investment Changes in net parent investment were as follows:
(Million of Dollars) Federal-Mogul initial investment in T&N........................ $ 666.1 Net earnings for the period March 6, 1998 through December 31, 1998.................................................... 13.8 Intercompany transactions, net............................... 59.2 ------- Balance at December 31, 1998................................... 739.1 Net earnings income.......................................... 30.6 Intercompany transactions, net............................... (193.3) ------- Balance at December 31, 1999................................... 576.4 Net earnings income.......................................... 22.0 Intercompany transactions, net............................... 101.5 ------- Balance at December 31, 2000................................... $ 699.9 =======
Note 7: Income Taxes T&N files a consolidated return with Federal-Mogul for U.S. federal income tax purposes. Federal income tax expense is calculated on a separate-return basis for financial reporting purposes.
2000 1999 1998 ----- ----- ----- (Millions of Dollars) Components of income tax expense (benefit): Current............................................. $ -- $ 8.2 $ 4.5 Deferred............................................ 24.1 20.4 11.5 ----- ----- ----- Income tax expense.................................. $24.1 $28.6 $16.0 ===== ===== =====
A reconciliation between the statutory federal income tax rate and the effective tax rate is as follows:
2000 1999 1998 ---- ---- ---- U.S. Federal statutory rate............................. 35% 35% 35% State and local taxes................................... 5 3 3 Nondeductible goodwill.................................. 12 10 16 --- --- --- Effective tax rate...................................... 52% 48% 54% === === ===
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the related amounts used for income tax purposes. Significant components of the Company's net deferred tax asset are non-deductible accruals, intangible assets and depreciation timing differences.
2000 1999 ---------- ----------- (Millions of Dollars) Current deferred tax assets...................... $ 11.1 $ 11.1 Long-term deferred tax assets.................... 65.4 89.1 ---------- ----------- Net deferred assets.............................. $ 76.5 $ 100.2 ========== ===========
As T&N files a consolidated tax return with Federal-Mogul, the net deferred tax liability at December 31, 2000 and 1999 is a component of the net parent investment. 115 T&N INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Note 8: Pension Plans In 1998, the various pension plans of T&N plc. were assumed by Federal- Mogul in its acquisition. In 2000, Federal-Mogul consolidated all domestic qualified defined benefit plans into one plan, the Federal Mogul Corporation Pension Plan. The pension charge allocated to T&N, in 2000 was approximately $3.6 million. For the year ended December 31, 1999, the credit to T&N from Federal- Mogul was approximately $2.1 million. The expense charged to T&N in 1998 was approximately $4.4 million. The fully funded aggregated projected benefit obligation of such domestic plans of $719.2 million was based upon a discount rate of 8%. The fair value of the plan's assets at December 31, 2000 was $852.5 million. Company contributions for 2000 were $6.9 million. Note 9: Postretirement Benefits Other Than Pensions As part of T&N plc. and subsequently Federal-Mogul, benefits provided to employees of T&N under various postretirement plans other than pensions, all of which are unfunded, include retiree medical care, dental care, prescription drugs and life insurance, with medical care accounting for approximately 95% of the total. The majority of participants under such plans are retirees. The expense related to such plans approximated $6.2 million, $3.8 million and $3.9 million for 2000, 1999 and 1998, respectively. The unfunded projected benefit obligation of these plans aggregated approximately $59.7 million at December 31, 2000, based upon a discount rate of 7.75% Note 10: Concentrations of Credit Risk and Other T&N grants credit to their customers, which are primarily in the automotive industry. Credit risk with respect to trade receivables is generally diversified due to the large number of entities comprising T&N' customer base and their dispersion across many different countries. T&N performs periodic credit evaluations of their customers and generally does not require collateral. T&N operates in a single business segment, Americas/Asia Pacific. T&N manufactures and distributes pistons, piston pins, rings, cylinder liners, camshafts, engine bearings, sintered products and sealing systems. No single customer accounted for 10% or more of revenues in 2000, 1999 or 1998. All revenues and assets of T&N reside in the United States. 116 REPORT OF INDEPENDENT AUDITORS The Board of Directors Federal-Mogul Corporation We have audited the accompanying consolidated balance sheets of Federal- Mogul Powertrain, Inc. and subsidiaries as of December 31, 2000 and 1999 and the related consolidated statements of operations, and cash flows for the years then ended and for the period from March 6, 1998 through December 31, 1998. 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 auditing standards generally accepted in the United States. 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 consolidated financial position of Federal-Mogul Powertrain, Inc. and subsidiaries at December 31, 2000 and 1999 and the consolidated results of their operations and their cash flows for the years then ended and for the period from March 5, 1998 through December 31, 1998, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Detroit, Michigan March 22, 2001 117 FEDERAL-MOGUL POWERTRAIN, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Millions of Dollars)
Period from March 6, Year ended 1998 December 31, through ------------- December 31, 2000 1999 1998 ---- ------ ------------ Net sales: Third party sales................................. $770.4 $766.0 $525.7 Affiliate sales................................... 30.3 33.9 12.5 ------ ------ ------ Total net sales................................. 800.7 799.9 538.2 Cost of products sold............................... 652.9 623.1 403.8 Selling, general and administrative expenses........ 68.7 62.3 53.7 Amortization expense................................ 13.3 13.5 10.4 Restructuring charges............................... 1.7 -- -- Interest expense.................................... 40.6 40.9 33.4 Other expense, net.................................. 9.1 4.7 6.4 ------ ------ ------ Earnings before income taxes...................... 14.4 55.4 30.5 Income taxes........................................ 10.5 26.2 15.5 ------ ------ ------ Net Earnings.................................. $ 3.9 $ 29.2 $ 15.0 ====== ====== ======
See accompanying Notes to Consolidated Financial Statements. 118 FEDERAL-MOGUL POWERTRAIN, INC. CONSOLIDATED BALANCE SHEETS (Millions of Dollars)
December 31, ------------- 2000 1999 ------ ------ ASSETS Accounts receivable............................................. $ 2.6 $ 9.0 Inventories..................................................... 41.3 41.0 Other........................................................... 5.8 4.5 ------ ------ Total Current Assets.......................................... 49.7 54.5 Property, plant and equipment, net.............................. 416.8 400.9 Goodwill, net................................................... 453.5 463.6 Other intangible assets, net.................................... 15.6 16.5 Other assets.................................................... 16.3 12.5 ------ ------ Total Assets.................................................. $951.9 $948.0 ====== ====== LIABILITIES AND NET PARENT INVESTMENT Accounts payable................................................ $ 40.6 $ 81.0 Accrued compensation............................................ 17.3 23.4 Short-term debt, including current maturities of long-term debt........................................................... 3.0 2.3 Other accrued liabilities....................................... 21.8 19.7 ------ ------ Total Current Liabilities..................................... 82.7 126.4 Long-term debt.................................................. 4.4 9.0 Minority interest in consolidated subsidiaries.................. 5.7 1.7 Net Parent Investment........................................... 859.1 810.9 ------ ------ Total Liabilities and Net Parent Investment................... $951.9 $948.0 ====== ======
See accompanying Notes to Consolidated Financial Statements. 119 FEDERAL-MOGUL POWERTRAIN, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Millions of Dollars)
Period from March 6, Year ended 1998 December 31, through --------------- December 31, 2000 1999 1998 ------ ------- ------------ Cash flows from operating activities: Net earnings................................... $ 3.9 $ 29.2 $ 15.0 Adjustments to reconcile to net cash provided by (used in) operating activities: Depreciation and amortization.................. 49.6 48.0 32.3 Changes in assets and liabilities: Accounts receivable.......................... 6.4 2.0 9.3 Inventories.................................. (0.3) 5.1 (4.7) Accounts payable and accrued liabilities..... (40.4) 28.6 2.1 Other assets and liabilities, net............ (7.0) (6.9) (0.6) ------ ------- ------ Net cash provided by (used in) operating activities................................ 12.2 106.0 53.4 Cash flows from investing activities: Business acquisition, net of cash acquired..... -- (25.2) -- Capital expenditures, net...................... (52.6) (91.5) (95.2) ------ ------- ------ Net cash used in investing activities...... (52.6) (116.7) (95.2) Cash flows from financing activities: Repayments of long-term debt................... (3.9) (4.6) (1.1) Transfers from (to) parent..................... 44.3 15.0 43.2 ------ ------- ------ Net cash provided by (used in) financing activities................................ 40.4 10.4 42.1 ------ ------- ------ Increase in cash................................. -- (0.3) 0.3 Cash, beginning of period.................. -- 0.3 -- ------ ------- ------ Cash, end of period........................ $ -- $ -- $ 0.3 ====== ======= ======
See accompanying Notes to Consolidated Financial Statements. 120 FEDERAL-MOGUL POWERTRAIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1: Basis of Presentation The accompanying financial statements reflect the consolidated assets, liabilities and operations of Federal-Mogul Powertrain, Inc. and its subsidiaries ("Powertrain"). Powertrain is a wholly owned subsidiary of T&N Industries Inc., which is a wholly owned subsidiary of Federal-Mogul Corporation ("Federal-Mogul"). Federal-Mogul purchased T&N plc., including Powertrain, on March 6, 1998 for approximately $2.4 billion of which approximately $870.8 million is attributable to Powertrain. The period from March 6, 1998 through December 31, 1998 is hereafter referred to as "1998". Powertrain operates with financial and operational staff on a decentralized basis. Federal-Mogul provides certain centralized services for employee benefits administration, cash management, risk management, legal services, public relations, domestic tax reporting and internal and external audit. Federal-Mogul bills Powertrain for all such direct expenses incurred on its behalf. General expenses that are not directly attributable to the operations of Powertrain have been allocated based on management's estimates, primarily driven by sales. Management believes that this allocation method is reasonable. The accompanying consolidated financial statements are presented as if Powertrain had existed as an entity separate from its parent during the period presented and include the assets, liabilities, revenues and expenses that are directly related to Powertrain's operations. Since the date of Federal-Mogul's acquisition of Powertrain, the financial statements include the push-down of fair value adjustments to assets and liabilities, including goodwill, other intangible assets and property, plant and equipment and their related amortization and depreciation adjustments. Powertrain's separate debt and related interest expense have been included in the consolidated financial statements. Because Powertrain is fully integrated into its parent's cash management system, all of their cash requirements are provided by its parent and any excess cash generated by Powertrain is transferred to its parent. Note 2: Summary of Significant Accounting Policies Principles of Consolidation: The consolidated financial statements include the accounts of Powertrain, and its subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation. 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 the accompanying notes. Actual results could differ from those estimates. Inventories: Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out method. At December 31, inventories consisted of the following:
2000 1999 ---------- ---------- (Millions of Dollars) Raw materials..................................... $ 13.1 $ 14.2 Work-in-process................................... 15.2 14.2 Finished goods.................................... 15.1 14.5 ---------- ---------- 43.4 42.9 Reserve for valuation of inventory................ (2.1) (1.9) ---------- ---------- $41.3 $ 41.0 ========== ==========
Property, Plant and Equipment: Property, plant and equipment are stated at Federal-Mogul's cost. Depreciation is computed over the estimated useful lives of the related assets using primarily the straight-line 121 FEDERAL-MOGUL POWERTRAIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) method. This method is applied to assets which in general have the following lives: buildings--10 to 40 years and machinery and equipment--3 to 12 years. At December 31, property, plant and equipment consisted of the following:
2000 1999 ------ ------ (Millions of Dollars) Property, plant and equipment: Land and land improvements.............................. $ 3.8 $ 3.5 Buildings............................................... 72.8 75.8 Machinery and equipment................................. 431.1 376.2 ------ ------ 507.7 455.5 Accumulated depreciation................................ (90.9) (54.6) ------ ------ $416.8 $400.9 ====== ======
Total rental expense under operating leases for the years ended December 31, 2000, 1999 and 1998 was approximately $2.4 million, $1.2 million and $2.4 million, respectively, exclusive of property taxes, insurance and other occupancy costs generally payable by Powertrain. Goodwill and Other Intangible Assets: At December 31, goodwill and other intangible assets, which result principally from acquisitions, consisted of the following:
Estimated Useful Life 2000 1999 ----------- ------ ------ (Millions of Dollars) Goodwill...................................... 40 years $489.3 $485.1 Accumulated amortization...................... (35.8) (21.5) ------ ------ 453.5 463.6 Trademarks.................................... 40 years 1.2 1.2 Developed technology.......................... 12-30 years 6.6 6.6 Assembled workforce........................... 15 years 10.4 10.4 ------ ------ 18.2 18.2 Accumulated amortization...................... (2.6) (1.7) ------ ------ 15.6 16.5 ------ ------ Net Intangible Assets....................... $469.1 $480.1 ====== ======
Intangible assets are periodically reviewed for impairment indicators. If impairment indicators exist, an assessment of undiscounted future cash flows related to assets held for use or fair value for assets held for sale are evaluated accordingly. There were no impairment charges during 2000 or 1999. Intangible assets are amortized on a straight-line basis over their estimated useful lives. Research and Development Costs: Powertrain expenses research and development costs as incurred. Research and development expense was approximately $4.5 million, $3.9 million and $8.6 million for 2000, 1999 and 1998, respectively. Net Parent Investment: The Net Parent Investment account reflects the balance of Powertrain historical earnings, intercompany debt, income taxes accrued and deferred, postemployment liabilities, other transactions between Powertrain and Federal-Mogul, foreign currency translations and equity pension adjustments. 122 FEDERAL-MOGUL POWERTRAIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Revenue Recognition: Powertrain recognizes revenue, estimated returns from product sales and related incentives when there is evidence of a sales agreement, the delivery of goods has occurred, the sales price is fixed or determinable and the collectibility of revenue is reasonably assured. Powertrain generally records sales upon shipment of product to customers and transfer of title under standard commercial terms. Affiliate sales are transferred at cost. Shipping and Handling Costs: Powertrain recognizes shipping and handling costs as a component of cost of products sold in the statement of operations. Recoverable Customer Engineering and Tooling: Pre-production tooling and engineering costs that Powertrain will not own and that will be used in producing products under long-term supply arrangements are expensed as incurred unless the supply arrangement provides Powertain the noncancelable right to use the tools or the reimbursement of such costs is contractually guaranteed by the customer. Third-party pre-production tooling and engineering costs that are owned by Powertrain are capitalized as part of machinery and equipment. Fair Value of Financial Instruments: The carrying amounts of certain financial instruments such as cash, accounts receivable and accounts payable approximate their fair value. Effect of Accounting Pronouncements: Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", was issued by the Financial Accounting Standards Board in June 1998. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. In June 2000, the FASB issued SFAS No. 138, which amends and clarifies certain guidance in SFAS No. 133. The Company has implemented the appropriate systems and processes to adopt these statements effective January 1, 2001. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. For fair-value hedge transactions the fair value of the derivative instrument will generally be offset in the income statement by changes in the hedged item's fair value. For cash-flow hedge transactions, the fair value of the derivative instrument will be reported in other comprehensive income. The ineffective portion of all hedges will be recognized in current-period earnings. The statements provide for the recognition of a cumulative adjustment for an accounting change, as of the date of adoption. The adoption of this FASB will not have a material impact on the financial position or the operating results of Powertrain. Note 3: Acquisitions In January 1999, Powertrain completed its acquisition of certain manufacturing operations of Crane Technologies, Inc. ("Crane"). Crane's two plants, located in Orland, Indiana and Jackson, Michigan, employ approximately 230 people with 1998 annual sales of approximately $36 million. Crane was accounted for as a purchase, Powertrain recorded $12.2 million of goodwill as a result of the acquisition. The results of operations of Crane are included in the consolidated statement of operations since the date of the acquisition. Note 4: Long-Term Debt and Other Financing Arrangements Powertrain's cash and indebtedness is managed on a worldwide basis by Federal-Mogul. The majority of the cash provided by or used by a particular division, including Powertrain, is provided through this consolidated cash and debt management system. As a result, the amount of cash or debt historically related to Powertrain is not determinable. For purposes of Powertrain' historical financial statements, identifiable debt was allocated to Powertrain during each year with all of Powertrain' positive or negative cash flows being treated as cash transferred to or from T&N. Federal-Mogul has allocated Powertrain a portion of the interest it incurred on the financing of T&N, plc. Federal-Mogul allocated Powertrain $40.0 million of interest in 2000, 1999 and $33.3 million in 1998. Interest was calculated by allocating a portion of the amount Federal-Mogul borrowed to purchase T&N plc., Federal-Mogul allocated $666.1 million of the debt to Powertrain and calculated interest at a rate of 6%. 123 FEDERAL-MOGUL POWERTRAIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Federal-Mogul has pledged 100% of Powertrain's capital stock and also provided collateral in the form of a pledge of inventories, property, plant and equipment, real property and intellectual properties to secure certain outstanding debt of Federal-Mogul. In addition, Powertrain has guaranteed fully and unconditionally, on a joint and several basis, the obligation to pay principal and interest under Federal-Mogul's Senior Credit Agreement and its publicly registered debt. Such pledges and guarantees have also been made by other subsidiaries of Federal-Mogul. Powertrain participates in Federal-Mogul's accounts receivable securitization program. On an ongoing basis, Powertrain sells certain accounts receivable to Federal-Mogul Funding Corporation ("FMFC"), a wholly owned subsidiary of Federal-Mogul, which then sells such receivables, without recourse, to a financial conduit. The transfers of these receivables are charged to the Net Parent Investment account. Powertrain does not retain any interest in these receivables and the accounts receivable are sold to FMFC at their carrying value. Note 5: Net Parent Investment Changes in net parent investment were as follows:
(Million of Dollars) Federal-Mogul initial investment in Powertrain.............. $870.8 Net earnings for the period March 6, 1998 through December 31, 1998................................................. 15.0 Intercompany transactions, net.............................. (59.1) ------ Balance at December 31, 1998................................ 826.7 Net earnings income....................................... 29.2 Intercompany transactions, net............................ (45.0) ------ Balance at December 31, 1999................................ 810.9 Net earnings income....................................... 3.9 Intercompany transactions, net............................ 44.3 ------ Balance at December 31, 2000................................ $859.1 ======
Note 6: Income Taxes Powertrain files a consolidated return with Federal-Mogul for U.S. federal income tax purposes. Federal income tax expense is calculated on a separate- return basis for financial reporting purposes.
2000 1999 1998 ----- ----- ----- (Millions of Dollars) Components of income tax expense (benefit): Current............................................. $ 9.8 $25.9 $14.4 Deferred............................................ 0.7 0.3 1.1 ----- ----- ----- Income tax expense.................................. $10.5 $26.2 $15.5 ===== ===== =====
A reconciliation between the statutory federal income tax rate and the effective tax rate is as follows:
2000 1999 1998 ---- ---- ---- (Millions of Dollars) U.S. Federal statutory rate............................. 35% 35% 35% State and local taxes................................... 3 3 3 Nondeductible goodwill.................................. 35 9 13 --- --- --- Effective tax rate...................................... 73% 47% 51% === === ===
124 FEDERAL-MOGUL POWERTRAIN, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the related amounts used for income tax purposes. Significant components of the Company's net deferred tax asset are non-deductible accruals, intangible assets and depreciation timing differences.
2000 1999 ------ ------ (Millions of Dollars) Current deferred tax assets.............................. $ 5.1 $ 19.6 Long-term deferred tax liabilities....................... (37.9) (51.2) ------ ------ Net deferred liabilities................................. $(32.8) $(31.6) ====== ======
As Powertrain files a consolidated tax return with Federal-Mogul, the net deferred tax liability at December 31, 2000 and 1999 is a component of the net parent investment. Note 7: Pension Plans In 1998, the various pension plans of Federal-Mogul Powertrain were assumed by Federal-Mogul in the acquisition of T&N Plc. In 2000, Federal-Mogul consolidated all domestic qualified defined benefit plans into one plan, the Federal Mogul Corporation Pension Plan. The pension charge allocated to Powertrain, as at December 31, 2000 was approximately $3.1 million. For the year ended December 31, 1999, the credit to Powertrain from Federal-Mogul was approximately $2.1 million. The charge to Powertrain from Federal-Mogul for 1998 was approximately $4.4 million. The fully funded aggregated projected benefit obligation of such domestic plans of $716.1 million was based upon a discount rate of 8%. The fair value of the plan's assets at December 31, 2000 was $852.5 million for domestic plans. Company contributions for 2000 were $6.9 million. Note 8: Postretirement Benefits Other Than Pensions As part of T&N Plc. and subsequently Federal-Mogul, benefits provided to employees of Powertrain under various postretirement plans other than pensions, all of which are unfunded, include retiree medical care, dental care, prescriptions and life insurance, with medical care accounting for approximately 95% of the total. The majority of participants under such plans are retirees. The expense related to such plans approximated $6.2 million, $3.8 million and $3.9 million for 2000, 1999 and 1998, respectively. The unfunded projected benefit obligation of these plans aggregated approximately $59.7 million at December 31, 2000, based upon a discount rate of 7.75% Note 9: Concentrations of Credit Risk and Other Powertrain grants credit to their customers, which are primarily in the automotive industry. Credit risk with respect to trade receivables is generally diversified due to the large number of entities comprising Powertrain customer base and their dispersion across many different countries. Powertrain performs periodic credit evaluations of their customers and generally does not require collateral. Powertrain operates in a single business segment, Americas/Asia Pacific. Powertrain manufactures and distributes pistons, piston pins, rings, cylinder liners, camshafts, engine bearings, sintered products and sealing systems. No single customer accounted for 10% or more of revenues in 2000, 1999 or 1998. All revenues and assets of Powertrain reside in the United States. 125 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FEDERAL-MOGUL CORPORATION /s/ G. Michael Lynch By __________________________________ G. Michael Lynch Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Act of 1934, this Report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title --------- ----- /s/ Frank E. Macher Chief Executive Officer ___________________________________________ Frank E. Macher President and Chief Operating /s/ Charles G. McClure Officer ___________________________________________ Charles G. McClure * Director ___________________________________________ John J. Fannon * Director ___________________________________________ Roderick M. Hills * Director ___________________________________________ Paul Scott Lewis * Director ___________________________________________ Robert S. Miller, Jr. * Director ___________________________________________ John C. Pope * Director ___________________________________________ Sir Geoffrey Whalen C.B.E.
/s/ James J. Zamoyski *By _________________________________ James J. Zamoyski Attorney-in-fact Dated: March 23, 2001 126 EX-3.2 2 0002.txt BYLAWS, AS AMENDED Exhibit 3.2 BYLAWS OF FEDERAL-MOGUL CORPORATION ------------------------- ARTICLE I --------- Shareholders Section 1. Annual Meeting. The annual meeting of the shareholders shall be - --------- -------------- held on the fourth Wednesday in May of each year or at such other date as the Board of Directors in its discretion shall determine at the time stated in the notice of meeting, for the purpose of electing directors and for the transaction of such other business as may be determined by the Board of Directors or as otherwise properly may come before the meeting. If the day fixed for the annual meeting shall be a legal holiday at the place of meeting, such meeting shall be held on the next succeeding business day. Section 2. Special Meetings. Special meetings of the shareholders may be - --------- ---------------- called by the Chairman of the Board, or by the President, or pursuant to resolution of the Board of Directors. Business transacted at a special meeting of stockholders shall be confined to the purpose or purposes of the meeting as stated in the notice of the meeting. Section 3. Place of Meeting. The Board of Directors may designate any place - --------- ---------------- either within or without the State of Michigan as the place of meeting for any annual or special meeting of shareholders called by the Board of Directors. If no designation is made or if a special meeting be called otherwise than by the Board of Directors, the place of meeting shall be the registered office of the Corporation in the State of Michigan. Section 4. Notice of Meetings. Written or printed notice stating the time, - --------- ------------------ place and purposes of a meeting of shareholders shall be given not less than ten nor more than sixty days before the date of the meeting, by mail, by or at the direction of the Chairman of the Board, the President, the Secretary, or the directors or persons calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be given when deposited in the United States mail in a sealed envelope addressed to the shareholder at his address as it appears on the records of the Corporation, with postage thereon prepaid. Section 5. Adjourned Meetings. Any annual or special meeting of shareholders - --------- ------------------ may be adjourned by the chairman of the meeting or pursuant to resolution of the Board of Directors. Notice need not be given of an adjourned meeting of shareholders if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting only such business may be transacted as might have been transacted at the original meeting. If after the adjournment the Board of Directors fixes a new record date for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder of record on the new record date entitled to vote at the meeting. Section 6. Voting Lists. It shall be the duty of the officer or agent who - --------- ------------ shall have charge of the stock transfer books for shares of the Corporation to make and certify a complete list of the shareholders entitled to vote at a shareholder's meeting or any adjournment thereof, arranged in alphabetical order within each class and series, with the addresses of, and the number of shares held by, each shareholder. Such list shall be produced at the time and place of the meeting, shall be subject to the inspection by any shareholder during the whole time of the meeting, and shall be prima facie evidence as to who are the shareholders entitled to examine such list or to vote in person or by proxy at such meeting. Section 7. Quorum. Unless a greater or lesser quorum is provided by law, a - --------- ------ majority of the outstanding shares of the Corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at any meeting of shareholders. The shareholders present in person or by proxy at such meeting may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum. Whether or not a quorum is present, the meeting may be adjourned by a vote of the shares present. Section 8. Manner of Acting. The election of directors shall be determined by - --------- ---------------- a plurality of the votes cast by the holders of shares entitled to vote thereon or their proxies. Except as otherwise provided by law, or by the Articles of Incorporation, all other matters shall be determined by a -2- majority of the votes cast by the holders of shares entitled to vote thereon or their proxies. Section 9. Postponement of Annual or Special Meeting. The Board of Director - --------- ----------------------------------------- acting by resolution may postpone and reschedule any previously scheduled annual or special meeting of shareholders. Section 10. Nomination and Shareholder Business Bylaw. - ---------- ----------------------------------------- (A) Annual Meetings of Shareholders. ------------------------------- (1) Nominations of persons for election to the Board of Directors of the Corporation and the proposal of business to be considered by the shareholders may be made at an annual meeting of shareholders (a) pursuant to the Corporation's notice of meeting, (b) by or at the direction of the Board of Directors or (c) by any shareholder of the Corporation who was a shareholder of record at the time of giving of notice provided for in this Bylaw, who is entitled to vote at the meeting and who complied with the notice procedures set forth in this Bylaw. (2) For nominations or other business to be properly brought before an annual meeting by a shareholder pursuant to clause (c) of paragraph (A) (1) of this Bylaw, the shareholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a shareholder's notice shall be delivered to the Secretary at the principal executive offices of the Corporation not less than 75 days nor more than 100 days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date, notice by the shareholder to be timely must be so delivered not earlier than the 100th day prior to such annual meeting and not later than the close of business on the later of the 75th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made. Such shareholder's notice shall set forth (a) as to each person whom the shareholder proposes to nominate for election or reelection as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act -3- of 1934, as amended (the "Exchange Act") (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (b) as to any other business that the shareholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such shareholder and the beneficial owner, if any, on whose behalf the proposal is made; (c) as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such shareholder, as they appear on the Corporation's books, and of such beneficial owner and (ii) the class and number of shares of the Corporation which are owned beneficially and of record by such shareholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of paragraph (A) (2) of this Bylaw to the contrary, in the event that the number of directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Corporation at least 70 days prior to the first anniversary of the preceding year's annual meeting, a shareholder's notice required by this Bylaw shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the Corporation. (B) Special Meetings of Shareholders. Only such business shall be conducted at -------------------------------- a special meeting of shareholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of shareholders at which directors are to be elected pursuant to the Corporation's notice of meeting (a) by or at the direction of the Board of Directors or (b) by any shareholder of the Corporation who is a shareholder of record at the time of giving of notice provided hereunder, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this Bylaw. Nominations by shareholders of persons for election to the Board of Directors may be made at such a special meeting of shareholders if this shareholder's notice required by paragraph (A) (2) of this Bylaw shall be delivered to the Secretary at the principal executive offices of the -4- Corporation not earlier than the 100th day prior to such special meeting and not later than the close of business on the later of the 75th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. (C) General. ------- (1) Only such persons who are nominated in accordance with the procedures set forth in this Bylaw shall be eligible to serve as directors and only such business shall be conducted at a meeting of shareholders as shall have been brought before the meeting in accordance with the procedure set forth in this Bylaw. The Chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with the procedures set forth in this Bylaw and, if any proposed nomination or business is not in compliance with this Bylaw, to declare that such defective proposal shall be disregarded. (2) For purposes of this Bylaw, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Sections 13, 14 or 15(d) of the Exchange Act. (3) Notwithstanding the foregoing provisions of this Bylaw, a shareholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Bylaw. Nothing in this Bylaw shall be deemed to affect any rights of shareholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. ARTICLE II ---------- Directors Section 1. General Powers. The business and affairs of the Corporation shall - --------- -------------- be managed by its Board of Directors, except as otherwise provided by law or by the Articles of Incorporation. -5- Section 2. Number, Tenure and Qualifications, and Removal. The number of - ---------- ---------------------------------------------- directors of the Corporation shall be as determined from time to time by the Board of Directors but effective January 6, 2001, shall be eight (8) members. Each director shall hold office for the term for which he is named or elected and until his successor shall have been elected and qualified, or until his resignation or removal. The age limit for directors, including directors who have served as Chief Executive Officer of the Corporation shall be age seventy- two, and for employee directors who have not served as Chief Executive Officer of the Corporation shall be age sixty-five. A director shall not be eligible for re-election at the annual meeting of the shareholders next following the date on which he attains the applicable age limit. Notwithstanding the foregoing provisions of this Section 2, the term of office of an employee director who has not served as Chief Executive Officer of the Corporation shall expire upon termination of his employment unless the Board of Directors shall theretofore have requested that he continue to hold office following such termination of employment. Any director may be removed from office as a director but only for cause and by the affirmative vote of the holders of a majority of the shares entitled to vote at an election of directors. Section 3. Annual Meetings. The newly elected Board of Directors shall meet - --------- --------------- immediately following the annual meeting of shareholders at the place where such annual shareholders meeting is held for the purpose of the organization of the Board, the election of officers, and the transaction of such other business as may properly come before the meeting, and no notice of such meeting shall be necessary. Section 4. Regular Meetings. Regular meetings of the Board of Directors may be - --------- ---------------- held without notice at such times and at such places, within or without the State of Michigan, as shall from time to time be determined by the Board. Section 5. Special Meetings. Special meetings of the Board of Directors may be - --------- ---------------- called by the Chairman of the Board, the President or a majority of the directors, and shall be called at the request of any two directors. Such meetings, if called by the Chairman of the Board, the President or by a majority of the directors may be held at such place within or without the State of Michigan as the Chairman of the Board, the President or as a majority of the Board of Directors may from -6- time to time determine. If any such special meetings are called other than by the Chairman of the Board, the President or a majority of the Board of Directors, they shall be held at the registered office of the Corporation in the State of Michigan unless otherwise consented to in writing by all of the directors or unless previous nuclear attack prevents the holding of a meeting at such place, in which case such meeting shall be held as close to such registered office as possible. Section 6. Notice. Notice of any special meeting of directors shall be given - --------- ------ by or at the direction of the Chairman of the Board, the President, the Secretary or the directors calling the meeting by written notice delivered personally or mailed to each director at his business address, or by telegram. If mailed, such notice shall be given at least four days prior to the meeting and shall be deemed to be given when deposited in the United States mail in a sealed envelope so addressed, with postage thereon prepaid. If notice be given by telegram, such notice shall be given at least twenty-four hours prior to the meeting and shall be deemed to be given when the telegram is delivered to the telegraph company. Any director may waive notice of any meeting. The attendance of a director at, or participation in, any meeting shall constitute a waiver of notice of such meeting, unless the director, at the beginning of the meeting, or upon his or her arrival, objects to the meeting or the transacting of business at the meeting and does not thereafter vote for or assent to any action taken at the meeting. A director may participate in a meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can communicate with each other and such participation shall constitute attendance at any meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. Section 7. Quorum. A majority of the Board of Directors then in office shall - --------- ------ constitute a quorum for the transaction of business at any meeting of the Board of Directors, but, if less than a majority of the directors are present at said meeting, a majority of the directors present may adjourn the meeting from time to time without further notice. -7- Section 8. Manner of Acting. The vote of the majority of directors present at - --------- ---------------- the meeting at which a quorum is present shall be the act of the Board of Directors, unless a larger number is required by law, the Articles of Incorporation or these Bylaws. Section 9. Vacancies. Vacancies in the Board of Directors may be filled by a - --------- --------- majority of the remaining members of the Board though less than a quorum. Such vacancies may be filled for a term of office continuing only until the next election of Directors by the Shareholders. Section 10. Compensation. Directors as such shall not receive any stated - ---------- ------------ salaries for their services, but by resolution of the Board of Directors, adopted by a majority of directors then in office, a fixed sum and expenses of attendance, if any may be allowed for attendance at each meeting of the Board of Directors; provided that nothing herein contained shall be construed to preclude any director from serving the Corporation in any capacity other than as a director or officer and receiving compensation therefor. Section 11. Committees. The Board of Directors may designate one or more - ---------- ---------- committees, each committee to consist of one or more directors, and may designate one or more directors as alternate members of a committee to replace an absent or disqualified member at a committee meeting. In the absence or disqualification of a member of a committee, the members thereof present at a meeting and not disqualified from voting, whether or not they constitute a quorum, may by unanimous vote appoint another director to act at the meeting in the place of such absent or disqualified member. Committees and each member thereof shall serve at the pleasure of the Board. To the extent provided by the resolution of the Board of Directors a committee shall have and may exercise all powers and authority of the Board in the management of the business and affairs of the Corporation. -8- ARTICLE III ----------- Officers Section 1. Number. The Board of Directors shall elect a Chairman of the Board, - --------- ------ a President, a Secretary and a Treasurer, (and shall designate a Chief Executive Officer in accordance with Section 5 of this Article III) and may elect a Vice Chairman of the Board, a Controller, one or more Executive Vice Presidents, Vice Presidents, Assistant Secretaries, Assistant Treasurers and such other officers and agents as it may deem necessary for the transaction of the business of the Corporation. No one of the said officers except the Chairman of the Board, the Vice Chairman of the Board, and the President need be a director. Two or more of the above offices except those of President and Vice President may be held by the same person, but no officer shall execute, acknowledge or verify any instrument in more than one capacity if the instrument is required by law or the Articles of Incorporation or these Bylaws to be executed, acknowledged or verified by two or more officers. Section 2. Election and Term of Office. The officers of the Corporation shall - --------- --------------------------- be elected annually by the Board of Directors at the first meeting of the Board of Directors held after each annual meeting of shareholders subject to the power of the Board of Directors to designate any office at any time and elect any person thereto. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as conveniently may be. Each officer shall hold office for the term for which he is elected and until his successor is elected and qualified or until his resignation or removal. Section 3. Removal and Resignations. Any officer or agent may be removed by - --------- ------------------------ the Board of Directors with or without cause. An officer may resign by written notice to the Corporation. Such resignations shall be effective upon receipt by the Corporation or at a subsequent time specified in the notice of resignation. Section 4. Vacancies. The Board of Directors shall have the power to fill any - --------- --------- vacancies in any office occurring from whatever reason. -9- Section 5. The Chief Executive Officer. The Board of Directors shall designate - --------- --------------------------- and appoint a Chief Executive Officer who may, but need not, be the Chairman of the Board or the President. Subject to the direction and under the supervision of the Board of Directors, the Chief Executive Officer shall be the highest ranking officer of the Corporation, shall manage the business and affairs of the Corporation, and shall be in charge of its property and have control over its officers, agents and employees. Subject to the direction and under the supervision of the Board of Directors, the Chief Executive Officer may execute in the name of the Corporation all deeds, bonds, mortgages, contracts and other documents except in cases where the execution thereof shall be expressly and specifically delegated by the Board of Directors or these Bylaws exclusively to some other person or persons. The President may act as the Chief Executive Officer in the case of the Chief Executive Officer's sickness, disability or temporary absence from the Corporation's Registered Office, and whether or not the Chief Executive Officer is sick, disabled or absent, the President may execute on behalf of the Corporation any deed, bond, mortgage, contract or document which a Chief Executive Officer is authorized hereinabove to execute, subject to the direction and supervision of the Board of Directors and the Chief Executive Officer. If the offices of President and Chief Executive Officer are combined, the Executive Vice President with the greatest length of service in such capacity or, if there be no Executive Vice President, the Chairman of the Board, may act as the Chief Executive Officer in the case of the Chief Executive Officer's sickness, disability or temporary absence from the Corporation's Registered Office, and whether or not the Chief Executive Officer is sick, disabled or absent, such Executive Vice President or Chairman of the Board, as the case may be, may execute on behalf of the Corporation any deed, bond, mortgage, contract or document which a Chief Executive Officer is authorized hereinabove to execute, subject to the direction and supervision of the Board of Directors and the Chief Executive Officer. Section 6. Authority of Officers, Agents and Employees, Generally. Except as - --------- ------------------------------------------------------ otherwise provided by law, the Articles of Incorporation or these Bylaws, all officers, agents and employees of the Corporation shall have such powers and perform such duties as from time to time may be prescribed by the Board of Directors, or the Chief Executive Officer. However, unless specifically authorized by resolution of the Board of Directors, a person who is not an officer of the Corporation -10- shall have no authority to execute on its behalf any (1) contract for the purchase or sale of lands or buildings, (2) deed, (3) lease of lands or buildings, (4) mortgage, (5) instrument creating any lien on the personal or real property of the Corporation or (6) contract or other instrument not entered into in the ordinary course of business. Section 7. The Chairman of the Board, The Vice Chairman of the Board and the - --------- ----------------------------------------------------------------- President. In addition to the powers and duties elsewhere herein conferred or - --------- provided for, the Chairman of the Board, the Vice Chairman of the Board, the Chief Executive Officer and the President shall have the following powers and duties subject to the direction and under the supervision of the Board of Directors. The Chairman of the Board shall preside at meetings of the Board of Directors and of the shareholders. In the absence of the Chairman of the Board, the Vice Chairman of the Board, if such office shall be created, shall so preside. The Chief Executive Officer shall preside at meetings of the Board of Directors and of the shareholders in the absence of the Chairman of the Board and any Vice Chairman of the Board. The President shall preside at meetings of the Board of Directors and of the shareholders in the absence of the Chairman of the Board, any Vice Chairman of the Board and the Chief Executive Officer. Section 8. The Secretary. In addition to the powers and duties elsewhere - --------- ------------- herein conferred or provided for, the Secretary shall have the following powers and duties subject to the direction and under the supervision of the Board of Directors and the Chief Executive Officer. He shall attend all meetings of the Board and all meetings of the shareholders and act as clerk thereof and record all votes and the minutes of all proceedings in a book to be kept for that purpose. He shall perform like duties for all directors' committees when required. He shall have custody of the seal of the Corporation and shall have authority to cause such seal to be affixed to or impressed or otherwise reproduced upon all documents the execution of which on behalf of the Corporation shall have been duly authorized. He shall cause to be kept records containing the names and addresses of all shareholders of the Corporation, the number, class and series of shares held by each and the dates when they respectively became shareholders of record thereof at the registered office of the Corporation or at the office of its transfer agent within or without the State of Michigan. In general, he shall perform the duties usually incident to the office of Secretary. At any meeting of the shareholders or Board of Directors at which the Secretary is not present a Secretary Pro Tempore or -11- Clerk of the meeting may be appointed by the meeting. Section 9. The Treasurer. In addition to the powers and duties elsewhere - --------- ------------- herein conferred or provided for, the Treasurer shall have the following powers and duties subject to the direction and under the control of the Board of Directors and the Chief Executive Officer. He shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation. He shall deposit all moneys and other valuable effects in the name of and to the credit of the Corporation, in such depositaries as may be designated by the Board of Directors, and, in general, he shall perform the duties usually incident to the office of Treasurer. If required by the Board of Directors, the Treasurer shall furnish the corporation with a proper bond, in a sum and with one or more sureties satisfactory to the Board of Directors, for the faithful performance of the duties of his office, and for the restoration to the Corporation in case of his death, resignation, retirement or removal from office of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control and belonging to the Corporation. Section 10. Assistant Secretaries and Assistant Treasurers. In addition to the - ---------- ---------------------------------------------- powers and duties elsewhere herein conferred or provided for, Assistant Secretaries and Assistant Treasurers shall have the following powers and duties subject to the direction and under the supervision of the Board of Directors and the Chief Executive Officer. Any Assistant Secretary or Assistant Treasurer may act as the Secretary or Treasurer, respectively, in the case of the sickness, disability or temporary absence from the Registered Office of the Corporation of the Secretary or Treasurer, as the case may be. In addition, any Assistant Secretary shall have the authority to cause the seal of the Corporation to be affixed to or impressed or otherwise reproduced upon all documents the execution of which on behalf of the Corporation shall have been duly authorized whether or not the Secretary is sick, disabled or absent. Section 11. Remuneration. The Board of Directors shall set from time to time - ---------- ------------ the remuneration of the officers of the Corporation after reviewing the recommendation of the Chief Executive Officer and as appropriate the report or recommendation of a committee of the Board consisting of one or more directors who are not also salaried employees of the Corporation. -12- ARTICLE IV ---------- Indemnification of Directors, Officers, Employees and Agents Section 1. Non-Derivative Actions. Subject to all of the other provisions of - ---------- ---------------------- this Article IV, the Corporation shall 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 the Corporation) by reason of the fact that the person is, was or agreed to become a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, whether for profit or not, against expenses (including attorneys' fees), judgments, penalties, fines, and amounts paid in settlement actually and reasonably incurred by him or her in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the Corporation 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. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the Corporation or its shareholders, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful. Section 2. Derivative Actions. Subject to all of the provisions of this - --------- ------------------ Article IV, the Corporation shall indemnify any person who was or is a party to or is threatened to be made a party to, or called as a witness in any threatened, pending or completed action or suit and any appeal thereof by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that the person is or was a director of officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee, or agent of another foreign or -13- domestic corporation, partnership, joint venture, trust or other enterprise, whether for profit or not, against expenses (including actual and reasonable attorneys' fees) and amounts paid in settlement incurred by the person in connection with such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the Corporation or its shareholders. However, indemnification shall not be made for any claim, issue or matter in which such person has been found liable to the Corporation unless and only to the extent that the court in which such action or suit was brought has determined upon application that, despite the adjudication of liability but in view of all circumstances of the case, such person is fairly and reasonably entitled to indemnification for the expenses which the court considers proper. Section 3. Expenses or Successful Defense. To the extent that a person has - --------- ------------------------------ been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 1, 2, 8 or 13 of these Bylaws, or in defense of any claim, issue or matter in the action, suit or proceeding, the person shall be indemnified against expenses (including actual and reasonable attorneys' fees) incurred by such person in connection with the action, suit or proceeding and any action, suit or proceeding brought to enforce the mandatory indemnification provided by this Section 3. Section 4. Definition. For the purposes of Sections 1, 2 and 13, "other - --------- ---------- enterprises" shall include employee benefit plans; "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; and "serving at the request of the Corporation" shall include any service as a director, officer, employee, or agent of the Corporation which imposes duties on, or involves services by, the director or officer with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner the person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be considered to have acted in a manner "not opposed to the best interests of the Corporation or its shareholders" as referred to in Sections 1 and 2. Section 5. Contract Right; Limitation on Indemnity. This Article IV shall be - --------- --------------------------------------- applicable to all proceedings commenced or continuing after its adoption, whether such arise out of events, acts or omissions which occurred prior or subsequent to such adoption, and shall continue as to a person who has ceased to be a director, officer or a person serving at the request of the Corporation as a -14- director, trustee, fiduciary, employee, agent or officer of another corporation, partnership, joint venture, trust or other person. This article IV shall be deemed to be a contract between the Corporation and each person who, at any time that this Article IV is in effect, serves or agrees to serve in any capacity which entitles him or her to indemnification hereunder and any repeal or other modification of this Article IV or any repeal or modification of the Michigan Business Corporation Act or any other applicable law shall not limit any rights of indemnification for proceedings then existing or later arising out of events, acts or omissions occurring prior to such repeal or modification for proceedings commenced after such repeal or modification to enforce this Article IV with regard to proceedings arising out of acts, omissions or events occurring prior to such repeal or modification. The right to indemnification conferred in this Article IV shall apply to services of a director or officer as an employee or agent of the Corporation as well as in such person's capacity as a director or officer. Except as provided in Sections 3 and 6 of these Bylaws, the Corporation shall have no obligations under this Article IV to indemnify any person in connection with any proceeding, or part thereof, initiated by such person without authorization by the Board of Directors. Section 6. Right of Claimant to Bring Suit. If a claim under Sections 1, 2, 8 - --------- ------------------------------- or 13 of this Article is not paid in full by the Corporation within thirty days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that indemnification of the claimant is prohibited by applicable law, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, its General Counsel or its shareholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, its General Counsel or its shareholders) that indemnification of the claimant is prohibited by applicable law, shall be a defense to the action or create a presumption that indemnification of the claimant is prohibited by -15- applicable law. Section 7. Proportionate Indemnity. If a person is entitled to indemnification - --------- ----------------------- under Sections 1, 2 or 13 of these Bylaws for a portion of expenses, including attorneys' fees, judgments, penalties, fines, and amounts paid in settlements, but not for the total amount thereof, the Corporation shall indemnify the person for the portion of the expenses, judgments, penalties, fines, or amounts paid in settlement for which the person is entitled to be indemnified. Section 8. Expense Advance. Expenses incurred in defending a civil or criminal - --------- --------------- action, suit or proceeding and any appeal thereof described in Sections 1, 2 or 13 of these Bylaws shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding; provided, however, that if ----------------- required by the Michigan Business Corporation Act, such expenses shall not be paid by the Corporation unless the Corporation receives an undertaking by or on behalf of the person involved to repay the expenses if it is ultimately determined that the person is not entitled to be indemnified by the Corporation. Section 9. Non-Exclusivity of Rights. The indemnification or advancement of - --------- ------------------------- expenses provided under this Article IV is not exclusive of other rights to which a person seeking indemnification or advancement of expenses may be entitled under any statute, provision of the Corporation's Articles of Incorporation, contractual arrangement, vote of the shareholders or disinterested directors or otherwise. However, the total amount of expenses advanced or indemnified from all sources combined shall not exceed the amount of actual expenses incurred by the person seeking indemnification or advancement of expenses. Section 10. Indemnification of Employees and Agents of the Corporation. The - ---------- ---------------------------------------------------------- Corporation may, to the extent authorized from time to time by the Board of Directors, or by written opinion of the General Counsel with respect to agents and employees of the Corporation not serving on its Executive Council or Advisory Board or their equivalents, grant rights to indemnification and to the advancement of expenses to any employee or agent of the Corporation to the fullest extent of the provisions of this Article IV with respect to the indemnification and advancement of expenses of directors and officers of the Corporation. -16- Section 11. Insurance. The Corporation may purchase and maintain insurance on - ---------- --------- behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another Corporation, partnership, joint venture, trust or other enterprise against any liability asserted against the person and incurred by him or her in any such capacity or arising out of his or her status as such, whether or not the Corporation would have power to indemnify the person against such liability under these Bylaws of the State of Michigan. Section 12. No Liability if Determination Made in Good Faith. Neither the - ---------- ------------------------------------------------ Corporation nor its directors or officers nor any person acting on its behalf shall be liable to anyone for any determination as to the existence or absence of conduct which would provide a basis for making or refusing to make any payment under this Article IV or for taking or omitting to take any other action under this Article, in reliance upon the advice of counsel. Section 13. Scope of Indemnity; Changes in Michigan Law. Notwithstanding any - ---------- ------------------------------------------- of the other provisions in this Article IV, each 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 (hereinafter a "proceeding"), by reason of the fact that the person is, was or agreed to become a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, partner, trustee, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, whether for profit or not, whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee, trustee, or agent or in any other capacity while serving as a director, officer, employee, trustee, or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Michigan Business Corporation Act, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), against all expenses (including attorneys' fees and other expenses of litigation), judgments, fines, penalties and amounts paid in settlement actually and reasonably incurred by such -17- person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer, employee, trustee, or agent and shall inure to the benefit of his or her heirs, executors and administrators: provided, however, that, except as provided in Sections 3 and 6 hereof, the Corporation shall indemnify any such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. Section 14. Severability. If any portion of this Article IV shall be - ---------- ------------ invalidated or held to be unenforceable on any ground by any court of competent jurisdiction, the decision of which shall not have been reversed on appeal, such invalidity or unenforceability shall not affect the other provisions hereof, and this Article shall be construed in all respects as if such invalid or unenforceable provisions had been omitted therefrom. ARTICLE V --------- Fixing Record Date In order to determine the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. If no record date is fixed, the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held, and the record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. -18- ARTICLE VI ---------- Loans, Checks, Deposits, etc. Section 1. Loans. No loans shall be contracted on behalf of the Corporation - --------- ----- and no evidences of indebtedness shall be issued in its name unless authorized by a resolution of the Board of Directors. Such authority may be general or confined to specific instances. Section 2. Checks, Drafts, etc. All checks, drafts, or other orders for the - --------- ------------------- payment of money, notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by such officers, employees, or agents of the Corporation and in such manner as shall from time to time be determined by or pursuant to and in accordance with general or specific resolutions of the Board of Directors. Section 3. Deposits. All funds of the Corporation not otherwise employed shall - --------- -------- be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositaries as the Board of Directors may select. Such selection shall be by or pursuant to and in accordance with a general or specific resolution of the Board of Directors. ARTICLE VII ----------- Certificates for Shares Section 1. Certificates for Shares. Certificates representing shares of the - --------- ----------------------- Corporation shall be in such form conforming to applicable laws as may be determined by the Board of Directors and shall be signed by or in the name of the Corporation by the Chairman of the Board, the Vice Chairman of the Board, the President or a Vice President and may also be signed by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary of the Corporation, certifying the number, and class and series of shares represented by such certificate. The signatures of the officers may be facsimiles if the certificate is countersigned by a transfer agent or registered by a registrar other than the Corporation or its employee. In case any officer has signed or whose facsimile signature has been placed upon a certificate ceases to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the date of issue. -19- Section 2. Lost Certificates. If a certificate of stock be lost or destroyed, - --------- ----------------- a new certificate of the identical tenor of the one alleged to be lost or destroyed may be issued upon satisfactory proof of such loss or destruction, and the giving of a bond sufficient to indemnify the Corporation against any claim that may be made against the Corporation on account of the alleged lost or destroyed certificate or the issuance of such a new certificate. Section 3. Transfer of Shares. Transfers of shares of the Corporation shall be - --------- ------------------ made only on the books of the Corporation by the registered holder thereof or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary or transfer agent of the Corporation, and on surrender for cancellation of the certificate for such shares. The person in whose name shares stand on the books of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation. Section 4. Regulations. The Board of Directors may make such rules and - --------- ----------- regulations as it may deem expedient concerning the issue, transfer and registration of the certificates for shares. It may appoint one or more transfer agents or registrars or both, and may require all certificates to bear the signature of either or both. Section 5. Elimination of Certificates for Stock. The Corporation may by - --------- ------------------------------------- resolution of the Board of Directors eliminate certificates representing shares of the Corporation and provide for such other methods of recording, noticing ownership and disclosure as may be provided by the rules of any national securities exchange on which such shares are listed. ARTICLE VIII ------------ Fiscal Year The fiscal year of the Corporation shall begin on the first day of January in each year and end on the thirty-first day of December in each year. -20- ARTICLE IX ---------- Seal The following shall be the design for the corporate seal of the Corporation: two concentric rings with the words "Federal-Mogul Corporation, Michigan" between the circles and the words "Corporate Seal" in the center. ARTICLE X --------- Emergency Provisions Section 1. General. The provisions of this Article shall be operative only - --------- ------- during a national emergency declared by the President of the United States or the person performing the President's functions, or in the event of a nuclear, atomic or other attack on the United States or a disaster making it impossible or impracticable for the Corporation to conduct its business without recourse to the provisions of this Article. Said provisions in such event shall override all other Bylaws of the Corporation in conflict with any provisions of this Article, and shall remain operative so long as it remains impossible or impracticable to continue the business of the Corporation otherwise, but thereafter shall be inoperative; provided that all actions taken in good faith pursuant to such provisions shall thereafter remain in full force and effect unless and until revoked by action taken pursuant to the provisions of the Bylaws other than those contained in this Article. Section 2. Unavailable Directors. All directors of the Corporation who are not - --------- --------------------- available to perform their duties as directors by reason of physical or mental incapacity or for any other reason or who are unwilling to perform their duties or whose whereabouts are unknown shall automatically cease to be directors, with like effect as if such persons had resigned as directors, so long as such unavailability continues. Section 3. Authorized Number of Directors. The authorized number of directors - --------- ------------------------------ shall be the number of directors remaining after eliminating those who have ceased to be directors pursuant to Section 2 of this Article, or the minimum number required by law, whichever number is greater. -21- Section 4. Quorum. The number of directors necessary to constitute a quorum - --------- ------ shall be one-third of the authorized number of directors as specified in the foregoing Section, or such other minimum number as, pursuant to the law or lawful decree then in force, it is possible for the Bylaws of a corporation to specify. Section 5. Creation of Emergency Committee. In the event the number of - --------- ------------------------------- directors remaining after eliminating those who have ceased to be directors pursuant to Section 2 of this Article is less than the minimum number of authorized directors required by law, then until the appointment of additional directors to make up such required minimum, all the powers and authorities which the Board could by law delegate, including all powers and authorities which the Board could delegate to a committee, shall be automatically vested in an emergency committee, and the emergency committee shall thereafter manage the affairs of the Corporation pursuant to such powers and authorities and shall have all other powers and authorities as may by law or lawful decree be conferred on any person or body of persons during a period of emergency. Section 6. Constitution of Emergency Committee. The emergency committee shall - --------- ----------------------------------- consist of all the directors remaining after eliminating those who have ceased to be directors pursuant to Section 2 of this Article, provided that such remaining directors are not less than three in number. In the event such remaining directors are less than three in number, the emergency committee shall consist of three persons, who shall be the remaining director or directors and either one or two officers or employees of the Corporation, as the remaining director or directors may in writing designate. If there is no remaining director, the emergency committee shall consist of the three most senior officers of the Corporation who are available to serve, and if and to the extent that officers are not available, the most senior employees of the Corporation. Seniority shall be determined in accordance with any designation of seniority in the minutes of the proceedings of the Board, and in the absence of such designation, shall be determined by rate of remuneration. In the event that there are no remaining directors and no officers or employees of the Corporation available, the emergency committee shall consist of three persons designated in writing by the shareholder owning the largest number of shares of record as of the date of the last record date. -22- Section 7. Powers of Emergency Committee. The emergency committee, once - --------- ----------------------------- appointed, shall govern its own procedures and shall have power to increase the number of members thereof beyond the original number, and in the event of a vacancy or vacancies therein, arising at any time, the remaining member or members of the emergency committee shall have the power to fill such vacancy or vacancies. In the event at any time after its appointment all members of the emergency committee shall die or resign or become unavailable to act for any reason whatsoever, a new emergency committee shall be appointed in accordance with the foregoing provisions of this Article. Section 8. Directors Becoming Available. Any person who has ceased to be a - --------- ---------------------------- director pursuant to the provisions of Section 2 of this Article and who thereafter becomes available to serve as a director shall automatically become a member of the emergency committee. Section 9. Election of Board of Directors. The emergency committee shall, as - --------- ------------------------------ soon after its appointment as is practicable, take all requisite action to secure the election of a Board of Directors, and upon such election all the powers and authorities of the emergency committee shall cease. Section 10. Termination of Emergency Committee. In the event, after the - ---------- ---------------------------------- appointment of an emergency committee, a sufficient number of persons who ceased to be directors pursuant to Section 2 of this Article become available to serve as directors, so that if they had not ceased to be directors as aforesaid, there would be enough directors to constitute the minimum number of directors required by law, then all such persons shall automatically be deemed to be reappointed as directors and the powers and authorities of the emergency committee shall be at an end. ARTICLE XI ---------- Amendments These Bylaws may be altered or new Bylaws may be made and adopted by the affirmative vote of a majority of the Board of Directors. -23- EX-4.9 3 0003.txt FIRST SUPPLEMENTAL INDENTURE Exhibit 4.9 FIRST SUPPLEMENTAL INDENTURE To INDENTURE dated as of August 12, 1994 among FEDERAL-MOGUL CORPORATION as Issuer, THE GUARANTORS PARTY HERETO FROM TIME TO TIME as Guarantors and CONTINENTAL BANK as Trustee Dated as of July 8, 1998 FIRST SUPPLEMENTAL INDENTURE, dated as of July 8, 1998 among Federal-Mogul Corporation, a Michigan corporation, as issuer (the "Company"), the companies listed on the signature pages hereto that are subsidiaries of the Company (the "Guarantors") and Continental Bank, an Illinois banking corporation, as trustee (the "Trustee"). RECITALS The Company has duly executed and delivered an Indenture (as such may be amended, supplemented or modified from time to time, the "Indenture") dated as of August 12, 1994, providing for the issuance from time to time of its unsecured debentures, notes or other evidence of indebtedness ("Securities") to be issued in one or more series. The Company has authorized the issuance of nine separate series of Securities designated as the Company's 8.80% Senior Notes due April 15, 2007 (the "8.80% Notes"), 8.06% Medium-Term Notes due October 12, 1999 (the "8.06% Notes"), 8.53% Medium-Term Notes due November 16, 1999 (the "8.53% Notes"), 8.66% Medium-Term Notes due November 16, 2000 (the "8.66% Notes"), 8.33% Medium- Term Notes due October 12, 2001 (the "8.33% Notes"), 8.37% Medium-Term Notes due October 18, 2001(the "8.37% Notes"), 8.46% Medium-Term Notes due October 18, 2002 (the "8.46% Notes"), 8.12% Medium-Term Notes due March 6, 2003 (the "8.12% Notes"), 8.16% Medium-Term Notes due March 6, 2003 (the "8.16% Notes"), and 8.24 Medium-Term Notes due March 6, 2005 (the "8.25% Notes," together with the 8.80% Notes, the 8.06% Notes, the 8.53% Notes, the 8.66% Notes, the 8.33% notes, the 8.37% Notes , the 8.46% Notes, the 8.12% Notes, the 8.16% Notes and the 8.25% Notes, the "Notes"), respectively, in the aggregate principal amount of $125,000,000 in the case of 8.80% Notes, $5,000,000 in the case of the 8.06% Notes, $16,000,000 in the case of 8.53% Notes, $20,000,000 in the case of 8.66% Notes, $12,000,000 in the case of the 8.33% Notes, $32,000,000 in the case of 8.37% Notes, $5,000,000 in the case of 8.46% Notes, $10,000,000 in the case of 8.12% Notes, $10,000,000 in the case of 8.16% Notes and $15,000,000 in the case of the 8.25% Notes. The Guarantors each desire to guarantee each of the aforementioned series of Securities and each additional series hereafter issued pursuant to the Indenture, such guarantees to be on the terms set forth herein. Section 901 of the Indenture provides that the Company and the Trustee may at any time and from time to time enter into one or more indentures supplemental to the Indenture to establish, among other things, to make provisions with respect to matters arising under the Indenture provided that such action does not adversely affect the rights of holders of any series of securities issued pursuant to the Indenture in any material respect. All things necessary to make this First Supplemental Indenture a valid agreement of the Company, the Guarantors and the Trustee, in accordance with its terms, have been done. For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed as follows for the equal and ratable benefit of the Holders of the Securities: ARTICLE 1 DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION Section 1.1 Definitions. (a) For all purposes of this First Supplemental ----------- Indenture, except as otherwise expressly provided or unless the context otherwise requires: 1. the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular; 2. all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein; 3. all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles; and 4. the words "herein" , "hereof" and "hereunder" and other words of similar import refer to this First Supplemental Indenture as a whole and not to any particular Article, Section or other subdivision. "Obligations" means any principal, premiums, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any indebtedness issued hereunder. "Senior Credit Agreement" means the Second Amended and Restated Credit Agreement among Federal-Mogul Corporation, The Chase Manhattan Bank as Agent and the lenders thereunder, dated as of December 18, 1997, as amended. Section 1.2. Headings. The Article and Section headings herein are for -------- convenience only and shall not affect the constriction hereof. Section 1.3. Successors and Assigns. This First Supplemental Indenture ---------------------- shall be binding upon the Company and the Guarantors and their respective successors and assigns and shall inure to the benefit of the Trustee and the Holders and, in the event of any transfer or assignment of rights by any Holder or the Trustee, the rights and privileges conferred upon that party in the Indenture and this First Supplemental Indenture and in the Securities shall automatically extend to and be vested in such transferee or assignee, all subject to the conditions of the Indenture. This First Supplemental Indenture shall be binding upon the Trustee and its successors and assigns. Section 1.4. Ratification of Indenture: Supplemental Indentures Part of ----------------------------------------------------------- Indenture. Except as expressly amended hereby, the Indenture is in all respects - --------- ratified and confirmed and all the terms, conditions and provisions thereof shall remain in full force and effect. This First Supplemental Indenture shall form a part of the Indenture for all purposes, and every Holder of Securities heretofore or hereafter authenticated and delivered shall be bound hereby. Section 1.5. Governing Law. THIS FIRST SUPPLEMENTAL INDENTURE AND THE ------------- GUARANTEES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. Section 1.6. Counterparts. This First Supplemental Indenture may be ------------ executed in any number of counterparts and by telecopier, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument. ARTICLE 2 SCOPE OF THIS FIRST SUPPLEMENTAL INDENTURE Section 2.1. Scope. The changes, modifications and supplements to the ----- Indenture effected by this First Supplemental Indenture shall be applicable with respect to, and govern the terms of, the Securities heretofore and hereafter issued pursuant to the Indenture. ARTICLE 3 NOTICES Section 3.1. Notices, etc., to the Trustee, the Company and the -------------------------------------------------- Guarantors. Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by the Indenture to be made upon, given or furnished to, or filed with, (a) the Trustee by any Holder or by the Company or any Guarantor shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Trustee at 231 LaSalle street, 16/th/ Floor, Chicago, Illinois 60697, Attention: Corporate Trust Department, or (b) the Company, or any Guarantor, by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company, or any Guarantor, addressed to it at Federal-Mogul Corporation, 26555 Northwestern Highway, Southfield, Michigan 48034, Attention: General Counsel or at any other address previously furnished in writing to the Trustee by the Company. This Section 3.1 is intended to supersede Section 1.05 of the Indenture. ARTICLE 4 GUARANTEES Section 1.4. Guarantees. (a) Subject to the provisions of this Article 4, ---------- each Guarantor, jointly and severally, hereby irrevocably and unconditionally guarantees to each Holder of Securities and to the Trustee on behalf of the Holders (i) the due and punctual payment of principal of, premium, if any, and interest in full on each Security when and as the same shall become due and payable whether at Stated Maturity, by declaration of acceleration or otherwise, (ii) the due and punctual payment of interest on the overdue principal of, premium, if any, and interest in full on the Securities, to the extent permitted by law, and (iii) the due and punctual performance of all other Obligations of the Company and the other Guarantors to the Holders or the Trustee, including without limitation the payment of fees, expenses, indemnification or other amounts, all in accordance with the terms of the Securities and the Indenture. In case of the failure of the Company punctually to make any such principal or interest payment or the failure of the Company or any other Guarantor to perform any such other Obligation, each Guarantor hereby agrees to cause any such payment to be made punctually when and as the same shall become due and payable, whether at Stated Maturity, by declaration of acceleration or otherwise, and as if such payment were made by the Company and to perform any such other Obligation of the Company immediately. Each Guarantor hereby further agrees to pay any and all expenses (including reasonable counsel fees and expenses) incurred by the Trustee or the Holders in enforcing any rights under these Guarantees. The Guarantees under this Article 4 are guarantees of payment and not of collection. (b) To the extent permitted by law, each of the Company and the Guarantors hereby waives diligence, presentment, demand of payment, filing of claims with a court in the event of merger, insolvency or bankruptcy of the Company or any other Guarantor, any right to require a proceeding first against the Company or any other Guarantor, protest or notice with respect to the Securities or the indebtedness evidenced thereby and all demands whatsoever, and covenants that these Guarantees will not be discharged except by complete performance of the Obligations contained in the Securities and in the Indenture, or as otherwise specifically provided therein and herein. (c) To the extent permitted by law, each Guarantor hereby waives and relinquishes: (i) any right to require the Trustee, the Holders or the Company (each, a "Benefited Party") to proceed against the Company, the Subsidiaries of the Company or any other Person or to proceed against or exhaust any security held by a Benefited Party at any time or to pursue any other remedy in any secured party's power before proceeding against the Guarantors; (ii) any defense that may arise by reason of the incapacity, lack of authority, death or disability of any other Person or Persons or the failure of a Benefited Party to file or enforce a claim against the estate (in administration, bankruptcy or any other proceeding) of any other Person or Persons; (iii) demand, protest and notice of any kind (except as expressly required by the Indenture), including but not limited to notice of the existence, creation or incurring of any new or additional indebtedness or obligation or of any action or non-action on the part of the Guarantors, the Company, the Subsidiaries of the Company, any Benefited Party, any creditor of the Guarantors, the Company or the Subsidiaries of the Company or on the part of any other Person whomsoever in connection with any obligations the performance of which are hereby guaranteed; (iv) any defense based upon an election of remedies by a Benefited Party, including but not limited to an election to proceed against the Guarantors for reimbursement; (v) any defense based upon any statute or rule of law which provides that the obligation of a surety must be neither larger in amount nor in other respects more burdensome than that of the principal; (vi) any defense arising because of a Benefited Party's election, in any proceeding instituted under the Bankruptcy Law, of the application of Section 1111(b) (2) of the Bankruptcy Law; and (vii) any defense based on any borrowing or grant of a security interest under Section 364 of the Bankruptcy Law. (d) Each Guarantor further agrees that, as between such Guarantor, on the one hand, and Holders and the Trustee, on the other hand, (i) for purposes of the relevant Guarantee, the maturity of the Obligations Guaranteed by such Guarantee may be accelerated as provided in Article 5 of the Indenture, notwithstanding any stay, injunction or other prohibition preventing such acceleration in respect of the Obligations guaranteed thereby, and (ii) in the event of any acceleration of such Obligations (whether or not due and payable) such Obligations shall forthwith become due and payable by such Guarantor for purposes of such Guarantee. (e) The Guarantee shall continue to be effective or shall be reinstated, as the case may be, if at any time any payment, or any part thereof, of principal of, premium, if any, or interest on any of the Securities is rescinded or must otherwise be returned by the Holders or the Trustee upon the insolvency, bankruptcy or reorganization of the Company or any of the Guarantors, all as though such payment had not been made. (f) Each Guarantor shall be subrogated to all rights of the Holders against the Company in respect of any amounts paid by such Guarantor pursuant to the provisions of the Guarantees or the Indenture; provided, however, that a Guarantor shall not be entitled to enforce -------- ------- or to receive any payments until the principal of, premium, if any, and interest on all Securities issued hereunder shall have been paid in full. Section 4.2. Obligations of Guarantors Unconditional. Each Guarantor --------------------------------------- hereby agrees that its Obligations hereunder shall be Guarantees of payment and shall be unconditional, irrespective of and unaffected by the validity, regularity or enforceability of the Securities of the Indenture, or of any amendment thereto or hereto, the absence of any action to enforce the same, the waiver or consent by any Holder or by the Trustee with respect to any provisions thereof or of the Indenture, the entry of any judgment against the Company or any other Guarantor or any action to enforce the same or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a guarantor. Section 4.3. Limitation on Guarantors' Liability. Each Guarantor, and by ----------------------------------- its acceptance hereof each holder, hereby confirms that it is the intention of all such parties that the Guarantee by such Guarantor pursuant to its Guarantee not constitute a fraudulent transfer or conveyance for purposes of the Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act or any similar federal or state law. To effectuate the foregoing intention, the Holders and such Guarantor hereby irrevocably agree that the Obligations of such Guarantor under this Article 4 shall be limited to the maximum amount as will, after giving effect to all other contingent and fixed liabilities of such Guarantor and after giving effect to any collections from or payments made by or on behalf of any other Guarantor in respect of the Obligations of such other Guarantor under this Article 4, result in the Obligation of such Guarantor under its Guarantee not constituting a fraudulent transfer or conveyance under applicable federal or state law. Section 4.4. Releases of Guarantees. (a) If the Securities are defeased ---------------------- in accordance with the terms of Article 13 of the Indenture, then each Guarantor shall be deemed to have been released from and discharged of its obligations under its Guarantee as provided in Article 13 of the Indenture, applied mutaris mutandis, subject to the conditions state therein. (b) In the event an entity that is a Guarantor ceases to be a guarantor under the Senior Credit Agreement (or any other credit agreement renewing, refunding, replacing, restating, refinancing or extending the Senior Credit Agreement), such entity shall also cease to be a Guarantor, whether or not a Default or an Event of Default is then outstanding. (c) Any Guarantor not released from its obligations under its Guarantee shall remain liable for the full amount of principal of, premium, if any, and interest on the Securities and for the other obligations of the Company, such Guarantor and any other Guarantor under the Indenture as provided in this Article 4. Section 4.5. Application of Certain Terms and Provisions to Guarantors. --------------------------------------------------------- (a) Any notice or demand which by any provision of the Indenture is required or permitted to be given or served by the Trustee or by the Holders of Securities to or on any Guarantor may be given or served as described in Section 105 of the Indenture. (b) Upon any demand, request or application by any Guarantor to the Trustee to take any action under the Indenture, such Guarantor shall furnish to the Trustee such certificates and opinions as are required in Section 603 of the Indenture as if all references therein to the Company were references to such Guarantor. Section 4.6. Additional Guarantors. The Company shall cause each --------------------- subsidiary of the Company that becomes a guarantor under the Senior Credit Agreement, as amended (or any other credit agreement renewing, refunding, replacing, restating, refinancing or extending the Senior Credit Agreement), after the date of this First Supplemental Indenture, to execute and deliver to the Trustee, promptly upon any such formation or acquisition (a) a supplemental indenture in form and substance satisfactory to the Trustee which subjects such subsidiary to the provisions of the Indenture as a Guarantor, and (b) an Opinion of Counsel to the effect that such supplemental indenture has been duly authorized and executed by such subsidiary and constitutes the legal, valid, binding and enforceable obligation of such subsidiary (subject to such customary exceptions concerning fraudulent conveyance laws, creditors' rights and equitable principles as may be acceptable to the Trustee in its discretion). IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental Indenture to be duly executed as of the day and year first above written. FEDERAL-MOGUL CORPORATION by: _________________________________ Name: Title: FEDERAL-MOGUL DUTCH HOLDINGS, INC., as Guarantor by: _________________________________ Name: Title: FEDERAL-MOGUL GLOBAL INC., as Guarantor by: _________________________________ Name: Title: FEDERAL-MOGUL U.K. HOLDINGS, INC., as Guarantor by: _________________________________ Name: Title: CARTER AUTOMOTIVE COMPANY, INC., as Guarantor by: _________________________________ Name: Title: FEDERAL-MOGUL VENTURE CORPORATION, as Guarantor by: ____________________________________ Name: Title: FEDERAL-MOGUL WORLD WIDE, INC., as Guarantor by: ____________________________________ Name: Title: FEDERAL-MOGUL GLOBAL PROPERTIES, INC., as Guarantor by: ____________________________________ Name: Title: FELT PRODUCTS MFG. CO., as Guarantor by: ____________________________________ Name: Title: FEL-PRO MANAGEMENT CO., as Guarantor by: ____________________________________ Name: Title: FEL-PRO CHEMICAL PRODUCTS L.P., as Guarantor by: ____________________________________ Name: Title: F-M UK HOLDINGS LIMITED, as Guarantor by: ____________________________________ Name: Title: CONTINENTAL BANK, as Trustee by: ____________________________________ Name: Title: EX-4.10 4 0004.txt SECOND SUPPLEMENTAL INDENTURE EXHIBIT 4.10 SECOND SUPPLEMENTAL INDENTURE To INDENTURE Dated as of August 12, 1994 Among FEDERAL-MOGUL CORPORATION As Issuer THE GUARANTORS PARTY HERETO FROM TIME TO TIME As Guarantors And U.S. BANK TRUST NATIONAL ASSOCIATION (successor to Continental Bank) as Trustee Dated as of October 9, 1998 SECOND SUPPLEMENTAL INDENTURE, dated as of October 9, 1998 among Federal-Mogul Corporation, a Michigan corporation, as issuer (the "Company"), the companies listed on the signature pages of the Indenture (as hereinafter defined), as supplemented, that are subsidiaries of the Company (the "Original Guarantors"), Champion Spark Plug Company, Cooper Automotive Products, Inc., Cooper Automotive Company, Cooper A&S Company, Moog Automotive Products, Inc., Moog Automotive Batesville, Inc., Moog Redevelopment Corporation, Moog Automotive Company, Champion Aviation, Inc. and Champion InterAmericana, Ltd., each a wholly-owned subsidiary of the Company (the "Additional Guarantors" and together with the Original Guarantors, the "Guarantors") and U.S Bank Trust National Association, a national banking association, as trustee ( the "Trustee"). RECITALS The Company has duly executed and delivered an Indenture (as such may be amended, supplemented or modified from time to time, the "Indenture ") dated as of August 12, 1994, providing for the issuance from time to time of its unsecured debentures, notes or other evidences of indebtedness ("Securities") to be issued in one or more series. U.S. Bank Trust National Association has succeeded Continental Bank as Trustee under the Indenture pursuant to Section 612 thereof by succeeding to the former corporate trust business of Continental Bank. The Company has authorized the issuance of nine separate series of Securities designated as the Company's 8.80% Senior Notes due April 15, 2007 (the "8.80% Notes"), 8.06% Medium-Term Notes due October 20, 1999 (the 8.06% Notes"), 8.53% Medium-Term Notes due November 25, 1999 (the "8.53% Notes"), 8.66% Medium-Term Notes due November 27, 2000 (the "8.66% Notes"), 8.33% Medium- Term Notes due November 15, 2001 (the "8.33% Notes"), 8.37% Medium-Term Notes due November 15, 2001 (the "8.37% Notes"), 8.46% Medium-Term Notes due October 26, 2002 (the "8.46% Notes"), 8.12% Medium-Term Notes due on March 6, 2003 (the "8.12% Notes"), 8.16% Medium-Term Notes due March 6, 2003 (the "8.16% Notes") and 8.25% Medium-Term Notes due March 3, 2005 (the "8.25% Notes," together with the 8.80% Notes, the 8.06% Notes, the 8.53% Notes, the 8.66% Notes, the 8.33% Notes, the 8.37% Notes, the 8.46% Notes, the 8.12% Notes, the 8.16% Notes and the 8.25% Notes, the "Notes"), respectively, in the aggregate principal amount of $125,000,000 in the case of the 8.80% Notes, $5,000,000 in the case of the 8.06% Notes, $16,000,000 in the case of the 8.53% Notes, $20,000,000 in the case of the 8.66% Notes, $12,000,000 in the case of the 8.33% Notes, $32,000,000 in the case of the 8.37% Notes, $5,000,000 in the case of the 8.46% Notes, $10,000,000 in the case of the 8.12% Notes, $10,000,000 in the case of the 8.16% Notes and $15,000,000 in the case of the 8.25% Notes. The Additional Guarantors each desire to guarantee each of the aforementioned series of Securities and each additional series hereafter issued pursuant to the Indenture, such guarantees to be on the terms set forth herein. Section 901 of the Indenture provides that the Company and the Trustee may at any time and from time to time enter into one or more indentures supplemental to the Indenture to establish, among other things, to make provisions with respect to matters arising under the Indenture provided that such action does not adversely affect the rights of holders of any series of securities issued pursuant to the Indenture in any material respect. All things necessary to make this Second Supplemental Indenture a valid agreement of the Company, the Guarantors and the Trustee, in accordance with its terms, have been done. For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed as follows for the equal and ratable benefit of the Holders of the Securities: Article 1 DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION Section 1.1. Definitions. For all purposes of this Second Supplemental ----------- Indenture, capitalized terms used herein without definition shall have the meanings specified in the Indenture. Section 1.2. Headings. The Article and Section headings herein are for -------- convenience only and shall not affect the construction hereof. Section 1.3. Successors and Assigns. This Second Supplemental ---------------------- Indenture shall be binding upon the Company and the Guarantors and their respective successors and assigns and shall inure to the benefit of the Trustee and the Holders and, in the event of any transfer or assignment of rights by any Holder or the Trustee, the rights and privileges conferred upon that party in the Indenture and the Second Supplemental Indenture and in the Securities shall automatically extend to and be vested in such transferee or assignee, all subject to the conditions of the Indenture. This Second Supplemental Indenture shall be binding upon the Trustee and its successors and assigns. Section 1.4. Ratification of Indenture: Supplemental Indentures Part ------------------------------------------------------- of Indenture. Except as expressly amended hereby, the Indenture is in all - ------------ respects ratified and confirmed and all the terms, conditions and provisions thereof shall remain in full force and effect. This Second Supplemental Indenture shall form a part of the Indenture for all purposes, and every Holder of Securities heretofore authenticated and delivered shall be bound hereby. Section 1.5. Governing Law. THIS SECOND SUPPLEMENTAL INDENTURE AND THE ------------- GUARANTEE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. Section 1.6. Counterparts. This Second Supplemental Indenture may be ------------ executed in any number of counterparts and by telecopier, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument. ARTICLE 2 SCOPE AND TERMS OF THIS SECOND SUPPLEMENTAL INDENTURE Section 2.1. Scope. The changes, modifications and supplements to the ----- Indenture effected by this Second Supplemental Indenture shall be applicable with respect to, and govern the terms of, the Securities heretofore and hereafter issued pursuant to the Indenture. Section 2.2. Additional Guarantors. Subject to the provisions of the --------------------- Indenture (including provisions for the release of a Guarantor), the Additional Guarantors shall be subject to the provisions of the Indenture as Guarantor of the Securities. IN WITNESS WHEREOF, the parties hereto have caused this Second Supplemental Indenture to be duly executed as of the day and year first above written. FEDERAL-MOGUL CORPORATION By: __________________________ Name: Title: FEDERAL-MOGUL DUTCH HOLDINGS INC., as Guarantor By: ___________________________ Name: Title: FEDERAL-MOGUL GLOBAL INC., as Guarantor By: ____________________________ Name: Title: FEDERAL-MOGUL U.K HOLDINGS INC., as Guarantor By: _____________________________ Name: Title: CARTER AUTOMOTIVE COMPANY, INC., as Guarantor By: ______________________________ Name: Title: FEDERAL-MOGUL VENTURE CORPORATION, as Guarantor By: _______________________________ Name: Title: FEDERAL-MOGUL WORLD WIDE, INC., as Guarantor By: _______________________________ Name: Title: FEDERAL-MOGUL GLOBAL PROPERTIES, INC., as Guarantor By: ________________________________ Name: Title: FELT PRODUCTS MFG. CO., as Guarantor By: _________________________________ Name: Title: FEL-PRO MANAGEMENT CO., as Guarantor By: _________________________________ Name: Title: MOOG AUTOMOTIVE BATESVILLE, INC., as Guarantor By: ____________________________________ Name: Title: MOOG REDEVELOPMENT CORPORATION, as Guarantor By: ____________________________________ Name: Title: MOOG AUTOMOTIVE COMPANY, as Guarantor By: ____________________________________ Name: Title: CHAMPION AVIATION, INC., as Guarantor By: ____________________________________ Name: Title: CHAMPION INTERAMERICANA, LTD., as Guarantor By: ____________________________________ Name: Title: U.S. BANK TRUST NATIONAL ASSOCIATION, as Trustee By: ____________________________________ Name: Title: F-M UK HOLDINGS LIMITED, as Guarantor By: __________________________________ Name: Title: CHAMPION SPARK PLUG COMPANY, as Guarantor By: __________________________________ Name: Title: COOPER AUTOMOTIVE PRODUCTS, INC., as Guarantor By: ___________________________________ Name: Title: COOPER AUTOMOTIVE COMPANY, as Guarantor By: ___________________________________ Name: Title: COOPER A&S COMPANY, as Guarantor By: ___________________________________ Name: Title: MOOG AUTOMOTIVE PRODUCTS, INC., as Guarantor By: ___________________________________ Name: Title: EX-4.14 5 0005.txt SECOND SUPPLEMENTAL INDENTURE Exhibit 4.14 SECOND SUPPLEMENTAL INDENTURE to INDENTURE Dated as of June 29, 1998 among FEDERAL-MOGUL CORPORATION as Issuer, THE GUARANTORS PARTY HERETO FROM TIME TO TIME as Guarantors and THE BANK OF New York as Trustees Dated as of July 21, 1998 SECOND SUPPLEMENTAL INDENTURE, dated as of July 21, 1998 among Federal- Mogul Corporation, a Michigan corporation, as issuer (the "Company") the companies listed on the signature pages of the Indenture (as hereinafter defined) that are subsidiaries of the Company (the "Original Guarantors"), F-M UK Holdings Limited, a wholly-owned subsidiary of the Company (the "Additional Guarantor" and together with the Original Guarantors, the "Guarantors") and The Bank of New York, a New York banking corporation, as trustee (the "Trustee"). RECITALS The Company and the Original Guarantors have duly executed and delivered an Indenture (as such may be amended, supplemented or modified from time to time, the "Indenture") dated, as of June 29, 1998, providing for the issuance from time to time of its unsecured debentures, notes or other evidences of indebtedness ("Securities") to be issued in one or more series. The Company and the Original Guarantors have duly executed and delivered a First Supplemental Indenture dated as of June 30, 1998 (the "First Supplemental Indenture"), providing for the issuance of three separate series of Securities designated as the Company's 7 1/2% Notes due July 1, 2004 (the "7 1/2% Notes"), 7 1/4% Notes due July 1, 2006 (the "7 1/4% Notes") and 7 7/8% Notes due July 1, 2010 (the "7 7/8% Notes," together with the 7 1/2% Notes and the 7 1/4% Notes, the "Notes"), respectively, in the aggregate principal amount of $250,000,000 in the case of the 7 1/2% Notes, $400,000,000 in the case of the 7 1/4% Notes, and $350,000,000 in the case of the 7 7/8% Notes, each series guaranteed by each of the Original Guarantors, on the terms set forth therein. The Additional Guarantor desires to guarantee each of the aforementioned series of Securities and each additional series hereafter issued pursuant to the Indenture, such guarantee to be on the terms set forth herein. Section 8.1 of the Indenture provides that the Company, the Guarantors and the Trustee may at any time and from time to time enter into one or more indentures supplemental to the Indenture to subject each such subsidiary of the Company that becomes a guarantor under the Senior Credit Agreement (or any other credit agreement renewing, refunding, replacing, restating, refinancing or extending the Senior Credit Agreement), to the provisions of the Indenture as a Guarantor as permitted by Section 12.6 of the Indenture. All things necessary to make this Second Supplemental Indenture a valid agreement of the Company, the Guarantors and the Trustee, in accordance with its terms, have been done. For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed as follows for the equal and ratable benefit of the Holders of the Securities: -2- ARTICLE 1 DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION Section 1.1. Definitions. For all purposes of this Second Supplemental ----------- Indenture, capitalized terms used herein without definition shall have the meanings specified in the Indenture. Section 1.2. Headings. The Article and Section headings herein are for -------- convenience only and shall not affect the construction hereof. Section 1.3. Successors and Assigns. This Second Supplemental Indenture ---------------------- shall be binding upon the Company and the Guarantors and their respective successors and assigns and shall inure to the benefit of the Trustee and the Holders and, in the event of any transfer or assignment of rights by any Holder or the Trustee, the rights and privileges conferred upon that party in the Indenture and this Second Supplemental Indenture and in the Securities shall automatically extend to and be vested in such transferee or assignee, all subject to the conditions of the Indenture. This Second Supplemental Indenture shall be binding upon the Trustee and its successors and assigns. Section 1.4. Ratification of Indenture; Supplemental Indentures Part of ---------------------------------------------------------- Indenture. Except as expressly amended hereby, the Indenture is in all respects - --------- ratified and confirmed and all the terms, conditions and provisions thereof shall remain in full force and effect. This Second Supplemental Indenture shall form a part of the Indenture for all purposes, and every Holder of Securities heretofore or hereafter authenticated and delivered shall be bound hereby. Section 1.5. Governing Law. THIS SECOND SUPPLEMENTAL INDENTURE AND THE ------------- GUARANTEE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. Section 1.6. Counterparts. This Second Supplemental Indenture may be ------------ executed in any number of counterparts and by telecopier, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument. ARTICLE 2 SCOPE AND TERMS OF THIS SECOND SUPPLEMENTAL INDENTURE Section 2.1. Scope. The changes, modifications and supplements to the ----- Indenture effected by this Second Supplemental Indenture shall be applicable with respect to, and govern the terms of, the Securities heretofore and hereafter issued pursuant to this Indenture. -3- Section 2.2. Additional Guarantor. Subject to the provisions of Article -------------------- 12 of the Indenture (including provisions for the release of a Guarantor), the Additional Guarantor shall be subject to the provisions of the Indenture as Guarantor of the Securities. IN WITNESS WHEREOF, the parties hereto have caused this Second Supplemental Indenture to be duly executed as of the day and year first above written. FEDERAL-MOGUL CORPORATION By: _______________________________________ Name: Title: FEDERAL-MOGUL DUTCH HOLDINGS INC., as Guarantor By: _______________________________________ Name: Title: FEDERAL-MOGUL GLOBAL INC., as Guarantor By: _______________________________________ Name: Title: FEDERAL-MOGUL U.K. HOLDINGS INC., as Guarantor By: _______________________________________ Name: Title: CARTER AUTOMOTIVE COMPANY, INC., as Guarantor By: _______________________________________ Name: Title: FEDERAL-MOGUL VENTURE CORPORATION, as Guarantor By: _______________________________________ Name: Title: -4- FEDERAL-MOGUL WORLD WIDE, INC., as Guarantor By: _______________________________________ Name: Title: FEDERAL-MOGUL GLOBAL PROPERTIES, INC., as Guarantor By: _______________________________________ Name: Title: FELT PRODUCTS MFG. CO., as Guarantor By: _______________________________________ Name: Title: FEL-PRO MANAGEMENT CO., as Guarantor By: _______________________________________ Name: Title: FEL-PRO CHEMICAL PRODUCTS L.P., as Guarantor By: _______________________________________ Name: Title: F-M UK HOLDINGS LIMITED, as Guarantor By: _______________________________________ Name: Title: THE BANK OF NEW YORK, as Trustee By: _______________________________________ Name: Title: -5- EX-4.15 6 0006.txt THIRD SUPPLEMENTAL INDENTURE Exhibit 4.15 THIRD SUPPLEMENTAL INDENTURE To INDENTURE Dated as of June 29, 1998 among FEDERAL-MOGUL CORPORATION as Issuer, THE GUARANTORS PARTY HERETO FROM TIME TO TIME as Guarantors and THE BANK OF NEW YORK as Trustee Dated as of October 9, 1998 THIRD SUPPLEMENTAL INDENTURE, dated as of October 9, 1998 among Federal-Mogul Corporation, a Michigan corporation, as issuer (the "Company"), the companies listed on the signature pages of the Indenture (as hereinafter defined), as supplemented, that are subsidiaries of the Company (the "Original Guarantors"), Champion Spark Plug Company, Cooper Automotive Products, Inc., Cooper Automotive Company, Cooper A&S Company, Moog Automotive Products, Inc., Moog Automotive Batesville, Inc., Moog Redevelopment Corporation, Moog Automotive Company, Champion Aviation, Inc. and Champion InterAmericana, Ltd., each a wholly-owned subsidiary of the Company (the "Additional Guarantors" and together with the Original Guarantors, the "Guarantor") and the Bank of New York, a New York banking corporation, as trustee (the "Trustee"). RECITALS The Company and The Original Guarantors have duly executed and delivered an Indenture (as such may be amended, supplemented or modified from time to time, the "Indenture") dated as of June 29, 1998, providing for issuance from time to time of its unsecured debentures, notes or other evidences of indebtedness ("Securities") to be issued in one or more series. The Company and the Original Guarantors have duly executed and delivered a First Supplemental Indenture dated as of June 30, 1998 (the "First Supplemental Indenture"), providing for the issuance of three separate series of Securities designated as the Company's 7 1/2% Notes due July 1, 2004 (the "7 1/2% Notes"), 7 3/4% Notes due by July 1, 2006 (the "7 3/4% Notes") and 7 7/8% Notes due July 1, 2010 (the "7 7/8% Notes", together with the 7 1/2% Notes and the 7 1/4% Notes, the "Notes"), respectively, in the aggregate principal amount of $250,000,000 in the case of the 7 1/2% Notes, $400,000,000 in the case of the7 3/4% Notes, and the $350,000,000 in the case of the 7 7/8% Notes, each series guaranteed by each of the Original Guarantors, on the terms set forth therein. The Additional Guarantors desire to guarantee each of the aforementioned series of Securities and each additional series hereafter issued pursuant to the Indenture, such guarantee to be on the terms set forth therein. Section 8.1 of the Indenture provides that the Company, the Guarantors and the Trustee may at any time and from time to time enter into one or more indentures supplemental to the Indenture to subject each such subsidiary of the Company that becomes a guarantor under the Senior Credit Agreement (or any other credit agreement renewing, refunding, replacing, restating, refinancing or extending the Senior Credit Agreement), to the provisions of the indenture as a Guarantor as permitted by Section 12.6 of the Indenture. All things necessary to make this Third Supplemental Indenture a valid agreement of the Company, the Guarantors and the Trustee, in accordance with its terms, have been done. For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed as follows for the equal and ratabel benefit of the Holders of the Securities: ARTICLE I DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION Section 1.1. Definitions. For all purposes of this Third ----------- Supplemental Indenture, capitalized terms used herein without definition shall have the meanings specified in the Indenture. Section 1.2. Heading. The Article and Section headings herein are ------- for convenience only and shall not affect the construction hereof. Section 1.3. Successors and Assigns. This Third Supplemental ---------------------- Indenture shall be binding upon the Company and the Guarantors and their respective successors and assigns and shall inure to the benefit of the Trustee and the Holders and, in the event of any transfer or assignment of rights by any Holder or the Trustee, the rights and privileges conferred upon that party in the Indenture and this Third Supplemental Indenture and in the Securities shall automatically extend to and be vested in such transferee or assignee, all subject to the conditions of the Indenture. This Third Supplemental Indenture shall be binding upon the Trustee and its successors and assigns. Section 1.4. Ratification of Indenture: Supplemental Indenture Part ------------------------------------------------------ of Indenture. Except as expressly amended hereby, the Indenture is in all - ------------ respects ratified and confirmed and all the terms, conditions, and provisions thereof shall remain in full force and effect. This Third Supplemental Indenture shall form a part of the Indenture for all purposes, and every Holder of Securities heretofore or hereafter authenticated and delivered shall be bound hereby. Section 1.5. Governing Law. THIS THIRD SUPPLEMENTAL INDENTURE AND THE ------------- GUARANTEE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWA OF THE STATE OF NEW YORK. Section 1.6. Counterparts. This Third Supplemental Indenture may be ------------ executed in any number of counterparts and by telecopier, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument. ARTICLE 2 SCOPE AND TERMS OF THIS THIRD SUPPLEMENTAL INDENTURE Section 2.1 Scope. The changes, modifications and supplements to the ----- Indenture effected by this Third Supplemental Indenture shall be applicable with respect to, and govern the terms of, the Securities heretofore and hereafter issued pursuant to the Indenture. Section 2.2 Additional Guarantors. Subject to the provisions of --------------------- Article 12 of the Indenture (including provisions for the release of a Guarantor), the Additional Guarantors shall be subject to the provisions of the Indenture as Guarantors of the Securities. IN WITNESS WHEREOF, the parties hereto have caused this Third Supplemental Indenture to be duly executed as of the day and year first above written. FEDERAL-MOGUL CORPORATION By: __________________________________________ Name: Title: FEDERAL-MOGUL DUTCH HOLDINGS INC., as Guarantor By: __________________________________________ Name: Title: FEDERAL-MOGUL GLOBAL INC., as Guarantor By: __________________________________________ Name: Title: FEDERAL-MOGUL U.K. HOLDINGS INC., as Guarantor By: __________________________________________ Name: Title: CARTER AUTOMOTIVE COMPANY, INC., as Guarantor By: __________________________________________ Name: Title: FEDERAL-MOGUL VENTURE CORPORTATION, as Guarantor By: ___________________________________ Name: Title: FEDERAL-MOGUL WORLD WIDE, INC., as Guarantor By: ___________________________________ Name: Title: FEDERAL-MOGUL GLOBAL PROPERTIES, INC., as Guarantor By: ___________________________________ Name: Title: FELT PRODUCTS MFG. CO., as Guarantor By: ___________________________________ Name: Title: FEL-PRO MANAGEMENT CO., as Guarantor By: ___________________________________ Name: Title: F-M UK HOLDINGS LIMITED, as Guarantor By: ___________________________________ Name: Title: CHAMPION SPARK PLUG COMPANY, as Guarantor By: ___________________________________ Name: Title: COOPER AUTOMOTIVE PRODUCTS, INC., as Guarantor By: ___________________________________ Name: Title: COOPER AUTOMOTIVE COMPANY, as Guarantor By: ___________________________________ Name: Title: COOPER A&S COMPANY, as Guarantor By: ___________________________________ Name: Title: MOOG AUTOMOTIVE PRODUCTS, INC., as Guarantor By: ______________________________________ Name: Title: MOOG AUTOMOTIVE BATESVILLE, INC., as Guarantor By: ______________________________________ Name: Title: MOOG REDEVELOPMENT CORPORATION, as Guarantor By: ______________________________________ Name: Title: MOOG AUTOMOTIVE COMPANY, as Guarantor By: ______________________________________ Name: Title: CHAMPION AVIATION, INC., as Guarantor By: ______________________________________ Name: Title: CHAMPION INTEAMERICA, LTD., as Guarantor By: ______________________________________ Name: Title: THE BANK OF NEW YORK, as Trustee By: ___________________________________ Title: EX-10.21 7 0007.txt FIFTH AMENDED AND RESTATED REC Exhibit 10.21 ================================================================================ ================================================================================ FIFTH AMENDED AND RESTATED RECEIVABLES SALE AND CONTRIBUTION AGREEMENT Dated as of February 16, 2001 Between FEDERAL-MOGUL CORPORATION, as Parent and FEDERAL-MOGUL FUNDING CORPORATION, as Buyer =============================================================================== =============================================================================== TABLE OF CONTENTS -----------------
Page ---- ARTICLE I. AMOUNTS AND TERMS OF THE PURCHASES....................................... 2 Section 1.1 Purchases of Receivables............................................... 2 Section 1.2 Payment for the Purchases.............................................. 3 Section 1.3 Purchase Price Credit Adjustments...................................... 4 Section 1.4 Payments and Computations, Etc......................................... 5 Section 1.5 Transfer of Records.................................................... 5 Section 1.6 Characterization....................................................... 6 ARTICLE II. REPRESENTATIONS AND WARRANTIES.......................................... 6 Section 2.1 Parent's Representations and Warranties................................ 6 ARTICLE III. CONDITIONS OF PURCHASES................................................ 10 Section 3.1 Conditions Precedent to Initial Purchase............................... 10 Section 3.2 Conditions Precedent to All Purchases.................................. 10 ARTICLE IV. COVENANTS .............................................................. 10 Section 4.1 Affirmative Covenants of Parent........................................ 10 Section 4.2 Negative Covenants of Parent........................................... 15 ARTICLE V. ADMINISTRATION AND COLLECTION............................................ 16 Section 5.1 Designation of Sub-Servicer............................................ 16 ARTICLE VI. EVENTS OF PURCHASE AND SALE TERMINATION................................. 16 Section 6.1 Events of Purchase and Sale Termination................................ 16 Section 6.2 Remedies............................................................... 18 ARTICLE VII. INDEMNIFICATION........................................................ 18 Section 7.1 Indemnities by the Parent.............................................. 18 Section 7.2 Other Costs and Expenses............................................... 20 ARTICLE VIII. MISCELLANEOUS......................................................... 20 Section 8.1 Waivers and Amendments................................................. 20 Section 8.2 Notices................................................................ 20 Section 8.3 Protection of Buyer's Interests........................................ 21 Section 8.4 Confidentiality........................................................ 21 Section 8.5 Bankruptcy Petition.................................................... 22 Section 8.6 Limitation of Liability................................................ 22
i Section 8.7 CHOICE OF LAW.......................................................... 23 Section 8.8 CONSENT TO JURISDICTION................................................ 23 Section 8.9 WAIVER OF JURY TRIAL................................................... 23 Section 8.10 Binding Effect; Assignability.......................................... 23 Section 8.11 Subordination.......................................................... 24 Section 8.12 Integration; Survival of Terms......................................... 24 Section 8.13 Counterparts; Severability............................................. 24 EXHIBIT I DEFINITIONS.............................................................. 1 EXHIBIT II CHIEF EXECUTIVE OFFICE OF THE PARENT; LOCATIONS OF RECORDS; TRADE NAMES; FEDERAL EMPLOYER IDENTIFICATION NUMBER................................................ 1 EXHIBIT III COLLECTION ACCOUNTS.................................................... 1 EXHIBIT IV [RESERVED].............................................................. 5 EXHIBIT V FORM OF COLLECTION ACCOUNT AGREEMENT..................................... 1 EXHIBIT VI CREDIT POLICIES......................................................... 1 EXHIBIT VII [RESERVED]............................................................. 1 EXHIBIT VIII FORM OF SETTLEMENT DATE STATEMENT..................................... 1 EXHIBIT IX FORM OF SUBSCRIPTION AGREEMENT.......................................... 1 EXHIBIT X FORM OF SUBORDINATED NOTE................................................ 7
ii THIS FIFTH AMENDED AND RESTATED RECEIVABLES SALE AND CONTRIBUTION AGREEMENT, dated as of February 16, 2001, is by and between FEDERAL-MOGUL CORPORATION, a Michigan corporation (the "Parent" or "Federal-Mogul") and FEDERAL-MOGUL FUNDING CORPORATION, a Michigan corporation (the "Buyer"), which amends and restates the Fourth Amended and Restated Receivables Sale and Contribution Agreement, dated as of June 26, 2001, between Federal-Mogul and the Buyer, which amended and restated the Amended and Restated Receivables Sale and Contribution Agreement, dated as of July 1, 1999, by and between Federal-Mogul and the Buyer, which amended and restated the Amended and Restated Receivables Sale and Contribution Agreement, dated as of April 19, 1999, by and among Federal-Mogul, CARTER AUTOMOTIVE COMPANY, INC., a Delaware corporation ("Carter"), FEDERAL-MOGUL CANADA LIMITED, a Canadian corporation ("Federal-Mogul Canada"), FEDERAL-MOGUL IGNITION COMPANY, a Delaware corporation, and the Buyer, which amended and restated the Receivables Sale and Contribution Agreement, dated as of November 20, 1998, by and among Federal-Mogul, Carter, Federal-Mogul Canada and the Buyer. Unless defined elsewhere herein, capitalized terms used in this Agreement shall have the meanings assigned to such terms in Exhibit I hereto. PRELIMINARY STATEMENTS The Parent now owns, and from time to time hereafter will own, Receivables. The Parent wishes to sell and assign to the Buyer, and the Buyer wishes to purchase from the Parent, all of the Parent's right, title and interest in and to its Receivables now owned and existing and hereafter arising. The Parent and the Buyer believe that it is in their mutual best interests for the Parent to sell its Receivables to the Buyer and for the Buyer to purchase such Receivables. The Buyer shall, on each applicable Purchase Date, purchase all of the Parent's right, title and interest in and to its Receivables existing on such date and all Related Security and Collections associated therewith. The Parent and the Buyer intend the transactions contemplated hereby to be true sales of its Receivables from the Parent to the Buyer, providing the Buyer with the full benefits of ownership of such Receivables, and the Parent and the Buyer do not intend these transactions to be, or for any purpose to be characterized as, loans from the Buyer to the Parent. Upon each purchase of Receivables from the Parent, the Buyer will sell undivided interests therein and in the associated Related Security and Collections pursuant to that certain Sixth Amended and Restated Receivable Interest Purchase Agreement dated as of February 16, 2001 (as the same may from time to time hereafter be amended, supplemented, restated or otherwise modified, the "Purchase Agreement"), among the Buyer, as seller, Federal- Mogul, as Servicer, Blue Ridge Asset Funding Corporation ("Blue Ridge") and Falcon Asset Securitization Corporation ("Falcon"), as Conduits and Purchasers, the financial institutions from time to time party thereto as "Liquidity Providers", Bank One, NA as Administrative Agent and Falcon Agent, and Wachovia Bank, N.A., as Blue Ridge Agent. ARTICLE I. AMOUNTS AND TERMS OF THE PURCHASES Section 1.1 Purchases of Receivables. ------------------------- (a) Effective on the date of the initial Purchase hereunder, in consideration for the Purchase Price and upon the terms and subject to the conditions set forth herein, the Parent does hereby sell, assign, transfer, set-over and otherwise convey to the Buyer, without recourse (except to the extent expressly provided herein), and the Buyer does hereby purchase from the Parent, all of the Parent's right, title and interest in and to all Receivables existing as of the date of such initial Purchase and all Receivables thereafter arising, together, in each case, with all Related Security relating thereto and all Collections and other proceeds thereof; provided, however, that in no event shall the Buyer purchase, or the Parent sell, any Receivable arising after the Termination Date; provided, further, that in no event shall the Buyer purchase, or the Parent sell, any Receivable arising on or after the date that the related Originator ceases to be a wholly-owned subsidiary of Federal-Mogul. On the date of the initial Purchase, the Buyer shall acquire all of the Parent's right, title and interest in and to all Receivables existing as of the close of business on the Business Day immediately prior to such Purchase, together with all Related Security relating thereto and all Collections and other proceeds thereof. On each Business Day thereafter through and including the Termination Date, the Buyer shall acquire all of the Parent's right, title and interest in and to all Receivables which were not previously purchased by the Buyer hereunder upon the creation of such Receivables (together with all Related Security relating thereto and all Collections and other proceeds thereof), provided that the acquisition by the Buyer of such right, title and interest of the Parent in connection with each Purchase hereunder is conditioned upon and subject to the Parent's receipt of the Purchase Price therefor in accordance with Section 1.2 below. In connection with consummation of any Purchase hereunder, the Buyer may request that the Parent deliver, and the Parent shall deliver, such approvals, opinions, information, reports or documents as the Buyer and/or any Agent (as the Buyer's assignee) may reasonably request. (b) It is the intention of the parties hereto that each Purchase of Receivables made hereunder shall constitute a "sale of accounts" (as such term is used in Article 9 of the UCC) (for non-tax purposes), which sales are (for non-tax purposes) absolute and irrevocable and provide the Buyer with the full benefits of ownership of the Receivables. Except for the Purchase Price Credits owed pursuant to Section 1.3 hereof, each sale of Receivables hereunder is made without recourse to the Parent; provided, however, that (i) the Parent shall be liable to the Buyer for all representations, warranties and covenants made by the Parent individually and as Sub-Servicer, pursuant to the terms of the Transaction Documents to which the Parent and the Sub-Servicer is a party, and (ii) such sale (for non-tax purposes) does not constitute and is not intended to result in an assumption by the Buyer or any assignee thereof of any obligation of the Parent, any other Originator or any other Person arising in connection with the Receivables, the related Contracts and/or other Related Security or any other obligations of the Parent or any other Originator. In view of the intention of the parties hereto that the Purchases of Receivables made hereunder shall constitute sales (for non-tax purposes) of such Receivables rather than 2 loans secured thereby, on or prior to the date hereof the Parent agrees to mark, and shall cause each other Originator to mark, its master data processing records relating to the Receivables with a legend acceptable to the Buyer and the Agents (as the Buyer's assignees), evidencing that the Buyer has purchased such Receivables as provided in this Agreement and to note in its financial statements that its Receivables have been assigned to the Buyer. Upon the request of the Buyer or any Agent (as the Buyer's assignee), the Parent shall execute and file, and shall cause each other Originator to execute and file, such financing or continuation statements, or amendments thereto or assignments thereof, and such other instruments or notices, as may be necessary or appropriate to perfect and maintain the perfection of the Buyer's ownership interest in the Purchased Assets, or as the Buyer or any Agent (as the Buyer's assignee) may reasonably request. Section 1.2 Payment for the Purchases. -------------------------- (a) The Purchase Price for the initial Purchase of Receivables shall be payable in full by the Buyer to the Parent on the date of such initial Purchase, and shall be paid to the Parent in the following manner: (i) by delivery of immediately available funds, to the extent of funds made available to the Buyer in connection with its subsequent sale of an interest in such Receivables to the Purchasers under the Purchase Agreement; provided that, a portion of such funds shall be offset by amounts owed by the Parent to the Buyer on account of the issuance of equity in the manner contemplated in the Subscription Agreement and having a total value of not less than $14,250,000, and (ii) the balance with the proceeds of a Subordinated Loan. The Purchase Price for each Purchase after the initial Purchase shall become due and owing in full by the Buyer to the Parent or its designee on the date of such Purchase (except that the Buyer may, with respect to any such Purchase, offset against such Purchase Price any amounts owed by the Parent to the Buyer hereunder and which have become due but remain unpaid) and shall be paid to the Parent in the manner provided in the following paragraphs (b), (c) and (d). (b) With respect to any Purchase after the initial Purchase hereunder, on each Settlement Date, the Buyer shall pay to the Sub-Servicer the Sub-Servicer Fee and to the Parent the Purchase Price for each Purchase during the preceding Collection Period as follows: first, by delivery of immediately available funds, to the extent of funds available to the Buyer from its subsequent sale of an interest in such Receivables to the Co-Agents for the benefit of their respective Purchaser Groups under the Purchase Agreement or otherwise; provided that Buyer shall make such payments of such Sub-Servicer Fee and Purchase Price by delivery of immediately available funds to the Parent; second, by borrowing from the Parent a subordinated revolving loan (each, a "Subordinated Loan") from the Parent in an amount not to exceed the lesser of (i) the remaining unpaid portion of such Purchase Price and (ii) the maximum Subordinated Loan that could be borrowed without rendering the Buyer's Net Worth less than the Required Capital Amount; and 3 third, unless the Parent has declared the Termination Date to have occurred, by accepting a contribution to its capital pursuant to the Subscription Agreement in an amount equal to the remaining unpaid balance of its Purchase Price. Subject to the limitations set forth in the preceding clause second, the Parent irrevocably agrees to advance each Subordinated Loan requested by the Buyer on or prior to the Termination Date. The Subordinated Loans shall be evidenced by, and shall be payable in accordance with the terms and provisions of, the Subordinated Notes and shall be payable solely from funds which the Buyer is not required under the Purchase Agreement to set aside for the benefit of, or otherwise pay over to, the Purchasers. (c) After the Termination Date, the Parent shall not (i) sell Receivables to the Buyer, or (ii) contribute Receivables to the Buyer's capital. (d) On each Business Day during a Collection Period after the date of the initial Purchase, all Collections received shall be applied by the Parent as payments toward the Purchase Price of Receivables sold or to be sold by the Parent to the Buyer during such Collection Period. Although amounts shall be paid directly to the Parent on a daily basis in accordance with the first sentence of this paragraph, settlement of the Purchase Price between the Buyer and the Parent shall be effected on a monthly basis on Settlement Dates with respect to all Purchases within the same Collection Period and based on the information contained in the Settlement Date Statement or Interim Settlement Date Statement, as the case may be, for the Collection Period then most recently ended. In addition to such other information as may be included therein, each Settlement Date Statement shall set forth the following with respect to the related Collection Period: (i) the aggregate Outstanding Balance of Receivables created and conveyed in Purchases during such Collection Period, as well as the Net Receivables Balance (as defined in the Purchase Agreement) included therein, (ii) the aggregate Purchase Price payable to the Parent in respect of such Purchases, specifying the Discount Factor in effect for such Collection Period and the aggregate Purchase Price Credits deducted in calculating such aggregate Purchase Price, (iii) the aggregate amount of funds received by the Parent during such Collection Period which are to be applied toward the aggregate Purchase Price owing for such Collection Period pursuant to the first sentence of this paragraph, (iv) the increase or decrease in the amount outstanding under the applicable Subordinated Note as of the end of such Collection Period after giving effect to the application of funds toward the aggregate Purchase Price and the restrictions on Subordinated Loans set forth in paragraph (b) above, and (v) the amount of any capital contribution made by the Parent to the Buyer as of the end of such Collection Period pursuant to paragraph (c) above. Although settlement shall be effected on Settlement Dates, increases or decreases in the amount owing under any Subordinated Note made pursuant to paragraph (b) above and any contribution of capital by the Parent to the Buyer made pursuant to paragraph (c) above shall be deemed to have occurred and shall be effective as of the last Business Day of the Collection Period to which such settlement relates. Section 1.3 Purchase Price Credit Adjustments. If on any day the --------------------------------- Outstanding Balance of a Receivable is: 4 (a) reduced as a result of any defective or damaged goods or services, any cash discount or any adjustment by the applicable Originator (whether individually or, in the case of Federal-Mogul, in its performance of its duties as Sub-Servicer), (b) reduced or canceled as a result of a setoff in respect of any claim by any Person (whether such claim arises out of the same or a related transaction or an unrelated transaction and whether such claim relates to an Originator or any Affiliate thereof), or (c) is otherwise reduced as a result of any of the factors set forth in the definition of "Dilutions," then, in such event, the Buyer shall be entitled to a credit (each, a "Purchase Price Credit") against the Purchase Price otherwise payable hereunder equal to the full amount of such reduction or cancellation. If such Purchase Price Credit exceeds the Original Balance of the Receivables to be sold hereunder on any Purchase Date, then the Parent shall pay the remaining amount of such Purchase Price Credit in cash within 5 Business Days thereafter; provided that if the Termination Date has not occurred, the Parent shall be allowed to deduct the remaining amount of such Purchase Price Credit from any indebtedness owed to it under the applicable Subordinated Note. Section 1.4 Payments and Computations, Etc. All amounts to be paid or ------------------------------ deposited by the Buyer hereunder shall be paid or deposited in accordance with the terms hereof on the day when due in immediately available funds to the account of the Parent designated from time to time by the Parent or as otherwise directed by the Parent. In the event that any payment owed by any Person hereunder becomes due on a day which is not a Business Day, then such payment shall be made on the next succeeding Business Day. Any amount due hereunder which is not paid when due hereunder shall bear interest at the Base Rate as in effect from time to time until paid in full; provided, however, that such interest rate shall not at any time exceed the maximum rate permitted by applicable law. All computations of interest payable hereunder shall be made on the basis of a year of 360 days for the actual number of days (including the first but excluding the last day) elapsed. Section 1.5 Transfer of Records. -------------------- (a) In connection with the Purchases of Receivables hereunder, the Parent hereby sells, transfers, assigns and otherwise conveys to the Buyer all of its right and title to and interest in the Records relating to all of its Receivables sold hereunder, without the need for any further documentation in connection with any Purchase. In connection with such transfer, the Parent hereby grants to each of the Buyer, the Administrative Agent and the Servicer an irrevocable, non-exclusive license to use, without royalty or payment of any kind, all software used by the Parent to account for its Receivables, to the extent necessary to administer its Receivables, whether such software is owned by the Parent or is owned by others and used by the Parent under license agreements with respect thereto, provided that should the consent of any licensor of the Parent to such grant of the license described herein be required, the Parent hereby agrees that upon the request of the Buyer (or the Administrative Agent as the Buyer's assignee), the Parent will use its reasonable efforts to obtain the consent of such third-party licensor. The 5 license granted hereby shall be irrevocable, and shall terminate on the date this Agreement terminates in accordance with its terms. (b) The Parent (i) shall take such action requested by the Buyer and/or any Agent (as the Buyer's assignee), from time to time hereafter, that may be necessary or appropriate to ensure that the Buyer and its assigns under the Purchase Agreement have an enforceable ownership interest in the Records relating to the Receivables purchased from the Parent hereunder, and (ii) shall use its reasonable efforts to ensure that the Buyer, the Agents and the Servicer each has an enforceable right (whether by license or sublicense or otherwise) to use all of the computer software used to account for the Receivables and/or to recreate such Records. Section 1.6 Characterization. If, notwithstanding the intention of ---------------- the parties expressed in Section 1.1(b), any sale or contribution by the Parent to the Buyer of Receivables hereunder shall be characterized as a secured loan and not a sale (for non-tax purposes), then this Agreement shall be deemed to constitute a security agreement under the UCC and other applicable law. Without being in derogation of the parties' intention that each sale of Receivables hereunder shall constitute a true sale (for non-tax purposes) thereof, the Parent hereby grants to the Buyer a duly perfected security interest in all of the Parent's right, title and interest, whether now owned or hereafter acquired, in, to and under the Purchased Assets, which security interest shall be prior to all other Adverse Claims thereto. After an Event of Purchase and Sale Termination, the Buyer and its assignees (including the Agents) shall have, in addition to the rights and remedies which they may have under this Agreement, all other rights and remedies provided to a secured creditor after default under the UCC and other applicable law, which rights and remedies shall be cumulative. ARTICLE II. REPRESENTATIONS AND WARRANTIES Section 2.1 Parent's Representations and Warranties. The Parent --------------------------------------- hereby represents and warrants, individually and in its capacity as the Sub-Servicer, to the Buyer and its assigns that: (a) Corporate Existence and Power. The Parent and each other ----------------------------- Originator is a corporation or limited liability company duly organized or formed and validly existing and in good standing under the laws of the State of its incorporation or formation and has, in all material respects, full corporate or limited liability company power, authority and legal right to own its properties and conduct its business as such properties are presently owned and such business is presently conducted, and to execute, deliver and perform its obligations under the Transaction Documents to which it is a party. (b) Due Qualification. The Parent and each other Originator is duly ----------------- qualified to do business and, where necessary, is in good standing as a foreign corporation (or is exempt from such requirement) and has obtained all necessary licenses and approvals in each jurisdiction in which the conduct of its business requires such qualification except where the failure to so qualify, be in good standing or obtain licenses or approvals would not have a Material Adverse Effect. 6 (c) Due Authorization; No Conflict. The execution and delivery of the ------------------------------ Transaction Documents to which the Parent and each other Originator is a party, the performance of the transactions contemplated thereby and the fulfillment of the terms thereof, will not conflict with, result in any breach of any of the material terms and provisions of, or constitute (with or without notice or lapse of time or both) a material default under, any indenture, contract, agreement, mortgage, deed of trust, or other instrument to which the Parent or such Originator is a party or by which it or its properties are bound. The execution and delivery of the Transaction Documents to which the Parent or each other Originator is a party, the performance of the transactions contemplated thereby and the fulfillment of the terms thereof which are applicable to the Parent or such Originator, will not conflict with or violate any material Requirements of Law applicable to the Parent or such Originator. (d) No Consents. Other than the filing of the financing statements ----------- required hereunder, no authorization or approval or other action by, and no notice to or filing with, any Governmental Authority or regulatory body is required for the due execution, delivery and performance by the Parent and each other Originator of the Transaction Documents to which it is a party, other than authorizations, approvals, actions, notices or filings the failure to obtain or perform would not reasonably be expected to have a Material Adverse Effect. (e) Binding Effect. The Transaction Documents to which the Parent and -------------- each other Originator is a party have been duly executed and delivered by the Parent and such Originator and constitute the legal, valid and binding obligations of the Parent and such Originator enforceable against the Parent and such Originator in accordance with their respective terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws relating to or limiting creditors' rights in general and except as such enforceability may be limited by general principles of equity (whether considered in a suit at law or in equity). (f) No Proceedings. There are no actions, suits or proceedings -------------- pending, or to the best of the Parent's knowledge, threatened, against or affecting the Buyer, the Parent or any other Originator, or any of the respective properties of the Buyer, the Parent or any other Originator, in or before any court, arbitrator or other body, which are reasonably likely to have a Material Adverse Effect. The Parent and each other Originator is not in default with respect to any order of any court, arbitrator or Governmental Authority. (g) Accuracy of Information. All information heretofore furnished by ----------------------- the Parent, any other Originator or any of its Affiliates to the Buyer, the Agents or the Purchasers for purposes of or in connection with this Agreement, any of the other Transaction Documents or any transaction contemplated hereby or thereby is, and all such information hereafter furnished by the Parent, any other Originator or any of its Affiliates to the Buyer, the Agents and/or the Purchasers will be, true and accurate in every material respect, on the date such information is stated or certified and does not and will not contain any material misstatement of fact or omit to state a material fact or any fact necessary to make the statements contained therein not misleading. (h) Use of Proceeds. No proceeds of any Purchase hereunder will be --------------- used for "purchasing" or "carrying" any "margin stock" within the respective meanings of each of the 7 quoted terms under Regulation U of the Board of Governors of the United States Federal Reserve System as now and from time to time hereafter in effect or for any purpose which violates the provisions of the Regulations of such Board of Governors (including but not limited to the provisions of Regulation U and Regulation X) or any similar rule of any other Governmental Authority. (i) Good Title; Perfection. Immediately prior to each Purchase ---------------------- hereunder, the Parent shall be the legal and beneficial owner of the Receivables and Related Security with respect thereto, free and clear of any Adverse Claim, except as created by the Transaction Documents. This Agreement is effective to, and shall, upon each Purchase hereunder, irrevocably transfer to the Buyer all legal and equitable title to, with the legal right to sell and encumber, such Receivable, its Collections and the Related Security, free and clear of any Adverse Claim, except as created by the Transaction Documents. Without limiting the foregoing, there has been duly filed all financing statements or other similar instruments or documents necessary under the UCC of all appropriate jurisdictions (or any comparable law) to provide the Buyer with a first priority perfected ownership interest in such Receivables and the other Purchased Assets. (j) Places of Business. The principal places of business and chief ------------------ executive office of the Parent and the offices where the Parent keeps all its Records are located at the address(es) listed on Exhibit II or such other locations notified to the Buyer and the Agents (as the Buyer's assignees) in accordance with Section 4.2(a) in jurisdictions where all action required by Section 4.2(a) has been taken and completed. The Parent's Federal Employer Identification Number is correctly set forth on Exhibit II. (k) Collection Banks; etc. Except as otherwise notified to the Buyer --------------------- and the Agents (as the Buyer's assignees) in accordance with Section 4.2(b): (i) the Parent and each other Originator has instructed all Obligors to pay all Collections directly to a segregated lock-box identified on Exhibit III hereto, (ii) in the case of all proceeds remitted to any such lock-box which is now or hereafter established, such proceeds will be deposited directly by the applicable Collection Bank into a concentration account or a depository account listed on Exhibit III, (iii) the names and addresses of all Collection Banks, together with the account numbers of the Collection Accounts of the Parent and each other Originator at each Collection Bank, are listed on Exhibit III, and (iv) each lock-box and Collection Account to which Collections are remitted shall be subject to a Collection Account Agreement that is then in full force and effect. In the case of lock-boxes and Collection Accounts identified on Exhibit III, exclusive dominion and control thereof has been transferred to the Buyer. The Parent and each other Originator has not granted any Person, other than the Buyer as contemplated by this Agreement, dominion and control of any lock-box or Collection Account, or the right to take dominion and control of any lock-box or Collection Account at a future time or upon the occurrence of a future event. 8 (l) Names. In the past five years, the Parent has not used any ----- corporate names, trade names or assumed names other than the name or names set forth on Exhibit II. (m) Credit Policies. With respect to each Receivable, the Parent, each --------------- other Originator and the Sub-Servicer has complied in all material respects with the Credit Policies. (n) Payments to Parent. With respect to each Receivable sold to the ------------------ Buyer under this Agreement, the Buyer has given reasonably equivalent value to the Parent in consideration for the transfer of such Receivable and the Related Security with respect thereto under this Agreement and such transfer was not made for or on account of an antecedent debt. No sale by the Parent to the Buyer of any Receivable is or may be voidable under any section of the Federal Bankruptcy Reform Act of 1978 (11 U.S.C.ss.ss.101 et seq.), as amended. (o) Ownership of the Buyer. The Parent directly owns 100% of the ---------------------- issued and outstanding capital stock of the Buyer. Such capital stock is validly issued, fully paid and nonassessable and there are no options, warrants or other rights to acquire securities of the Buyer. (p) Not an Investment Company. Neither the Parent nor any other ------------------------- Originator is an "investment company" within the meaning of the Investment Company Act of 1940, as amended from time to time, or any successor statute. (q) Purpose. The Parent has determined that, from a business ------- viewpoint, the sale of Receivables to the Buyer contemplated hereby is in the best interest of the Parent. (r) Financial Statements; Material Adverse Effect. The consolidated --------------------------------------------- financial statements of the Parent and its consolidated Subsidiaries dated March 31, 2000 furnished by the Parent to the Buyer and the Agents are complete and correct in all material respects, and such financial statements have been prepared in accordance with generally accepted accounting principles consistently applied and fairly present the consolidated financial condition and results of operations of the Parent and its consolidated Subsidiaries as of such date and for the period ended on such date. Since March 31, 2000, no event has occurred which would have a Material Adverse Effect. (s) ERISA. No fact or circumstance, including but not limited to any ----- Reportable Event, exists in connection with any Plan which would constitute grounds for the termination of any Plan by the PBGC or for the appointment by the appropriate United States District Court of a trustee to administer any such Plan and which would result in the termination of a Plan and the incurrence of material liability by the Parent or any other Originator or any ERISA Affiliate to the Plan, the PBGC, participants, beneficiaries or a trustee. No Plan has an accumulated funding deficiency as defined in Section 412(a) of the Code or Section 302(a) of ERISA, and no lien exists with respect to any Plan for failure to make required contributions as described under 412(n) of the Code or Section 302(f) of ERISA. For the purposes of this representation and warranty, the Parent and each other Originator shall be deemed to have knowledge of all facts attributable to the Plan administrator designated pursuant to ERISA. 9 ARTICLE III. CONDITIONS OF PURCHASES Section 3.1 Conditions Precedent to Initial Purchase. The initial ---------------------------------------- Purchase under this Agreement is subject to the conditions precedent that (i) the Buyer shall have received on or before the date of such Purchase those documents listed on Schedule A hereto and (ii) all conditions precedent to the initial purchase under the Purchase Agreement shall have been satisfied and/or waived. Section 3.2 Conditions Precedent to All Purchases. Each Purchase shall ------------------------------------- be subject to the further conditions precedent that (a) on the date of each such Purchase, the following statements shall be true both before and after giving effect to such Purchase (and acceptance of the proceeds of such Purchase shall be deemed a representation and warranty by the Parent that such statements are then true): (i) the representations and warranties set forth in Article II are correct on and as of the date of such Purchase as though made on and as of such date; (ii) no event has occurred, or would result from such Purchase, that will constitute an Event of Purchase and Sale Termination, and no event has occurred and is continuing, or would result from such Purchase, that would constitute a Potential Event of Purchase and Sale Termination; and (iii) the Termination Date shall not have occurred; and (b) the Buyer and/or the Agents (as the Buyer's assignees) shall have received such other approvals, opinions or documents as it may reasonably request. Notwithstanding the foregoing conditions precedent, upon payment of the Purchase Price for any Purchase (whether by payment of cash, through an increase in the amounts outstanding under the Subordinated Notes, by offset of amounts owed to the Buyer and/or by offset of capital contributions to be made under the Subscription Agreement), title to the Receivables and related assets included in such Purchase shall vest in the Buyer, whether or not the conditions precedent to such Purchase were in fact satisfied. ARTICLE IV. COVENANTS Section 4.1 Affirmative Covenants of Parent. Until the date this ------------------------------- Agreement shall terminate in accordance with its terms, the Parent hereby covenants, individually and in its capacity as Sub-Servicer, that: (a) Financial Reporting and other Information. The Parent shall ----------------------------------------- maintain, and shall cause each other Originator to maintain, a system of accounting established and administered in accordance with generally accepted accounting principles, and furnish to the Buyer and the Agents (as assignees of the Buyer): 10 (i) Annual Reporting. As soon as available, but in any event within ---------------- 120 days after the close of each fiscal year of the Parent, an audit report not qualified for anything under the control of the Parent, certified by independent public accountants acceptable to the Buyer and the Agents (which until the Buyer and/or the Agents (as the Buyer's assignees) notifies the Parent in writing to the contrary may be Ernst & Young LLP, public accountants), prepared in accordance with generally accepted accounting principles on a consolidated basis for the Parent and its Subsidiaries including consolidated balance sheets as of the end of such period, and related profit and loss and reconciliation of the surplus statements; (ii) Quarterly Reporting. As soon as available, but in any event ------------------- within 60 days after the close of the first three quarterly periods of each fiscal year of the Parent, for the Parent and its Subsidiaries, consolidated unaudited balance sheets as at the close of each such period and consolidated profit and loss and reconciliation of surplus statements for the period beginning from the beginning of such fiscal year to the end of such quarter; and (iii) Securities and Exchange Commission Filings. The Parent shall ------------------------------------------ provide the Buyer and the Agents (as the Buyer's Assignees), promptly after the same are available, copies of all proxy statements, financial statements and reports as the Parent shall send or make available generally to any of its public security holders, and copies of all regular and period reports and of all registration statements which the Parent may file with the Securities and Exchange Commission or with any securities exchange. (iv) Notices under Transaction Documents. Forthwith upon its receipt ----------------------------------- of any notice, request for consent, financial statements, certification, report or other communication under or in connection with any Transaction Document from any Person other than the Buyer, the Agents or any Purchaser, copies of the same. (v) Change in Credit Policies. At least 30 days prior to the ------------------------- effectiveness of any material change in or amendment to the Credit Policies, a copy of the Collection Policies then in effect and a notice indicating such change or amendment. (vi) Other Information. Such other information (including ----------------- non-financial information) as the Buyer (or any of its assignees) may from time to time reasonably request. (b) Notices. The Parent shall notify the Buyer and the Agents in ------- writing of any of the following immediately upon learning of the occurrence thereof, describing the same and, if applicable, the steps being taken with respect thereto: (i) Actual and Potential Events of Purchase and Sale Termination. ------------------------------------------------------------ The occurrence of each Event of Purchase and Sale Termination or Potential Event of Purchase and Sale Termination of which the Parent becomes aware. (ii) Litigation. The institution of any litigation, arbitration ---------- proceeding or governmental proceeding against the Parent or any of its Subsidiaries, or to which the Parent or any of its Subsidiaries becomes party, in either case which (A) remains 11 unsettled for a period of 90 days from the commencement thereof and involves claims for damages or relief in an amount which could reasonably be expected to have a Material Adverse Effect, or (B) has resulted in a final judgment or judgments for the payment of money in an amount which has a Material Adverse Effect. (iii) ERISA. The occurrence of any Reportable Event under Section ----- 4043(c)(5), (6) or (9) of ERISA with respect to any Plan, any decision to terminate or withdraw from a Plan, any finding made with respect to a Plan under Section 4041(c) or (e) of ERISA, the commencement of any proceeding with respect to a Plan under Section 4042 of ERISA, the failure to make any required installment or other required payment under Section 412 of the Code or Section 302 of ERISA on or before the date for such installment or payment, or any material increase in the actuarial present value of unfunded vested benefits under all Plans over the preceding year. (iv) Downgrade. Any downgrade in the rating of any Indebtedness of --------- Federal-Mogul by Standard & Poor's Ratings Services, a division of The McGraw Hill Companies, Inc., or by Moody's Investors Service, Inc., setting forth the Indebtedness affected and the nature of such change. (v) Labor Strike, Walkout, Lockout or Slowdown. The commencement or ------------------------------------------ threat of any labor strike, walkout, lockout or concerted labor slowdown with respect to the Parent or any of its Subsidiaries, which could reasonably be expected to have a Material Adverse Effect (collectively, "Labor Actions"). (c) Compliance with Laws. The Parent shall comply, and shall cause -------------------- each other Originator to comply, in all material respects with all applicable laws, rules, regulations, orders, writs, judgments, injunctions, decrees or awards to which it may be subject. (d) Audits. The Parent shall furnish, and shall cause each other ------ Originator to furnish, to the Buyer (and/or any Agent on behalf of the Buyer) from time to time such information with respect to it and the Receivables as the Buyer or such Agent may reasonably request. The Parent shall, and shall cause each other Originator, from time to time during regular business hours as requested by Buyer (or any Agent on its behalf) upon reasonable notice, permit the Buyer or such Agent, or their respective agents or representatives, (i) to examine and make copies of and abstracts from all Records in the possession or under the control of the Parent or such Originator relating to Receivables and the Related Security, including, without limitation, the related Contracts, and (ii) to visit the offices and properties of the Parent or such Originator for the purpose of examining such materials described in clause (i) above, and to discuss matters relating to the Parent's or such Originator's financial condition or the Receivables and the Related Security or the Parent's or such Originator's performance hereunder or under any other Transaction Document to which it is a party or the Parent's or such Originator's performance under the Contracts with any of the officers or employees of the Parent or such Originator having knowledge of such matters. (e) Keeping and Marking of Records and Books. 12 (i) The Parent shall maintain and implement, and shall cause each other Originator to maintain and implement, administrative and operating procedures (including, without limitation, an ability to recreate records evidencing Receivables in the event of the destruction of the originals thereof), and keep and maintain all documents, books, records and other information reasonably necessary or advisable for the collection of all Receivables (including, without limitation, records adequate to permit the immediate identification of each new Receivable and all Collections of and adjustments to each existing Receivable). The Parent shall give, and shall cause each other Originator to give, the Buyer and the Agents (as the Buyer's assignees) notice of any material change in the administrative and operating procedures referred to in the previous sentence. (ii) The Parent shall, and shall cause each other Originator to, (a) on or prior to the date hereof, mark its master data processing records and other books and records relating to the Receivables with a legend, acceptable to the Buyer and to the Agents (as the Buyer's assignees), describing the ownership interest of the Buyer therein and further describing the Receivable Interests sold by the Buyer to the Purchasers pursuant to the Purchase Agreement and (b) upon the request of the Buyer or any Agent (as the Buyer's assignee) following the occurrence of an Event of Purchase and Sale Termination: (x) mark each Contract with a legend describing Buyer's interest therein and further describing the Receivable Interests of the Purchasers and (y) deliver to the Buyer or its designee all Contracts (including, without limitation, all multiple originals of any such Contract). (f) Compliance with Contracts and Credit Policies. The Parent shall, --------------------------------------------- and shall cause each other Originator to, timely and fully, (i) perform and comply with all provisions, covenants and other promises required to be observed by it under the Contracts related to the Receivables, and (ii) comply in all material respects with the Credit Policies. The Parent shall, and shall cause each other Originator to, pay when due any taxes payable in connection with the Receivables. (g) Ownership Interest. The Parent shall take all necessary action to ------------------ establish and maintain in favor of the Buyer a valid and perfected first priority ownership interest in the Purchased Assets to the fullest extent contemplated herein, including, without limitation, taking such action to perfect, protect or more fully evidence the interest of the Buyer hereunder as the Buyer or its assignees may reasonably request. (h) Purchasers' Reliance. The Parent acknowledges that the Agents and -------------------- the Purchasers are entering into the transactions contemplated by the Purchase Agreement in reliance upon the Buyer's identity as a separate legal entity from the Parent and each other Originator. Therefore, from and after the date of execution and delivery of this Agreement, the Parent shall take, and shall cause each other Originator to take, all reasonable steps, including, without limitation, all steps that the Buyer or any assignee of the Buyer (including the Agents) may from time to time reasonably request, to maintain the Buyer's identity as a separate legal entity and to make it manifest to third parties that the Buyer is an entity with assets and liabilities distinct from those of the Parent, each other Originator and any Affiliates thereof and not just a division of the Parent or any other Originator. Without limiting the generality of the foregoing and in addition 13 to the other covenants set forth herein, the Parent (i) shall not, and shall cause each other Originator not to, hold itself out to third parties as liable for the debts of the Buyer nor purport to own the Receivables and other assets acquired by the Buyer, (ii) shall take all other actions necessary on its part to ensure that the Buyer is at all times in compliance with the "separateness" covenants set forth in Section 6.01(j) of the Purchase Agreement and (iii) shall cause all tax liabilities arising in connection with the transactions contemplated herein or otherwise to be allocated between the Parent and the Buyer on an arm's-length basis and in a manner consistent with the procedures set forth in U.S. Treasury Regulations (S)(S) 1.1502-33(d) and 1.1552-1. (i) Collections. The Parent shall instruct, and shall cause each other ----------- Originator to instruct, all Obligors to pay all Collections directly to a segregated lock-box or other Collection Account listed on Exhibit III, each of which is subject to a Collection Account Agreement. In the case of payments remitted to any such lock-box, the Parent shall cause, and shall cause each other Originator to cause, all proceeds from such lock-box to be deposited directly by a Collection Bank into a Collection Account on Exhibit III. Pursuant to Section 5.3 hereof and the Collection Account Agreements, the Parent has transferred and assigned to the Buyer all of its right, title and interest in and to, and exclusive ownership, dominion and control (subject to the terms of this Agreement) to each such lock-box, concentration account and depositary account. In the case of any Collections received by the Parent or any other Originator, the Parent shall remit, and shall cause each other Originator to remit, such Collections to a Collection Account not later than the Business Day immediately following the date of receipt of such Collections, and, at all times prior to such remittance, the Parent shall itself hold, and shall cause each other Originator to hold, such Collections in trust, for the exclusive benefit of the Buyer and its assigns. In the case of any remittances received by the Parent or any other Originator in any such Collection Account that shall have been identified, to the satisfaction of the Servicer, to not constitute Collections or other proceeds of the Receivables or the Related Security, the Parent shall promptly remit such items to the Person identified to it as being the owner of such remittances. From and after the date the Administrative Agent delivers to any of the Collection Banks a Collection Notice pursuant to Section 7.03 of the Purchase Agreement, the Administrative Agent, as assignee of the Buyer, may request that the Parent or any other Originator, and the Parent thereupon promptly shall direct, or shall cause any other applicable Originator to direct, all Obligors on Receivables to remit all payments thereon to a new depositary account (the "New Concentration Account") specified by the Administrative Agent and, at all times thereafter, the Parent shall not deposit or otherwise credit, and shall cause each other Originator not to deposit or credit, to the New Concentration Account any cash or payment item other than Collections. Alternatively, the Administrative Agent may request that the Parent or any other Originator, and the Parent thereupon promptly shall direct, or shall cause any other applicable Originator to direct, all Persons then making remittances to any account listed on Exhibit III which remittances are not payments on Receivables to deliver such remittances to a location other than an account listed on Exhibit III. (j) ERISA. The Parent shall make, and shall cause each other ----- Originator to make, all required installments or other required payments under Section 412 of the Code or Section 302 of ERISA on or before the due date for such installment or other payment. 14 Section 4.2 Negative Covenants of Parent. Until the date this ---------------------------- Agreement shall terminate in accordance with its terms, the Parent hereby covenants, individually and in its capacity as Sub-Servicer, that: (a) Name Change, Offices, Records and Books of Accounts. The Parent --------------------------------------------------- shall not, and shall cause each Originator not to, change its name, identity or corporate structure (within the meaning of Section 9-402(7) of any applicable enactment of the UCC) or relocate its chief executive office or any office where Records are kept unless it shall have: (i) given the Buyer and the Agents at least 45 days prior notice thereof and (ii) delivered to the Buyer all financing statements, instruments and other documents requested by the Buyer (or any Agent on behalf of the Buyer) in connection with such change or relocation. (b) Change in Payment Instructions to Obligors. The Parent shall not ------------------------------------------ add or terminate any bank as a Collection Bank from those listed in Exhibit III, or make any change in its instructions to Obligors regarding payments to be made to the Parent or payments to be made to any lock-box, Collection Account or Collection Bank, unless the Buyer and the Agents shall have received, at least fifteen (15) Business Days before the proposed effective date therefor: (i) written notice of such addition, termination or change, and (ii) with respect to the addition of a lock-box, Collection Account or Collection Bank, an executed account agreement and an executed Collection Account Agreement from such Collection Bank relating thereto; provided, however, that the Parent may make changes in instructions to Obligors regarding payments if such new instructions require such Obligor to make payments to another existing lock-box or other Collection Account that is subject to a Collection Agreement then in effect. (c) Modifications to Contracts and Credit Policies. The Parent shall ---------------------------------------------- not, and shall cause each other Originator not to, make any material change in the character of its business or any change to the Credit Policies which would be reasonably likely to, in either case, adversely affect the collectibility of any material portion of the Receivables or decrease the credit quality of any newly created Receivables. Except as provided in Section 5.2(c), the Parent, acting as Sub-Servicer or otherwise, will not extend, amend or otherwise modify the terms of any Receivable or any Contract related thereto other than in accordance with the Credit Policies. (d) Sales, Liens, Etc. The Parent shall not, and shall cause each ----------------- Originator not to, sell, assign (by operation of law or otherwise) or otherwise dispose of, or grant any option with respect to, or create or suffer to exist any Adverse Claim upon (including, without limitation, the filing of any financing statement) or with respect to, any of the Purchased Assets or assign any right to receive income in respect thereof (other than, in each case, the creation of the interests therein in favor of the Buyer provided for herein and the Agents and the Purchasers provided for in the Purchase Agreement), and the Parent shall defend, and shall cause each other Originator to defend, the right, title and interest of the Buyer in, to and under any of the foregoing property, against all claims of third parties claiming through or under the Parent or such Originator. 15 (e) Accounting for Purchases. The Parent shall not, and shall not ------------------------ permit any Affiliate to, account for or treat (whether in financial statements or otherwise) the transactions contemplated hereby in any manner other than the sale of the Receivables and Related Security by the Parent to the Buyer or in any other respect account for or treat the transactions contemplated hereby in any manner other than as a sale of the Receivables and Related Security by the Parent to the Buyer except to the extent that such transactions are not recognized on account of consolidated financial reporting in accordance with generally accepted accounting principles. (f) Restricted Junior Payments. The Parent shall not request or -------------------------- require the Buyer to make any Restricted Junior Payment if an Amortization Event or a Potential Amortization Event exists or would result therefrom. (g) Amendments and Waivers. The Parent shall not, and shall not permit ---------------------- any other Originator to, amend, modify, supplement, restate, or waive any provision of, the Receivables Purchase Agreement without the written consent of the Buyer and Agents (as the assignees of the Borrower). ARTICLE V. ADMINISTRATION AND COLLECTION Section 5.1 Designation of Sub-Servicer. --------------------------- (a) The servicing, administration and collection of the Receivables shall be conducted by the Servicer so designated from time to time in accordance with Section 7.01 of the Purchase Agreement. Federal-Mogul is hereby designated as, and hereby agrees to act as, sub-servicer (the "Sub-Servicer") for the Servicer. The Sub-Servicer covenants and agrees to service the Receivables in accordance with the terms of the Purchase Agreement. (b) On or prior to the Report Date and the Interim Report Date, the Sub-Servicer shall prepare and forward to the Buyer and the Co-Agents (as the Buyer's assignees) a Settlement Date Statement for the related Collection Period and an Interim Settlement Date Statement for the related period, respectively. ARTICLE VI. EVENTS OF PURCHASE AND SALE TERMINATION Section 6.1 Events of Purchase and Sale Termination. The occurrence --------------------------------------- of any one or more of the following events shall constitute an "Event of Purchase and Sale Termination": (a) An Insolvency Event shall occur with respect to the Parent, the Sub-Servicer or any other Originator, and, in the case of an Involuntary Insolvency Event concerning the Parent, the Sub-Servicer or any other Originator shall have continued undischarged or unstayed for a period of 60 days; 16 (b) Failure on the part of the Parent, the Sub-Servicer or any other Originator, as applicable, to make any payment or deposit required by the terms of any of the Transaction Documents; (c) Failure on the part of the Sub-Servicer to deliver a Settlement Date Statement or an Interim Settlement Date Statement within five Business Days of the day such item is due to be delivered under any of the Transaction Documents; (d) Failure on the part of the Parent, the Sub-Servicer or any other Originator, as applicable, to duly observe or perform in any material respect any of their other respective covenants or agreements set forth in the Transaction Documents, which failure continues unremedied for a period of ten days after the earlier of (i) the date on which the Parent, the Sub-Servicer or such Originator, as applicable, becomes aware of such failure and (ii) the date on which written notice of such failure, requiring the same to be remedied, shall have been received by the Parent, Sub-Servicer, or such Originator as applicable; (e) Any representation or warranty made by the Parent, the Sub-Servicer or any other Originator in any Transaction Document to which it is a party: (i) shall prove to have been incorrect in any material respect when made, and shall continue to be incorrect in any material respect for a period of 10 days after the earlier to occur of (A) the date on which written notice of such failure, requiring the same to be remedied, shall have been given to the Parent, the Sub-Servicer or such Originator by the Buyer or any Agent, or (B) the date on which the Parent, the Sub-Servicer or such Originator becomes aware of such failure, and (ii) as a result of such incorrectness, a Material Adverse Effect occurs; (f) One or more final judgments shall be entered against the Parent, any other Originator or any of their Subsidiaries for the payment of money in the aggregate amount of $30,000,000, or the equivalent thereof in another currency, or more on claims not covered by insurance or as to which the insurance carrier has denied its responsibility, and such judgment shall continue unsatisfied and in effect for thirty (30) consecutive days without a stay of execution; (g) Any Plan of the Parent, any other Originator or any of their Subsidiaries shall be terminated within the meaning of Title IV of ERISA except as permitted by Section 4044(d) of ERISA, or a trustee shall be appointed by the appropriate U.S. District Court to administer any Plan of the Parent, any other Originator or any of their Subsidiaries, or the PBGC shall institute proceedings to terminate any Plan of the Parent, any other Originator or any of their Subsidiaries or to appoint a trustee to administer any such Plan and each such event, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect; (h) A Change of Control shall occur; and/or (i) Failure of the Parent, any other Originator or any of their Subsidiaries taken as a whole to pay any Indebtedness in excess of $25,000,000 in aggregate principal amount ("Material Debt") when due; or the default by the Parent, any other Originator or any of their Subsidiaries in the performance of any term, provision or condition contained in any agreement under which any Material Debt was created or is governed, the effect of which is to cause, or to 17 permit the holder or holders of such Material Debt to cause, such Material Debt to become due prior to its stated maturity; or any Material Debt of the Parent, any other Originator or any of their Subsidiaries shall be declared to be due and payable or required to be prepaid (other than by a regularly scheduled payment) prior to the date of maturity thereof. Section 6.2 Remedies. Upon the occurrence and during the continuation -------- of an Event of Purchase and Sale Termination, the Buyer and its assignees (including the Agents) may (i) remove any Sub-Servicer as Sub-Servicer (to the extent such Event of Purchase and Sale Termination was caused by, or arose as a result of the activities of, such Sub-Servicer), and/or (ii) declare the Termination Date to have occurred, whereupon the Termination Date shall forthwith occur, without demand, protest or further notice of any kind, all of which are hereby expressly waived by the Parent; provided, however, that upon the occurrence of an Event of Purchase and Sale Termination described in Section 6.1(a) above or of an actual or deemed entry of an order for relief with respect to the Parent or any other Originator under the Federal Bankruptcy Code, the Termination Date shall automatically occur, without demand, protest or any notice of any kind, all of which are hereby expressly waived by the Parent; provided, further, that the provisions of this Section 6.2 shall not be applicable if any Event of Purchase and Sale Termination occurs with respect to any Originator (other than Federal-Mogul) or a group of Originators (other than Federal-Mogul) that individually or as a group have Receivables with aggregate Outstanding Balances (determined as of the date of the applicable Event of Purchase and Sale Termination) of less than 5.0% of the Outstanding Balances of all the Receivables as of such date, and the Buyer and the Agents receive written notice from Federal-Mogul within 3 days of the date of the occurrence of such Event of Purchase and Sale Termination that Federal-Mogul shall promptly terminate the Receivables Purchase Agreement with respect to such Originator or such group of Originators and such termination promptly occurs. For purposes of the immediately preceding sentence, an Event of Purchase and Sale Termination shall be deemed to have occurred with respect to a " group of Originators" if any Event of Purchase and Sale Termination occurs with respect to two or more Originators within any period of time. Upon the occurrence of the Termination Date for any reason whatsoever, the Buyer and its assigns (including the Agents) shall have, in addition to all other rights and remedies under this Agreement or otherwise, all other rights and remedies provided under the UCC, which rights shall be cumulative. ARTICLE VII. INDEMNIFICATION Section 7.1 Indemnities by the Parent. Without limiting any other ------------------------- rights which the Buyer may have hereunder or under applicable law, the Parent and each Sub-Servicer hereby agrees to indemnify the Buyer and its assignees (including the Agents and each Purchaser) and their respective officers, directors, agents and employees (each an "Indemnified Party") from and against any and all damages, losses, claims, taxes, liabilities, costs and expenses and for all other amounts payable, including reasonable attorneys' fees (which attorneys may be employees of the Buyer, the Agents or such Purchaser) and disbursements (all of the foregoing being collectively referred to as "Indemnified Amounts"), awarded against or incurred by any of them arising out of any of the following: 18 (i) any representation or warranty made by the Parent, such Sub-Servicer or any other Originator (or any officers of the Parent, such Sub-Servicer or any other Originator) under or in connection with this Agreement, any other Transaction Document, any Settlement Date Statement, any interim Settlement Date Statement or any other information or report delivered by the Parent, such Sub-Servicer or any other Originator pursuant hereto or thereto, which shall have been false or incorrect when made or deemed made; (ii) the failure by the Parent, such Sub-Servicer or any other Originator to comply with any applicable law, rule or regulation with respect to any Receivable or Contract sold to the Buyer or serviced by it hereunder, as applicable, or the nonconformity of such Receivable or Contract with any such applicable law, rule or regulation; (iii) any failure of the Parent, such Sub-Servicer or any other Originator to perform its duties or obligations in accordance with the provisions of this Agreement or any other Transaction Document; (iv) RESERVED; (v) any dispute, claim, offset or defense (other than discharge in bankruptcy of the Obligor) of any Obligor to the payment of any Receivable (including, without limitation, a defense based on such Receivable or the related Contract not being a legal, valid and binding obligation of such Obligor enforceable against it in accordance with its terms), or any other claim resulting from the sale of the merchandise or service giving rise to such Receivable or the furnishing or failure to furnish such merchandise or services; (vi) the commingling by the Parent or such Sub-Servicer of Collections of Receivables sold by it to the Buyer or serviced by it hereunder, as applicable, at any time with other funds; (vii) any investigation, litigation or proceeding related to or arising from this Agreement or any other Transaction Document, the transactions contemplated hereby or thereby, the use of the proceeds of a Purchase, the ownership of the Receivables or any other investigation, litigation or proceeding relating to the Parent or any other Originator in which any Indemnified Party becomes involved as a result of any of the transactions contemplated hereby or thereby; (viii) any inability to litigate any claim against any Obligor in respect of any Receivable sold to the Buyer as a result of such Obligor being immune from civil and commercial law and suit on the grounds of sovereignty or otherwise from any legal action, suit or proceeding; or (ix) the reference in any Settlement Date Statement or Interim Settlement Date Statement to any Receivable sold to the Buyer or serviced by the Sub-Servicer hereunder, as applicable, as an Eligible Receivable, which Receivable as of the date it was sold to the Buyer and as of the date of the Settlement Date Statement or Interim Settlement Date 19 Statement, as applicable, is not an Eligible Receivable and such Eligible Receivable is used in determining (x) the Net Receivables Balance and (y) whether the Net Receivables Balance as of any date of determination equals or exceeds the sum of (A) (x) Capital divided by (y) 1 minus the Aggregate Reserve Percentage and (B) the Contractual Dilution Balance. excluding, however, the following: (b) Indemnified Amounts to the extent final judgment of a court of competent jurisdiction holds such Indemnified Amounts resulted from gross negligence or willful misconduct on the part of the Indemnified Party seeking indemnification; (c) Indemnified Amounts to the extent the same includes losses in respect of Receivables that prove to be uncollectible on account of the insolvency, bankruptcy or lack of creditworthiness of the related Obligor; or (d) taxes imposed by the jurisdiction in which such Indemnified Party's principal executive office is located, on or measured by the overall net income of such Indemnified Party to the extent that the computation of such taxes is consistent with (i) the characterization of the Purchases as true sales and (ii) the characterization of the transactions under the Purchase Agreement as creating indebtedness of the Buyer for purposes of taxation. Section 7.2 Other Costs and Expenses. The Parent shall pay to the ------------------------ Buyer on demand any and all costs and expenses of the Buyer, if any, including reasonable counsel fees and expenses in connection with the enforcement of this Agreement and the other documents delivered hereunder and in connection with any restructuring or workout of this Agreement or such documents, or the administration of this Agreement following an Event of Purchase and Sale Termination. ARTICLE VIII. MISCELLANEOUS Section 8.1 Waivers and Amendments. ---------------------- (a) No failure or delay on the part of the Buyer (or any of its assignees, including the Agents and the Purchasers) or the Parent in exercising any power, right or remedy under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or remedy preclude any other further exercise thereof or the exercise of any other power, right or remedy. The rights and remedies herein provided shall be cumulative and nonexclusive of any rights or remedies provided by law. Any waiver of this Agreement shall be effective only in the specific instance and for the specific purpose for which given. (b) No provision of this Agreement may be amended, supplemented, modified or waived except in writing signed by the Parent and the Buyer and, to the extent required under the Purchase Agreement, the Administrative Agent and the Co-Agents. Section 8.2 Notices. Except as otherwise expressly provided herein, ------- all communications and notices provided for hereunder shall be in writing (including bank wire, 20 telecopy or electronic facsimile transmission or similar writing) and shall be given to the other party hereto at its respective address or telecopy number set forth on the signature pages hereof. All such communications and notices shall, when mailed, telecopied, telegraphed, telexed or cabled, be effective when received through the mails, transmitted by telecopy, delivered to the telegraph company, confirmed by telex answerback or delivered to the cable company, respectively. Section 8.3 Protection of Buyer's Interests. ------------------------------- (a) The Parent agrees, and shall cause each other Originator to agree, that from time to time, at its expense, it will promptly execute and deliver all instruments and documents, and take all actions, that may be necessary or desirable, or that the Buyer (or its assignees, including the Agents) may reasonably request, to perfect, protect or more fully evidence the Buyer's ownership of the Receivables, or to enable the Buyer (or its assignees, including the Agents) to exercise and enforce their rights and remedies hereunder. The Buyer (or its assignees, including the Agents) may, or the Buyer (or its assignees, including the Agents), may direct the Parent and each other Originator to, notify the Obligors of Receivables, at any time following the replacement of the Parent as Sub-Servicer and at the Parent's expense, of the Buyer's (or its assignees', including the Agents') ownership of the Receivables and may also direct that payments of all amounts due or that become due under any or all Receivables be made directly to the Buyer or its designee. (b) If the Parent or a Sub-Servicer fails to perform any of its obligations hereunder, the Buyer (or any of its assignees, including any Agent) may (but shall not be required to) perform, or cause the performance of, such obligation; and the Buyer's (and any of its assignee's, including any Agent's) costs and expenses incurred in connection therewith shall be payable by the Parent or such Sub-Servicer, as applicable, on demand. The Parent and each Sub-Servicer irrevocably authorizes the Buyer at any time and from time to time in the sole discretion of the Buyer, and appoints the Buyer as its attorney-in-fact, to act on behalf of the Parent and such Sub-Servicer (i) to execute on behalf of the Parent as seller/debtor and to file financing statements necessary or desirable in the Buyer's sole discretion to perfect and to maintain the perfection and priority of the Buyer's ownership interest in the Purchased Assets and (ii) to file a carbon, photographic or other reproduction of this Agreement or any financing statement with respect to the Receivables as a financing statement in such offices as the Buyer in its sole discretion deems necessary or desirable to perfect and to maintain the perfection and priority of the Buyer's ownership interest in the Purchased Assets. This appointment is coupled with an interest and is irrevocable. Section 8.4 Confidentiality. --------------- (a) The Parent and each Sub-Servicer shall, and the Parent shall cause each other Originator to, maintain and shall cause each of its employees and officers to maintain the confidentiality of this Agreement and the Purchase Agreement and the other confidential proprietary information with respect to the Agents, each Purchaser Group and their respective businesses obtained by it or them in connection with the structuring, negotiating and execution of the transactions contemplated herein and therein, except that the Parent, each Sub-Servicer and their respective officers and employees may disclose such information to each other Originator, 21 the Parent's, such Sub-Servicer's or such other Originator's external accountants and attorneys and as required by any applicable law or order of any judicial or administrative proceeding. In addition, the Parent, the Sub-Servicer and each Originator may disclose any such nonpublic information pursuant to any law, rule, regulation, direction, request or order of any judicial, administrative or regulatory authority or proceedings (whether or not having the force or effect of law). (b) Anything herein to the contrary notwithstanding, the Parent and each Sub-Servicer hereby consents, and the Parent shall cause each other Originator to consent, to the disclosure of any nonpublic information with respect to it (i) to the Buyer, the Agents, the Purchaser Groups by each other, (ii) by the Buyer, the Agents or the Purchasers to any prospective or actual assignee or participant of any of them or (iii) by the Agents to any rating agency, commercial paper dealer or provider of a surety, guaranty or credit or liquidity enhancement to Falcon or Blue Ridge or any entity organized for the purpose of purchasing, or making loans secured by, financial assets for which Bank One or Wachovia acts as the administrative agent and to any officers, directors, employees, outside accountants and attorneys of any of the foregoing, provided each such Person is informed of the confidential nature of such information in a manner consistent with the practice of the Agents for the making of such disclosures generally to Persons of such types. In addition, the Buyer, the Purchasers and the Agents may disclose any such nonpublic information pursuant to any law, rule, regulation, direction, request or order of any judicial, administrative or regulatory authority or proceedings (whether or not having the force or effect of law). Section 8.5 Bankruptcy Petition. ------------------- (a) The Parent and each Sub-Servicer hereby covenants and agrees that, prior to the date which is one year and one day after the payment in full of all outstanding senior indebtedness of Falcon and/or Blue Ridge, it shall not institute, or join any other Person in instituting, against Falcon and/or Blue Ridge, any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings or other similar proceeding under the laws of the United States or any state of the United States. (b) The Parent and each Sub-Servicer hereby covenants and agrees that, prior to the date which is one year and one day after all Aggregate Unpaids (under and as defined in the Purchase Agreement) have been paid, it shall not institute against, or join any other Person in instituting against, the Buyer any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings or other similar proceeding under the laws of the United States or any state of the United States. Section 8.6 Limitation of Liability. Except with respect to any claim ----------------------- arising out of the willful misconduct or gross negligence of Falcon, Blue Ridge, the Agents or any Liquidity Provider, no claim may be made by the Parent, the Sub-Servicer or any other Person against Falcon, Blue Ridge, the Agents or any Liquidity Provider or their respective Affiliates, directors, officers, employees, attorneys or agents for any special, indirect, consequential or punitive damages in respect of any claim for breach of contract or any other theory of liability arising out of or related to the transactions contemplated by this Agreement, or any act, omission or event occurring in connection therewith; and the Parent hereby waives, releases, and agrees 22 not to sue upon any claim for any such damages, whether or not accrued and whether or not known or suspected to exist in its favor. Section 8.7 CHOICE OF LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ------------- ACCORDANCE WITH THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF NEW YORK. Section 8.8 CONSENT TO JURISDICTION. THE PARENT HEREBY IRREVOCABLY ----------------------- SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR NEW YORK STATE COURT SITTING IN NEW YORK, NEW YORK IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY DOCUMENT EXECUTED BY THE PARENT PURSUANT TO THIS AGREEMENT AND THE PARENT HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF THE BUYER (OR THE RIGHTS OF THE AGENTS OR ANY PURCHASER AS THE BUYER'S ASSIGNEES) TO BRING PROCEEDINGS AGAINST THE PARENT IN THE COURTS OF ANY OTHER JURISDICTION WHEREIN ANY ASSETS OF THE PARENT MAY BE LOCATED. ANY JUDICIAL PROCEEDING BY THE PARENT AGAINST THE BUYER, THE AGENTS OR ANY PURCHASER, ANY AFFILIATE OF THE AGENTS OR A PURCHASER, OR ANY OTHER OF THE BUYER'S ASSIGNEES INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH THIS AGREEMENT OR ANY DOCUMENT EXECUTED BY THE PARENT PURSUANT TO THIS AGREEMENT SHALL BE BROUGHT ONLY IN A COURT IN NEW YORK, NEW YORK. Section 8.9 WAIVER OF JURY TRIAL. THE PARENT AND THE BUYER HEREBY -------------------- WAIVES TRIAL BY JURY IN ANY JUDICIAL PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH THIS AGREEMENT, ANY DOCUMENT EXECUTED BY THE PARENT PURSUANT TO THIS AGREEMENT OR THE RELATIONSHIP ESTABLISHED HEREUNDER OR THEREUNDER. Section 8.10 Binding Effect; Assignability. This Agreement shall be ----------------------------- binding upon and inure to the benefit of the Parent, the Buyer and their respective successors and permitted assigns (including any trustee in bankruptcy). The Parent may not assign any of its rights and obligations hereunder or any interest herein without the prior written consent of the Buyer. The Buyer may assign at any time its rights and obligations hereunder and interests herein to any other Person without the consent of the Parent. Without limiting the foregoing, the Parent acknowledges that the Buyer, pursuant to the Purchase Agreement, shall assign to the Administrative Agent, for the benefit of the Purchasers and the Co-Agents, its rights, remedies, powers and privileges hereunder and that the Administrative Agent may further assign such 23 rights, remedies, powers and privileges to the extent permitted in the Purchase Agreement. The Parent agrees that the Agents, as the assignees of the Buyer, shall, subject to the terms of the Purchase Agreement, have the right to enforce this Agreement and to exercise directly all of the Buyer's rights and remedies under this Agreement (including, without limitation, the right to give or withhold any consents or approvals of the Buyer to be given or withheld hereunder) and the Parent agrees to cooperate fully with the Agents and the Servicer in the exercise of such rights and remedies. The Parent further agrees to give to the Agents copies of all notices it is required to give to the Buyer hereunder. This Agreement shall create and constitute the continuing obligations of the parties hereto in accordance with its terms and shall remain in full force and effect until such time, after the Termination Date, as the Aggregate Unpaids shall be equal to zero; provided, however, that the rights and remedies with respect to (i) any breach of any representation and warranty made by the Parent pursuant to Article II, (ii) the indemnification and payment provisions of Article VII, (iii) Section 8.4, and (iv) Section 8.5 shall be continuing and shall survive any termination of this Agreement. Section 8.11 Subordination. The Parent agrees that any indebtedness, ------------- obligation or claim it may from time to time hold or otherwise have (other than any obligation or claim with respect to the fees payable by the Buyer under Section 5.6) against the Buyer or any assets or properties of the Buyer, whether arising hereunder or otherwise existing, shall be subordinate in right of payment to the prior payment in full of any indebtedness or obligation of the Buyer owing to the Agents or any Purchaser under the Purchase Agreement. The subordination provision contained herein is for the direct benefit of, and may be enforced by, the Agents and the Purchasers and/or any of their assignees under the Purchase Agreement. Section 8.12 Integration; Survival of Terms. This Agreement, the ------------------------------ Subordinated Notes, the Subscription Agreement and the Collection Account Agreements contain the final and complete integration of all prior expressions by the parties hereto with respect to the subject matter hereof and shall constitute the entire agreement among the parties hereto with respect to the subject matter hereof superseding all prior oral or written understandings. Section 8.13 Counterparts; Severability. This Agreement may be -------------------------- executed in any number of counterparts and by each party hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same Agreement. Any provisions of this Agreement which are prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 24 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their duly authorized officers as of the date hereof. Parent and Sub-Servicer: FEDERAL-MOGUL CORPORATION, as Parent and Sub-Servicer By:____________________________________ Name: Title: Address for Notices: Federal-Mogul Corporation 26555 Northwestern Highway Southfield, Ml 48034 Attention: Treasury Department Phone: (248) 354-7700 Fax: (248) 354-6746 Buyer: FEDERAL-MOGUL FUNDING CORPORATION, as Buyer By:____________________________________ Name: Title: Address for Notices: Federal-Mogul Funding Corporation 26555 Northwestern Highway Southfield, Ml 48034 Attention: Treasury Department Phone: (248) 354-7700 Fax: (248) 354-6746 25 EXHIBIT I DEFINITIONS As used in this Agreement, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined): "Adverse Claim" means a lien, security interest, charge or encumbrance, or other right or claim in, of or on any Person's assets or properties in favor of any other Person. "Administrative Agent" means Bank One in its capacity as "Administrative Agent" under the Purchase Agreement, and any successor Administrative Agent appointed under Article X of the Purchase Agreement. "Affiliate" means, with respect to any Person, any other Person directly or indirectly controlling (including but not limited to all directors and officers of such Person), controlled by, or under direct or indirect common control with such Person. A Person shall be deemed to control another Person if the controlling Person owns 10% or more of any class of voting securities of the controlled Person or possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of the other Person, whether through ownership of voting securities, by contract or otherwise. "Agents" shall have the meaning specified in the Purchase Agreement. "Aggregate Reserve Percentage" shall have the meaning specified in the Purchase Agreement. "Aggregate Unpaids" has the meaning set forth in the Purchase Agreement. "Agreement" means this Fifth Amended and Restated Receivables Sale and Contribution Agreement, as it may be amended, restated or otherwise modified and in effect from time to time. "Amortization Event" shall have the meaning specified in the Purchase Agreement. "Available Funding Amount" shall have the meaning specified in the Purchase Agreement. "Bank One" means Bank One, NA, in its individual capacity and its successors. "Base Rate" means a rate per annum equal to the corporate base rate, prime rate or base rate of interest, as applicable, announced by the Reference Bank from time to time, changing when and as such rate changes; provided, however, that from and after the occurrence of an Event of Purchase and Sale Termination, and during the continuation thereof, the "Base Rate" shall equal the sum of the corporate base rate, prime rate or base rate of interest, as applicable, announced by the Reference Bank from time to time, plus 2% per annum, changing when and as such rate changes. "Blue Ridge" shall have the meaning assigned to that term in the preliminary statements to this Agreement and includes such entity's successors and assigns. "Business Day" means any day on which banks are not authorized or required to close in New York, New York, Detroit, Michigan, Atlanta, Georgia, Winston-Salem, North Carolina or Chicago, Illinois and The Depository Trust Company of New York is open for business. "Capital" shall have the meaning set forth in the Purchase Agreement. "Change of Control" shall have the meaning set forth in the Purchase Agreement. "Co-Agents" shall have the meaning set forth in the Purchase Agreement. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Collection Account" means each concentration account, depositary account, lock-box account or similar account in which any Collections are collected or deposited. "Collection Account Agreement" means, in the case of any actual or proposed Collection Account, an agreement in substantially the form of Exhibit V hereto. "Collection Bank" means, at any time, any of the banks or other financial institutions holding one or more Collection Accounts. "Collection Date" means that date following the Termination Date which is one year and one day after the date which (i) the Outstanding Balance of all Receivables sold hereunder has been reduced to zero and (ii) the Parent has paid to the Buyer all indemnities, adjustments and other amounts which may be owed hereunder in connection with the Purchases. "Collection Period" shall have the meaning set forth in the Purchase Agreement. "Collections" means, with respect to any Receivable, all cash collections and other cash proceeds in respect of such Receivable, including, without limitation, all cash proceeds of Related Security with respect to such Receivable. "Contract" means, with respect to any Receivable, any and all Invoices and other agreements pursuant to which goods or services are ordered from or provided by an Originator. "Contractual Dilution Balance" shall have the meaning specified in the Purchase Agreement. "Credit Policies" means an Originator's credit and collection policies and practices relating to Contracts and Receivables existing on the date hereof, a copy of which is 2 attached hereto as in Exhibit VI hereto, as modified from time to time in accordance with this Agreement, provided that each Originator may have Credit Policies with certain immaterial variations from the credit and collection policies attached hereto in Exhibit VI. "Defaulted Receivable" means a Receivable: (i) as to which any payment, or part thereof, remains unpaid for 90 days or more from the original due date for such payment; (ii) an Insolvency Event has occurred with respect to the Obligor thereof; (iii) as to which the Obligor thereof, if a natural person, is deceased; or (iv) which has been identified by an Originator as uncollectible. "Dilutions" means, at any time, the aggregate amount of reductions in the Outstanding Balances of the Receivables as a result of any setoff, discount, adjustment or otherwise, other than (i) cash Collections on account of the Receivables, and (ii) charge-offs. "Discount Factor" means a percentage calculated to provide the Buyer with a reasonable return on its investment in the Receivables after taking account of (i) the time value of money based upon the anticipated dates of collection of the Receivables and the cost to the Buyer of financing its investment in the Receivables during such period, (ii) the risk of nonpayment by the Obligors, and (iii) the costs of sub-servicing performed by an Originator. The Parent and the Buyer may agree from time to time to change the Discount Factor based on changes in one or more of the items affecting the calculation thereof, provided that any change to the Discount Factor shall take effect as of the commencement of a Collection Period, shall apply only prospectively and shall not affect the Purchase Price payment in respect of Purchases which occurred during any Collection Period ending prior to the Collection Period during which the Parent and the Buyer agree to make such change. "Eligible Receivable" shall have the meaning specified in the Purchase Agreement. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Affiliate" means any trade or business (whether or not incorporated) that is treated as a single employer with an Originator under Section 414 of the Code. "Event of Purchase and Sale Termination" has the meaning assigned to that term in Section 6.1. "Facility Termination Date" has the meaning set forth in the Purchase Agreement. "Falcon" shall have the meaning assigned to that term in the preliminary statements to this Agreement and includes such entity's successors and assigns. "Federal-Mogul" means Federal-Mogul Corporation, a Michigan corporation, and its successors and permitted assigns. 3 "Finance Charges" means, with respect to a Contract, any finance, interest, late payment charges or similar charges owing by an Obligor pursuant to such Contract. "Governmental Authority" shall have the meaning specified in the Purchase Agreement. "Indebtedness" shall have the meaning specified in the Purchase Agreement. "Independent Director" means, with respect to Federal-Mogul, any Person: (i) who is not an officer, an employee, a pensioner, or a beneficial owner, directly or indirectly, of 10% or more of any equity interest in Federal-Mogul or any Affiliate thereof, and who is not related by blood, marriage or adoption to any of the foregoing Persons; (ii) who has not been an employee of Federal-Mogul or any Affiliate in the last five years; (iii) who is not affiliated with, or employed by, any Person providing services to, any of Federal-Mogul's significant customers or suppliers; (iv) who is not affiliated with any tax exempt or other organization that receives significant contributions from Federal-Mogul or any of its Affiliates; and (v) who has not provided and is not providing directly or indirectly, whether or not through any related corporation, partnership, limited liability company, limited liability partnership or other Person, legal, accounting or investment banking services for Federal- Mogul or any Affiliate. In the case of an accountant, an accountant will only be Independent for purposes hereof only where he or she also meets the criteria of independence described in SEC Regulation S-X, Rule 2-01(B) and does not otherwise provide any professional services directly or indirectly to Federal-Mogul or its Affiliates and none of his or her professional affiliates having managerial responsibilities participate in any such services. "Insolvency Event" shall have the meaning specified in the Purchase Agreement. "Interim Report Date" shall have the meaning specified in the Purchase Agreement. "Interim Settlement Date Statement" shall have the meaning specified in the Purchase Agreement. "Investors" has the meaning set forth in the Preliminary Statement of this Agreement. "Invoice" means, collectively, with respect to any Receivable, any and all instruments, bills of lading, invoices or other writings which evidence such Receivable or the goods underlying such Receivable. "Involuntary Insolvency Event" shall have the meaning specified in the Purchase Agreement. "Labor Actions" has the meaning set forth in Section 4.1(b)(v). "Liquidity Providers" shall have the meaning specified in the Purchase Agreement. 4 "Material Adverse Effect" means a material adverse effect on (i) the financial condition, business or operations of an Originator, (ii) the ability of an Originator to perform its obligations under any Transaction Document, (iii) the legality, validity or enforceability of this Agreement, any Transaction Document or any Collection Account Agreement relating to a Collection Account into which a material portion of Collections are deposited, (iv) the Originator's, the Buyer's, the Agents' or any Purchaser's interest in the Receivables generally or in any significant portion of the Receivables, the Related Security or the Collections with respect thereto, or (v) the collectibility of the Receivables generally or of any material portion of the Receivables. "Net Receivables Balance" shall have the meaning specified in the Purchase Agreement. "Net Worth" means, as of the last Business Day of each Collection Period preceding any date of determination, the excess, if any, of (a) the aggregate Outstanding Balance of the Receivables owned by the Buyer at such time, over (b) the sum of (i) the aggregate Capital outstanding at such time, plus (ii) the aggregate outstanding principal balance of the Subordinated Loans (including any Subordinated Loan proposed to be made on the date of determination). "Obligor" means a Person obligated to make payments pursuant to a Contract. "Original Balance" means, with respect to any Receivable, the Outstanding Balance of such Receivable on the date it was purchased by the Buyer. "Originator" means each of (a) Federal-Mogul; (b) Federal-Mogul Canada Limited; (c) Federal-Mogul Piston Rings, Inc.; (d) Federal-Mogul Flowery Branch, LLC; (e) Federal-Mogul Powertain, Inc.; (f) Federal-Mogul Sealing Systems, Inc.; (g) Federal-Mogul Carolina, Inc.; (h) Federal Mogul South Bend, Inc., (i) Federal-Mogul LaGrange, Inc.; (j) Federal-Mogul Sintered Products, Inc.; (k) Federal-Mogul Sintered Products-Waupun, Inc.; (l) Federal-Mogul Engineered Bearings, Inc.; (m) Federal-Mogul Camshafts, Inc.; (n) Federal-Mogul Aviation, Inc.; (o) Federal-Mogul Ignition Company; (p) Federal-Mogul Products, Inc.; (q) Federal-Mogul System Protection Group, Inc.; and shall include any other wholly-owned subsidiary of Federal-Mogul which the Buyer and the Agents unanimously approve. "Outstanding Balance" of any Receivable at any time means the then outstanding principal balance thereof, and shall exclude any interest or finance charges thereon, without regard to whether any of the same shall have been capitalized. "Parent" means Federal-Mogul Corporation, a Michigan corporation, and its successors and assigns. "PBGC" means the Pension Benefit Guaranty Corporation created under Section 4002(a) of ERISA or any successor thereto. "Person" means an individual, partnership, corporation, limited liability company, joint venture, association, trust, or any other entity or organization, including a 5 Governmental Authority or other government or political subdivision or agent or instrumentality thereof. "Plan" means any defined benefit plan maintained or contributed to by the Originator or any Subsidiary of the Originator or by any trade or business (whether or not incorporated) under common control with the Originator or any Subsidiary of the Originator as defined in Section 4001(b) of ERISA and insured by the PBGC under Title IV of ERISA. "Potential Amortization Event" shall have the meaning specified in the Purchase Agreement. "Potential Event of Purchase and Sale Termination" means an event which, with the passage of time or the giving of notice, or both, would constitute an Event of Purchase and Sale Termination. "Purchase" means a purchase by the Buyer of the Receivables and the Related Security and all Collections and other proceeds thereof from the Parent pursuant to Section 1.1 of this Agreement. "Purchase Agreement" has the meaning set forth in the Preliminary Statement of this Agreement. "Purchase Date" means the date on which each Purchase occurs hereunder. "Purchase Price" means, with respect to any Purchase on any date, the aggregate price to be paid to the Parent for such Purchase in accordance with Section 1.2 of this Agreement for the Receivables and Related Security being sold to the Buyer on such date, which price shall equal (i) the product of (x) the Original Balance of such Receivables times (y) one minus the Discount Factor then in effect, minus (ii) any Purchase Price Credits to be credited against the purchase price otherwise payable in accordance with Section 1.3 hereof. "Purchase Price Credit" has the meaning set forth in Section 1.3. "Purchased Assets" means, collectively, all Receivables existing on the date of the initial Purchase hereunder, and all Receivables arising thereafter through and including the Termination Date, all Collections and Related Security associated therewith, the Receivables Purchase Agreement, all proceeds of the foregoing, and all Collection Accounts and all balances, checks, money orders and other instruments from time to time therein. "Purchaser" has the meaning set forth in the Purchase Agreement. "Purchaser Group" has the meaning set forth in the Purchase Agreement. "Receivable" means all the U.S. dollar denominated and all the Canadian dollar-denominated accounts receivable shown on the records of an Originator, and from time to time thereafter, arising from the sale of merchandise rendered by an Originator in the ordinary course of business; provided, however, that "Receivable" that includes a Stock Lift shall be sold to - -------- ------- Buyer net of any adjustment with respect to such Stock Lift. Receivables which become 6 Defaulted Receivables will cease to be included as Receivables on the day on which they become Defaulted Receivables. "Receivable Interests" has the meaning set forth in the Purchase Agreement. "Receivables Purchase Agreement" means the Second Amended and Restated Receivables Purchase Agreement, dated as of February 16, 2001, between the Parent, as purchaser, and the other Originators, as Sellers, as amended, modified, supplemented or restated from time to time. "Records" means, with respect to any Receivable, all Contracts and other documents, books, records and other information (including, without limitation, computer programs, tapes, disks, punch cards, data processing software and related property and rights) relating to such Receivable, any Related Security therefor and the related Obligor. "Reference Bank" means Bank One, Michigan or such other bank as the Co-Agents shall designate with the consent of the Buyer. "Related Security" means, with respect to any Receivable: (i) all of the Parent's interest, if any, in any goods the sale of which gave rise to such Receivable, (ii) all other security interests or liens and property subject thereto from time to time, if any, purporting to secure payment of such Receivable, whether pursuant to the Contract related to such Receivable or otherwise, together with all financing statements and security agreements describing any collateral securing such Receivable, (iii) all guaranties, insurance and other agreements or arrangements of whatever character from time to time supporting or securing payment of such Receivable whether pursuant to the Contract related to such Receivable or otherwise, (iv) all Records related to such Receivables, (v) all of the Parent's right, title and interest in, to and under each Contract executed in connection therewith in favor of or otherwise for the benefit of the Parent; and (vi) all proceeds of any of the foregoing. "Report Date" shall have the meaning specified in the Purchase Agreement. "Reportable Event" has the meaning set forth in Section 4043 of ERISA. "Required Capital Amount" means $14,250,000. "Requirement of Law" shall have the meaning specified in the Purchase Agreement. 7 "Restricted Junior Payment" shall have the meaning specified in the Purchase Agreement. "Section" means a numbered section of this Agreement, unless another document is specifically referenced. "Servicer" means at any time the Person then authorized pursuant to Article VII of the Purchase Agreement to service, administer and collect Receivables. "Settlement Date" means, (a) prior to the earlier to occur of (i) an Event of Purchase and Sale Termination or (ii) the Facility Termination Date, (1) the second Business Day immediately succeeding each Report Date, (2) the second Business Day immediately succeeding the Interim Report Date if the related Interim Settlement Date Statement indicated that Capital exceeds the Available Funding Amount and (b) from and after the earlier to occur of (i) an Event of Purchase and Sale Termination or (ii) the Facility Termination Date, the twentieth (20th) day of each month or, if such day is not a Business Day, the next succeeding Business Day, and any other Business Day designated by the Co-Agents. "Settlement Date Statement" means a report substantially in the form of Exhibit VIII hereto (appropriately completed) furnished by a Sub-Servicer to the Buyer and the Co-Agents (as the Buyer's Assignees) pursuant to Section 5.1(b). "Stock Lift" shall mean an account receivable, or portion thereof, as to which any Originator or one of its subsidiaries has issued a credit in an amount equal to the balance of such account receivable or portion thereof. "Subordinated Loan" has the meaning set forth in Section 1.2(b). "Subordinated Note" means a promissory note in substantially the form of Exhibit X hereto as more fully described in Section 1.2, as the same may be amended, restated, supplemented or otherwise modified from time to time. "Subscription Agreement" means the Stockholder and Subscription Agreement in substantially the form of Exhibit IX hereto, as the same may be amended, restated, supplemented or otherwise modified from time to time. "Sub-Servicer" means Federal-Mogul, in its capacity as a sub-servicer for the Servicer as described in Section 5.1 hereof. "Sub-Servicer Fee" means the fee described in Section 5.6 hereof. "Subsidiary" of a Person means (i) any corporation more than 50% of the outstanding securities having ordinary voting power of which shall at the time be owned or controlled, directly or indirectly, by such Person or by one or more of its Subsidiaries or by such Person and one or more of its Subsidiaries, or (ii) any partnership, association, limited liability company, joint venture or similar business organization more than 50% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled. 8 Unless otherwise expressly provided, all references herein to a "Subsidiary" shall mean a Subsidiary of the Parent. "Termination Date" means the earliest of (i) the Facility Termination Date, (ii) the date of the declaration or automatic occurrence of the Termination Date pursuant to Section 6.2, and (iii) the date designated by the Parent as the Termination Date in a written notice delivered to the Buyer not less than ten days prior to such designated date. "Transaction Documents" means collectively, this Agreement, the Purchase Agreement, the Subordinated Notes, the Subscription Agreement, each Collection Agreement, the Receivables Purchase Agreement and all other instruments, documents and agreements executed and delivered by the Parent and each other Originator in connection herewith. "UCC" means the Uniform Commercial Code as from time to time in effect in the specified jurisdiction. "Wachovia" means Wachovia Bank, N.A. in its individual capacity and its successors. All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles. All terms used in Article 9 of the UCC in the State of New York, and not specifically defined herein, are used herein as defined in such Article 9. 9 EXHIBIT II CHIEF EXECUTIVE OFFICE OF THE PARENT; LOCATIONS OF RECORDS; TRADE NAMES; FEDERAL EMPLOYER IDENTIFICATION NUMBER FEDERAL-MOGUL CORPORATION ------------------------- Chief Executive Office and Location of Records 26555 Northwestern Highway Southfield, MI 48034 Trade Names, Assumed Names and Former Names Federal-Mogul Corporation Federal-Mogul Ignition Company Champion Spark Plug Co. Federal-Mogul Chesterfield Inc. Cooper Automotive Products, Inc. Federal-Mogul Automotive Company Cooper Automotive Company Federal-Mogul A&S Company Cooper A&S Company Federal-Mogul Interamericana, Ltd. Champion Interamericana, Ltd. Federal Employer Identification Number 38-0533580
EXHIBIT III COLLECTION ACCOUNTS Bank/Lox Box Location Account # Box # - --------------------- --------- ----- Comerica Bank 1000013027 148901 and 30401 P.O. Box Detroit, MI 48275-3265 BANK ONE CORPORATION 200011003677 771327 Dept. 771327 A E Goetze Inc. P.O. Box 77000 Detroit, MI 48277-1327 Bank/Lox Box Location Account # Box # - --------------------- --------- ----- BANK ONE CORPORATION 182953 771128 Dept. 771128 Supermet Inc. P.O. Box 77000 Detroit, MI 48277-1128 First National Bank of Chicago 59-36047 730113 PO Box 730113 Dallas, TX 75373-0113 First National Bank of Chicago 55-56872 73696 P.O. Box 73696 Chicago, IL 60673-7696 First Maryland National Bank 171-8376-9 N/A 25 S Charles Baltimore, MD 21201 First Maryland National Bank 184-8841-1 64899 AE Goetze LaGrange P.O. Box 64899 Baltimore, MD 21264-4899 First Maryland National Bank 179-8459-5 64011 Deva Engineered Bearings P.O. Box 64011 Baltimore, MD 21264-4011 Bank of America 7304749 96347 Comtech Manufacturing Co. 96347 Collection Center Dr. Chicago, IL 60693 Bank of America 7311095 99543 Glacier Clevite Heavywall Bearings 99543 Collections Center Drive Chicago IL 60693 Comerica 185068964 108901 Glacier Clevite Heavywall Bearings P. O. Box 6700 Detroit, MI 48267-1089 2 Bank/Lox Box Location Account # Box # - --------------------- --------- ----- Bank of America 7710925 98966 Weyburn Bartel Inc. 98966 Collections Center Dr. Chicago IL 60693 Comerica 185068964 109001 Department 109001 Weyburn Bartel Inc. P. O. Box 6700 Detroit, MI 48267-1090 Nations BankUS 3750324114 100220 P.O. Box 100220 Atlanta, GA 30384-0220 Nations BankUS 3750324114 277964 P.O. Box 277964 Atlanta, GA 30384-7964 Nations BankUS 3750324114 277969 P.O. Box 277969 Atlanta, GA 30384-7969 Royal Bank of Canada 1157189 2026 Federal-Mogul Funding Corp. P.O. Box 2026 Station Centre-Ville Montreal Quebec Canada H3B 4H4 Royal Bank of Canada 1157189 2676 Federal-Mogul Funding Corp. P.O. Box 2676 Post Station A Toronto Ontario Canada M5W 2N7 Royal Bank of Canada 1157189 6590 Federal-Mogul Funding Corp. P.O. Box 6590 Main Post Office Winnepeg Manitoba Canada R3C 4N6 3 Bank/Lox Box Location Account # Box # - --------------------- --------- ----- Bank of America NT&SA 375135162 2219 Federal-Mogul Funding Corp. 2219 Collections Center Drive Chicago, Illinois 60693 4 EXHIBIT IV [RESERVED] EXHIBIT V FORM OF COLLECTION ACCOUNT AGREEMENT [See Exhibit B to Receivables Interest Purchase Agreement] EXHIBIT VI CREDIT POLICIES CUSTOMER CREDIT Purpose - ------- This policy outlines requirements for creation and monitoring customer credit. Customer Credit Limits - ---------------------- The establishment and monitoring of a limit or maximum level of credit sales to each individual customer serves to reduce the risk of a significant loss due to uncollectible accounts. A credit limit represents the level of credit sales (including previous outstanding accounts receivable) above which additional credit will not be extended. Credit limits should be established after consideration is given to the payment history of each customer and an assessment of the customer's financial condition. Independent outside sources of credit history available locally (e.g. Dun & Bradstreet in the U.S.), credit references and or customer financial statements should be evaluated to establish customer credit limits and for updating credit limits on a periodic basis. Credit Hold Routines - -------------------- Routines should be established to preclude shipping product to customers that exceeds the customer credit limit. Specific approval by a designated finance/customer credit individual of any deviation from the established routines. INTRODUCTION CENTRALIZED SOUTHFIELD ENVIRONMENT . Supporting the Following * OEM--United States * Aftermarket--United States * Aftermarket--Canada . Specific Responsibilities * Credit approval * Collection * Receivable management * Billing--NAA only * Dispute resolution . Department Organization Chart * 85 total employees * 5 part-time/associate * 80 full-time company employees (74% 4-year degrees) . Software Utilized * CARMS--receivable management * Lotus Notes--communication and dispute management * Maxretriever--document management * UPS--proof of deliveries * PRC--scanner utilization * Internally developed--AMS, MAPS, STRAP . Aggressive Reengineering Initiative * Relentless pursuit of superior customer service * Eliminate deductions * Continuous investigation of electronic options in our daily operations * Review of document delivery options for invoices and statements * Resolve customer inquiries with one call methodology * Investigation of order to cash possibilities at manufacturing plants * denotes the arrows. 2 CREDIT POLICY AND PROCEDURE . Determination of Credit Limits * Credit limits are set at approximately 2.5 times estimated month sales for new accounts. * Existing account credit limits are adjusted according to payment habits and financial stability. An account that shows a pattern of paying their account past due will have their credit limit adjusted downward to 1 - 1 1/2 times monthly sales. . New Account Procedure * The following information is requested for new open accounts: - 3-trade credit references - 1 bank credit reference - Credit reporting agency report (optional) - Verbal credit references from industry credit group members (optional) * Requests for additional credit are evaluated by reviewing payment history (prompt %/discount % vs. late %), review of current financial statements and amount of additional credit requested compared to the current year high credit. . Levels of Credit Granting Approval * Two step process for new credit approval, after Sales has requested the account be given open account status. Review and approval/reject is given first by the Credit Analyst, then by the Area Credit Manager. * Increases in credit for current customers are reviewed by the Credit Analyst. . Use of Security Documents and Personal Guarantees * Personal guarantees are included in the customer's Credit Application. While a personal guarantee is not required for all new accounts, it is required in cases of higher than usual financial risk. * UCC-1's, UCC-3's, and Purchase Money Security Agreements are taken (or continued) on customers with large projected or current sales volumes (**$150,000) or when a customer's financial condition is deteriorating. * denotes the arrows ** denotes greater than 3 . Training of Credit Granting Personnel * Each Credit Analyst undergoes a 5 day training schedule, reviewing a formal training agenda with each of the Credit Analysts. Items covered include: - A/R management software and systems (CARMS, MAPS & STRAP) - New account/account maintenance procedures - Special payment terms request approval and rejection - Security documents - Credit and collection procedures . Credit Files * A file is kept for each customer account. An example of information in this file is: - Original credit application - Notes from phone conversations and meeting with customers - Copies of written correspondence - Information from creditor discussion groups - Personal guarantee (optional) * These files are kept in a central location in the Customer Financial Services Department * Additionally, notes are kept concerning Credit Analyst discussions with the customer on CARMS. Examples of this information are: - Customer commitments to send checks - Date customers are put on hold - Miscellaneous comments noted by the Credit Analyst that may be of value in future credit decisions * denotes the arrows 4 . Payment Terms * Standard terms for OEM customers are either net 10/th/ and net 25/th/ prox or net 30 days on the date in the month in which the product is shipped. For net 10/th/ and net 25/th/ prox, if the product is shipped in the first 15 days of the month, payment is due by the 10/th/ day of the following month. If shipped later in the month, payment is due by the 25/th/ day of the following month. Customers are sent an invoice or an ASN for each shipment. * Standard terms for the FM Aftermarket and Retail are based on a shipping month of the 26/th/ to the 25/th/ and qualify for a 2% prompt payment discount if the invoice is paid by the 10/th/ of the following month, otherwise, full payment for the Aftermarket is due by the 25/th/ of the following month and for Retail, full payment is due the 25/th/ of the 2/nd/ month following. Gasket, ignition, chassis and brake terms in general are 2% 2/nd/ 10/th/ net 25/th/ prox. In addition, there are negotiated terms for Retailers and selected buying groups which can range from 2% 2/nd/ 10/th/ to net 90 days. . Determinants of Price * Prices for the Aftermarket are published on product line price sheets. * Prices for Retail and OEM accounts are negotiated and specified on a pricing agreement for a given period of time and are supported by a purchase order or vendor agreement. . Cash In Advance/Cash On Account * Used at the Credit Analyst's discretion in the following situations: - Account consistently pays past due and is judged to be a credit risk - Bankruptcy - New account with credit references judged unsatisfactory . Notes Receivable * Used at the Credit Analyst's discretion and reviewed monthly for payment. As of May, 1999 month end, there were 4 open Notes Receivable for a total of $463,604.45. * denotes the arrows 5 CREDIT AND COLLECTION . Account Maintenance * The Credit and Accounts Receivable Management System (CARMS) produces an action list on a daily basis, which lists accounts that require attention due to a change in status (account over credit limit, account past due, etc). * Action lists are reviewed by credit analysts for resolution. * Summary past due reports are generated on a monthly basis and are reviewed by the analysts for credit restriction. * Credit analysts continue follow up by making timely collection calls to customers on past due invoices until payment is received. * Sales is contacted to assist with collection of past due items and the resolution of customer disputes. * If payment is not received or a mutual payment arrangement cannot be made, the customer is sent a final demand notice, which details the debt and allows the customer ten working days to make acceptable payment arrangements. * If payment is still not received and no payment agreement has been made, the account is referred to the Area Credit Manager for further disposition. . Collection Agencies / Bankruptcies * Accounts which are seriously past due may be referred to FM's legal counsel for action or placed with an outside collection agency. Accounts are moved to a separate credit manager code for follow-up. * Accounts that have filed for bankruptcy are moved to a separate credit manager code for follow-up and are written off quarterly. * denotes the arrows 6 AFTERMARKET - CUSTOMER BASE OVERVIEW . Number of Aftermarket and Retail Accounts * 5,548 active Aftermarket accounts * 187 active Retail accounts . Product Portfolio * Powertrain Systems - power cylinder systems, engine bearings, pistons, piston rings, piston pins, piston liners, connecting rods, bushings, washers, spark plugs, ignition wires and cables, ignition coils, and ceramic insulators. * Sealing Systems - total engine sealing, total transmission sealing, total axle sealing, cylinder head gaskets, ancillary gaskets, dynamic seals, bonded pistons, wiper products, heat shields, noise and vibration sealing systems. * General Products - camshafts, brake and friction products, chassis products, driveline products, fuel pumps, carburetors, emission control products, strobes, marker lights, reflective tape, sintered products, and systems protection products. . Method of Order Placement and Shipment * Orders can be placed electronically via EDI or through Federal-Mogul's Customer Service/Order Entry via phone or fax. * Aftermarket orders are usually shipped from one of our Service Centers located in the U.S. and Canada. Larger orders may be shipped from one of three main Distribution Centers located in Jacksonville, AL, Maysville, KY and Skokie, IL. . Customer Operations * Aftermarket customers consist mainly of warehouse distributors that buy product for downstream sales to independent or warehouse owned auto parts stores. Examples are NAPA, MAWDI and Pittsburgh Crankshaft. * Retail customers buy product for resale in their own company owned store. Examples are CSK Automotive, Advance and AutoZone. * denotes the arrows 7 ORIGINAL EQUIPMENT MARKET AND EXPORT OVERVIEW . OE Export Customer Base * 1,344 active OEM accounts * 208 active Export accounts . Customer Operations * OE & Export customers consist primarily of automotive, heavy duty vehicle, farm equipment and industrial equipment manufacturers. * Major customers include Ford, General Motors and Chrysler. . Product Portfolio * Powertrain Systems - power cylinder systems, engine bearings, pistons, piston rings, piston pins, piston liners, connecting rods, bushings, washers, spark plugs, ignition wires and cables, ignition coils, and ceramic insulators. * Sealing Systems - total engine sealing, total transmission sealing, total axle sealing, cylinder head gaskets, ancillary gaskets, dynamic seals, bonded pistons, wiper products, heat shields, noise and vibration sealing systems. * General Products - camshafts, brake and friction products, chassis products, driveline products, fuel pumps, carburetors, emission control products, strobes, marker lights, reflective tape, sintered products, and system protection products. . Order Process * Decentralized customer service - one at each of our plant locations. * Orders are scheduled in advance by large OEM Customers (such as Ford, GM, Chrysler) and the accum's are adjusted as product is shipped, material release forecasts updated weekly. * Smaller OEM's send purchase orders in advance with date required. Purchase orders reviewed at plant before orders are scheduled. * denotes the arrows 8 ACCOUNTS RECEIVABLE DILUTIONS . Cash Discount * 1.8% of NAA Sales . Doubtful Accounts * Written off quarterly as approved by the department manager * Continual follow up until financial conclusion . Credit Memos * Stocklift returns * Obsolescence returns * 30 day returns * Warranty * Price * Policy allowance . Checks Issued * Rebates for volume incentives . Invoices/Statements * The invoices generated from a plant sale can be mailed or sent electronically through EDI. * The Aftermarket invoices that are not sent via EDI are mailed at least weekly. * Monthly statements are sent to customers based on the 25/th/ or month- end cutoff based on the customer. . Reconciliations * A monthly reconciliation is completed of CARMS to the General Ledger balance. * Typical reconciliation items can be cash or billings due to different closing schedules. * denotes the arrows 9 EXHIBIT VII [RESERVED] EXHIBIT VIII FORM OF SETTLEMENT DATE STATEMENT [See Exhibit C to the Receivable Interest Purchase Agreement] EXHIBIT IX FORM OF SUBSCRIPTION AGREEMENT _________ STOCKHOLDER AND SUBSCRIPTION AGREEMENT THIS STOCKHOLDER AND SUBSCRIPTION AGREEMENT (this "Agreement"), dated as of June 26, 2000, is entered into by and between Federal-Mogul Funding Corporation, a Michigan corporation ("SPC"), and Federal-Mogul Corporation, a Michigan corporation ("Parent"). This Agreement supercedes any and all stockholder and subscription agreements previously entered into by and between SPC and the Parent. Except as otherwise specifically provided herein, capitalized terms used in this Agreement have the meanings ascribed thereto in the Fourth Amended and Restated Receivables Sale and Contribution Agreement dated as of even date herewith between the Parent and SPC (as amended, restated, supplemented or otherwise modified from time to time, the "Sale Agreement"). RECITALS A. SPC has been organized under the laws of the State of Michigan for the purpose of, among other things, purchasing, holding, financing, receiving and transferring accounts receivable and related assets originated or otherwise held by Parent. B. Contemporaneously with the execution and delivery of this Agreement: (i) Parent and SPC have entered into the Sale Agreement pursuant to which Parent has, from and after the initial purchase date thereunder and prior to the termination date specified therein, sold all of its Receivables, Collections and Related Security to SPC; and (ii) SPC, Parent, Blue Ridge Asset Funding Corporation, Falcon Asset Securitization Corporation, certain financial institutions from time to time party thereto as "Liquidity Providers," Bank One, NA, as the "Administrative Agent," and "Falcon Agent", and Wachovia Bank, N.A., as the "Blue Ridge Agent," have entered into a Fourth Amended and Restated Receivables Interest Purchase Agreement (as amended, restated, supplemented or otherwise modified from time to time, the "Purchase Agreement") pursuant to which SPC will sell "Receivable Interests" to the Co-Agents for the benefit of their respective Purchaser Groups. C. SPC desires to sell shares of its capital stock to Parent, and Parent desires to purchase such shares, on the terms set forth in this Agreement. NOW, THEREFORE, SPC and Parent agree as follows: 1. Purchase and Sale of Capital Stock. Parent hereby purchases from ---------------------------------- SPC, and SPC hereby sells to Parent, 100 shares of common stock, par value $1.00 per share, of SPC (the "Common Stock") for the Stock Purchase Price set forth in Section 2.1. The shares of Common Stock being purchased under this Agreement are referred to herein as the "Shares." Within three (3) Business Days from the date hereof, SPC shall deliver to Parent a certificate registered in Parent's name representing the Shares. 2. Consideration for Shares and Capital Contributions. -------------------------------------------------- 2.1 Consideration for Shares. To induce SPC to enter into the Sale ------------------------ Agreement and to enable SPC to fund its obligations thereunder by consummating the transactions contemplated by the Purchase Agreement, and in reliance upon the representations and warranties set forth herein, Parent hereby pays to SPC on the date hereof the sum of $14,250,000 (the "Stock Purchase Price") in consideration of the purchase of the Shares. The Stock Purchase Price shall take the form of a transfer of cash, except that Parent may, in lieu of cash payment of the Stock Purchase Price, offset the amount of the Stock Purchase Price against the purchase price otherwise payable by SPC to Parent on the initial purchase date pursuant to the Sale Agreement. 2.2 Contributions After Initial Closing Date. From time to time ---------------------------------------- Parent may make additional capital contributions to SPC. All such contributions shall take the form of a cash transfer, except that SPC agrees to, in lieu of cash payment thereof, offset the amount of such contributions against the purchase price for Receivables otherwise payable by SPC to Parent on the date of such capital contributions. All of the Receivables so paid for through such offset shall constitute purchased Receivables within the meaning of the Sale Agreement and shall be subject to all of the representations, warranties and indemnities otherwise made thereunder. It is expressly understood and agreed that Parent has no obligations under this Agreement or otherwise to make any capital contributions from and after payment of the Stock Purchase Price. 3. Representations and Warranties of SPC. SPC represents and ------------------------------------- warrants to Parent as follows: (a) SPC is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Michigan, and has all requisite corporate power and authority to carry on its business as proposed to be conducted on the date hereof. (b) SPC has all requisite legal and corporate power to enter into this Agreement, to issue the Shares and to perform its other obligations under this Agreement. (c) Upon receipt by SPC of the Stock Purchase Price and the issuance of the Shares to Parent, the Shares will be duly authorized, validly issued, fully paid and nonassessable. (d) SPC has taken all corporate action necessary for its authorization, execution and delivery of, and, its performance under, this Agreement. (e) This Agreement constitutes a legally valid and binding obligation of SPC, enforceable against SPC in accordance with its terms, except that enforceability may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally and by general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law. 2 (f) The issuance of the Shares by SPC hereunder is legally permitted by all laws and regulations to which SPC is subject. 4. Representations and Warranties of Parent. Parent represents and ---------------------------------------- warrants to SPC as follows: (a) Parent is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Michigan, and has all requisite corporate power and authority to carry on its business as conducted on the date hereof. (b) Parent has all requisite legal and corporate power to enter into this Agreement, to purchase the Shares and to perform its other obligations under this Agreement. (c) Parent has taken all corporate action necessary for its authorization, execution and delivery of, and its performance under, this Agreement. (d) This Agreement constitutes a legally valid and binding obligation of Parent, enforceable against Parent in accordance with its terms, except that enforceability may be limited by bankruptcy, insolvency, reorganization or other similar laws affecting the enforcement of creditors' rights generally and by general principles of equity, regardless of whether such enforceability is considered in a proceeding in equity or at law. (e) Parent is purchasing the Shares for investment for its own account, not as a nominee or agent, and not with a view to any distribution of any part thereof; Parent has no current intention of selling, granting a participation in, or otherwise distributing, the shares. (f) Parent understands that the Shares have not been registered under the Securities Act of 1933, as amended, or under any other Federal or state law, and that SPC does not contemplate such a registration. (g) Parent has such knowledge, sophistication and experience in financial and business matters that it is capable of evaluating the merits and risks of the transactions contemplated by this Agreement, and has made such investigations in connection herewith as have been deemed necessary or desirable to make such evaluation. (h) The purchase of the Shares by Parent is legally permitted by all laws and regulations to which Parent is subject. 5. Restrictions on Transfer Imposed by the Act; Legend. --------------------------------------------------- 5.1 Legend. Each certificate representing any Shares shall be ------ endorsed with the following legend: THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE NOT REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933, AS 3 AMENDED, OR ANY STATE SECURITIES ACT. SUCH SECURITIES SHALL NOT BE SOLD, PLEDGED, HYPOTHECATED, DONATED OR OTHERWISE TRANSFERRED OR DISPOSED OF ABSENT SUCH REGISTRATION, UNLESS, IN THE OPINION OF THE CORPORATION'S COUNSEL, SUCH REGISTRATION IS NOT REQUIRED. IN ADDITION, THESE SECURITIES HAVE BEEN ISSUED OR SOLD IN RELIANCE ON SECTION 4(2) OF THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD OR TRANSFERRED EXCEPT IN A TRANSACTION WHICH IS EXEMPT UNDER SUCH ACT OR PURSUANT TO AN EFFECTIVE REGISTRATION UNDER SUCH ACT. 5.2 Registration of Transfers. SPC need not register a transfer of ------------------------- any Shares unless the conditions specified in the legend set forth in Section 5.1 hereof are satisfied. SPC may also instruct its transfer agent (which may be SPC) not to register the transfer of any Shares unless the conditions specified in the legend set forth in Section 5.1 hereof are satisfied. 6. Agreement to Vote. Parent hereby agrees and covenants to vote ----------------- all of the shares of Common Stock now or hereafter owned by it, whether beneficially or otherwise, as is necessary at a meeting of stockholders of SPC, or by written consent in lieu of any such meeting, to cause to be elected to, and maintained on, SPC's board of directors at least one (1) person meeting the qualifications of an Independent Director and selected in accordance with the provisions of the Certificate of Incorporation and By-Laws of SPC. 7. Successors and Assigns. Each party agrees that it will not ---------------------- assign, sell, transfer, delegate, or otherwise dispose of, whether voluntarily or involuntarily, or by operation of law, any right or obligation under this Agreement except in connection with a transfer of Shares in compliance with the terms and conditions hereof, as contemplated by Section 5.2 above, or otherwise in accordance with the terms hereof. Any purported assignment, transfer or delegation in violation of this Section 7 shall be null and void ab initio. Subject to the foregoing limits on assignment and delegation and except as otherwise provided herein, this Agreement shall be binding upon and inure to the benefit of the parties hereto, their respective heirs, legatees, executors, administrators, assignees and legal successors. 8. Amendments and Waivers. Any term hereof may be amended and the ---------------------- observance of any term hereof may be waived (either generally or in a particular instance and either retroactively or prospectively) only with the written consent of SPC and Parent. Any amendment or waiver so effected shall be binding upon SPC and Parent. 9. Further Acts. Each party agrees to perform any further acts and ------------ execute and deliver any document which may be reasonably necessary to carry out the provisions of this Agreement. 10. Counterparts. This Agreement may be executed in any number of ------------ counterparts, and all of such counterparts together will be deemed one instrument. 11. Notices. Any and all notices, acceptances, statements and other ------- communications to Parent in connection herewith shall be in writing, delivered personally, by 4 facsimile or certified mail, return receipt requested, and shall be addressed to the address of Parent indicated on the stock transfer register of SPC or, if no address is so indicated, to the address provided to SPC pursuant to the Sale Agreement unless changed by written notice to SPC or its successor. 12. Governing Law. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE ------------- WITH AND BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK, EXCEPT AND TO THE EXTENT THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE IS APPLICABLE. 13. Entire Agreement. This Agreement, together with the Sale ---------------- Agreement and documents expressly to be delivered in connection therewith, constitute the entire understanding and agreement between the parties hereto with subject matter hereof and thereof. This Agreement supercedes all stockholder and subscription agreements previously entered into by and between SPC and Parent. 14. Severability of this Agreement. In case any provision of this ------------------------------ Agreement shall be invalid or unenforceable, the validity, legality and enforceability of the remaining shall not in any way be affected or impaired thereby. 5 IN WITNESS WHEREOF, the parties have executed and delivered this Agreement as of the date first above written. SPC PARENT FEDERAL-MOGUL FUNDING FEDERAL-MOGUL CORPORATION, a CORPORATION, a Michigan Michigan corporation corporation By:_______________________________ By:_____________________________ Name: Name: Title: Title: 6 EXHIBIT X FORM OF SUBORDINATED NOTE _________ SUBORDINATED NOTE June 26, 2000 1. Note. FOR VALUE RECEIVED, the undersigned, FEDERAL-MOGUL FUNDING ---- CORPORATION, a Michigan corporation ("SPC"), hereby unconditionally promises to pay to the order of FEDERAL-MOGUL CORPORATION, a Michigan corporation ("Parent"), in lawful money of the United States of America and in immediately available funds, on the date following the Termination Date which is one year and one day after the date which (i) the Outstanding Balance of all Receivables sold under the "Sale Agreement" referred to below has been reduced to zero and (ii) Parent has paid to the Buyer all indemnities, adjustments and other amounts which may be owed hereunder in connection with the Purchases (the "Collection Date"), the aggregate unpaid principal sum outstanding of all "Subordinated Loans" made from time to time by Parent to SPC pursuant to and in accordance with the terms of that certain Fourth Amended and Restated Receivables Sale and Contribution Agreement dated as of June __, 2000 between Parent and SPC (as amended, restated, supplemented or otherwise modified from time to time, the "Sale Agreement"). Reference to Section 1.2 of the Sale Agreement is hereby made for a statement of the terms and conditions under which the loans evidenced hereby have been and will be made. All terms which are capitalized and used herein and which are not otherwise specifically defined herein shall have the meanings ascribed to such terms in the Sale Agreement. 2. Interest. SPC further promises to pay interest on the -------- outstanding unpaid principal amount hereof from the date hereof until payment in full hereof at a rate equal to the Base Rate; provided, however, that if SPC shall default in the payment of any principal hereof, SPC promises to, on demand, pay interest at the rate of the Base Rate plus 2.00% on any such unpaid amounts, from the date such payment is due to the date of actual payment. Interest shall be payable on the first Business Day of each month in arrears; provided, however, that SPC may elect on the date any interest payment is due hereunder to defer such payment and upon such election the amount of interest due but unpaid on such date shall constitute principal under this Subordinated Note. The outstanding principal of any loan made under this Subordinated Note, together with all accrued and unpaid interest thereon, shall be due and payable on the Collection Date and may be repaid or prepaid at any time without premium or penalty. 3. Principal Payments. Parent is authorized and directed by SPC to ------------------ enter on the grid attached hereto, or, at its option, in its books and records, the date and amount of each loan made by it which is evidenced by this Subordinated Note and the amount of each payment of principal made by SPC, and absent manifest error, such entries shall constitute prima facie evidence of the accuracy of the information so entered; provided that neither the failure of Parent to make any such entry or any error therein shall expand, limit or affect the obligations of SPC hereunder. 7 4. Subordination. The indebtedness evidenced by this Subordinated ------------- Note is subordinated to the prior payment in full of all of SPC's recourse obligations under that certain Fourth Amended and Restated Receivable Interest Purchase Agreement dated as of June 26, 2000 by and among SPC, Federal-Mogul Corporation, Blue Ridge Asset Funding Corporation, Falcon Asset Securitization Corporation, the financial institutions from time to time a party thereto, Bank One, NA, as the Administrative Agent and the Falcon Agent, and Wachovia Bank, N.A., as the Blue Ridge Agent (as amended, restated, supplemented or otherwise modified from time to time, the "Purchase Agreement"). The subordination provisions contained herein are for the direct benefit of, and may be enforced by, the Agents and the Purchasers and/or any of their respective assignees (collectively, the "Senior Claimants") under the Purchase Agreement. Until the date on which all "Capital" outstanding under the Purchase Agreement has been repaid in full and all other obligations of SPC and/or the Servicer thereunder and under the "Fee Letters" referenced therein (all such obligations, collectively, the "Senior Claim") have been indefeasibly paid and satisfied in full, Parent shall not demand, accelerate, sue for, take, receive or accept from SPC, directly or indirectly, in cash or other property or by set-off or any other manner (including, without limitation, from or by way of collateral) any payment or security of all or any of the indebtedness under this Subordinated Note or exercise any remedies or take any action or proceeding to enforce the same; provided, however, that (i) Parent hereby agrees that it will not institute against SPC any Insolvency Event unless and until the Collection Date has occurred and (ii) nothing in this paragraph shall restrict SPC from paying, or Parent from requesting, any payments under this Subordinated Note so long as SPC is not required under the Purchase Agreement to set aside for the benefit of, or otherwise pay over to, the funds used for such payments to any of the Senior Claimants and further provided that the making of such payment would not otherwise violate the terms and provisions of the Purchase Agreement. Should any payment, distribution or security or proceeds thereof be received by Parent in violation of the immediately preceding sentence, Parent agrees that such payment shall be segregated, received and held in trust for the benefit of, and deemed to be the property of, and shall be immediately paid over and delivered to the Co-Agents for the benefit of the Senior Claimants. 5. Bankruptcy; Insolvency. Upon the occurrence of any Insolvency ---------------------- Event involving SPC as debtor, then and in any such event the Senior Claimants shall receive payment in full of all amounts due or to become due on or in respect of Capital and the Senior Claim (including "Yield" accruing under the Purchase Agreement after the commencement of any such proceeding, whether or not any or all of such Yield is an allowable claim in any such proceeding) before Parent is entitled to receive payment on account of this Subordinated Note, and, to that end, any payment or distribution of assets of SPC of any kind or character, whether in cash, securities or other property, in any applicable insolvency proceeding, which would otherwise be payable to or deliverable upon or with respect to any or all indebtedness under this Subordinated Note, is hereby assigned to and shall be paid or delivered by the Person making such payment or delivery (whether a trustee in bankruptcy, a receiver, custodian or liquidating trustee or otherwise) directly to the Co-Agents for application to, or as collateral for the payment of, the Senior Claim until such Senior Claim shall have been paid in full and satisfied. 6. Amendments. This Subordinated Note shall not be amended or ---------- modified except in accordance with Section 8.1(b) of the Sale Agreement. The terms of this Subordinated 8 Note may not be amended or otherwise modified without the prior written consent of the Agents for the benefit of the Purchasers. 7. Governing Law. This Subordinated Note has been made and ------------- delivered at the offices of Latham & Watkins, 885 Third Avenue, New York, New York 10022, and shall be interpreted and the rights and liabilities of the parties hereto determined in accordance with the laws and decisions of the State of New York. Wherever possible each provision of this Subordinated Note shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Subordinated Note shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Subordinated Note. THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK 9 8. Waivers. All parties hereto, whether as makers, endorsers, or ------- otherwise, severally waive presentment for payment, demand, protest and notice of dishonor. Parent additionally expressly waives all notice of the acceptance by any Senior Claimant of the subordination and other provisions of this Subordinated Note and expressly waives reliance by any Senior Claimant upon the subordination and other provisions herein provided. 9. Assignment. This Subordinated Note may not be assigned, pledged ---------- or otherwise transferred to any party other than Parent without the prior written consent of the Co-Agents, and any such attempted transfer shall be void. FEDERAL-MOGUL FUNDING CORPORATION By:___________________________________ Name: Title: 10 Schedule to SUBORDINATED NOTE SUBORDINATED LOANS AND PAYMENTS OF PRINCIPAL -------------------------------------------- Amount of Amount Unpaid Subordinated of Principal Notation Date Loan Principal Paid Balance made by - ------------- ------------ -------------- --------- -------- - ------------ ---------- ----------- ------- -------- - ------------ ---------- ----------- ------- -------- - ------------ ---------- ----------- ------- -------- - ------------ ---------- ----------- ------- -------- - ------------ ---------- ----------- ------- -------- - ------------ ---------- ----------- ------- -------- - ------------ ---------- ----------- ------- -------- - ------------ ---------- ----------- ------- -------- - ------------ ---------- ----------- ------- -------- - ------------ ---------- ----------- ------- -------- - ------------ ---------- ----------- ------- -------- - ------------ ---------- ----------- ------- -------- - ------------ ---------- ----------- ------- -------- - ------------ ---------- ----------- ------- -------- - ------------ ---------- ----------- ------- -------- - ------------ ---------- ----------- ------- -------- - ------------ ---------- ----------- ------- -------- 11 SCHEDULE A LIST OF CLOSING DOCUMENTS List of Participants -------------------- Participant Abbreviation ----------- ------------ Federal-Mogul Corporation FMC Federal-Mogul Canada Limited FM Canada Federal-Mogul Piston Rings, Inc. FM Piston Federal-Mogul Flowery Branch, LLC FM Flowery Federal-Mogul Powertrain, Inc. FM Powertrain Federal-Mogul Sealing Systems, Inc. FM Sealing Federal-Mogul Carolina, Inc. FM Carolina Federal-Mogul South Bend, Inc. FM South Bend Federal-Mogul LaGrange, Inc. FM LaGrange Federal-Mogul Sintered Products, Inc. FM Sintered Federal-Mogul Sintered Products - Waupun, Inc. FM Waupun Federal-Mogul System Protection Group, Inc. FM System Federal-Mogul Engineered Bearings, Inc. FM Engineered Federal-Mogul Camshafts, Inc. FM Camshafts Federal-Mogul Aviation, Inc. FM Aviation Federal-Mogul Ignition Company "Blazer" FM Blazer Federal-Mogul Products, Inc. "Moog" FM Moog Federal-Mogul Funding Corporation FMFC Falcon Asset Securitization Corporation Falcon Financial Institutions Liquidity Providers Bank One, NA Administrative Agent/ Falcon Agent Baker & McKenzie B&M Brown & Wood B&W Latham & Watkins L&W Wachovia Bank, N.A. Blue Ridge Agent International Securitization Corporation ISC Index of Closing Documents --------------------------
Document Tab No. Responsibility -------- ------- -------------- STEP I - Sale from the Originators to FMC ----------------------------------------- First Amended and Restated Receivables Purchase 1.0 B&W Agreement Subordinated Note executed by FMC in favor of each 2.0 B&W Originator (other than FMC) Secretary's Certificate for each Originator (other than 3.0 B&W FMC), as to organizational document certified by, and good standing certificate issued by, Secretary of State of the State of incorporation, By-Laws, resolutions and specimen signatures: FM Canada 3.1 B&W FM Piston 3.2 B&W FM Flowery 3.3 B&W FM Powertrain 3.4 B&W FM Sealing 3.5 B&W FM Carolina 3.6 B&W FM South Bend 3.7 B&W FM LaGrange 3.8 B&W FM Sintered 3.9 B&W FM Waupun 3.10 B&W FM System 3.11 B&W FM Engineered 3.12 B&W FM Camshafts 3.13 B&W FM Aviation 3.14 B&W FM Blazer 3.15 B&W
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Document Tab No. Responsibility -------- ------- -------------- FM Moog 3.16 B&W Officer's Certificate of each Originator (other than 4.0 B&W FMC), dated as of June __, 2000 Re: No Event of Purchase and Sale Termination or Potential Event of Purchase and Sale Termination, and absence of Material Adverse Effect since March 31, 2000. FM Canada 4.1 B&W FM Piston 4.2 B&W FM Flowery 4.3 B&W FM Powertrain 4.4 B&W FM Sealing 4.5 B&W FM Carolina 4.6 B&W FM South Bend 4.7 B&W FM LaGrange 4.8 B&W FM Sintered 4.9 B&W FM Waupun 4.10 B&W FM System 4.11 B&W FM Engineered 4.12 B&W FM Camshafts 4.13 B&W FM Aviation 4.14 B&W FM Blazer 4.15 B&W FM Moog 4.16 B&W UCC-3 Financing Statement to be filed in connection 5.0 L&W with First Amended and Restated Receivables Purchase Agreement, each Originator (other than FMC) as debtor, and Bank One, NA as secured party
3 Document Tab No. Responsibility -------- ------- -------------- FM Canada 5.1 L&W - Ontario FM Piston 5.2 L&W - Secretary of State of Michigan - Secretary of State of Wisconsin FM Flowery 5.3 L&W - Hall County (Georgia) FM Powertrain 5.4 L&W - Secretary of State of Minnesota - Secretary of State of Ohio - Morgan County FM Sealing 5.5 L&W - Secretary of State of Alabama FM Carolina 5.6 L&W - Secretary of State of South Carolina FM South Bend 5.7 L&W - Secretary of State of Indiana FM LaGrange 5.8 L&W - Troup County (Georgia) FM Sintered 5.9 L&W - Secretary of State of Ohio - Montgomery County FM Waupun 5.10 L&W - Secretary of State of Wisconsin FM System 5.11 L&W - Secretary of State of Pennsylvania - Chester County FM Engineered 5.12 L&W - Secretary of State of Ohio - Stark County - Summit County FM Camshafts 5.13 L&W - Secretary of State of Michigan 4
Document Tab No. Responsibility -------- ------- -------------- FM Aviation 5.14 L&W - Secretary of State of South Carolina FM Blazer 5.15 L&W - Secretary of State of Michigan - Secretary of State of Illinois FM Moog 5.16 L&W - Secretary of State of Missouri - St. Louis City UCC Lien and Related Searches for each Originator 6.0 B&W (other than FMC) FM Canada 6.1 B&W - Ontario FM Piston 6.2 B&W - Secretary of State of Michigan - Kent County - Secretary of State of Wisconsin - Marathon County - Manitowoc County FM Flowery 6.3 B&W - Secretary of State of Georgia (Central Index) - Hall County FM Powertrain 6.4 B&W - Secretary of State of Minnesota - Wabasha County - Goodhue County - Secretary of State of Ohio - Morgan County FM Sealing 6.5 B&W - Secretary of State of Alabama - Limestone County FM Carolina 6.6 B&W - Secretary of State of South Carolina - Sumter County
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Document Tab No. Responsibility -------- ------- -------------- FM South Bend 6.7 B&W - Secretary of State of Indiana - St. Joseph County FM LaGrange 6.8 B&W - Secretary of State of Georgia (Central Index) - Troup County FM Sintered 6.9 B&W - Secretary of State of Ohio - Montgomery County FM Waupun 6.10 B&W - Secretary of State of Wisconsin - Dodge County - Fond du Lac County FM System 6.11 B&W - Secretary of State of Pennsylvania - Chester County FM Engineered 6.12 B&W - Secretary of State of Ohio - Stark County - Summit County FM Camshafts 6.13 B&W - Secretary of State of Michigan - Ottawa County FM Aviation 6.14 B&W - Secretary of State of South Carolina - Pickens County FM Blazer 6.15 B&W - Secretary of State of Illinois - Cook County FM Moog 6.16 B&W - Secretary of State of Missouri - St. Louis County - St. Louis City
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Document Tab No. Responsibility -------- ------- -------------- STEP II - Sale from FMC to FMFC ------------------------------- Fourth Amended and Restated Receivables Sale and 7.0 L&W Contribution Agreement ("Receivables Sale Agreement"). -------------------------- Stockholder and Subscription Agreement 8.0 L&W Subordinated Note executed by FMC 9.0 L&W Secretary's Certificate of FMC, as to good standing 10.0 B&W certificate issued by, and Certificate of Incorporation certified by, Secretary of State of Michigan, By-Laws, resolutions and specimen signatures. Officer's Certificate of FMC Re: No Event of Purchase 11.0 B&W and Sale Termination or Potential Event of Purchase and Sale Termination, and absence of Material Adverse Effect since March 31, 2000. UCC-3 Financing Statement to be filed in connection 12.0 L&W with Receivables Sale Agreement, FMC as debtor and FMFC as secured party and Administrative Agent, as Assignee: - Secretary of State of Michigan UCC Lien and Related Searches for the FMC 13.0 B&W - Secretary of State of Michigan - Oakland County STEP III - Sale from FMFC to Falcon, Blue Ridge and the Liquidity Providers --------------------------------------------------------------------------- Fourth Amended and Restated Receivables Interest 14.0 L&W Purchase Agreement (the "Receivables Interest Purchase ----------------------------- Agreement") - --------- Blue Ridge Liquidity Asset Purchase Agreement 15.0 L&W Falcon Liquidity Agreement 16.0 L&W Blue Ridge Fee Letter 17.0 L&W Falcon Fee Letter 18.0 L&W
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Document Tab No. Responsibility -------- ------- -------------- Assignment Agreement between ISC and Blue Ridge 19.0 L&W Assignment Agreement between Falcon and Blue Ridge 20.0 L&W Assignment Agreement between Bank One, Michigan and 21.0 L&W Wachovia Bank, N.A. Secretary's Certificate of FMFC, as to good standing 22.0 B&W certificate issued by, and Certificate of Incorporation certified by, Secretary of State of Michigan, By-Laws, resolutions and specimen signatures. Officer's Certificate of FMFC Re: No Amortization 23.0 B&W Event or Potential Amortization Event, and absence of Material Adverse Effect since March 31, 1999. Certificate Re: B&W True Sale/Nonconsolidation Opinion 24.0 B&W signed by each of the Originators (other than FMC) (Step I) FMC Certificate Re: B&W True Sale/Nonconsolidation 25.0 B&W Opinion (Step II) FMFC Certificate Re: B&W True Sale/Nonconsolidation 26.0 B&W Opinion (Step II) True Sale/Nonconsolidation Opinion of B&W (Step I and 27.0 B&W Step II). Corporate Opinion of B&W (including perfection and 28.0 B&W priority), counsel to Originators, FMC and FMFC (Step I, Step II and Step III) Corporate Opinion of in-house (including perfection and 29.0 B&W priority), counsel to Originators, FMC and FMFC (Step I, Step II and Step III) Corporate Opinion of B&M, Canadian counsel for FM 30.0 B&W/B&M Canada (Step I) UCC-3 Financing Statement to be filed in connection 31.0 L&W with Receivables Interest Purchase Agreement, FMFC as debtor and Agent as secured party: - Secretary of State of Michigan
8 Document Tab No. Responsibility -------- ------- -------------- UCC Lien and Related Searches for FMFC 32.0 B&W - Secretary of State of Michigan - Oakland County 9 EX-10.22 8 0008.txt SIXTH AMENDED AND RESTATED REC Exhibit 10.22 420,000,000 SIXTH AMENDED AND RESTATED RECEIVABLE INTEREST PURCHASE AGREEMENT Dated as of February 16, 2001 Among FEDERAL-MOGUL FUNDING CORPORATION, as Seller, FEDERAL-MOGUL CORPORATION as Servicer, BLUE RIDGE ASSET FUNDING CORPORATION and FALCON ASSET SECURITIZATION CORPORATION, as Purchasers, THE FINANCIAL INSTITUTIONS FROM TIME TO TIME PARTY HERETO, as Liquidity Providers, BANK ONE, NA, as Administrative Agent and as Falcon Agent and WACHOVIA BANK, N.A., as Blue Ridge Agent TABLE OF CONTENTS -----------------
Page ---- ARTICLE I. DEFINITIONS Section 1.01 Defined Terms............................................ 3 Section 1.02 Other Definitional Provisions............................ 25 ARTICLE II. PURCHASE ARRANGEMENTS; PAYMENTS AND COLLECTIONS Section 2.01 Purchase Facility........................................ 26 Section 2.02 Increases................................................ 27 Section 2.03 Decreases................................................ 27 Section 2.04 Payment Requirements..................................... 28 Section 2.05 Payments................................................. 28 Section 2.06 Collections Prior to Amortization........................ 28 Section 2.07 Collections Following Amortization....................... 29 Section 2.08 Application of Collections............................... 29 Section 2.09 Payment Recission........................................ 30 Section 2.10 Clean Up Call............................................ 30 ARTICLE III. YIELD Section 3.01 Accrual and Payment of Yield............................. 30 Section 3.02 Falcon's CP Yield; Notification of CP Costs.............. 30 Section 3.03 Blue Ridge's CP Yield; Notification of CP Costs.......... 30 Section 3.04 Base Rate Yield.......................................... 31 Section 3.05 LIBO Rate Yield and Unavailability of the LIBO Rate...... 31 Section 3.06 Liquidity Funding........................................ 31 ARTICLE IV. REPRESENTATIONS AND WARRANTIES Section 4.01 Seller Representations and Warranties.................... 32 Section 4.02 Liquidity Provider Representations and Warranties........ 35 ARTICLE V. CONDITIONS OF PURCHASES Section 5.01 Conditions Precedent to Initial Purchase................. 35 Section 5.02 Conditions Precedent to All Purchases and Reinvestments.. 36
ARTICLE VI. COVENANTS OF THE SELLER AND SERVICER Section 6.01 Affirmative Covenants of Seller and the Servicer.............................................. 36 (a) Notices....................................................................................... 36 (b) Compliance with Laws.......................................................................... 37 (c) Audits; Inspection Rights..................................................................... 37 (d) Keeping and Marking of Records and Books...................................................... 38 (e) Compliance with Invoices and Credit Policies; Taxes........................................... 38 (f) Purchase of Receivables from the Originators.................................................. 38 (g) Ownership Interest............................................................................ 38 (h) Payment to Federal-Mogul...................................................................... 39 (i) Performance and Enforcement of Sale Agreement................................................. 39 (j) Purchasers' Reliance.......................................................................... 39 (k) Collections................................................................................... 40 (l) Minimum Net Worth............................................................................. 41 (m) Credit Agreement/Pledge Agreement/Security Agreement/Surety Documents/Trust Agreement......... 41 (n) [Reserved].................................................................................... 41 (o) Certificate of Responsible Officer Pursuant to Credit Agreement............................... 41 Section 6.02 Negative Covenants of Seller.................................................................. 41 (a) Name Change, Offices, Records and Books of Accounts........................................... 41 (b) Change in Payment Instructions to Obligors.................................................... 41 (c) Modifications to Credit Policies.............................................................. 42 (d) Sales, Liens, Etc............................................................................. 42 (e) Nature of Business; Other Agreements; Other Indebtedness...................................... 42 (f) Amendments to Sale Agreement.................................................................. 42 (g) Amendments to Corporate Documents............................................................. 43 (h) Merger........................................................................................ 43 (i) Restricted Junior Payments.................................................................... 43 (j) Financial Covenants Under Credit Agreement Incorporated by Reference.......................... 43 ARTICLE VII. SERVICING, ADMINISTRATION AND COLLECTION OF THE RECEIVABLES Section 7.01 Designation of Servicer....................................................................... 43 Section 7.02 Duties of Servicer............................................................................ 44 Section 7.03 Collection Notices............................................................................ 45 Section 7.04 Responsibilities of the Seller................................................................ 45 Section 7.05 Settlement Date Statements/Interim Settlement Date Statements................................. 45 Section 7.06 Quarterly Servicer's Certificate.............................................................. 46 Section 7.07 Weekly Report and Distribution................................................................ 46 Section 7.08 Reporting Covenants of the Servicer........................................................... 46 (a) Financial Reporting........................................................................... 46 (b) Notices....................................................................................... 47 Section 7.09 Inspection Rights............................................................................. 47
ii Section 7.10 Credit Policies....................................................................... 47 Section 7.11 Servicing Compensation................................................................ 48 ARTICLE VIII. AMORTIZATION EVENTS Section 8.01 Amortization Events................................................................... 48 ARTICLE IX. INDEMNIFICATION Section 9.01 Indemnities by the Seller............................................................. 50 Section 9.02 Increased Cost and Reduced Return..................................................... 52 Section 9.03 Costs and Expenses Relating to this Agreement......................................... 53 Section 9.04 Taxes................................................................................. 53 ARTICLE X. THE ADMINISTRATIVE AGENT Section 10.01 Authorization and Action.............................................................. 54 Section 10.02 Delegation of Duties.................................................................. 55 Section 10.03 Exculpatory Provisions................................................................ 55 Section 10.04 Reliance by Administrative Agent...................................................... 55 Section 10.05 Non-Reliance on Administrative Agent and Other Purchasers............................. 56 Section 10.06 Reimbursement and Indemnification..................................................... 56 Section 10.07 Administrative Agent in its Individual Capacity....................................... 56 Section 10.08 Successor Administrative Agent........................................................ 56 ARTICLE XI. THE CO-AGENTS Section 11.01 Authorization and Action.............................................................. 57 Section 11.02 Delegation of Duties.................................................................. 57 Section 11.03 Exculpatory Provisions................................................................ 57 Section 11.04 Reliance by Co-Agents................................................................. 58 Section 11.05 Non-Reliance on Agents and other Purchasers........................................... 58 Section 11.06 Reimbursement and Indemnification..................................................... 59 Section 11.07 Co-Agents in their Individual Capacities.............................................. 59 ARTICLE XII. ASSIGNMENTS; PARTICIPATIONS Section 12.01 Assignments........................................................................... 59 Section 12.02 Participations........................................................................ 60
iii ARTICLE XIII. MISCELLANEOUS Section 13.01 Waivers and Amendments...................................................................... 60 Section 13.02 Notices..................................................................................... 61 Section 13.03 Ratable Payments............................................................................ 62 Section 13.04 Protection of Ownership Interests of the Administrative Agent on behalf of the Purchasers and Co-Agents............................................................................... 62 Section 13.05 Confidentiality............................................................................. 63 Section 13.06 Bankruptcy Petition......................................................................... 64 Section 13.07 Limitation of Liability..................................................................... 64 Section 13.08 CHOICE OF LAW............................................................................... 64 Section 13.09 CONSENT TO JURISDICTION..................................................................... 64 Section 13.10 WAIVER OF JURY TRIAL........................................................................ 64 Section 13.11 Integration; Survival of Terms.............................................................. 65 Section 13.12 Counterparts; Severability.................................................................. 65 Section 13.13 Bank One Roles and Wachovia Roles........................................................... 65 Section 13.14 Characterization............................................................................ 65 Section 13.15 Acknowledgments............................................................................. 66
EXHIBIT A FORM OF PURCHASE NOTICE EXHIBIT B FORM OF COLLECTION ACCOUNT AGREEMENT EXHIBIT C FORM OF SETTLEMENT DATE STATEMENT EXHIBIT D PRINCIPAL PLACES OF BUSINESS, CHIEF EXECUTIVE OFFICE, OFFICES FOR RECORDS, FEDERAL EMPLOYEE IDENTIFICATION NUMBER EXHIBIT E COLLECTION BANKS AND COLLECTION ACCOUNTS EXHIBIT F FORM OF COMPLIANCE CERTIFICATE EXHIBIT G CREDIT POLICIES EXHIBIT H FORM OF REDUCTION NOTICE EXHIBIT I FORM OF INTERIM SETTLEMENT DATE STATEMENT SCHEDULE A CONDITIONS PRECEDENT TO INITIAL PURCHASE iv THIS SIXTH AMENDED AND RESTATED RECEIVABLE INTEREST PURCHASE AGREEMENT, dated as of February 16, 2001, is by and among: (1) FEDERAL-MOGUL FUNDING CORPORATION, a Michigan corporation (the "Seller"), (2) FEDERAL-MOGUL CORPORATION, a Michigan corporation, as the initial servicer (initially, the "Servicer"), (3) BLUE RIDGE ASSET FUNDING CORPORATION, a Delaware corporation ("Blue Ridge"), and FALCON ASSET SECURITIZATION CORPORATION, a Delaware corporation ("Falcon" and, together with Blue Ridge, each individually a Purchaser and a "Conduit," and collectively the "Conduits"), (4) WACHOVIA BANK, N.A. ("Wachovia"), as a liquidity provider to Blue Ridge (together with its successors and permitted assigns, the "Blue Ridge Liquidity Providers" and, together with Blue Ridge, the "Blue Ridge Group), (5) BANK ONE, NA (formerly known as The First National Bank of Chicago), as a liquidity provider to Falcon (together with its respective successors and permitted assigns, the "Falcon Liquidity Providers" and, together with Falcon, the "Falcon Group"), (6) WACHOVIA BANK, N.A., in its capacity as agent for the Blue Ridge Group (in such capacity, together with its successors in such capacity, the "Blue Ridge Agent" or a "Co-Agent"), and BANK ONE, NA, in its capacity as agent for the Falcon Group (in such capacity, together with its successors in such capacity, the "Falcon Agent" or a "Co-Agent"), and (7) BANK ONE, NA (formerly known as The First National Bank of Chicago), in its capacity as administrative agent for the Blue Ridge Group, the Falcon Group and the Co-Agents (in such capacity, together with its successors in such capacity, the "Administrative Agent"), and amends and restates that certain Amended and Restated Receivable Interest Purchase Agreement dated as of July 1, 1999, by and among the Seller, the Servicer, Falcon, International Securitization Corporation ("ISC"), the financial institutions from time to time party thereto, as investors, and Bank One, NA, as agent (the "Agent"), as amended by Amendment No. 1, dated as of September 29, 1999, to Amended and Restated Receivable Interest Purchase Agreement, dated as of July 1, 1999, by and among, the Seller, the Servicer, Falcon, ISC, the financial institutions from time to time party thereto and the Agent, as further amended by Amendment No. 2, dated as of March 31, 2000, to Amended and Restated Receivable Interest Purchase Agreement, dated as of July 1, 1999, by and among the Seller, the Servicer, Falcon, ISC, the financial institutions from time to time party thereto and the Agent, as amended by the Fourth Amended and Restated Receivable Interest Purchase Agreement, dated as of June 26, 2000, by and among the Seller, the Servicer, Blue Ridge, Falcon, the financial institutions from time to time party thereto, the Administrative Agent, the Falcon Agent and the Blue Ridge Agent, amended by the Fifth Amended and Restated Receivable Interest Purchase Agreement, dated as of December 27, 2000, among the Seller, the Servicer, Blue Ridge, Falcon, the financial institutions from time to time party thereto, the Administrative Agent, the Falcon Agent and the Blue Ridge Agent (collectively, the "Existing Agreement"). PRELIMINARY STATEMENTS WHEREAS, the Seller has been transferring and assigning Receivable Interests pursuant to the Existing Agreement and now desires to transfer and assign Receivable Interests to the Co- Agents for the benefit of their respective Purchaser Groups from time to time; WHEREAS, the parties desire to amend and restate the Existing Agreement as hereinafter provided; WHEREAS, on the terms and subject to the conditions hereinafter set forth, each of Blue Ridge and Falcon may, in its absolute and sole discretion, purchase Receivable Interests from the Seller from time to time and, in the event that Blue Ridge or Falcon does not purchase a particular Receivable Interest, unless the Seller otherwise directs, the Blue Ridge Liquidity Providers or the Falcon Liquidity Providers, as the case may be, shall purchase such Receivable Interest from the Seller; WHEREAS, the Blue Ridge Liquidity Providers have also agreed to provide a liquidity facility to Blue Ridge with respect to Receivable Interests purchased by it, and the Falcon Liquidity Providers have also agreed to provide a liquidity facility to Falcon with respect to Receivable Interests purchased by it; WHEREAS, Federal-Mogul Corporation has been requested to act, and is willing to act, as Servicer on behalf of the Seller and the Purchasers in accordance with the terms hereof; WHEREAS, Bank One, NA has been requested to act, and is willing to act, as Falcon Agent on behalf of Falcon and the Falcon Liquidity Providers, and Wachovia Bank, N.A. has been requested to act, and is willing to act, as Blue Ridge Agent on behalf of Blue Ridge and the Blue Ridge Liquidity Providers, in each case, in accordance with the terms of this Agreement, and WHEREAS, Bank One, NA has been requested to act, and is willing to act, as Administrative Agent on behalf of the Purchasers and the Co-Agents in accordance with the terms hereof; NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 2 ARTICLE I. DEFINITIONS Section 1.01 Defined Terms. As used in this Agreement, the following ------------- terms shall have the following meanings: "Accrual Period" means, for both Conduits, each calendar month, provided that the initial Accrual Period hereunder means the period from (and including) the Closing Date to (and including) the last day of the calendar month thereafter. "Administration Fee" shall have the meaning specified in the Fee Letter. "Administrative Agent" has the meaning assigned to that term in the preamble of this Agreement. "Adverse Claim" means a lien, security interest, charge or encumbrance, or other right or claim in, of or on any Person's assets or properties in favor of any other Person. "Affected Liquidity Provider" shall have the meaning assigned to such term in Section 12.01(c). "Affiliate" means, with respect to any Person, any other Person directly or indirectly controlling (including but not limited to all directors and officers of such Person), controlled by, or under direct or indirect common control with such Person. A Person shall be deemed to control another Person if the controlling Person owns 10% or more of any class of voting securities of the controlled Person or possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of the other Person, whether through ownership of voting securities, by contract or otherwise. In addition, for purposes of the definitions of "Obligor Overconcentration," "Eligible Receivable" and "Net Receivables Balance," a Person shall be deemed to control another Person if such Person owns more than 50% of any class of voting securities (or corresponding interest in the case of non-corporate entities) of the other Person. "Agents" means the Administrative Agent and the Co-Agents. "Aggregate Commitment" means collectively the Blue Ridge Group Commitments and the Falcon Group Commitments. "Aggregate Reduction" has the meaning assigned to such term in Section 2.03. "Aggregate Reserve Percentage" means, as of any Report Date or Interim Report Date, the sum of (a) the Loss Reserve Percentage, (b) the Floating Dilution Reserve Percentage, (c) the Fee Reserve Percentage and (d) the FX Reserve Percentage. "Aggregate Reserves" shall equal, as of any Report Date or Interim Report Date, the product of (a) the Aggregate Reserve Percentage times (b) the Available Receivables. 3 "Aggregate Unpaids" means, at any time, an amount equal to the sum of all (a) Capital, (b) Obligations, and (c) without duplication, other amounts owed (whether due or accrued) hereunder or under the Fee Letter to the Agents and the Purchasers at such time, plus all accrued and unpaid Monthly Servicing Fees owed hereunder to the Servicer. "Agreement" means this Sixth Amended and Restated Receivable Interest Purchase Agreement, as it may be amended, modified, supplemented or amended and restated and in effect from time to time. "Amortization Event" has the meaning assigned to that term in Section 8.01. "Assignment Agreement" has the meaning assigned to that term in Section 12.01(b). "Available Funding Amount" means, as of any date of determination, the lesser of (a) the Available Receivables less the Aggregate Reserves and (b) $420,000,000. "Available Receivables" means, as of any Report Date or Interim Report Date, the excess of the Net Receivables Balance over the Contractual Dilution Balance. "Bank One" means Bank One, NA, in its individual capacity and its successors. "Bank One Roles" has the meaning assigned to that term in Section 13.13(a). "Base Rate" means, for either of the Purchaser Groups, a rate per annum equal to the prime rate or base rate of interest, as applicable, announced by its Reference Bank from time to time, changing when and as such rate changes. "Blue Ridge" has the meaning assigned to that term in the preamble to this Agreement and includes such entity's successors and assigns. "Blue Ridge Agent" has the meaning assigned to that term in the preamble of this Agreement. "Blue Ridge Group" has the meaning assigned to that term in the preamble of this Agreement. "Blue Ridge Group Commitment" means, for each Blue Ridge Liquidity Provider, the commitment of such Blue Ridge Liquidity Provider to purchase its Pro Rata Share of Receivable Interests from (i) the Seller and (ii) Blue Ridge, such Pro Rata Share not to exceed, in the aggregate, the amount set forth opposite such Blue Ridge Liquidity Provider's name on the signature pages of this Agreement, as such amount may be modified in accordance with the terms hereof. "Blue Ridge Liquidity Agreement" means the Liquidity Asset Purchase Agreement dated as June 26, 2000, among Blue Ridge, the Blue Ridge Agent and the Blue Ridge Liquidity Providers from time to time party thereto, as amended, restated, supplemented, replaced or otherwise modified from time to time. 4 "Blue Ridge Liquidity Providers" has the meaning assigned to that term in the preamble of this Agreement. "Blue Ridge Purchase Limit" means $200,000,000. "Broken Funding Costs" means for any Receivable Interest which: (i) has its Capital reduced without compliance by the Seller with the notice requirements hereunder or (ii) does not become subject to an Aggregate Reduction following the delivery of any Reduction Notice or (iii) is subject to a Liquidity Funding or is otherwise assigned under Article II or terminated prior to the date on which it was originally scheduled to end; an amount equal to the excess, if any, of (A) the Discount or Yield (as applicable) that would have accrued during the remainder of the Tranche Periods or the CP Tranche Periods for Commercial Paper determined by the applicable Co-Agent to relate to such Receivable Interest (as applicable) subsequent to the date of such reduction, assignment or termination (or in respect of clause (ii) above, the date such Aggregate Reduction was designated to occur pursuant to the Reduction Notice) of the Capital of such Receivable Interest if such reduction, assignment or termination had not occurred or such Reduction Notice had not been delivered, over (B) the sum of (x) to the extent all or a portion of such Capital is allocated to another Receivable Interest, the amount of Discount or Yield actually accrued during the remainder of such period on such Capital for the new Receivable Interest, and (y) to the extent such Capital is not allocated to another Receivable Interest, the income, if any, actually received during the remainder of such period by the holder of such Receivable Interest from investing the portion of such Capital not so allocated. In the event the amount referred to in clause (B) exceeds the amount referred to in clause (A), the relevant Purchaser or Purchasers agree to pay to the Seller the amount of such excess. All Broken Funding Costs shall be due and payable hereunder upon demand. "Business Day" means any day on which banks are not authorized or required to close in New York, New York, Detroit, Michigan, Atlanta, Georgia, Winston-Salem, North Carolina, or Chicago, Illinois, and The Depository Trust Company of New York is open for business and, if the applicable Business Day relates to any computation or payment to be made with respect to the LIBO Rate, any day on which dealings in dollar deposits are carried on in the London interbank market. "Canadian Receivables" means Receivables which are payable in Canadian Dollars and generated from sales to Obligors located in Canada. "Capital" of any Receivable Interest means, at any time, (A) the Purchase Price of such Receivable Interest, minus (B) the sum of the aggregate amount of Collections and other payments received by the Co-Agents which in each case are applied to reduce such Capital in accordance with the terms and conditions of this Agreement; provided that such Capital shall be restored (in accordance with Section 2.09 hereof) in the amount of any Collections or other payments so received and applied if at any time the distribution of such Collections or payments are rescinded, returned or refunded for any reason. "Change of Control" means (i) any Person or Persons acting in concert shall acquire beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of 50% or more of the outstanding 5 shares of voting stock of Federal-Mogul; or (ii) during any period of twelve (12) consecutive months, commencing before or after the Closing Date, individuals who at the beginning of such twelve-month period were directors of Federal-Mogul shall cease for any reason to constitute a majority of the board of directors of Federal-Mogul; or (iii) except as set forth in the Pledge Agreement, Federal-Mogul shall cease to own, free and clear of all Adverse Claims, all of the outstanding shares of voting stock of the Seller on a fully diluted basis; or (iv) any Person, other than the Lenders and the Administrative Agent (as such terms are defined in the Credit Agreement) and the Surety Parties (as such term is defined in the Trust Agreement), shall have the right, directly or indirectly, to direct or instruct the Trustee (as such term is defined in the Pledge Agreement) to exercise any rights, remedies, powers, privileges or options with respect to the common stock or voting stock of the Seller pursuant to the terms of the Pledge Agreement; or (v) any Person, directly or indirectly, exercises in any manner whatsoever any rights or remedies or takes any action pursuant to the Pledge Agreement (including, but not limited to, any rights and remedies pursuant to Section 5 of the Pledge Agreement and/or the exercise of any rights relating to the appointment of such Person as an attorney-in-fact under the Pledge Agreement) with respect the common stock or voting stock of the Seller. "Closing Date" means June 26, 2000. "Co-Agents" means the Blue Ridge Agent and the Falcon Agent. "Collection Account" means each concentration account, depositary account, lock-box account or similar account in which any Collections are collected or deposited. "Collection Account Agreement" means, in the case of any actual or proposed Collection Account, an agreement in substantially the form of Exhibit B hereto. "Collection Bank" means, at any time, any of the banks or other financial institutions holding one or more Collection Accounts. "Collection Notice" means a notice in the form attached to a Collection Account Agreement, from the Administrative Agent to a Collection Bank. "Collection Period" means, with respect to any Settlement Date, the calendar month preceding the month in which such Settlement Date occurs. "Collections" means, with respect to any Receivable, all cash collections and other cash proceeds in respect of such Receivable, including, without limitation, all cash proceeds of Related Security with respect to such Receivable and all Deemed Collections payable to the Co-Agents for the account of the applicable Purchaser(s) by the Seller. "Commercial Paper" means promissory notes of the Conduits issued by the Conduits in the commercial paper market. "Conduit" has the meaning assigned to that term in the preamble to this Agreement. 6 "Confidential Information" means, in relation to any Person, any written information delivered or made available by or on behalf of another Person (or its Affiliates or subsidiaries) in connection with or pursuant to the Transaction Documents or the transactions contemplated thereby which is proprietary in nature and clearly marked or identified in writing as being confidential information, other than information (a) which was publicly known, or otherwise known to such Person, at the time of disclosure (except pursuant to disclosure in connection with the Transaction Documents), (b) which subsequently becomes publicly known through no act or omission by such Person, or (c) which otherwise becomes known other than through disclosure by the Person to whom it pertains or one of its Affiliates or subsidiaries. "Constituents" means (a) with respect to the Blue Ridge Agent, Blue Ridge and the Blue Ridge Liquidity Providers, and (b) with respect to the Falcon Agent, Falcon and the Falcon Liquidity Providers. "Contractual Dilution Balance" means, as of any Report Date or Interim Report Date, the sum of (a) 2% of North American aftermarket sales during the immediately preceding Collection Period, (b) the greater of (i) the accrual for obsolescence and (ii) two times the aggregate amount of Credit Memos issued during such Collection Period due to obsolescence, (c) 1.5 times the aggregate amount of Credit Memos issued during such Collection Period due to Stock Lifts and (d) the total rebates and adjustments currently owed to Obligors as of the end of such Collection Period (as reflected in the Customer Program Balances in the books and records of the Servicer). "Coverage Shortfall" means, as of any Report Date or Interim Report Date, the excess, if any, of (a) outstanding Capital as of such Report Date or Interim Report Date, over (b) the Available Receivables determined as of such Report Date or Interim Report Date minus the Aggregate Reserves determined as of such Report Date or Interim Report Date. "CP Costs" means, with respect to either Conduit, for each day, the sum of (i) discount accrued on Pooled Commercial Paper on such day, plus (ii) any and all accrued commissions in respect of placement agents and Commercial Paper dealers, and issuing and paying agent fees incurred, in respect of such Pooled Commercial Paper for such day, plus (iii) other costs associated with funding small or odd-lot amounts with respect to all receivable purchase facilities which are funded by Pooled Commercial Paper for such day, minus (iv) any accrual of income net of expenses received on such day from investment of collections received under all receivable purchase facilities funded substantially with Pooled Commercial Paper, minus (v) any payment received on such day net of expenses in respect of Broken Funding Costs related to the prepayment of any Receivables Interest of such Conduit pursuant to the terms of any receivable purchase facilities funded substantially with Pooled Commercial Paper. In addition to the foregoing costs, if the Seller shall request any Incremental Purchase during any period of time determined by the Blue Ridge Agent or the Falcon Agent, as applicable, in its sole discretion to result in incrementally higher CP Costs applicable to such Incremental Purchase, the Capital associated with any such Incremental Purchase shall, during such period, be deemed to be funded by such Conduit in a special pool (which may include capital associated with other receivable purchase facilities) for purposes of determining such additional CP Costs applicable only to such special pool and charged each day during such period against such Capital. 7 "CP Rate" shall mean with respect to each Conduit for any CP Tranche Period, the rate equivalent to its CP Costs. "CP Tranche Period" shall mean, with respect to each Conduit, an Accrual Period. "Credit Agreement" means the Fourth Amended and Restated Credit Agreement, dated as of December 29, 2000, among Federal-Mogul, the Foreign Subsidiary Borrowers (as defined therein), the several banks and other financial institutions from time to time parties thereto, and the Chase Manhattan Bank, as Administrative Agent, as amended, modified, supplemented or amended and restated and in effect from time to time. "Credit Memo" means any credit memo relating to (a) the North American Aftermarket obsolescence, (b) the North American Aftermarket Stock Lifts, (c) the North American Aftermarket core deposits, (d) the North American Aftermarket billing adjustments, (e) the North American Aftermarket customer accommodation returns, (f) the North American Aftermarket other and (g) original equipment manufacturers. "Credit Policies" has the meaning assigned to that term in Section 7.10. "Customer Program Balances" means rebates owed to customers by an Originator based upon prior purchases. "Deductions" means any Receivable that is created due to the related Obligor making a partial payment on an invoice, and the outstanding amount of such newly created Receivable shall be an amount equal to that portion of the invoice that has not been paid by such Obligor. "Deemed Collections" means the aggregate of all amounts the Seller shall have been deemed to have received as a Collection of a Receivable. The Seller shall be deemed to have received a Collection in full of a Receivable if at any time (i) the Outstanding Balance of any such Receivable is either (x) reduced as a result of any defective or rejected goods or services, any discount or any adjustment or otherwise by the Seller (other than cash Collections on account of the Receivables) or (y) reduced or cancelled as a result of a setoff in respect of any claim by any Person (whether such claim arises out of the same or a related transaction or an unrelated transaction) or (ii) the representations or warranties in Sections 4.01(i), (j), (l), (n) or (o) are no longer true with respect to any Receivable. The Seller hereby agrees to pay all Deemed Collections immediately to the Servicer for application in accordance with the terms and conditions hereof. "Default Fee" means with respect to any amount due and payable by the Seller hereunder or under the Fee Letter and which is not otherwise accruing Yield at the Post-Amortization Rate, an amount equal to interest on any such amount at a rate per annum equal to 2% above the applicable Base Rate; provided, however, that such interest rate will not at any time exceed the maximum rate permitted by applicable law. "Defaulted Receivable" means a Receivable: (i) as to which any payment, or part thereof, remains unpaid for 90 days or more from the original due date for such payment; (ii) an 8 Insolvency Event has occurred with respect to the Obligor thereof; (iii) as to which the Obligor thereof, if a natural person, is deceased; or (iv) which has been identified by the Seller as uncollectible. "Delinquency Ratio" means, as of any Report Date or Interim Report Date, the percentage equivalent of a fraction, (i) the numerator of which is the sum of (x) the aggregate amount of Receivables as of the last Business Day of the immediately preceding Collection Period that are 61 or more days past due and (y) the Placed Accounts Balance, and (ii) the denominator of which is the Pool Balance as of such Business Day. "Dilution Horizon Ratio" or "DHR" means, for any Report Date or Interim Report Date, a fraction, the numerator of which is the sum of the aggregate amounts of all new Receivables generated during the two immediately preceding Collection Periods and the denominator of which is the Available Receivables as of such Report Date. "Dilution Ratio" means, as of any Report Date or Interim Report Date, the percentage equivalent of a fraction, the numerator of which is all non-cash reductions to the Pool Balance, not related to the credit-worthiness of the Obligor, including, but not limited to, the aggregate amount of Credit Memos issued during the immediately preceding Collection Period, adjustments related to 2/10 discounts (i.e., cash discounts related to prompt payments) made during the immediately preceding Collection Period, and other adjustments made during the immediately preceding Collection Period and the denominator of which is the Pool Balance as of such Business Day. "Discount Rate" means, with respect to any Receivable Interest, a CP Rate, LIBO Rate, Base Rate or Post-Amortization Rate, as applicable. "Downgraded Liquidity Provider" means a Liquidity Provider that has been the subject of a Downgrading Event. "Downgrading Event" with respect to any Liquidity Provider means the lowering of the rating with regard to the short-term securities of such Liquidity Provider to below (i) A-1 by S&P or (ii) P-1 by Moody's. "Eligible Assignee" means (a) any "bankruptcy remote" special purpose entity which is administered by Wachovia or Bank One (or any Affiliate of the foregoing) that is in the business of acquiring or financing receivables, securities and/or financial assets and which issues commercial paper notes that are rated at least A-1 by S&P and P-1 by Moody's, (b) any Qualifying Liquidity Provider having a combined capital and surplus of at least $250,000,000, or (c) any Downgraded Liquidity Provider whose liquidity commitment has been fully drawn by the applicable Conduit or its Co-Agent and funded into a collateral account. "Eligible Originator" means Federal-Mogul and each other Originator at any time while it is wholly-owned by Federal-Mogul; provided, however, any such Person shall not be an Eligible Originator upon the occurrence of an Insolvency Event with respect to such Person. "Eligible Receivable" means each Receivable which meets the following criteria: 9 (1) the obligation is denominated and payable in U.S. dollars in the United States, or, if a Canadian Receivable, is denominated and payable in Canadian dollars (provided that for purposes of any reporting and/or calculations hereunder Canadian dollars shall be reflected as U.S. dollars based upon the Bloomberg exchange rate used for Federal-Mogul's month end accounting close); or is related to an original equipment manufacturer export and is denominated in U.S. dollars; (2) the related Obligor is a resident of the United States or Canada; (3) the related Obligor is not an Affiliate of any of the parties hereto; (4) the contract terms of the Receivables call for payment within 90 days of original billing date, except for up to 3% of the Pool Balance which may have terms that call for payment within 91 to 180 days of original billing date; (5) the Receivable is neither a Defaulted Receivable nor in a Placed Accounts Balance; (6) the Receivable is an "account" under Section 9-106 of the Uniform Commercial Code; (7) the Receivable is a legal, valid and binding obligation of the related Obligor; (8) the terms of the contract for the Receivable do not require the consent of the Obligor to sell or assign such Receivable; (9) no Co-Agent has notified the Seller that the Receivable is not acceptable; (10) the Receivable was generated in the ordinary course of business by an Eligible Originator; (11) the Receivable satisfies all applicable requirements of the Credit Policies of an Eligible Originator and the Seller; (12) with respect to Receivables for the related Obligor which represent in the aggregate 3.00% or more of the Pool Balance, there are no offset arrangements with respect to such Obligor; (13) the contract for the Receivable represents all or a part of the sales price of merchandise, insurance and services within the meaning of (S)3(c)(5) of the Investment Company Act of 1940, as amended; and (14) the Receivable has not been materially extended, modified or converted to a long term obligation; 10 provided, however, that if, as of any Report Date or Interim Report Date, the aggregate amount of Receivables for an Obligor represent 2.00% or more of the Pool Balance and 30.00% or more of such Receivables are 91 days or more past due, all Receivables relating to such Obligor shall not constitute "Eligible Receivables"; provided, further, that any Deductions that are 60 days or more past due shall not constitute "Eligible Receivables." "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "Excess Concentration Amount" means, as of any Report Date or Interim Report Date, the sum of the Obligor Overconcentrations on such date. "Existing Agreement" has the meaning assigned to that term in the preamble of this Agreement. "Expected Floating Dilution Ratio" or "EFD" means, as of any Report Date or Interim Report Date, the average of the Floating Dilution Ratios for the twelve immediately preceding Collection Periods. "Facility Account" means the Seller's Account No. 55-73688 at Bank One. "Facility Termination Date" means the earliest of (i) the Liquidity Termination Date, (ii) the date the Seller shall exercise its right to repurchase the outstanding Receivable Interests pursuant to Section 2.10, (iii) any date selected by the Seller on not less than 30 days' prior written notice to the Co-Agents pursuant to Section 2.01(b); provided that such date shall not be between Settlement Periods, and provided further that if any Person then acting as Administrative Agent hereunder shall have elected or been required to resign as Administrative Agent and the Blue Ridge Agent is not appointed as the successor Administrative Agent pursuant to Section 10.08, the Seller may elect, by written notice to the Agents given promptly following notice to the Seller of such resignation, to have the Facility Termination Date occur on the effective date of such resignation, (iv) the date of the occurrence of an Amortization Event involving the Seller and of the type described in Section 8.01(a), (v) any date following the occurrence, and during the continuance, of any other Amortization Event which the Co-Agents declare in writing to be the Facility Termination Date, (vi) the date on which Federal-Mogul ceases selling and/or contributing Receivables to the Seller pursuant to the Sale Agreement and/or the Subscription Agreement referred to therein and (vii) the Termination Date. "Falcon" has the meaning assigned to that term in the preamble to this Agreement and includes such entity's successors and assigns. "Falcon Agent" has the meaning assigned to that term in the preamble of this Agreement. "Falcon Group" has the meaning assigned to that term in the preamble of this Agreement. "Falcon Group Commitment" means, for each Falcon Liquidity Provider, the commitment of such Falcon Liquidity Provider to purchase its Pro Rata Share of Receivable 11 Interests from (i) the Seller and (ii) Falcon, such Pro Rata Share not to exceed, in the aggregate, the amount set forth opposite such Falcon Liquidity Provider's name on the signature pages of this Agreement, as such amount may be modified in accordance with the terms hereof. "Falcon Liquidity Agreement" means the Liquidity Agreement dated as of June 26, 2000, among Falcon, the Falcon Agent, and the Falcon Liquidity Providers from time to time party thereto, as amended, restated, supplemented, replaced or otherwise modified from time to time. "Falcon Liquidity Providers" has the meaning assigned to that term in the preamble of this Agreement. "Falcon Purchase Limit" means, collectively, the aggregate of the Falcon Group Commitments of the Falcon Liquidity Providers hereunder (which aggregate amount is $220,000,000 as of the date of this Agreement). "Federal Funds Effective Rate" means, for any period, a fluctuating interest rate per annum equal for each day during such period equal to (i) the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the preceding Business Day) by the Federal Reserve Bank of New York in the Composite Closing Quotations for U.S. Governments Securities; or (ii) if such rate is not so published for any day which is a Business Day, the Federal Funds Effective Rate for such day shall be the average rate charged to the applicable Co-Agent on such day on such transactions, as reasonably determined by such Co-Agent. "Federal-Mogul" means Federal-Mogul Corporation, a Michigan corporation, and its successors in interest to the extent permitted hereunder. "Fee Letter" means that certain letter agreement dated as of December 27, 2000, by and among the Seller, Falcon, the Falcon Agent, Blue Ridge and the Blue Ridge Agent, as amended, modified, supplemented or amended and restated and in effect from time to time. "Fee Reserve Percentage" means (a) as of any Report Date or Interim Report Date when Turnover Days have been less than or equal to 60 days during the immediately preceding Collection Period, 1.5%, and (b) as of any Report Date or Interim Report Date when Turnover Days have been greater than 60 days during the immediately preceding Collection Period, 2.0%. "Fees" means, collectively, the Administration Fee, Program Fee and Default Fees. "Finance Charges" means, with respect to an invoice, any finance, interest, late payment charges or similar charges owing by an Obligor pursuant to such invoice. "Financial Covenants" means Section 11.1, Section 11.2 and/or Section 11.3 of the Credit Agreement, as amended, modified, supplemented or amended and restated from time to time, in each case, with the prior written consent of each Co-Agent. 12 "Floating Dilution" means, as of any Report Date or Interim Report Date, the aggregate amount of Credit Memos issued during the immediately preceding Collection Period relating to the (i) North American Aftermarket core deposits, (ii) the North American Aftermarket billing adjustments, (iii) the North American Aftermarket customer accommodation returns, (iv) the North American Aftermarket other and (v) original equipment manufacturers. "Floating Dilution Ratio" means, as of any Report Date or Interim Report Date, the percentage equivalent of a fraction, the numerator of which shall be the Floating Dilution determined as of such Report Date or Interim Report Date and the denominator of which shall be the aggregate amount of new Receivables transferred to the Seller pursuant to the Sale Agreement during the second immediately preceding Collection Period. "Floating Dilution Reserve Percentage" or "FDRP" shall equal, as of any Report Date or Interim Report Date, the greater of: (a) 7.0%, and (b) 1.75 X EFD X DHR + [ (FDS-EFD) x FDS ] EFD where: FDR = Floating Dilution Ratio EFD = Expected Floating Dilution Ratio FDS = Floating Dilution Spike Ratio DHR = Dilution Horizon Ratio "Floating Dilution Spike Ratio" or "FDS" means, as of any Report Date or Interim Report Date, the highest average of the Floating Dilution Ratio for any two consecutive Collection Periods that occurred during the twelve immediately preceding Collection Periods. "Funding Agreement" means this Agreement and any agreement or instrument executed by any Funding Source with or for the benefit of any Conduit. "Funding Source" means (i) any Liquidity Provider or (ii) any insurance company, bank or other financial institution providing liquidity, credit enhancement or back-up purchase support or facilities to any Conduit. "FX Reserve Percentage" means, as of any Report Date or Interim Report Date, the percentage equivalent of a fraction, the numerator of which shall be an amount equal to the product of (i) 6.5% and (ii) the Outstanding Balance of all Canadian Receivables that do not exceed the Obligor Overconcentration relating to Canadian Receivables, and the denominator of which shall be the Net Receivables Balance. "Governmental Authority" shall mean the United States of America, any state or other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. 13 "Guaranty" means any guaranty by any Person of Indebtedness or other obligations of any other Person that is not a consolidated subsidiary of such Person or any assurance with respect to the financial condition of any other Person that is not a consolidated subsidiary of such Person (including, without limitation, any purchase or repurchase agreement, any indemnity or any keep- well, take-or-pay, through-put or other arrangement having the effect of assuring or holding harmless any third Person against loss with respect to any Indebtedness or other obligation of such other Person) except endorsements of negotiable instruments for collection in the ordinary course of business. "Incremental Purchase" means a purchase of one or more Receivable Interests which increases the total outstanding Capital of the Purchasers pursuant to Section 2.02. "Indebtedness" means any (a) indebtedness for borrowed money or for the deferred purchase price of property or services, (b) obligations under leases which, in accordance with generally accepted accounting principles, are to be recorded as capital leases, (c) obligations which are evidenced by notes, acceptances or other instruments, (d) net liabilities under interest rate swap, foreign currency swap, commodity swap, exchange or cap agreements and (e) obligations, whether or not assumed, secured by Liens or payable out of proceeds or production from property now or hereafter owned or acquired; provided, however, that the term "Indebtedness" shall not include short-term obligations payable to suppliers incurred in the ordinary course of business. "Indemnified Amounts" shall have the meaning assigned to such term in Section 9.01. "Indemnified Party" shall have the meaning assigned to such term in Section 9.01. "Independent Director" shall have the meaning assigned to such term in the Sale Agreement. "Insolvency Event" means, with respect to any Person, the occurrence of any of the following: (a) such Person files a petition commencing a voluntary case under any chapter of the Federal bankruptcy laws; or such Person files a petition, answer or consent seeking reorganization, arrangement, adjustment, or composition under any other similar applicable federal law, or shall consent to the filing of any such petition, answer, or consent; or such Person appoints, or consents to the appointment of, a custodian, receiver, liquidator, trustee, assignee, sequestrator or other similar official in bankruptcy or insolvency of it or of any substantial part of its property; or such Person makes an assignment for the benefit of creditors, or admits in writing its inability to pay its debts generally as they become due; or (b) an order for relief is entered against such Person by a court having jurisdiction in the premises under any chapter of the Federal bankruptcy laws; a decree or an order by a court having jurisdiction in the premises is entered approving as properly filed a petition seeking reorganization, arrangement, 14 adjustment, or composition of such Person under any other similar applicable federal law; or a decree or an order of a court having jurisdiction in the premises for the appointment of a custodian, receiver, liquidator, trustee, assignee, sequestrator, or other similar official in bankruptcy or insolvency of such Person or of any substantial part of its property or for the winding up or liquidation of its affairs, is entered (each of the foregoing events in this clause (b), an "Involuntary Insolvency Event"). "Intended Characterization" means, for income tax purposes, the characterization of the acquisition by the Purchasers of Receivable Interests as a loan or loans by the Purchasers to the Seller secured by the Receivables, the Related Security, the Collection Accounts and the Collections. "Interim Report Date " means for each month (i) during the month of December 2000, December 31, 2000, (ii) during the months of January 2001, February 2001 and March 2001, the date that is five (5) Business Days immediately succeeding the 15th calendar day of such month, and (iii) for each month succeeding the month of March 2001, the date that is three (3) Business Days immediately succeeding the 15th calendar day of such month. "Interim Settlement Date Statement" means a report in substantially the form of Exhibit I hereto (appropriately completed), furnished by the Servicer to the Co-Agents pursuant to Section 7.05. "Invoice" means, collectively, with respect to any Receivable, any and all instruments, bills of lading, invoices or other writings which evidence such Receivable or the goods underlying such Receivable. "LIBO Rate" means the rate per annum equal to the sum of (i)(a) the rate at which deposits in U.S. Dollars are offered by the Reference Bank to first-class banks in the London interbank market at approximately 11:00 a.m. (London time) two Business Days prior to the first day of the relevant Tranche Period such deposits being in the approximate amount of the Capital of the Receivable Interest to be funded or maintained, divided by (b) one minus the maximum aggregate reserve requirement (including all basic, supplemental, marginal or other reserves) which is imposed against the Reference Bank in respect of Eurocurrency liabilities, as defined in Regulation D of the Board of Governors of the Federal Reserve System as in effect from time to time (expressed as a decimal), applicable to such Tranche Period plus (ii) 0.75% per annum. The LIBO Rate shall be rounded, if necessary, to the next higher 1/16 of 1%. "LIBO Tranche Period" has the meaning set forth in clause (a) of the definition of "Tranche Period". "Liquidity Agreements" means the Blue Ridge Liquidity Agreement and the Falcon Liquidity Agreement. "Liquidity Funding" means, with respect to either Conduit: (i) any put by such Conduit to its Liquidity Providers or other Funding Sources of all or any portion of its Capital, (ii) any sale of a participation by such Conduit to its Liquidity Providers or other Funding Sources in all or any portion of its Capital, (iii) any borrowing by such Conduit from any 15 Funding Source to pay or refinance Commercial Paper issued by such Conduit to fund all or any portion of its Capital, (iv) any draw, demand or claim by such Conduit upon or under any letter of credit, surety bond or insurance policy issued by any Funding Source to support the payment or refinancing of any Commercial Paper issued by such Conduit to fund all or any portion of its Capital, and/or (v) any election pursuant to Section 2.01 of this Agreement to have such Conduit's Liquidity Providers purchase any Receivable Interest. "Liquidity Providers" means, collectively, the Blue Ridge Liquidity Providers and the Falcon Liquidity Providers. "Liquidity Termination Date" means June 22, 2001, unless such date is extended by mutual written agreement of the Seller, the Agents and each of the Purchasers. "Loss Reserve Percentage" means, as of any Report Date or Interim Report Date, the greater of (a) 9.0% and (b) 3 times the Loss-to-Liquidation Ratio. "Loss-to-Liquidation Ratio" means, as of any Report Date or Interim Report Date, a fraction, the numerator of which equals the sum of (a) the aggregate of Receivables that were 61 to 90 days past due as of the last day of the immediately preceding Collection Period and (b) the excess, if any, of (i) the aggregate amount of Placed Accounts Balance during the immediately preceding Collection Period over (ii) the aggregate amount of Placed Accounts Balance during the second immediately preceding Collection Period, and the denominator of which is Collections received during the immediately preceding Collection Period. "Material Adverse Effect" means a material adverse effect on (i) the financial condition, business or operations of the Seller or any Originator, (ii) the ability of the Seller or any Originator to perform its obligations under any Transaction Document, (iii) the legality, validity or enforceability of this Agreement, any Transaction Document or any Collection Account Agreement or Collection Notice relating to a Collection Account into which a material portion of Collections are deposited, (iv) the Seller's or any Purchaser's interest in the Receivables generally or in any significant portion of the Receivables, the Related Security or the Collections with respect thereto, or (v) the collectibility of the Receivables generally or of any material portion of the Receivables. "Minimum Enhancement Amount" means, as of any Report Date or Interim Report Date, an amount equal to the greater of: (a) an amount equal to the product of (i) the Aggregate Reserve Percentage as of such Report Date or Interim Report Date and (ii) a fraction the numerator of which is equal to outstanding Capital as of such Report Date or Interim Report Date and the denominator of which is 1 minus such Aggregate Reserve Percentage plus (iii) the Contractual Dilution Balance as of such Report Date or Interim Report Date and (b) $15,800,000. "Monthly Servicing Fee" shall have the meaning specified in Section 7.11. "Moody's" means Moody's Investors Service, Inc. "Net Receivables Balance" means, at anytime, the aggregate Outstanding Balance of all Eligible Receivables at such time, reduced by the Excess Concentration Amount. 16 "New Concentration Account" has the meaning assigned to that term in Section 6.01(k). "Obligations" means, collectively, (i) all Yield, (ii) all Fees (which fees shall be sufficient to pay all fees owing to the Liquidity Providers), (iii) all amounts payable as Deemed Collections (which shall be applied to reduce outstanding Capital hereunder in accordance with Section 2.06 and 2.07), (iv) all amounts payable pursuant to Article IX, if any, (v) all Servicer costs and expenses in connection with servicing, administering and collecting the Receivables, (vi) all Broken Funding Costs and (vii) all Default Fees. "Obligor" means a Person obligated to make payments pursuant to an Invoice. "Obligor Overconcentration" means, as of any Report Date or Interim Report Date, the excess of (a) the aggregate of all amounts of Eligible Receivables owned by the Seller and generated under accounts receivable with any one Obligor or type of Receivable as of the last day of the Collection Period immediately preceding such Report Date or Interim Report Date over (b) 3.0% of the Eligible Receivables on the last day of such immediately preceding Collection Period; provided that the Obligor Overconcentration with respect to the following Obligors or types of Receivables, shall be the applicable amount described in clause (a) in excess of the following percentages respectively, of the Eligible Receivables on the last day of such immediately preceding Collection Period: Obligor/Receivable Type Percentage ----------------------- ---------- Chrysler 7% Ford 7% General Motors 7% Auto Zone 7% Genuine Parts 6% Canadian Receivables 6% provided, further, that, other that with respect to Genuine Parts, on or after the date of any downgrade of the short-term debt rating or long-term debt rating of any Obligor referenced in the immediately preceding table by S&P or Moody's, either Co-Agent, in its sole discretion, by written notice to the Seller and the Servicer, may decrease the percentage relating to such Obligor in the immediately preceding table to a percentage that is mutually agreed upon by the Co-Agents in their sole discretion (for the avoidance of doubt, any reduction in a modifier (e.g. "+", "1", "2" or "3") to a short-term debt rating or long-term debt rating shall constitute a downgrade by S&P or Moody's, as applicable); provided, further, that, with respect to Genuine Parts, on or after the date of the occurrence of any event or condition that may have a material adverse effect on the business, assets, property, condition (financial or otherwise) or prospects of Genuine Parts, either Co-Agent, in its sole discretion, by written notice to the Seller and the Servicer, may decrease the percentage relating to Genuine Parts in the immediately preceding table to a percentage that is mutually agreed upon by the Co-Agents in their sole discretion. "Originator" means each of (a) Federal-Mogul; (b) Federal-Mogul Canada Limited; (c) Federal-Mogul Piston Rings, Inc.; (d) Federal-Mogul Flowery Branch, LLC; 17 (e) Federal-Mogul Powertain, Inc.; (f) Federal-Mogul Sealing Systems, Inc.; (g) Federal-Mogul Carolina, Inc.; (h) Federal-Mogul South Bend, Inc.; (i) Federal- Mogul LaGrange, Inc.; (j) Federal-Mogul Sintered Products, Inc.; (k) Federal- Mogul Sintered Products-Waupun, Inc.; (l) Federal-Mogul Engineered Bearings, Inc.; (m) Federal-Mogul Camshafts, Inc.; (n) Federal-Mogul Aviation, Inc.; (o) Federal-Mogul Ignition Company; (p) Federal-Mogul Products, Inc.; (q) Federal- Mogul Systems Protection Group, Inc.; and shall include any other wholly-owned Subsidiary of Federal-Mogul which the Agents and the Purchasers unanimously approve. "Outstanding Balance" of any Receivable at any time means the then outstanding principal balance thereof, and shall exclude any interest or finance charges thereon, without regard to whether any of the same shall have been capitalized. "Participant" shall have the meaning assigned to such term in Section 12.02. "Percentage" means, (a) with respect to the Blue Ridge Group, the percentage equivalent of a fraction, the numerator of which shall be the aggregate Blue Ridge Group Commitments and the denominator of which shall be the Aggregate Commitment and (b) with respect to Falcon, the percentage equivalent of a fraction, the numerator of which shall be the aggregate Falcon Group Commitments and the denominator of which shall be the Aggregate Commitment. "Person" means an individual, partnership, corporation, association, trust, limited liability company, joint venture or any other entity, or organization, including a Governmental Authority or other government or political subdivision or agent or instrumentality thereof. "PBGC" means the Pension Benefit Guaranty Corporation created under Section 4002(a) of ERISA or any successor thereto. "Placed Accounts Balance" means the aggregate Outstanding Balance of any Receivables that have been moved to a separate credit manager code in accordance with the Credit Policies. "Plan" means any defined benefit plan maintained or contributed to by the Originator or any Subsidiary of the Originator or by any trade or business (whether or not incorporated) under common control with the Originator or any Subsidiary of the Originator as defined in Section 4001(b) of ERISA and insured by the PBGC under Title IV of ERISA. "Pledge Agreement" means the Second Amended and Restated Domestic Pledge Agreement, dated as of December 29, 2000, as amended, modified, supplemented or amended and restated from time to time, made by each of the signatories thereto, as the Grantors, in favor of First Union National Bank, a national banking association, as Trustee (the "Trustee") under the Second Amended and Restated Trust Agreement, dated as of December 29, 2000, as amended, modified, supplemented or amended and restated from time to time, among Federal- Mogul, the subsidiaries of Federal-Mogul parties thereto and the Trustee. "Pool Balance" means, as of the time of determination thereof, the aggregate Outstanding Balance of all Receivables owned by the Seller at such time. 18 "Pooled Commercial Paper" means Commercial Paper notes of either Conduit subject to any particular pooling arrangement by either Conduit, but excluding Commercial Paper issued by either Conduit for a tenor and in an amount specifically requested by any Person in connection with any agreement effected by either Conduit. "Post-Amortization Rate" means, for all Capital of each Purchaser, the sum of its applicable Base Rate plus 2% per annum. "Potential Amortization Event" means an event which, with the passage of time or the giving of notice, or both, would constitute an Amortization Event. "Principal Amount" means, with respect to Blue Ridge's Commercial Paper, the actual net cash proceeds received by Blue Ridge upon issuance of its Commercial Paper. "Pro Rata Share" means, for each Liquidity Provider, the ratio which its liquidity commitment to purchase its pro rata share of Receivable Interests pursuant to the terms of this Agreement, which is the amount set forth next to such Liquidity Provider's name on the signature pages to this Agreement, bears to the Blue Ridge Group Commitment or the Falcon Group Commitment, as applicable. "Program Fee" shall have the meaning specified in the Fee Letter. "Proposed Reduction Date" has the meaning assigned to that term in Section 2.03. "Purchase Date" means the date of the sale by Seller, and the purchase by the Conduits or the Co-Agents on behalf of the Liquidity Providers, of any Receivables Interests hereunder. "Purchase Limit" means (i) the aggregate of the Falcon Purchase Limit and the Blue Ridge Purchase Limit (which aggregate amount is $420,000,000 as of the date of this Agreement); (ii) with respect to Falcon, the Falcon Purchase Limit; and (iii) with respect to Blue Ridge, the Blue Ridge Purchase Limit, in each case, as applicable. "Purchase Notice" shall have the meaning specified in Section 2.02. "Purchase Price" means, with respect to any Incremental Purchase by a Purchaser Group of a Receivable Interest, the least of: (a) such Purchaser Group's Percentage of the aggregate amount of Capital requested by the Seller from both Purchaser Groups, (b) the remaining unused portion of the Blue Ridge Purchase Limit or the Falcon Purchase Limit, as applicable, and (c) the maximum amount by which the aggregate outstanding Capital of such Purchaser Group could be increased such that after giving effect to such increase in such Purchaser Group's aggregate outstanding Capital, such Purchaser 19 Group's Percentage of the Net Receivables Balance will equal or exceed the product of (A) such Purchaser Group's Percentage and (B) sum of (i) (x) Capital relating to all Receivable Interests divided by (y) 1 minus the Aggregate Reserve Percentage, plus (ii) the Contractual Dilution Balance. "Purchaser" means Blue Ridge, Falcon and/or any Liquidity Provider, as applicable. "Purchaser Group" means the Falcon Group or the Blue Ridge Group. "Qualifying Liquidity" means a Liquidity Provider with a rating of its short term securities equal to or higher than (i) A-1 by S&P and (ii) P-1 by Moody's. "Purchasing Liquidity Provider" has the meaning specified in Section 12.01(b). "Reassignment Amount" means, with respect to each Purchaser Group on any Settlement Date, after giving effect to any deposits and distributions otherwise to be made on such Settlement Date, the sum of (i) the Capital outstanding from such Purchaser Group on such Settlement Date, (ii) the amount of accrued and unpaid Yield relating to Capital, and (iii) the amount of any accrued and unpaid Fees and Broken Funding Costs. "Receivable" means all the U.S. dollar denominated and all the Canadian dollar-denominated accounts receivable shown on the records of Federal- Mogul or any other Originator, and from time to time thereafter, arising from the sale of merchandise by Federal-Mogul or any other Originator in the ordinary course of business that has been sold, assigned, transferred, set-over or otherwise conveyed to the Seller pursuant to the terms of the Sale Agreement; provided, however, that "Receivable" that includes a Stock Lift shall be sold to Seller net of any adjustment with respect to such Stock Lift. "Receivable Interest" means, at any time, for either of the Purchaser Groups, an undivided percentage ownership interest (computed as set below) associated with a designated amount of Capital, Discount Rate and Tranche Period selected pursuant to the terms and conditions hereof in: (a) all Receivables transferred to or otherwise acquired or held by the Seller and arising prior to the time of the most recent computation or recomputation of such undivided interest, (b) all Related Security with respect to such Receivables, and (c) all Collections with respect to, and other proceeds of, such Receivables. Such undivided percentage interest shall equal: C ------------------------------- (PX AVR) - (P X AR) where: C = the Capital of such Receivable Interest. P = the applicable Purchaser Group's Percentage. AVR = the Available Receivables. 20 AR = the Aggregate Reserves. "Receivables Purchase Agreement" means the Second Amended and Restated Receivables Purchase Agreement dated as of February 16, 2001, by and between Federal-Mogul, as Purchaser, and the other Originators, as sellers, as amended, modified, supplemented or amended and restated from time to time. "Records" means, with respect to any Receivable, all invoices and other documents, books, records and other information (including, without limitation, computer programs, tapes, disks, punch cards, data processing software and related property and rights) relating to such Receivable, any Related Security therefor and the related Obligor. "Reduction Notice" has the meaning assigned to such term in Section 2.03. "Reference Bank" means (a) with respect to the Falcon Group, Bank One, Michigan, or such other bank as the Falcon Agent shall designate with the consent of the Seller, and (b) with respect to the Blue Ridge Group, Wachovia, or such other bank as the Blue Ridge Agent shall designate with the consent of the Seller. "Reinvestment" has the meaning assigned to that term in Section 2.06. "Related Security" means, with respect to any Receivable: (i) all of the Seller's interest in the goods, the shipment of which gave rise to such Receivable, (ii) all other security interests or liens and property subject thereto from time to time, if any, purporting to secure payment of such Receivable, whether pursuant to the Contract related to such Receivable or otherwise, together with all financing statements and security agreements describing any collateral securing such Receivable, (iii) all guaranties, insurance and other agreements or arrangements of whatever character from time to time supporting or securing payment of such Receivable whether pursuant to the invoice related to such Receivable or otherwise, (iv) all Records related to such Receivables, (v) all of the Seller's right, title and interest in, to and under the Sale Agreement and the Receivables Purchase Agreement and, with respect to such Agreement, each bill of lading, instrument, document or agreement executed in connection therewith in favor of or otherwise for the benefit of the Seller; and (vi) all proceeds of any of the foregoing. 21 "Report Date" means the eleventh day of each month, or if such day is not a Business Day, the next succeeding Business Day. "Required Notice Period" means the number of days required notice set forth below applicable to the Aggregate Reduction indicated below: Aggregate Reduction Required Notice Period ------------------- ---------------------- *$100,000,000 two Business Days $100,000,000 to $250,000,000 five Business Days **$250,000,000 ten Business Days * less than ** greater than "Requirements of Law" for any Person shall mean the certificate of incorporation and by-laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation, or determination of an arbitrator or Governmental Authority, in each case applicable to or binding upon such Person or to which such Person is subject, whether Federal, state or local (including usury laws and the Federal Truth in Lending Act). "Restricted Junior Payment" means (i) any dividend or other distribution, direct or indirect, on account of any shares of any class of capital stock of the Seller now or hereafter outstanding, except a dividend payable solely in shares of that class of stock or in any junior class of stock to any Originator, (ii) any redemption, retirement, sinking fund or similar payment, purchase or other acquisition for value, direct or indirect, of any shares of any class of capital stock of the Seller now or hereafter outstanding, (iii) any payment or prepayment of principal of, premium, if any, or interest, fees or other charges on or with respect to, and any redemption, purchase, retirement, defeasance, sinking fund or similar payment and any claim for rescission with respect to the Indebtedness evidenced by the Subordinated Notes (as defined in the Sale Agreement), (iv) any payment made to redeem, purchase, repurchase or retire, or to obtain the surrender of, any outstanding warrants, options or other rights to acquire shares of any class of capital stock of the Seller now or hereafter outstanding, and (v) any payment of management fees by the Seller. "S&P" means Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies. "Sale Agreement" means that certain Fifth Amended and Restated Receivables Sale and Contribution Agreement dated as of February 16, 2001, between the Seller, as purchaser, and Federal-Mogul, as seller, as the same may be amended, restated, supplemented or otherwise modified from time to time. "Section" means a numbered section of this Agreement, unless another document is specifically referenced. "Security Agreement" means that certain Security Agreement, dated as of December 29, 2000, made by Federal-Mogul and certain of its subsidiaries in favor of Wilmington Trust Company, as trustee, as amended, modified, supplemented or amended and restated from time to time. 22 "Seller" has the meaning assigned to such term in the preamble of this Agreement. "Servicer" has the meaning assigned to such term in the preamble of this Agreement and any successor Servicer authorized pursuant to Article VII to service, administer and collect Receivables. "Settlement Date" means, (a) prior to the earlier to occur of (i) an Amortization Event or (ii) the Facility Termination Date, (1) the second Business Day immediately succeeding each Report Date, (2) the second Business Day immediately succeeding the Interim Report Date if the related Interim Settlement Date Statement indicated that Capital exceeds the Available Funding Amount and (3) the last day of the relevant Tranche Period in respect of each Receivable Interest of the Liquidity Providers, and (b) from and after the earlier to occur of (i) an Amortization Event or (ii) the Facility Termination Date, (x) the twentieth (20th) day of each month or, if such day is not a Business Day, the next succeeding Business Day, (y) the last day of the relevant Tranche Period in respect of each Receivable Interest of the Liquidity Providers and (z) or any other Business Day designated by the Co-Agents. "Settlement Date Statement" means a report, in substantially the form of Exhibit C hereto (appropriately completed), furnished by the Servicer to the Co-Agents pursuant to Section 7.05. "Settlement Period" means (A) in respect of each Receivable Interest of a Conduit, the immediately preceding Accrual Period, and (B) in respect of each Receivable Interest of the Liquidity Providers, the entire Tranche Period of such Receivable Interest. "Stock Lift" means an account receivable, or portion thereof, as to which Federal-Mogul or one of its subsidiaries has issued a credit in an amount equal to the balance of such account receivable or portion thereof. "Subsidiary" of a Person means (i) any corporation more than 50% of the outstanding securities having ordinary voting power of which shall at the time be owned or controlled, directly or indirectly, by such Person or by one or more of its Subsidiaries or by such Person and one or more of its Subsidiaries, or (ii) any partnership, association, joint venture or similar business organization more than 50% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled. Unless otherwise expressly provided, all references herein to a "Subsidiary" shall mean a Subsidiary of the Seller. "Surety Documents" means, collectively, (i) the Contract of Indemnity, dated as of December 29, 2000, made by Federal-Mogul and certain of its subsidiaries in favor of National Fire Insurance Company of Hartford and Continental Casualty Company, relating to Bond number 929182983, (ii) the Contract of Indemnity, dated as of December 29, 2000, made by Federal-Mogul and certain of its subsidiaries in favor of SAFECO Insurance Company of America, relating to Bond number 6066092, (iii) the Contract of Indemnity, dated as of December 29, 2000, made by Federal-Mogul and certain of its subsidiaries in favor of Travelers Casualty & Surety Company of America, relating to Bond number 103529229, and (iv) the Contract of Indemnity, dated as of December 29, 2000, made by Federal-Mogul and certain of its 23 subsidiaries in favor of Travelers Casualty & Surety Company of America, relating to Bond number 103529126, in the case of clauses (i), (ii), (iii) and (iv), as amended, modified, supplemented or amended and restated from time to time. "Taxes" shall have the meaning set forth in Section 9.04. "Tranche Period" means, with respect to any Receivable Interest: (a) if Yield for such Receivable Interest is calculated on the basis of the LIBO Rate, a period of one, two, three or six months, or such other period as may be mutually agreeable to the applicable Co-Agent and the Seller, commencing on a Business Day selected by the Seller and agreed to by the applicable Co-Agent pursuant to this Agreement. Such Tranche Period shall end on the day in the applicable succeeding calendar month which corresponds numerically to the beginning day of such Tranche Period; provided, however, that if there is no such numerically corresponding day in such succeeding month, such Tranche Period shall end on the last Business Day of such succeeding month (each period described in this clause (a), a "LIBO Tranche Period"); (b) if Yield for such Receivable Interest is calculated on the basis of the Base Rate, a period commencing on a Business Day selected by the Seller and agreed to by the applicable Co-Agent, provided no such period shall exceed 30 days; and (c) if Yield for such Receivable Interest is calculated on the basis of Blue Ridge's or Falcon's CP Rate, a CP Tranche Period. If any Tranche Period would end on a day which is not a Business Day, such Tranche Period shall end on the next succeeding Business Day; provided, however, that in the case of LIBO Tranche Periods, if such next succeeding Business Day falls in a new month, such LIBO Tranche Period shall end on the immediately preceding Business Day. In the case of any Tranche Period for any Receivable Interest which commences before the Facility Termination Date and would otherwise end on a date occurring after the Facility Termination Date, such Tranche Period shall end on the Facility Termination Date. The duration of each Tranche Period which commences after the Facility Termination Date shall be of such duration as selected by the Co-Agents. "Transaction Documents" means, collectively, this Agreement, the Sale Agreement, the Subscription Agreement, the Subordinated Notes (as defined in the Sale Agreement), the Fee Letter, each Collection Agreement, each Collection Notice, the Receivables Purchase Agreement, the Liquidity Agreements and all other instruments, documents and agreements executed and delivered by the Seller or any Originator in connection herewith. "Trust Agreement" means the Second Amended and Restated Trust Agreement dated as of December 29, 2000, among Federal-Mogul, the subsidiaries of Federal-Mogul from time to time parties thereto, and First Union National Bank, as Trustee, as amended, modified, supplemented or amended and restated from time to time. 24 "Turnover Days" means, as of any Report Date or Interim Report Date, an amount equal to the Pool Balance as of the last day of the immediately preceding Collection Period divided by Collections relating to the immediately preceding Collection Period times 30. "UCC" means the Uniform Commercial Code as from time to time in effect in the specified jurisdiction. "Voting Block" has the meaning assigned to that term in Section 11.04. "Wachovia" has the meaning assigned to that term in the preamble of this Agreement. "Wachovia Roles" has the meaning assigned to that term in Section 13.13(b). "Waiver Letter" means that certain letter agreement, dated December 27, 2000 among Federal Mogul, the Seller, the Co-Agents and the Purchasers. "Weekly Settlement Date" has the meaning assigned to that term in Section 7.07. "Weekly Report" has the meaning assigned to that term in Section 7.07. "Yield" means, for any Tranche Period: --- --- DR x C x AD --------- 360 --- --- where: DR = the Discount Rate for such Tranche Period; C = the portion of the Capital allocated to such Tranche Period; and AD = the actual number of days elapsed during such Tranche Period; provided that no provision of this Agreement shall require the payment or permit the collection of Yield in excess of the maximum permitted by applicable law; and provided, further, that Yield for any Tranche Period shall not be considered paid by any distribution to the extent that at any time all or a portion of such distribution is rescinded or must otherwise be returned for any reason. Section 1.02 Other Definitional Provisions. ----------------------------- (a) All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles in effect in the United States from time to time. 25 (b) All terms used in Article 9 of the UCC in the State of New York, and not specifically defined herein, are used herein as defined in such Article 9. (c) The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section, subsection, Schedule and Exhibit references are to this Agreement unless otherwise specified. (d) Meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. ARTICLE II. PURCHASE ARRANGEMENTS; PAYMENTS AND COLLECTIONS Section 2.01 Purchase Facility. Upon the terms and subject to the ------------------ conditions hereof during the period from the date hereof to but not including the Facility Termination Date: (a) The Seller may, at its option, sell and assign Receivable Interests to the Co-Agents, for the benefit of their respective Constituents. Each such sale and assignment of a Receivable Interest to the Blue Ridge Agent shall be made simultaneously with a sale and assignment of a Receivable Interest to the Falcon Agent, and the amount of Capital associated with the Receivable Interests offered shall be ratable in accordance with the Purchaser Groups' respective Percentages. In accordance with the terms and conditions set forth herein: (i) Blue Ridge may, at its option, instruct the Blue Ridge Agent to purchase Receivable Interests on behalf of Blue Ridge or if Blue Ridge shall decline to make any such purchase, the Blue Ridge Agent shall purchase such Receivable Interests on behalf of the Blue Ridge Liquidity Providers; and (ii) Falcon may, at its option, instruct the Falcon Agent to purchase Receivable Interests on behalf of Falcon or if Falcon shall decline to make any such purchase, the Falcon Agent shall purchase such Receivable Interests on behalf of the Falcon Liquidity Providers; provided, however, that in no event shall the aggregate Capital of the Receivable Interests of the Blue Ridge Group at any one time outstanding exceed the Blue Ridge Purchase Limit, and in no event shall the aggregate Capital of the Receivable Interests of the Falcon Group at any one time outstanding exceed the Falcon Limit. (b) The Seller may, upon at least 30 days' prior written irrevocable notice to the Co-Agents terminate in whole or permanently reduce in part, the unused portion of the Purchase Limit; provided, however, that each reduction of the Purchase Limit shall be made ratable between the Purchaser Groups in accordance with their respective Percentages, and shall be applied ratably amongst the Liquidity Providers within a given Purchaser Group based upon their respective Pro Rata Shares); and provided further that each partial reduction of the Purchase Limit shall be in a minimum amount equal to $2,000,000 or a larger integral multiple of $1,000,000. 26 Section 2.02 Increases. The Seller shall provide the Co-Agents with --------- at least three Business Days' prior notice in either the form set forth as Exhibit A hereto of each Incremental Purchase or in a Settlement Date Statement - --------- (each such form and/or Settlement Date Statement, a "Purchase Notice"). Each Purchase Notice shall be subject to Section 5.02 and, except as set forth below, shall be irrevocable and shall specify the requested Tranche Period and Purchase Price (which shall not be less than $2,000,000 for either Purchaser Group) and date of purchase (which, in the case of any Incremental Purchase (after the initial purchase hereunder), shall only be on a Settlement Date, provided that an Incremental Purchase shall not be made on a Settlement Date within the meaning of clause (a)(2) of the definition of "Settlement Date") and, in the case of an Incremental Purchase to be funded by the Liquidity Providers, the requested Discount Rate. Following receipt of a Purchase Notice, the Blue Ridge Agent shall determine whether Blue Ridge agrees to make the purchase of the Receivable Interest offered to the Blue Ridge Agent, and the Falcon Agent shall determine whether Falcon agrees to make the purchase of the Receivable Interest offered to the Falcon Agent. If Blue Ridge or Falcon declines to make a proposed purchase, the Seller may cancel the Purchase Notice as to both Purchaser Groups. In the absence of such a cancellation, the Incremental Purchase of any Receivable Interest which Blue Ridge declines to purchase shall be made by the Blue Ridge Liquidity Providers in accordance with their respective Pro Rata Shares, and the Incremental Purchase of any Receivable Interest which Falcon declines to purchase shall be made by the Falcon Liquidity Providers in accordance with their respective Pro Rata Shares. On the date of each Incremental Purchase, upon satisfaction of the applicable conditions precedent set forth in Article V, each Conduit or its Liquidity Providers, as applicable, shall deposit to the Facility Account, in immediately available funds, no later than 12:00 noon (Chicago time), an amount equal to (i) in the case of each Conduit, the aggregate Purchase Price of the Receivable Interests such Conduit is then purchasing or (ii) in the case of a Liquidity Provider, such Liquidity Provider's Pro Rata Share of the aggregate Purchase Price of the Receivable Interests the related Liquidity Providers are purchasing. Section 2.03 Decreases. The Seller shall provide the Co-Agents with --------- prior written notice, substantially in the form of Exhibit H, in conformity with the Required Notice Period of any reduction of Capital from Collections requested by the Seller (a "Reduction Notice"). Such Reduction Notice shall designate: (i) the date (the "Proposed Reduction Date") upon which any such reduction of Capital shall occur (which date shall give effect to the applicable Required Notice Period), (ii) the aggregate amount of Capital of both Purchaser Groups to be reduced (the "Aggregate Reduction"), and (iii) whether all or any portion of such Aggregate Reduction is to be applied to Receivable Interests of the Liquidity Providers. Only one (1) Reduction Notice may be outstanding at any time. Each Aggregate Reduction shall be allocated between the Purchaser Groups ratably in accordance with their respective Percentages and once so allocated, if any portion of either Purchaser Group's share of such amount is to be applied to Receivable Interests of the Liquidity Providers, shall be allocated 27 amongst the Liquidity Providers in each Purchaser Group ratably in accordance with their respective Pro Rata Shares. Section 2.04 Payment Requirements. All amounts to be paid or -------------------- deposited by the Seller pursuant to any provision of this Agreement shall be paid or deposited in accordance with the terms hereof no later than 11:00 a.m. (Chicago time) on the day when due in immediately available funds, and if not received before 11:00 a.m. (Chicago time) shall be deemed to be received on the next succeeding Business Day. If such amounts are payable to Blue Ridge or the Blue Ridge Liquidity Providers they shall be paid to the Blue Ridge Agent, for the account of Blue Ridge or the Blue Ridge Liquidity Providers, at the Blue Ridge General and Administrative Account, Account No. 0531-00494 until otherwise notified by the Blue Ridge Agent. If such amounts are payable to Falcon or the Falcon Liquidity Providers they shall be paid to the Falcon Agent, for the account of Falcon or the Falcon Liquidity Providers at 1 Bank One Plaza, Chicago, Illinois 60670 until otherwise notified by the Falcon Agent. Upon notice to the Seller, the Falcon Agent may debit the Facility Account for all amounts due and payable hereunder. All computations of Yield (including, without limitation, all per annum fees calculated as part of Falcon's CP Costs) and all per annum Fees shall be made on the basis of a year of 360 days for the actual number of days elapsed. If any amount hereunder shall be payable on a day which is not a Business Day, such amount shall be payable on the next succeeding Business Day. Section 2.05 Payments. Notwithstanding any limitation on recourse -------- contained in this Agreement, the Seller shall immediately pay to the Co-Agents when due, for the account of the relevant Conduit and its related Liquidity Providers on a full recourse basis, the Obligations. If any Person fails to pay any of the Obligations when due, such Person agrees to pay, on demand, the Default Fee in respect thereof until paid. Notwithstanding the foregoing, no provision of this Agreement or the Fee Letter shall require the payment or permit the collection of any amounts hereunder in excess of the maximum permitted by applicable law. If at any time the Seller receives any Collections or is deemed to receive any Collections, the Seller shall immediately pay such Collections or Deemed Collections to the Servicer and, at all times prior to such payment, such Collections shall be held in trust by the Seller for the exclusive benefit of the Purchasers and the Agents. Section 2.06 Collections Prior to Amortization. Prior to the Facility --------------------------------- Termination Date, any Collections received by the Servicer (after the initial purchase of a Receivable Interest hereunder and on or prior to the Facility Termination Date of such Receivable Interest) shall be set aside and held in trust by the Servicer for the payment of any accrued and unpaid Aggregate Unpaids or for a Reinvestment as provided in this Section 2.06. If at any time any Collections are received by the Servicer prior to the Facility Termination Date, the Seller hereby requests and the Purchasers in each Purchaser Group hereby agree to make, simultaneously with such receipt, a reinvestment (each a "Reinvestment") with that portion of each and every Collection received by the Servicer that is part of any Receivable Interest of that Purchaser Group, such that after giving effect to such Reinvestment, the amount of Capital of such Receivable Interest immediately after such receipt and corresponding Reinvestment shall be equal to the amount of Capital immediately prior to such receipt, but after giving effect to any reduction of Capital pursuant to Section 2.03 and reduction in Purchase Limit pursuant to Section 2.01 to be effected on such date. On each Settlement Date prior to the occurrence of the 28 Facility Termination Date, the Servicer shall remit to the Co-Agents' accounts their Purchaser Groups' respective Percentages of the amounts set aside during the related Settlement Period and apply such amounts (if not previously paid in accordance with Section 2.05) to reduce unpaid Obligations. If such Obligations shall be reduced to zero, any additional Collections received by the Servicer shall (i) if applicable, be remitted to the Co-Agents' accounts, ratably in accordance with their respective Purchaser Group's Percentages, no later than 11:00 a.m. (Chicago time) to the extent required to fund any Aggregate Reduction on such Settlement Date and (ii) thereafter be remitted from the Servicer to the Seller on such Settlement Date. Section 2.07 Collections Following Amortization. On the Facility ---------------------------------- Termination Date and on each day thereafter, the Servicer shall set aside and hold in trust, for the holder(s) of each Receivable Interest, all Collections received on such day. On and after the Facility Termination Date, the Servicer shall, on each Settlement Date and at any other time requested by (or pursuant to standing instructions from) the Co-Agents (i) remit to the Co-Agents' accounts their Purchaser Groups' respective Percentages of the amounts set aside pursuant to the preceding sentence, and (ii) apply such amounts to reduce the Aggregate Unpaids. Section 2.08 Application of Collections. If there shall be -------------------------- insufficient funds on deposit for the Servicer to distribute funds in payment in full of the aforementioned amounts pursuant to Section 2.06 or 2.07 (as applicable), the Servicer shall distribute funds: first, to the payment of the Servicer's reasonable out-of- ----- pocket costs and expenses in connection with servicing, administering and collecting the Receivables if the Seller or one of its Affiliates is not then acting as the Servicer; second, to the reimbursement of the Agents' costs of ------ collection and enforcement of this Agreement, pro rata based upon the respective amounts of such costs of collection and enforcement; third, ratably to the payment of all accrued and unpaid Fees ----- under the Fee Letter and Yield; fourth, (if applicable) in reduction of Capital of the ------ Receivable Interests; fifth, for the ratable payment of all other unpaid ----- Obligations, provided that to the extent such Obligations relate to the payment of Servicer costs and expenses when the Seller or one of its Affiliates is acting as the Servicer, such costs and expenses shall not be paid until after the payment in full of all other Obligations; and sixth, after the Aggregate Unpaids have been indefeasibly ----- reduced to zero, to the Seller. Collections applied to the payment of Aggregate Unpaids shall be distributed in accordance with the aforementioned provisions, and, giving effect to each of the priorities set forth in this Section 2.08, shall be shared ratably (within each priority) among the Agents and the Purchasers in accordance with the amount of such Aggregate Unpaids owing to each of them in respect of each such priority. 29 Section 2.09 Payment Recission. No payment of any of the Aggregate ----------------- Unpaids shall be considered paid or applied hereunder to the extent that, at any time, all or any portion of such payment or application is rescinded by application of law or judicial authority, or must otherwise be returned or refunded for any reason. The Seller shall remain obligated for the amount of any payment or application so rescinded, returned or refunded, and shall promptly pay to the Co-Agents (for application to the Person or Persons who suffered such recission, return or refund) the full amount thereof, plus the Default Fee from the date of any such recission, return or refunding. Section 2.10 Clean Up Call. In addition to the Seller's rights ------------- pursuant to Section 2.03, the Seller shall have the right (after providing written notice to the Co-Agents in accordance with the Required Notice Period), at any time following the reduction of the Capital to a level that is less than 10.0% of the original Purchase Limit, to repurchase from the Purchasers all, but not less than all, of the then outstanding Receivable Interests. The purchase price in respect thereof shall be an amount equal to the Aggregate Unpaids through the date of such repurchase, payable in immediately available funds. Such repurchase shall be without representation, warranty or recourse of any kind by, on the part of, or against any Purchaser or the Agents. ARTICLE III. YIELD Section 3.01 Accrual and Payment of Yield. Yield shall accrue on the ---------------------------- Capital relating to each Receivable Interest for each day occurring during its applicable Tranche Period. On each Settlement Date, the Servicer shall pay to each Co-Agent an amount equal to the accrued and unpaid Yield owing to such Co- Agent's Constituents for all Tranche Periods ending on or prior to such Settlement Date, together with any Broken Funding Costs for any such Tranche Periods. Upon the occurrence of an Amortization Event, all existing outstanding Tranche Periods shall terminate, each Purchasers' Capital shall be automatically allocated to a new Tranche Period accruing Yield at the Post-Amortization Rate, and the Seller shall pay to the Co-Agents, for the account of their applicable Purchasers, any Broken Funding Costs arising from such early termination of their existing Tranche Periods. Section 3.02 Falcon's CP Yield; Notification of CP Costs. Except as ------------------------------------------- otherwise provided in Section 3.06, Falcon's Capital shall accrue Yield at Falcon's CP Rate and shall be allocated to a single Receivable Interest. On or before the 5th day preceding each Settlement Date (excluding, however, any Settlement Date within the meaning of clause (a)(2) of the definition of "Settlement Date"), the Falcon Agent shall notify the Servicer of Falcon's Yield and Broken Funding Costs, if any, that will be owing to Falcon on the next succeeding Settlement Date. Section 3.03 Blue Ridge's CP Yield; Notification of CP Costs. Except ----------------------------------------------- as otherwise provided in Section 3.06, Blue Ridge's Capital shall accrue Yield at Blue Ridge's CP Rate and shall be allocated to a single Receivable Interest. On or before the 5th day preceding each Settlement Date (excluding, however, any Settlement Date within the meaning of clause (a)(2) of the definition of "Settlement Date"), the Blue Ridge Agent shall notify the Servicer of 30 the Blue Ridge's Yield and Broken Funding Costs, if any, that will be owing to Blue Ridge on the next succeeding Settlement Date. Section 3.04 Base Rate Yield. Except as otherwise provided in --------------- Section 3.05, all Capital of each of the Liquidity Providers shall accrue Yield at the Base Rate applicable to its Purchaser Group. Notwithstanding the foregoing, the Seller (or the Servicer on the Seller's behalf) shall give the applicable Co-Agents irrevocable written notice not later than 11:00 a.m. (Chicago time) not later than one (1) Business Day prior to the expiration of each Tranche Period with respect to which the applicable Base Rate is being requested as a new Discount Rate. Section 3.05 LIBO Rate Yield and Unavailability of the LIBO Rate. --------------------------------------------------- With respect to each Liquidity Provider's Capital, the Seller (or the Servicer on the Seller's behalf) may from time to time, with the consent of the applicable Co-Agent, select a LIBO Rate as the Discount Rate to be applicable to all or any portion of such Liquidity Provider's Capital for a LIBO Tranche Period by irrevocable written notice delivered to the applicable Co-Agent not later than 11:00 a.m. (Chicago time) on the third Business Day prior to the commencement of each such requested LIBO Tranche Period; provided, however, that in no event may less than $1,000,000 be allocated to any LIBO Tranche Period of any Liquidity Provider. If either Co-Agent shall fail to receive such prior written notice on a timely basis, all such Capital of the Liquidity Providers in its Purchaser Group will accrue Yield at the applicable Base Rate from and after the expiration of any existing LIBO Tranche Period until notice of a new Discount Rate and Tranche Period selection is given in accordance with this Section 3.05. If either Co-Agent notifies the Seller (or the Servicer on the Seller's behalf) that one or more of its Liquidity Providers has determined that funding its share of Capital at a LIBO Rate would violate any applicable law, rule, regulation, or directive, whether or not having the force of law, or has determined that: (i) deposits of a type and maturity appropriate to match-fund its investment in a Receivable Interest at the LIBO Rate are not available, or (ii) such LIBO Rate does not accurately reflect the cost of making or maintaining such investment at such LIBO Rate, then such Co-Agent shall suspend the availability of the LIBO Rate for the Liquidity Providers in its Purchaser Group and require the Seller (or the Servicer on the Seller's behalf) to select the applicable Base Rate for any Tranche Period of such Purchaser Group that is accruing Discount at such LIBO Rate. Section 3.06 Liquidity Funding. If either Conduit determines that it ----------------- cannot maintain or that it is undesirable to maintain its Capital at a CP Rate and notifies its Co-Agent and the Seller (or the Servicer on the Seller's behalf) that it has availed itself of a Liquidity Funding for all or any portion of its Capital allocated to a CP Tranche Period for which Yield is being computed with respect to a CP Rate, such CP Tranche Period shall automatically terminate, the portion of Capital allocated to such CP Tranche Period shall be automatically allocated to a new Tranche Period accruing Yield at the applicable Base Rate, and the Seller shall pay to such Co-Agent, for the account of such Conduit, any Broken Funding Costs arising from early termination of such CP Tranche Period. 31 ARTICLE IV. REPRESENTATIONS AND WARRANTIES Section 4.01 Seller Representations and Warranties. The Seller ------------------------------------- hereby represents and warrants to the Agents and the Purchasers that: (a) Corporate Existence and Power. The Seller is a corporation duly ----------------------------- organized and validly existing and in good standing under the law of the State of Michigan and has, in all material respects, full corporate power, authority and legal right to own its properties and conduct its business as such properties are presently owned and such business is presently conducted, and to execute, deliver and perform its obligations under the Transaction Documents to which it is a party. (b) Due Qualification. The Seller is duly qualified to do business ----------------- and, where necessary, is in good standing as a foreign corporation (or is exempt from such requirement) and has obtained all necessary licenses and approvals in each jurisdiction in which the conduct of its business requires such qualification except where the failure to so qualify, be in good standing or obtain licenses or approvals would not have a Material Adverse Effect. (c) Due Authorization; No Conflict. The execution and delivery of the ------------------------------ Transaction Documents to which the Seller is a party, the performance of the transactions contemplated thereby and the fulfillment of the terms thereof, will not conflict with, result in any breach of any of the material terms and provisions of, or constitute (with or without notice or lapse of time or both) a material default under, any indenture, contract, agreement, mortgage, deed of trust, or other instrument to which the Seller is a party or by which it or its properties are bound. The execution and delivery of the Transaction Documents to which the Seller is a party, the performance of the transactions contemplated thereby and the fulfillment of the terms thereof which are applicable to the Seller, will not conflict with or violate any material Requirements of Law applicable to the Seller. (d) No Consents. Other than the filing of the financing statements ----------- required hereunder, no authorization or approval or other action by, and no notice to or filing with, any Governmental Authority or regulatory body is required for the due execution, delivery and performance by the Seller of the Transaction Documents to which it is a party, other than authorizations, approvals, actions, notices or filings the failure to obtain or perform would not reasonably be expected to have a Material Adverse Effect. (e) Binding Effect. The Transaction Documents to which the Seller is -------------- a party have been duly executed and delivered by the Seller and constitute the legal, valid and binding obligations of the Seller enforceable against the Seller in accordance with their respective terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws relating to or limiting creditors' rights in general and except as such enforceability may be limited by general principles of equity (whether considered in a suit at law or in equity). (f) No Proceedings. There are no actions, suits or proceedings -------------- pending, or to the best of the Seller's knowledge, threatened, against or affecting the Seller or any Originator, 32 or any of the respective properties of the Seller or any Originator, in or before any court, arbitrator or other body, which are reasonably likely to have a Material Adverse Effect. Neither the Seller nor any Originator is in default with respect to any order of any court, arbitrator or Governmental Authority. (g) Accuracy of Information. All information heretofore furnished by ----------------------- the Seller or any of its Affiliates to the Agents or the Purchasers for purposes of or in connection with this Agreement, any of the other Transaction Documents or any transaction contemplated hereby or thereby is, and all such information hereafter furnished by the Seller or any of its Affiliates to the Purchasers will be, true and accurate in every material respect, on the date such information is stated or certified and does not and will not contain any material misstatement of fact or omit to state a material fact or any fact necessary to make the statements contained therein not misleading. (h) Use of Proceeds. No proceeds of any purchase hereunder will be --------------- used for "purchasing" or "carrying" any "margin stock" within the respective meanings of each of the quoted terms under Regulation U of the Board of Governors of the United States Federal Reserve System as now and from time to time hereafter in effect or for any purpose which violates the provisions of the Regulations of such Board of Governors (including but not limited to the provisions of Regulation U and Regulation X) or any similar rule of any other Governmental Authority. (i) Title to Receivables. Each Receivable has been purchased by the -------------------- Seller from Federal-Mogul in accordance with the terms of the Sale Agreement, and the Seller has thereby irrevocably obtained all legal and equitable title to, and has the legal right to sell and encumber, such Receivable, its Collections and the Related Security. Each such Receivable has been transferred to the Seller free and clear of any Adverse Claim. Without limiting the foregoing, there has been duly filed all financing statements or other similar instruments or documents necessary under the UCC of all appropriate jurisdictions (or any comparable law) to perfect the Seller's ownership interest in such Receivable. (j) Good Title; Perfection. Immediately prior to each purchase ---------------------- hereunder, the Seller shall be the legal and beneficial owner of the Receivables and Related Security with respect thereto, free and clear of any Adverse Claim, except as created by the Transaction Documents. This Agreement is effective to, and shall, upon each purchase hereunder, transfer to the relevant Purchaser or Purchasers (and such Purchaser or Purchasers shall acquire from the Seller) a valid and perfected first priority undivided percentage ownership interest in each Receivable existing or hereafter arising and in the Related Security and Collections with respect thereto, free and clear of any Adverse Claim, except as created by the Transactions Documents. (k) Places of Business. The principal places of business and chief ------------------ executive office of the Seller and the offices where the Seller keeps all its Records are located at the address(es) listed on Exhibit D or such other locations notified to the Agent in accordance with Section 6.02(a) in jurisdictions where all action required by Section 6.02(a) has been taken and completed. The Seller's Federal Employer Identification Number is correctly set forth on Exhibit D. 33 (l) Collection Banks; etc. Except as otherwise notified to the --------------------- Administrative Agent in accordance with Section 6.02(b): (i) the Seller has instructed, or has required the Originators and the Servicer to instruct, all Obligors to pay all Collections directly to a segregated lock-box identified on Exhibit E hereto, (ii) in the case of all proceeds remitted to any such lock- box which is now or hereafter established, such proceeds will be deposited directly by the applicable Collection Bank into a concentration account or a depository account listed on Exhibit E, (iii) the names and addresses of all Collection Banks, together with the account numbers of the Collection Accounts of the Seller at each Collection Bank, are listed on Exhibit E, and (iv) each lock-box and Collection Account to which Collections are remitted shall be subject to a Collection Account Agreement that is then in full force and effect. In the case of lock-boxes and Collection Accounts identified on Exhibit E which were established by any Originator or by any Person other than the Seller, exclusive dominion and control thereof has been transferred to the Seller. The Seller has not granted any Person, other than the Administrative Agent as contemplated by this Agreement, dominion and control of any lock-box or Collection Account, or the right to take dominion and control of any lock-box or Collection Account at a future time or upon the occurrence of a future event. (m) Names. In the past five years, the Seller has not used any ----- corporate names, trade names or assumed names other than the name in which it has executed this Agreement. (n) Credit Policies. With respect to each Receivable, each of the ---------------- Originators, the Seller and the Servicer has complied in all material respects with the Credit Policies. (o) Payments to Federal-Mogul. With respect to each Receivable ------------------------- transferred to the Seller, the Seller has given reasonably equivalent value to Federal-Mogul in consideration for such transfer of such Receivable and the Related Security with respect thereto under the Sale Agreement and such transfer was not made for or on account of an antecedent debt. No transfer or contribution by Federal-Mogul of any Receivable is or may be voidable under any Section of the Federal Bankruptcy Reform Act of 1978 (11 U.S.C. (S)(S)101 et seq.), as amended. (p) Ownership of the Seller. Federal-Mogul directly owns 100% of the ----------------------- issued and outstanding capital stock of the Seller. Such capital stock is validly issued, fully paid and nonassessable and there are no options, warrants or other rights to acquire securities of the Seller. (q) Not an Investment Company. The Seller is not an `investment ------------------------- company" within the meaning of the Investment Company Act of 1940, as amended from time to time, or any successor statute. 34 (r) Purpose. The Seller has determined that, from a business ------- viewpoint, the purchase of Receivables and related interests from Federal-Mogul under the Sale Agreement, and the sale of Receivable Interests to the Purchasers and the other transactions contemplated herein, are in the best interest of the Seller. (s) Net Receivables Balance. Both before and after giving effect to ----------------------- each Incremental Purchase and Reinvestment, the Net Receivables Balance equals or exceeds the sum of (i) (x) Capital divided by (y) 1 minus the Aggregate Reserve Percentage, and (ii) the Contractual Dilution Balance. Section 4.02 Liquidity Provider Representations and Warranties. ------------------------------------------------- Each Liquidity Provider hereby represents and warrants to the Agents, the other Purchasers and the Seller that: (a) Existence and Power. Such Liquidity Provider is a corporation or ------------------- a banking association duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation or organization, and has all corporate power to perform its obligations hereunder. (b) No Conflict. The execution, delivery and performance by such ----------- Liquidity Provider of this Agreement are within its corporate powers, have been duly authorized by all necessary corporate action, do not contravene or violate (i) its certificate or articles of incorporation or association or by-laws, (ii) any material law, rule or regulation applicable to it, (iii) any restrictions under any material agreement, contract or instrument to which it is a party or any of its property is bound, or (iv) any order, writ, judgment, award, injunction or decree binding on or affecting it or its property, and do not result in the creation or imposition of any Adverse Claim on its assets. This Agreement has been duly authorized, executed and delivered by such Liquidity Provider. (c) Governmental Authorization. No authorization or approval or other -------------------------- action by, and no notice to or filing with, any governmental authority or regulatory body is required for the due execution, delivery and performance by such Liquidity Provider of this Agreement. (d) Binding Effect. This Agreement constitutes the legal, valid and -------------- binding obligation of such Liquidity Provider enforceable against such Liquidity Provider in accordance with its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws relating to or limiting creditors' rights generally. ARTICLE V. CONDITIONS OF PURCHASES Section 5.01 Conditions Precedent to Initial Purchase. The initial ---------------------------------------- purchase of a Receivable Interest under this Agreement is subject to the conditions precedent that (a) the Agents shall have received on or before the date of such purchase those documents listed on Schedule A hereto, and (b) the Agents shall have been paid all fees required to be paid on such date pursuant to the terms of the Fee Letter. 35 Section 5.02 Conditions Precedent to All Purchases and Reinvestments. ------------------------------------------------------- Each purchase of a Receivable Interest and each Reinvestment shall be subject to the further conditions precedent that: (a) in the case of each Incremental Purchase, the Servicer shall have delivered to the Co-Agents on or prior to the Purchase Date all Settlement Date Statements and all Interim Settlement Date Statements and when due under Section 7.05; (b) on the date of each Incremental Purchase or Reinvestment, the following statements shall be true both before and after giving effect to such purchase or Reinvestment (and acceptance of the proceeds of such purchase or Reinvestment shall be deemed a representation and warranty by the Seller that such statements are then true): (i) the representations and warranties set forth in Section 4.01 are correct on and as of the date of such purchase or Reinvestment as though made on and as of such date; (ii) no event has occurred, or would result from such purchase or Reinvestment, that will constitute an Amortization Event, and no event has occurred and is continuing, or would result from such purchase or Reinvestment, that would constitute a Potential Amortization Event; and (iii) neither the Liquidity Termination Date nor the Facility Termination Date shall have occurred, the aggregate Capital of all Receivable Interests shall not exceed the Purchase Limit and the aggregate Receivable Interests shall not exceed 100%; and (iv) if the proposed date of such purchase or Reinvestment is a Settlement Date, the Seller shall have paid immediately available funds in the amount of any Coverage Shortfall that will exist after giving effect to such purchase or Reinvestment to the Agent for distribution to the Purchasers; and (c) the Co-Agents shall have received such other approvals, opinions or documents as it may reasonably request. ARTICLE VI. COVENANTS OF THE SELLER AND SERVICER Section 6.01 Affirmative Covenants of Seller and the Servicer. Until ------------------------------------------------ the date on which the Aggregate Unpaids have been indefeasibly paid in full, each of the Seller and Servicer (for the avoidance of doubt, the Servicer covenants and agrees only to Section 6.01(m) and Section 6.01(o)) hereby covenants and agrees that: (a) Notices. Except as set forth in clauses (vii) and (viii) below, ------- the Seller will notify the Co-Agents in writing of any of (A) the events specified below in clauses (i) and (iv) immediately, and (B) the events specified in clauses (ii), (iii), (v) and (vi) within three Business Days, in each case, upon learning of the occurrence thereof, describing the same and, if applicable, the steps being taken with respect thereto: 36 (i) Amortization Events or Potential Amortization Events. The ---------------------------------------------------- occurrence of each Amortization Event (including, but not limited to, any failure to satisfy the Financial Covenants pursuant to Section 6.02(j)) or Potential Amortization Event, by a statement of the Chief Financial Officer, the Treasurer or the Assistant Treasurer of the Seller; (ii) Judgment. The entry of any judgment or decree against the -------- Seller; (iii) Litigation. The institution of any litigation, arbitration ---------- proceeding or governmental proceeding against the Seller or to which the Seller becomes party; (iv) Termination Date under Sale Agreement. The declaration by ------------------------------------- Federal-Mogul of the "Termination Date" under the Sale Agreement; and/or (v) Downgrade. Any downgrade in the rating of any Indebtedness of --------- Federal-Mogul by S&P or by Moody's setting forth the Indebtedness and the nature of such change. (vi) Copies of Notices, Etc. under Sale Agreement and Other ------------------------------------------------------ Transaction Documents. Forthwith upon its receipt of any notice, request --------------------- for consent, financial statements of Federal-Mogul, certification, report or other communication under or in connection with any Transaction Document from any Person other than the Agents or the Conduits, copies of the same. (vii) Change in Credit Policies. At least 30 days prior to the ------------------------- effectiveness of any material change in or amendment to the Credit Policies, a copy of the Credit Policies then in effect and a notice indicating such change or amendment. (viii) Other Information. As soon as reasonably practicable, such ----------------- other information (including non-financial information) as any Agent or any Purchaser may from time to time reasonably request. (b) Compliance with Laws. The Seller will comply in all material ----------------- respects with all applicable laws, rules, regulations, orders writs, judgments, injunctions, decrees or awards to which it may be subject. (c) Audits; Inspection Rights. The Seller will, or will require the ------------------------- Originators and the Servicer to, furnish to any Co-Agent from time to time such information with respect to it and the Receivables as such Co-Agent may reasonably request. The Seller shall, from time to time during regular business hours as requested by any Co-Agent upon reasonable notice, permit such Co-Agent, or its agents or representatives (and shall require the Originators and the Servicer to permit such Co-Agent or its agents or representatives) (i) to examine and make copies of and abstracts from all Records in the possession or under the control of the Seller or any Originator relating to Receivables and the Related Security, including, without limitation, the related invoices, and (ii) to visit the offices and properties of the Seller or the Originators for the purpose of examining such materials described in clause (i) above, and to discuss matters relating to the Seller's or any Originator's financial condition or the Receivables and the Related Security or the Seller's performance hereunder, or any Originator's performance under any of the other Transaction Documents, or the Seller's or any Originator's performance under the invoices with 37 any of the officers or employees of the Seller or any Originator having knowledge of such matters. (d) Keeping and Marking of Records and Books. ----------------------------------------- (i) The Seller will, and will require the Originators and the Servicer to, maintain and implement administrative and operating procedures (including, without limitation, an ability to recreate records evidencing Receivables in the event of the destruction of the originals thereof), and keep and maintain all documents, books, records and other information reasonably necessary or advisable for the collection of all Receivables (including, without limitation, records adequate to permit the immediate identification of each new Receivable and all Collections of and adjustments to each existing Receivable). The Seller will, and will require the Originators and the Servicer to, give the Co-Agents notice of any material change in the administrative and operating procedures referred to in the previous sentence. (ii) The Seller will, and will require the Originators and the Servicer to: (a) on or prior to the date hereof, mark its master data processing records and other books and records, if any, relating to the Receivable Interests with a legend, acceptable to the Agents, describing the Receivable Interests and (b) upon the request of any Agent following an Amortization Event: (A) mark each invoice with a legend describing the Receivable Interests and (B) deliver to the Administrative Agent all invoices (including, without limitation, all multiple originals of any such invoice) relating to the Receivables. (e) Compliance with Invoices and Credit Policies; Taxes. The --------------------------------------------------- Seller will, and will require the Originators and the Servicer to, timely and fully (i) perform and comply with all provisions, covenants and other promises required to be observed by it under the invoices (other than bills of lading) related to the Receivables, and (ii) comply in all material respects with any bills of lading included in the invoices and with the Credit Policies. The Seller will, and will require the Originators to, pay when due any taxes payable in connection with the Receivables. (f) Purchase of Receivables from the Originators. With respect -------------------------------------------- to each Receivable purchased under the Sale Agreement, the Seller shall (or shall require the Originators and the Servicer to) take all actions necessary to vest legal and equitable title to such Receivable and the Related Security irrevocably in the Seller, including, without limitation, the filing of all financing statements or other similar instruments or documents necessary under the UCC of all appropriate jurisdictions (or any comparable law) to perfect the Seller's interest in such Receivable and such other action to perfect, protect or more fully evidence the interest of the Seller as any Agent may reasonably request. (g) Ownership Interest. The Seller shall take all necessary ------------------ action to establish and maintain a valid and perfected first priority undivided percentage ownership interest in the Receivables and the Related Security and Collections with respect thereto, to the full extent contemplated herein, in favor of the Administrative Agent and the Purchasers, including, without limitation, taking such action to perfect, protect or more fully evidence the interest of the Administrative Agent and the Purchasers hereunder as the Administrative Agent may reasonably request. 38 (h) Payment to Federal-Mogul. With respect to any Receivable ------------------------ purchased by the Seller from Federal-Mogul, such sale shall be effected under, and in strict compliance with the terms of, the Sale Agreement, including, without limitation, the terms relating to the amount and timing of payments to be made to Federal-Mogul in respect of the purchase price for such Receivable. (i) Performance and Enforcement of Sale Agreement. The Seller --------------------------------------------- shall timely perform the obligations required to be performed by the Seller, and shall vigorously enforce the rights and remedies accorded to the Seller, under the Sale Agreement. The Seller shall take all actions to perfect and enforce its rights and interests (and the rights and interests of the Purchasers and the Agents, as assignees of the Seller) under the Sale Agreement as any Agent may from time to time reasonably request, including, without limitation, making claims to which it may be entitled under any indemnity, reimbursement or similar provision contained in the Sale Agreement. (j) Purchasers' Reliance. The Seller acknowledges that the -------------------- Agents and the Purchasers are entering into the transactions contemplated by this Agreement in reliance upon the Seller's identity as a legal entity that is separate from each of the Originators. Therefore, from and after the date of execution and delivery of this Agreement, the Seller shall take all reasonable steps including, without limitation, all steps that any Agent or any Purchaser may from time to time reasonably request to maintain the Seller's identity as a separate legal entity and to make it manifest to third parties that the Seller is an entity with assets and liabilities distinct from those of each of the Originators and any Affiliates thereof and not just a division of an Originator. Without limiting the generality of the foregoing and in addition to the other covenants set forth herein, the Seller shall: (i) maintain its own separate books and records and bank accounts; (ii) at all times hold itself out to the public as a legal entity separate from the Servicer, the Originators, any Affiliates thereof or any other Person; (iii) at all times have at least one member of its Board of Directors who is an Independent Director; (iv) file its own tax returns, if any, as may be required under applicable law, to the extent not part of a consolidated group filing a consolidated return or returns, and pay any taxes so required to be paid under applicable law; (v) not commingle its assets with assets of any other Person (except as contemplated by the Transaction Documents); (vi) conduct its business in its own name; (vii) maintain separate financial statements; (viii) pay its own liabilities only out of its own funds; (ix) maintain an arm's length relationship with its Affiliates; 39 (x) pay the salaries of its own employees, if any; (xi) not guarantee or become obligated for the debts of any other Person or hold out its credit as being available to satisfy the obligations of others; (xii) allocate fairly and reasonably any overhead for shared office space; (xiii) use separate stationery, invoices and checks; (xiv) not pledge its assets for the benefit of any other Person or make any loans or advances to any Person (except as contemplated by the Transaction Documents); (xv) correct any known misunderstanding regarding its separate identity; (xvi) maintain adequate capital in light of its contemplated business purposes; and (xvii) cause its Board of Directors to meet at least annually or act pursuant to written consent and keep minutes of such meetings and actions and observe all other Michigan corporate formalities; (k) Collections. The Seller shall instruct all Obligors, or ----------- require the Originators and the Servicer to instruct, all Obligors to pay all Collections directly to a segregated lock-box or other Collection Account listed on Exhibit E, each of which is subject to a Collection Account Agreement. In the case of payments remitted to any such lock-box, the Seller shall require all proceeds from such lock-box to be deposited directly by a Collection Bank into a Collection Account listed on Exhibit E, which is subject to a Collection Account Agreement. The Seller shall maintain exclusive dominion and control (subject to the terms of this Agreement) to each such Collection Account. In the case of any Collections received by the Seller or an Originator, the Seller shall remit (or shall require the Originators and the Servicer to remit) such Collections to a Collection Account not later than the Business Day immediately following the date of receipt of such Collections, and, at all times prior to such remittance, the Seller shall itself hold (or, if applicable, shall require the Originators and the Servicer to hold) such Collections in trust, for the exclusive benefit of the Purchasers and the Agents. In the case of any remittances received by the Seller in any such Collection Account that shall have been identified, to the satisfaction of the Servicer, to not constitute Collections or other proceeds of the Receivables or the Related Security, the Seller shall promptly remit such items to the Person identified to it as being the owner of such remittances. From and after the date the Administrative Agent delivers to any of the Collection Banks a Collection Notice pursuant to Section 7.03, the Administrative Agent may request that the Seller, and the Seller thereupon promptly shall and shall direct the Originators to, direct all Obligors on Receivables to remit all payments thereon to a new depositary account (the "New Concentration Account") specified by the Administrative Agent and, at all times thereafter the Seller shall not deposit or otherwise credit, and shall not permit any Originator or any other Person to deposit or otherwise credit to the New Concentration Account any cash or payment item other than Collections. Alternatively, the Administrative Agent may request that the Seller, and the Seller thereupon promptly shall, direct all Persons then making remittances to any Collection Account listed on Exhibit E which 40 remittances are not payments on Receivables to deliver such remittances to a location other than an account listed on Exhibit E. (l) Minimum Net Worth. The Seller shall at all times maintain total ----------------- assets which exceed its total liabilities by not less than $14,250,000. (m) Credit Agreement/Pledge Agreement/Security Agreement/Surety ----------------------------------------------------------- Documents/Trust Agreement. Within three Business Days of the date of the - ------------------------- execution and delivery of any amendment, modification, supplement or amendment and restatement of the Credit Agreement, the Pledge Agreement, the Security Agreement, any Surety Document or the Trust Agreement, the Servicer shall deliver a copy of thereof to each Co-Agent, and, upon the request of either Co- Agent, shall also deliver a copy thereof marked to show all changes. (n) [Reserved] (o) Certificate of Responsible Officer Pursuant to Credit Agreement. --------------------------------------------------------------- The Servicer shall deliver to each Co-Agent the certificate specified in Section 10.2 of the Credit Agreement contemporaneously with the delivery of such certificate to the Lenders (as such term is defined in the Credit Agreement) pursuant to Section 10.2 of the Credit Agreement. Section 6.02 Negative Covenants of Seller. Until the date on which the ---------------------------- Aggregate Unpaids have been indefeasibly paid in full, the Seller hereby covenants, individually and in its capacity as Servicer, that: (a) Name Change, Offices, Records and Books of Accounts. The Seller --------------------------------------------------- will not change its name, identity or corporate structure (within the meaning of Section 9-402(7) of any applicable enactment of the UCC) or relocate its chief executive office or any office where Records are kept unless it shall have: (i) given the Administrative Agent at least 45 days prior notice thereof (or such lesser number of days as the parties hereto may agree upon) and (ii) delivered to the Administrative Agent all financing statements, instruments and other documents requested by the Administrative Agent in connection with such change or relocation. (b) Change in Payment Instructions to Obligors. The Seller will not ------------------------------------------ add or terminate any bank as a Collection Bank from those listed in Exhibit E, or make any change in its instructions to Obligors regarding payments to be made to the Seller or payments to be made to any lock-box, Collection Account or Collection Bank, unless the Administrative Agent shall have received, at least fifteen (15) Business Days before the proposed effective date therefor: (i) written notice of such addition, termination or change, and (ii) with respect to the addition of a lock-box, Collection Account or Collection Bank, an executed account agreement and an executed Collection Account Agreement from such Collection Bank relating thereto; provided, however, that the Seller may make changes in instructions to Obligors regarding payments if such new instructions require such Obligor to make payments to another existing lock-box or Collection Account that is subject to a Collection Account Agreement then in effect. 41 (c) Modifications to Credit Policies. The Seller will not make any -------------------------------- change to the Credit Policies which would be reasonably likely to adversely affect the collectibility of any material portion of the Receivables or decrease the credit quality of any newly created Receivables. Except as provided in Section 7.02(c), the Seller, acting as Servicer or otherwise, will not extend, amend or otherwise modify the terms of any Receivable or any invoice related thereto other than in accordance with the Credit Policies. (d) Sales, Liens, Etc. The Seller shall not sell, assign (by ----------------- operation of law or otherwise) or otherwise dispose of, or grant any option with respect to, or create or suffer to exist any Adverse Claim upon (including, without limitation, the filing of any financing statement) or with respect to, any Receivable, Related Security or Collections, or upon or with respect to any invoice under which any Receivable arises, or any lock-box or Collection Account or assign any right to receive income in respect thereof (other than, in each case, the creation of the interests therein in favor of the Administrative Agent, the Purchasers and the Co-Agents provided for herein), and the Seller shall defend the right, title and interest of the Administrative Agent, the Purchasers and the Co-Agents in, to and under any of the foregoing property, against all claims of third parties claiming through or under the Seller or any Originator. (e) Nature of Business; Other Agreements; Other Indebtedness. The -------------------------------------------------------- Seller shall not engage in any business or activity of any kind or enter into any transaction or indenture, mortgage, instrument, agreement, contract, lease or other undertaking other than the transactions contemplated and authorized by this Agreement and the Sale Agreement. Without limiting the generality of the foregoing, the Seller shall not create, incur, guarantee, assume or suffer to exist any indebtedness or other liabilities, whether direct or contingent, other than: (i) as a result of the endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business, (ii) the incurrence of obligations under this Agreement, (iii) the incurrence of obligations, as expressly contemplated in the Sale Agreement, to make payment to Federal-Mogul thereunder for the purchase of Receivables from Federal-Mogul under the Sale Agreement, and (iv) the incurrence of operating expenses in the ordinary course of business of the type otherwise contemplated in Section 6.01(j) of this Agreement. In the event the Seller shall at any time borrow a "Subordinated Loan" under the Sale Agreement, the obligations of the Seller in connection therewith shall be subordinated to the obligations of the Seller to the Purchasers and the Agents under this Agreement, on such terms as shall be satisfactory to the Co-Agents. (f) Amendments to Sale Agreement. The Seller shall not, without the ---------------------------- prior written consent of the Co-Agents: (i) cancel or terminate the Sale Agreement, (ii) give any consent, waiver, directive or approval under the Sale Agreement, 42 (iii) waive any default, action, omission or breach under the Sale Agreement, or otherwise grant any indulgence thereunder, or (iv) amend, supplement or otherwise modify any of the terms of the Sale Agreement. (g) Amendments to Corporate Documents. The Seller shall not amend its Certificate of Incorporation or By-Laws in any respect that would impair its ability to comply with the terms or provisions of any of the Transaction Documents, including, without limitation, Section 6.01(j) of this Agreement. (h) Merger. The Seller shall not merge or consolidate with or ------ into, or convey, transfer, lease or otherwise dispose of (whether in one transaction or in a series of transactions, and except as otherwise contemplated herein) all or substantially all of its assets (whether now owned or hereafter acquired) to, or acquire all or substantially all of the assets of, any Person. (i) Restricted Junior Payments. The Seller shall not make any --------------------------- Restricted Junior Payment if an Amortization Event or a Potential Amortization Event exists or would result therefrom. (j) Financial Covenants Under Credit Agreement Incorporated by ---------------------------------------------------------- Reference. The Financial Covenants are hereby incorporated by reference in this - --------- Agreement and shall be an integral part of this Agreement as if such Financial Covenants were fully set forth in this Agreement. For the avoidance of doubt, in the event that any Financial Covenant is amended, modified, supplemented or amended and restated without the prior written consent of each Co-Agent, then the Financial Covenants in effect prior to such amendment, modification, supplement or amendment and restatement shall continue to be an integral part of this Agreement and shall remain in full force and effect. ARTICLE VII. SERVICING, ADMINISTRATION AND COLLECTION OF THE RECEIVABLES Section 7.01 Designation of Servicer. (a) The servicing, ----------------------- administration and collection of the Receivables shall be conducted by such Person (the "Servicer") so designated from time to time in accordance with this Section 7.01. Federal-Mogul is hereby designated as, and hereby agrees to perform the duties and obligations of, the Servicer pursuant to the terms of this Agreement. Either Co-Agent may at any time following the occurrence of an Amortization Event designate as Servicer any Person to succeed Federal-Mogul or any successor Servicer. (a) Without the prior written consent of the Co-Agents, Federal- Mogul shall not be permitted to delegate any of its duties or responsibilities as Servicer to any Person other than the other Originators. If at any time the Co-Agents shall designate as Servicer any Person other than Federal-Mogul, all duties and responsibilities theretofore delegated by Federal-Mogul to any other Originator may, at the discretion of the Co-Agents, be terminated forthwith on notice given by the Co-Agents to Federal-Mogul and to the Seller. (b) Notwithstanding the foregoing subsection (b), (i) Federal- Mogul shall be and remain primarily liable to the Agents and the Purchasers for the full and prompt performance 43 of all duties and responsibilities of the Servicer hereunder and (ii) the Agents and the Purchasers shall be entitled to deal exclusively with Federal-Mogul in matters relating to the discharge by the Servicer of its duties and responsibilities hereunder. The Agents and the Purchasers shall not be required to give notice, demand or other communication to any Person other than Federal- Mogul in order for communication to the Servicer and its sub-servicer or other delegate with respect thereto to be accomplished. Federal-Mogul, at all times that it is the Servicer, shall be responsible for providing any sub-servicer or other delegate of the Servicer with any notice given to the Servicer under this Agreement. Section 7.02 Duties of Servicer. ------------------ (a) The Servicer shall take or cause to be taken all such actions as may be necessary or advisable to collect each Receivable from time to time, all in accordance with applicable laws, rules and regulations, with reasonable care and diligence, and in accordance with the applicable invoices and the Credit Policies. (b) The Servicer shall administer the Collections in accordance with the procedures described herein and in Article II. The Servicer shall set aside and hold in trust for the account of the Seller and the Purchasers their respective shares of the Collections of Receivables in accordance with Sections 2.06 and 2.07. The Servicer shall upon the request of the Co-Agents after the occurrence of an Amortization Event segregate, in a manner acceptable to the Co- Agents, all cash, checks and other instruments received by it from time to time constituting Collections from the general funds of the Servicer or the Seller prior to the remittance thereof in accordance with Section 2.07. If the Servicer shall be required to segregate Collections pursuant to the preceding sentence, the Servicer shall segregate and deposit with a bank designated by the Co-Agents such allocable share of Collections of Receivables set aside for the Purchasers on the first Business Day following receipt by the Servicer of such Collections, duly endorsed or with duly executed instruments of transfer. (c) The Servicer, may, in accordance with the Credit Policies, extend the maturity of any Receivable or adjust the Outstanding Balance of any Receivable as the Servicer may determine to be appropriate to maximize Collections thereof; provided, however, that such extension or adjustment shall not alter the status of such Receivable as a Defaulted Receivable or limit the rights of the Agents or the Purchasers under this Agreement. Notwithstanding anything to the contrary contained herein, from and after the occurrence of an Amortization Event, the Co-Agents shall have the absolute and unlimited right to direct the Servicer to commence or settle any legal action with respect to any Receivable or to foreclose upon or repossess any Related Security. (d) The Servicer shall hold in trust for the Seller and the Purchasers, in accordance with their respective interests in the Receivables, all Records that evidence or relate to the Receivables, the related invoices and Related Security or that are otherwise necessary or desirable to collect the Receivables and shall, as soon as practicable upon demand of any Agent following the occurrence of an Amortization Event, deliver or make available to the Administrative Agent all such Records to such location as the Administrative Agent may designate in writing. The Servicer shall, as soon as practicable following receipt thereof, turn over to the Seller: (i) that portion of Collections of Receivables representing the Seller's 44 undivided fractional ownership interest therein, less, in the event that Federal-Mogul or one of its Affiliates is not then acting as the Servicer, all reasonable out-of-pocket costs and expenses of the Servicer of servicing, administering and collecting the Receivables, and (ii) any cash collections or other cash proceeds received with respect to indebtedness not constituting Receivables. The Servicer shall, from time to time at the request of any Co- Agent or any Purchaser, furnish to such Co-Agent for distribution to the Purchasers (promptly after any such request) a calculation of the amounts set aside for the Purchasers pursuant to Section 2.07. (e) Any payment by an Obligor in respect of any indebtedness owed by it to the Seller shall, except as otherwise specified by such Obligor or otherwise required by contract or law and unless otherwise instructed by the Co- Agents, be applied as a Collection of any Receivable of such Obligor (starting with the oldest such Receivable) to the extent of any amounts then due and payable thereunder before being applied to any other receivable or other obligation of such Obligor. Section 7.03 Collection Notices. At any time, either of the Co-Agents ------------------ is hereby authorized to direct the Administrative Agent, and the Administrative Agent is hereby authorized and directed to comply with such direction, to deliver to the Collection Banks a Collection Notice under any Collection Account Agreement. The Seller hereby transfers to the Administrative Agent for the benefit of the Purchasers, effective when the Administrative Agent delivers such notice, the exclusive ownership and control of the Collection Accounts. In case any authorized signatory of the Seller whose signature appears on a Collection Account Agreement shall cease to have such authority before the delivery of such notice, such Collection Notice shall nevertheless be valid as if such authority had remained in force. The Seller hereby authorizes the Administrative Agent, and agrees that the Administrative Agent shall be entitled to (i) endorse the Seller's and/or any Originator's name on checks and other instruments representing Collections, (ii) enforce the Receivables, the related invoices and the Related Security and (iii) take such action as shall be necessary or desirable to cause all cash, checks and other instruments constituting Collections of Receivables to come into the possession of the Administrative Agent rather than the Seller. Section 7.04 Responsibilities of the Seller. Anything herein to the ------------------------------ contrary notwithstanding, the exercise by the Agents and the Purchasers of their rights hereunder shall not release the Servicer or the Seller from any of their duties or obligations with respect to any Receivables or under the related invoices. None of the Agents or the Purchasers shall have no obligation or liability with respect to any Receivables or related invoices, nor shall any of them be obligated to perform the obligations of the Seller. Section 7.05 Settlement Date Statements/Interim Settlement Date -------------------------------------------------- Statements. On or prior to the Report Date, the Servicer will provide to the Co- - ---------- Agents a Settlement Date Statement substantially in the form of Exhibit C, and on each Settlement Date the Co-Agents shall forward to its respective Purchaser Group such Statement. On or prior to each Interim Report Date, the Servicer will provide to the Co-Agents an Interim Settlement Date Statement substantially in the form of Exhibit I and the Co-Agents shall forward to its respective Purchase Group such Statement. 45 Section 7.06 Quarterly Servicer's Certificate. The Servicer shall -------------------------------- deliver to the Co-Agents on or prior to the Report Date occurring in the month immediately succeeding each of the first three calendar quarters of each year, a certificate signed by a senior financial officer of the Servicer stating that (a) a review of the activities of the Servicer during the preceding calendar quarter and of its performance under the Transaction Documents was made under the supervision of the officer signing such Compliance Certificate and (b) to the best of such officer's knowledge, based on such review, the Servicer has performed in all material respects its obligations under the Transaction Documents throughout such quarter, or, if there has been a material default in the performance of any such obligation, specifying each such default known to such officer and the nature and status thereof. Section 7.07 Weekly Report and Distribution. Notwithstanding any other ------------------------------ provision of any of the Transaction Documents, any Co-Agent, at its sole option, may provide a written notice to the Seller, the Servicer and the Purchasers to the effect that the Servicer shall deliver a weekly report (the "Weekly Report") and distributions shall be made to the Purchasers on a weekly basis, in each case, as described below. Upon receipt of such notice, on Friday of each week, or if such day is not a Business Day, the next succeeding Business Day, the Servicer shall deliver the Weekly Report to the Co-Agents. Each Weekly Report shall provide the following information: (i) the aggregate Collections deposited in the Collection Account during the current week, or the preceding week, as applicable, (ii) the aggregate amount of Receivables as of the date of the Weekly Report, and (iii) the amount to be distributed on the second Business Day immediately succeeding the date of such report (the "Weekly Settlement Date"). On each Weekly Settlement Date the Co-Agents, in accordance with the Weekly Report delivered by the Servicer, shall make a distribution to its related Purchasers. The amounts to be distributed on each Weekly Settlement Date shall be a pro rata portion of the amounts specified in the Transaction Documents based upon the actual number of days in the preceding week and a 30-day month. Section 7.08 Reporting Covenants of the Servicer. ----------------------------------- (a) Financial Reporting. The Servicer, for so long as Federal-Mogul ------------------- is to Servicer and any Aggregate Unpaids remain outstanding, hereby covenants that it shall maintain, for itself and each of its Subsidiaries, a system of accounting established and administered in accordance with generally accepted accounting principles, and furnish to the Co-Agents: (i) Annual Reporting. As soon as available, but in any event within ---------------- 120 days after the close of each fiscal year of the Servicer, an audit report not qualified for anything under the control of the Servicer, certified by independent public accountants acceptable to the Co-Agents (which until the Co-Agents notify the Servicer in writing to the contrary may be Ernst & Young LLP, public accountants), prepared in accordance with generally accepted accounting principles on a consolidated basis for the Servicer and its Subsidiaries including consolidated balance sheets as of the end of such period, and related profit and loss and reconciliation of the surplus statements; (ii) Quarterly Reporting. As soon as available, but in any event ------------------- within 60 days after the close of the first three quarterly periods of each fiscal year of the Servicer, for the Servicer and its Subsidiaries, consolidated unaudited balance sheets as at the close 46 of each such period and consolidated profit and loss and reconciliation of surplus statements for the period beginning from the beginning of such fiscal year to the end of such quarter; and (iii) Securities and Exchange Commission Filings. The Servicer shall ------------------------------------------ provide the Co-Agents, promptly after the same are available, copies of all proxy statements, financial statements and reports as the Servicer shall send or make available generally to any of its public security holders, and copies of all regular and period reports and of all registration statements which the Servicer may file with the Securities and Exchange Commission or with any securities exchange. (b) Notices. The Servicer shall promptly notify the Co-Agents in ------- writing of any of the following immediately upon learning of the occurrence thereof, describing the same, and if applicable, the steps being taken with respect thereto; (i) the occurrence of each Amortization Event and each Potential Amortization Event, by a statement of the corporate comptroller or senior financial officer of the Servicer, (ii) the entry of one or more judgments or decrees against the Servicer or any of its Subsidiaries if the aggregate amount of all such judgments and decrees outstanding (not paid or fully covered by insurance as to which the insurance carrier has admitted liability) equals or exceeds $30,000,000, (iii) the occurrence of any Insolvency Event with respect to the Servicer, (iv) the occurrence of any Insolvency Event with respect to the Seller or any Originator of which the Servicer becomes aware, and (v) the occurrence of any other event of which the Servicer becomes aware that has, or could reasonably be expected to have, a Material Adverse Effect or that constitutes an Amortization Event or a Potential Amortization Event. Section 7.09 Inspection Rights. The Servicer shall provide any Co-Agent, ----------------- and any of its agents and representatives, with access to (a) any books, records, files and documents (including, without limitation, computer tapes and discs) relating to the Transaction Documents, the Receivables and the servicing of the Receivables, and such Co-Agent and such representatives and agents shall be permitted to make copies of and abstracts from the foregoing and (b) the officers, directors and auditors of the Servicer to discuss the business and operations of the Servicer relating to the Transaction Documents and the Receivables and the Servicer's performance under the Transaction Documents, but only (i) upon reasonable request, (ii) during normal business hours, (iii) subject to the Servicer's normal security and confidentiality procedures and (iv) at reasonably accessible offices designated by the Servicer. Section 7.10 Credit Policies. The Servicer shall timely and fully (a) --------------- perform and comply with all provisions and covenants and other promises required to be observed by it under terms of such Receivable and (b) comply in all material respects with the credit and collection policies and procedures in effect on the date hereof (the "Credit Policies") with respect to the Receivables, a copy of which is attached hereto as Exhibit G. The Servicer shall not amend, modify or supplement the Credit Policies in any material adverse respect without the prior written consent of the Co-Agents, which consent shall not be unreasonably withheld. Upon any amendment, modification or supplement to the Credit Policies consented to by the Co-Agents, the Servicer shall deliver to the Co-Agents, for distribution to the related Purchasers, such amendment, modification or supplement and Exhibit G shall be deemed to be amended by such amendment, modification or supplement. 47 Section 7.11 Servicing Compensation. The monthly servicing fee (the ---------------------- "Monthly Servicing Fee") shall be payable to the Servicer, either (a) through withdrawals from Collections as provided in Sections 2.08 or (b) shall be payable in arrears, on each Settlement Date in respect of any Collection Period (or portion thereof) occurring prior to the earlier of the first Settlement Date following reduction of the Pool Balance to zero and the first Settlement Date on which Capital is zero. The Monthly Servicing Fee shall be an amount equal to the product of (a) 0.50% per annum and (b) the Pool Balance and (c) a fraction, the numerator of which is the actual number of days in the preceding Collection Period and the denominator of which is 360. The Monthly Servicing Fee shall be payable to the Servicer solely to the extent amounts are available for distribution in accordance with the terms of Sections 2.06 and 2.07. ARTICLE VIII. AMORTIZATION EVENTS Section 8.01 Amortization Events. If any one or more of the ------------------- following events (each, an "Amortization Event") shall occur: (a) Insolvency Events. An Insolvency Event shall occur with respect ----------------- to the Seller, the Servicer or an Originator, and, in the case of an Involuntary Insolvency Event concerning an Originator, shall have continued undischarged or unstayed for a period of 60 days; (b) Failure to Make Payments and Deposits. Failure on the part of ------------------------------------- the Seller, Federal-Mogul, the Servicer or any other Originator, as applicable, to make any payment or deposit required by the terms of any of the Transaction Documents; (c) Settlement Date Statements/Interim Settlement Date Statements. ------------------------------------------------------------- Failure on the part of the Servicer to deliver a Settlement Date Statement or an Interim Settlement Date Statement within 5 days of the date such item is due to be delivered under any of the Transaction Documents; (d) Other Covenants. (A) Other than with respect to Section 6.02(j), --------------- failure on the part of the Seller, the Servicer, Federal-Mogul or any other Originator, as applicable, to duly observe or perform in any material respect any of their other respective covenants or agreements set forth in the Transaction Documents, which failure continues unremedied for a period of ten days after the earlier of (i) the date on which the Seller, the Servicer, Federal-Mogul or such Originator, as applicable, becomes aware of such failure and (ii) the date on which written notice of such failure, requiring the same to be remedied, shall have been received by the Seller, the Servicer, Federal-Mogul or such Originator, as applicable; and (B) and with respect to Section 6.02(j) of this Agreement, failure on the part of Servicer to duly observe or perform any of its covenants or agreements set forth therein; (e) Material Misrepresentations. Any representation or warranty made --------------------------- by the Seller, Federal-Mogul or any other Originator in any Transaction Document to which it is a party: (i) shall prove to have been incorrect in any material respect when made, and shall continue to be incorrect in any material respect for a period of 10 days after the earlier to occur of (A) the date on which written notice of such failure, requiring the same to be remedied, shall have been given to the Seller by any Agent, or (B) the date on which the Seller, the Servicer, 48 Federal-Mogul or such Originator, as applicable, becomes aware of such failure, and (ii) as a result of such incorrectness, a Material Adverse Effect occurs; provided, however, that an Amortization Event shall not be deemed to have occurred under this paragraph if the misrepresentation related to a specific Receivable and the Seller has repurchased the related Receivable or all such Receivables, if applicable, during such period in accordance with the provisions of this Agreement; (f) Investment Company. The Seller or any Originator shall become an ------------------ "investment company" within the meaning of the Investment Company Act; (g) Delinquency Ratio. The Delinquency Ratio for any two consecutive ----------------- Collection Periods is a rate equal to or greater than 9.00%; (h) Loss-to-Liquidation Ratio. The average Loss-to-Liquidation Ratio ------------------------- for any three consecutive Collection Periods is a rate equal to or greater than 6.00%; (i) Dilution Ratio. The average Dilution Ratio for any three -------------- consecutive Collection Periods is a rate equal to or greater than 7.00%; (j) Nonpayment of Coverage Shortfall. The Coverage Shortfall, if any, -------------------------------- relating to any Settlement Date is not paid to the Purchasers on the applicable Settlement Date; (k) Minimum Enhancement Amount. The sum of Contractual Dilution and -------------------------- Aggregate Reserves is less than the Minimum Enhancement Amount; (l) Change of Control. A Change of Control shall occur; ----------------- (m) Event of Default in Material Debt. Failure of the Servicer or any --------------------------------- of its Subsidiaries to pay any Indebtedness in excess of $25,000,000 in aggregate principal amount ("Material Debt") when due; or the default by the Servicer or any of its Subsidiaries in the performance of any term, provision or condition contained in any agreement under which any Material Debt was created or is governed, the effect of which is to cause, or to permit the holder or holders of such Material Debt to cause, such Material Debt to become due prior to its stated maturity; or any Material Debt of the Servicer or any of its Subsidiaries shall be declared to be due and payable or required to be prepaid (other than by a regularly scheduled payment) prior to the date of maturity thereof; (n) Judgments. A final judgment shall have been entered against the --------- Seller or one or more final judgments shall be entered against any Originator or any of its Subsidiaries for the payment of money in the aggregate amount of $30,000,000, or the equivalent thereof in another currency, or more on claims not covered by insurance or as to which the insurance carrier has denied its responsibility, and such judgment shall continue unsatisfied and in effect for thirty (30) consecutive days without a stay of execution; (o) ERISA. Any Plan of the Seller or any Originator or any of its ----- Subsidiaries shall be terminated within the meaning of Title IV of ERISA except as permitted by Section 4044(d) of ERISA, or a trustee shall be appointed by the appropriate U.S. District Court to administer any Plan of the Seller or any Originator or any of its Subsidiaries, or the PBGC shall 49 institute proceedings to terminate any Plan of the Seller or any Originator or any of its Subsidiaries or to appoint a trustee to administer any such Plan and each such event, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect; then, subject to applicable law, and after the applicable grace period, if any, an Amortization Event shall occur without any notice or other action on the part of any Agent or any of the Purchasers, immediately upon the occurrence of such event and the Co-Agents, by notice then given in writing to the Seller and the Servicer, may terminate all but not less than all of the rights and obligations (other than its obligations that have accrued up to the time of such termination) of the Servicer as Servicer under the Transaction Documents and the Co-Agents shall appoint a successor Servicer hereunder, provided, however, that the provisions of this sentence should not be applicable if any Amortization Event occurs with respect to any Originator or a group of Originators (other than Federal-Mogul) that individually or as a group have originated less than 5.0% of the aggregate Outstanding Balances of all Eligible Receivables as of the date of such Amortization Event, and the Co- Agents receive notice from the Seller within 3 days of the occurrence of such Amortization Event, that the Receivables originated by such Originator or such group of Originators with respect to which the Amortization Event occurred (i) shall not constitute Eligible Receivables as of the date of such Amortization Event, and (ii) the Seller shall not purchase any Receivables from Federal-Mogul pursuant to the Sale Agreement that have been originated by such Originator or group of Originators. For purposes of the immediately preceding sentence, an Amortization Event shall be deemed to have occurred with respect to a "group of Originators" if any Amortization Event occurs with respect to two or more Originators within any period of time. All authority and power granted to the Servicer or any successor Servicer under the Transaction Documents shall automatically cease and terminate upon payment in full of the Aggregate Unpaids. ARTICLE IX. INDEMNIFICATION Section 9.01 Indemnities by the Seller. Without limiting any ------------------------- other rights which the Agents or any Purchaser may have hereunder or under applicable law, the Seller hereby agrees to indemnify the Agents and each Purchaser and their respective officers, directors, agents and employees (each, an "Indemnified Party") from and against any and all damages, losses, claims, taxes, liabilities, costs, expenses and for all other amounts payable, including reasonable attorneys' fees (which attorneys may be employees of the Agents or such Purchaser) and disbursements (all of the foregoing being collectively referred to as "Indemnified Amounts") awarded against or incurred by any of them arising out of or as a result of this Agreement or the acquisition, either directly or indirectly, by a Purchaser of an interest in the Receivables, excluding, however: (a) Indemnified Amounts to the extent final judgment of a court of competent jurisdiction holds such Indemnified Amounts resulted from gross negligence or willful misconduct on the part of the Indemnified Party seeking indemnification; 50 (b) Indemnified Amounts to the extent the same includes losses in respect of Receivables which are uncollectible on account of the insolvency, bankruptcy or lack of creditworthiness of the related Obligor; or (c) taxes imposed on such Indemnified Party to the extent that the computation of such taxes is consistent with the Intended Characterization; provided, however, that nothing contained in this sentence shall limit the liability of the Seller or the Servicer or limit the recourse of the Purchasers to the Seller or Servicer for amounts otherwise specifically provided to be paid by the Seller or the Servicer under the terms of this Agreement. Without limiting the generality of the foregoing indemnification, the Seller shall indemnify the Agents and the Purchasers for Indemnified Amounts (including, without limitation, losses in respect of uncollectible receivables, regardless of whether reimbursement therefor would constitute recourse to the Seller or the Servicer) relating to or resulting from: (i) any representation or warranty made by the Seller, any Originator or the Servicer (or any officers of the Seller, an Originator or the Servicer) under or in connection with this Agreement, any other Transaction Document, any Settlement Date Statement, any Interim Settlement Date Statement or any other information or report delivered by the Seller, any Originator or the Servicer pursuant hereto or thereto, which shall have been false or incorrect when made or deemed made; (ii) the failure by the Seller, any Originator or the Servicer to comply with any applicable law, rule or regulation with respect to any Receivable or invoice related thereto, or the nonconformity of any Receivable or invoice included therein with any such applicable law, rule or regulation; (iii) any failure of the Seller, any Originator or the Servicer to perform its duties or obligations in accordance with the provisions of this Agreement or any other Transaction Document; (iv) RESERVED; (v) any dispute, claim, offset or defense (other than discharge in bankruptcy of the Obligor) of any Obligor to the payment of any Receivable (including, without limitation, a defense based on such Receivable or the related invoice not being a legal, valid and binding obligation of such Obligor enforceable against it in accordance with its terms), or any other claim resulting from the sale of the merchandise or service related to such Receivable or the furnishing or failure to furnish such merchandise or services; (vi) the commingling of Collections of Receivables at any time with other funds; (vii) any investigation, litigation or proceeding related to or arising from this Agreement or any other Transaction Document, the transactions contemplated hereby or thereby, the use of the proceeds of a purchase, the ownership of the Receivable Interests or any other investigation, litigation or proceeding relating to the Seller or any Originator in which any Indemnified Party becomes involved as a result of any of the transactions 51 contemplated hereby or thereby other than (a) litigation between the Seller on the one hand and any Agent and one or more of the Liquidity Providers on the other hand in which the Seller prevails or (b) any investigation or proceeding arising from (i) the gross negligence or willful misconduct of any Agent or one or more Liquidity Providers or (ii) the unlawful conduct of any Agent or one or more Liquidity Providers; (viii) any inability to litigate any claim against any Obligor in respect of any Receivable as a result of such Obligor being immune from civil and commercial law and suit on the grounds of sovereignty or otherwise from any legal action, suit or proceeding; or (ix) any Insolvency Event with respect to the Servicer. Section 9.02 Increased Cost and Reduced Return. ---------------------------------- (a) If after the date hereof, any Funding Source shall be charged any fee, expense or increased cost on account of the adoption of any applicable law, rule or regulation (including any applicable law, rule or regulation regarding capital adequacy) or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance with any request or directive (whether or not having the force of law) of any such authority, central bank or comparable agency (a "Regulatory Change"): (i) which subjects any Funding Source to any charge or withholding on or with respect to any Funding Agreement or a Funding Source's obligations under a Funding Agreement, or on or with respect to the Receivables, or changes the basis of taxation of payments to any Funding Source of any amounts payable under any Funding Agreement (except for changes in the rate of tax on the overall net income of a Funding Source) or (ii) which imposes, modifies or deems applicable any reserve, assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of a Funding Source, or credit extended by a Funding Source pursuant to a Funding Agreement or (iii) which imposes any other condition the result of which is to increase the cost to a Funding Source of performing its obligations under a Funding Agreement, or to reduce the rate of return on a Funding Source's capital as a consequence of its obligations under a Funding Agreement, or to reduce the amount of any sum received or receivable by a Funding Source under a Funding Agreement or to require any payment calculated by reference to the amount of interests or loans held or interest received by it, then, upon demand by the Agent, the Seller shall pay to the applicable Co-Agent, for the benefit of the relevant Funding Source, such amounts charged to such Funding Source or compensate such Funding Source for such reduction. (b) Payment of any sum pursuant to Section 9.02(a) shall be made by the Seller to the applicable Co-Agent, for the benefit of the relevant Funding Source, not later than ten (10) days after any such demand is made. A certificate of any Funding Source, signed by an authorized officer claiming compensation under this Section 9.02 and setting forth the additional amount to be paid for its benefit and explaining the manner in which such amount was determined shall be conclusive evidence of the amount to be paid, absent manifest error. 52 (c) Each Liquidity Provider will promptly notify the Seller and the applicable Co-Agent of any event of which it has knowledge which is reasonably likely to entitle such Liquidity Provider to compensation pursuant to this Section 9.02; provided, however, that no failure to give or delay in giving such notification shall adversely affect the rights of any Liquidity Provider to such compensation. Section 9.03 Costs and Expenses Relating to this Agreement. The --------------------------------------------- Seller shall pay to the Agents, Blue Ridge and/or Falcon on demand all reasonable costs and out-of-pocket expenses in connection with the preparation, execution, delivery and administration of this Agreement, the transactions contemplated hereby and the other documents to be delivered hereunder, including without limitation, the reasonable cost of the Administrative Agent's auditors auditing the books, records and procedures of the Seller and the Servicer, reasonable fees and out-of-pocket expenses of legal counsel for Blue Ridge, Falcon and/or the Agents (which such counsel may be employees of Blue Ridge, Falcon and/or the Agents) with respect thereto and with respect to advising Blue Ridge, Falcon and/or the Agents as to their respective rights and remedies under this Agreement. The Seller shall pay to the Agents on demand any and all costs and expenses of the Agents and the Purchasers, if any, including reasonable counsel fees and expenses in connection with the enforcement of this Agreement and the other documents delivered hereunder and in connection with any restructuring or workout of this Agreement or such documents, or the administration of this Agreement following an Amortization Event. Section 9.04 Taxes. ------ (a) Any and all payments and deposits required to be made hereunder or under any other Transaction Document by the Seller or the Servicer to or for the benefit of the Conduits or any Liquidity Provider shall be made free and clear of and without deduction for any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding taxes imposed on, or measured by reference to, the net income of, franchise taxes imposed on, and taxes (other than withholding taxes) imposed on the receipts or gross receipts that are imposed on any Conduit or such Liquidity Provider by any of (i) the United States or any State thereof, (ii) the state jurisdiction under the laws of which any Conduit or such Liquidity Provider is organized or in which it is otherwise doing business or (iii) any political subdivision thereof (all such non-excluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Seller or the Servicer shall be required by law to deduct any Taxes from or in respect of any sum required to be paid or deposited hereunder or under any instrument delivered hereunder to or for the benefit of any Conduit or any Liquidity Provider, (A) such sum shall be increased as may be necessary so that after making all required deductions (including deductions applicable to additional sums required to be paid or deposited under this Section 9.04) the amount received by the Conduits or the relevant Liquidity Provider, or otherwise deposited hereunder or under such instrument, shall be equal to the sum which would have been so received or deposited had no such deductions been made, (B) the Seller or the Servicer (as appropriate) shall make such deductions and (c) the Seller or the Servicer (as appropriate) shall pay the full amount of such deductions to the relevant taxation authority or other authority in accordance with applicable law. (b) The Seller will indemnify each of the Purchasers for the full amount of Taxes (including, without limitation, any Taxes imposed by any jurisdiction on amounts payable 53 under this Section 9.04) paid by such Purchaser and any liability (including penalties, interest and expenses) arising therefrom or required to be paid with respect thereto. Each of the Purchasers agrees to promptly notify the Seller of any payment of Taxes made by it and, if practicable, any request, demand or notice received in respect thereof prior to such payment. Each of the Purchasers shall be entitled to payment of this indemnification, as owner of Receivable Interests within 30 days from the date such Purchaser makes written demand therefor to the applicable Co-Agent and the Seller. A certificate as to the amount of such indemnification submitted to the Seller and the applicable Co- Agent by any Purchaser, setting forth the calculation thereof, shall (absent manifest error) be conclusive and binding for all purposes. (c) Within 30 days after the date of any payment of Taxes, the Seller or the Servicer (as the case may be) will furnish to the applicable Co-Agent the original or a certified copy of a receipt evidencing payment thereof. (d) Notwithstanding the foregoing and any other provisions of this Section 9.04, the obligations of the Servicer under this Section 9.04 shall be payable only out of Collections. (e) Each Liquidity Provider that is organized under the laws of a jurisdiction other than the United States or a state thereof hereby agrees to complete, execute and deliver to the related Co-Agent from time to time prior to the initial Settlement Date on which the related Co-Agent, acting on behalf of such Liquidity Provider, will be entitled to receive distributions pursuant to this Agreement, Internal Revenue Service Forms 1001 or 4224 (or any successor form), as applicable, or such other forms or certificates as may be required under the laws of any applicable jurisdiction in order to permit the Seller or the Servicer to make payments to, and deposit funds to or for the account of, the related Co-Agent, acting on behalf of such Liquidity Provider, hereunder and under the other Transaction Documents without any deduction or withholding for or on account of any tax or with such withholding or deduction at a reduced rate. ARTICLE X. THE ADMINISTRATIVE AGENT Section 10.01 Authorization and Action. Each Purchaser and each ------------------------ Co-Agent hereby designates and appoints Bank One, NA, to act as its Administrative Agent hereunder and under each other Transaction Document, and authorizes the Administrative Agent to take such actions as agent on its behalf and to exercise such powers as are delegated to the Administrative Agent by the terms of the Transaction Documents together with such powers as are reasonably incidental thereto. The Administrative Agent shall not have any duties or responsibilities, except those expressly set forth herein or in any other Transaction Document, or any fiduciary relationship with any Purchaser or any Co-Agent, and no implied covenants, functions, responsibilities, duties, obligations or liabilities on the part of the Administrative Agent shall be read into this Agreement or any other Transaction Document or otherwise exist for the Administrative Agent. In performing its functions and duties hereunder and under the other Transaction Documents, the Administrative Agent shall act solely as agent for the Purchasers and the Co-Agents and does not assume nor shall be deemed to have assumed any obligation or relationship of trust or agency with or for the Seller or any of its successors or assigns. The Administrative Agent shall not be required to take any action which exposes the Administrative 54 Agent to personal liability or which is contrary to this Agreement, any other Transaction Document or applicable law. The appointment and authority of the Administrative Agent hereunder shall terminate upon the indefeasible payment in full of all Aggregate Unpaids. Each Purchaser and each Co-Agent hereby authorizes the Administrative Agent to execute on behalf of such Purchaser and each Co-Agent (the terms of which shall be binding on such Purchaser and such Co-Agent) each of the Uniform Commercial Code financing statements, together with such other instruments or documents determined by the Administrative Agent to be necessary or desirable in order to perfect, evidence or more fully protect the interest of the Purchasers and the Co-Agents contemplated hereunder. Section 10.02 Delegation of Duties. The Administrative Agent may -------------------- execute any of its duties under this Agreement and each other Transaction Document by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Administrative Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. Section 10.03 Exculpatory Provisions. Neither the Administrative ---------------------- Agent nor any of its directors, officers, agents or employees shall be (i) liable for any action lawfully taken or omitted to be taken by it or them under or in connection with this Agreement or any other Transaction Document (except for its, their or such Person's own gross negligence or willful misconduct), or (ii) responsible in any manner to any of the Purchasers or any Co-Agent for any recitals, statements, representations or warranties made by the Seller contained in this Agreement, any other Transaction Document or any certificate, report, statement or other document referred to or provided for in, or received under or in connection with, this Agreement, or any other Transaction Document or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement, or any other Transaction Document or any other document furnished in connection herewith or therewith, or for any failure of the Seller to perform its obligations hereunder or thereunder, or for the satisfaction of any condition specified in Article V, or for the perfection, priority, condition, value or sufficiency or any collateral pledged in connection herewith. The Administrative Agent shall not be under any obligation to any Purchaser or any Co-Agent to ascertain or to inquire as to the observance or performance of any of the agreements or covenants contained in, or conditions of, this Agreement or any other Transaction Document, or to inspect the properties, books or records of the Seller. The Administrative Agent shall not be deemed to have knowledge of an Amortization Event or a Potential Amortization Event unless the Administrative Agent has received notice from the Seller or a Purchaser. Section 10.04 Reliance by Administrative Agent. The Administrative -------------------------------- Agent shall in all cases be entitled to rely, and shall be fully protected in relying, upon any document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Seller), independent accountants and other experts selected by the Administrative Agent. The Administrative Agent shall in all cases be fully justified in failing or refusing to take any action under this Agreement or any other Transaction Document unless it shall first receive such advice or concurrence of Blue Ridge, Falcon, the Co-Agents and/or all of the Purchasers, as applicable, as it deems appropriate and it shall first be indemnified to its satisfaction by the Purchasers, provided that unless and until the Administrative Agent shall have 55 received such advice, the Administrative Agent may take or refrain from taking any action, as the Administrative Agent shall deem advisable and in the best interests of the Purchasers and the Co-Agents. The Administrative Agent shall in all cases, be fully protected in acting, or in refraining from acting, in accordance with a request of Blue Ridge, Falcon, the Co-Agents and/or all of the Purchasers, as applicable, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Purchasers and the Co-Agents. Section 10.05 Non-Reliance on Administrative Agent and Other Purchasers. --------------------------------------------------------- Each Purchaser and each Co-Agent expressly acknowledges that neither the Administrative Agent, nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates has made any representations or warranties to it and that no act by the Administrative Agent hereafter taken, including, without limitation, any review of the affairs of the Seller, shall be deemed to constitute any representation or warranty by the Administrative Agent. Each Purchaser and each Co-Agent represents and warrants to the Administrative Agent that it has and will, independently and without reliance upon the Administrative Agent, any other Purchaser or any Co-Agent and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, prospects, financial and other conditions and creditworthiness of the Seller and made its own decision to enter into this Agreement, the other Transaction Documents and all other documents related hereto or thereto. Section 10.06 Reimbursement and Indemnification. The Liquidity Providers --------------------------------- agree to reimburse and indemnify the Administrative Agent and its officers, directors, employees, representatives and agents ratably according to their Pro Rata Shares, to the extent not paid or reimbursed by the Seller (i) for any amounts for which the Administrative Agent, acting in its capacity as Administrative Agent, is entitled to reimbursement by the Seller hereunder and (ii) for any other expenses incurred by the Administrative Agent, in its capacity as Administrative Agent and acting on behalf of the Purchasers and the Co-Agents, in connection with the administration and enforcement of the Transaction Documents. Section 10.07 Administrative Agent in its Individual Capacity. The ----------------------------------------------- Administrative Agent and its Affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Seller or any Affiliate of the Seller as though the Administrative Agent were not the Administrative Agent hereunder. With respect to the acquisition of Receivable Interests pursuant to this Agreement, the Administrative Agent shall have the same rights and powers under this Agreement as any Purchaser and may exercise the same as though it were not the Administrative Agent, and the terms "Liquidity Provider," "Purchaser," "Liquidity Providers" and "Purchasers" shall include the Administrative Agent in its individual capacity if applicable. Section 10.08 Successor Administrative Agent. The Administrative Agent ------------------------------ may, upon ten days' notice to the Seller, the Purchasers and the Co-Agents, and the Administrative Agent will, upon the direction of all of the Purchasers (other than the Administrative Agent, in its individual capacity) resign as Administrative Agent. If the Administrative Agent shall resign, then the Co- Agents during such five-day period shall appoint from among the Purchasers a successor agent. If for any reason no successor Administrative Agent is appointed by the Co-Agents during such five-day period, then effective upon the termination of such five day period, 56 the Purchasers shall perform all of the duties of the Administrative Agent hereunder and under the other Transaction Documents and the Seller shall make all payments in respect of the Aggregate Unpaids directly to the applicable Purchasers and for all purposes shall deal directly with the Purchasers. After the effectiveness of any retiring Administrative Agent's resignation hereunder as Administrative Agent, the retiring Administrative Agent shall be discharged from its duties and obligations hereunder and under the other Transaction Documents and the provisions of this Article X and Article IX shall continue in effect for its benefit with respect to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement and under the other Transaction Documents. ARTICLE XI. THE CO-AGENTS Section 11.01 Authorization and Action. Each of Blue Ridge and the Blue ------------------------ Ridge Liquidity Providers hereby designates and appoints Wachovia Bank, N.A., to act as its Co-Agent hereunder and under each other Transaction Document, and authorizes such Co-Agent to take such actions as agent on its behalf and to exercise such powers as are delegated to such Co-Agent by the terms of the Transaction Documents together with such powers as are reasonably incidental thereto. Each of Falcon and the Falcon Liquidity Providers hereby designates and appoints Bank One, NA, to act as its Co-Agent hereunder and under each other Transaction Document, and authorizes such Co-Agent to take such actions as agent on its behalf and to exercise such powers as are delegated to such Co-Agent by the terms of the Transaction Documents together with such powers as are reasonably incidental thereto. The Co-Agents shall not have any duties or responsibilities, except those expressly set forth herein or in any other Transaction Document, or any fiduciary relationship with any Purchaser, any Liquidity Provider or any other Agent, and no implied covenants, functions, responsibilities, duties, obligations or liabilities on the part of such Co- Agent shall be read into this Agreement or any other Transaction Document or otherwise exist for such Co-Agent. In performing its functions and duties hereunder and under the other Transaction Documents, each Co-Agent shall act solely as the agent for its respective Conduit and its respective Liquidity Providers, and does not assume nor shall be deemed to have assumed any obligation or relationship of trust or agency with or for the Seller or any of its successors or assigns. Each Co-Agent shall not be required to take any action which exposes such Co-Agent to personal liability or which is contrary to this Agreement, any other Transaction Document or applicable law. The appointment and authority of each Co-Agent hereunder shall terminate upon the indefeasible payment in full of all Aggregate Unpaids. Section 11.02 Delegation of Duties. Each Co-Agent may execute any of its -------------------- duties under this Agreement and each other Transaction Document by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. Neither Co-Agent shall be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care. Section 11.03 Exculpatory Provisions. No Co-Agent nor any of its ---------------------- directors, officers, agents or employees shall be (i) liable for any action lawfully taken or omitted to be taken by it or them under or in connection with this Agreement or any other Transaction Document (except for its, their or such Person's own gross negligence or willful misconduct), or (ii) responsible in any manner to any of the Purchasers, any of the Liquidity Providers or any 57 other Agent for any recitals, statements, representations or warranties made by the Seller contained in this Agreement, any other Transaction Document or any certificate, report, statement or other document referred to or provided for in, or received under or in connection with, this Agreement, or any other Transaction Document or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement, or any other Transaction Document or any other document furnished in connection herewith or therewith, or for any failure of the Seller to perform its obligations hereunder or thereunder, or for the satisfaction of any condition specified in Article V, or for the perfection, priority, condition, value or sufficiency or any collateral pledged in connection herewith. No Co-Agent shall be under any obligation to any Purchaser, to any Liquidity Provider or any other Agent to ascertain or to inquire as to the observance or performance of any of the agreements or covenants contained in, or conditions of, this Agreement or any other Transaction Document, or to inspect the properties, books or records of the Seller. No Co-Agent shall be deemed to have knowledge of an Amortization Event or a Potential Amortization Event unless such Co-Agent has received notice from the Seller or a Purchaser. Section 11.04 Reliance by Co-Agents. Each Co-Agent shall in all cases be --------------------- entitled to rely, and shall be fully protected in relying, upon any document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Seller and each Liquidity Provider), independent accountants and other experts selected by such Co-Agent. Each Co-Agent shall in all cases be fully justified in failing or refusing to take any action under this Agreement or any other Transaction Document unless it shall first receive such advice or concurrence of its respective Voting Block, as it deems appropriate under the relevant circumstances and it shall first be indemnified to its satisfaction by its respective Liquidity Banks, provided that unless and until such Co-Agent shall have received such advice, such Co-Agent may take or refrain from taking any action, as such Co-Agent shall deem advisable and in the best interests of its respective Conduit and its respective Liquidity Providers. Each Co-Agent shall determine with its Conduit and, as applicable, its respective Liquidity Providers, the number of such Persons that shall be required to request or direct such Co-Agent to take action, or refrain from taking action, under this Agreement on behalf of such Persons and whether any consent of the rating agencies who rate such Conduit's Commercial Paper is required (such Persons and, if applicable, rating agencies, a "Voting Block"). Each Co-Agent shall in all cases, be fully protected in acting, or in refraining from acting, in accordance with a request of its respective Voting Block, and such request and any action taken or failure to act pursuant thereto shall be binding upon all of such Co- Agent's Constituents. Section 11.05 Non-Reliance on Agents and other Purchasers. Each Purchaser ------------------------------------------- and each Liquidity Provider expressly acknowledges that no Co-Agent, nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates has made any representations or warranties to it and that no act by such Co-Agent hereafter taken, including, without limitation, any review of the affairs of the Seller, shall be deemed to constitute any representation or warranty by such Co- Agent. Each Purchaser and each Liquidity Provider represents and warrants to the Co-Agents that it has and will, independently and without reliance upon the Co- Agents, any other Purchaser or any other Liquidity Provider and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, prospects, financial and other conditions and creditworthiness of 58 the Seller and made its own decision to enter into this Agreement, the other Transaction Documents and all other documents related hereto or thereto. Section 11.06 Reimbursement and Indemnification. Each Liquidity Provider --------------------------------- agrees to reimburse and indemnify its Co-Agent and such Co-Agent's, officers, directors, employees, representatives and agents ratably according to their Pro Rata Shares, to the extent not paid or reimbursed by the Seller (i) for any amounts for which such Co-Agent, acting in its capacity as Co-Agent, is entitled to reimbursement by the Seller hereunder and (ii) for any other expenses incurred by such Co-Agent, in its capacity as Co-Agent and acting on behalf of its respective Conduit and its respective Liquidity Providers, in connection with the administration and enforcement of the Transaction Documents. Section 11.07 Co-Agents in their Individual Capacities. Each Co-Agent and ---------------------------------------- its Affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Seller, the Servicer or any Affiliate of the Seller or the Servicer as though such Co-Agent were not a Co-Agent hereunder. With respect to the acquisition of Receivable Interests pursuant to this Agreement, each Co-Agent shall have the same rights and powers under this Agreement as any Purchaser and may exercise the same as though it were not a Co- Agent, and the terms "Liquidity Provider," "Purchaser," "Liquidity Providers" and "Purchasers" shall include such Co-Agent in its individual capacity if applicable. ARTICLE XII. ASSIGNMENTS; PARTICIPATIONS Section 12.01 Assignments. ------------ (a) The Seller and each Liquidity Provider hereby agrees and consents to the complete or partial assignment by any Conduit of all of its rights under, interest in, title to and obligations under this Agreement to its Liquidity Providers (or to its Co-Agent for the ratable benefit of its Liquidity Providers) or to any other Person, and upon such assignment, such Conduit shall be released from its obligations so assigned. Further, the Seller and each Liquidity Provider hereby agrees that any assignee of any Conduit of this Agreement or all or any of the Receivable Interests of such Conduit shall have all of the rights and benefits under this Agreement as if the term "Conduit" explicitly referred to such party, and no such assignment shall in any way impair the rights and benefits of the Conduits hereunder. The Seller shall not have the right to assign its rights or obligations under this Agreement. (b) Any Liquidity Provider may at any time and from time to time assign to one or more Persons ("Purchasing Liquidity Providers") all or any part of its rights and obligations under this Agreement pursuant to an assignment or an agreement, that is substantially in the form required by the applicable Liquidity Agreement (the "Assignment Agreement"), executed by such Purchasing Liquidity Provider and such selling Liquidity Provider. The consent of the related Conduit shall be required prior to the effectiveness of any such assignment. Each assignee of a Liquidity Provider shall be an Eligible Assignee. Upon delivery of the executed Assignment Agreement to the applicable Co-Agent, such selling Liquidity Provider shall be released from its obligations hereunder to the extent of such assignment. Thereafter the Purchasing Liquidity Provider shall for all purposes be a Liquidity Provider party to this 59 Agreement and shall have all the rights and obligations of a Liquidity Provider under this Agreement to the same extent as if it were an original party hereto and no further consent or action by the Seller, the Purchasers or the Agents shall be required. (c) Each of the Liquidity Providers agrees that in the event that it is the subject of a Downgrading Event. (an "Affected Liquidity Provider"), such Affected Liquidity Provider shall be obliged, at the request of the related Conduit or the related Co-Agent, to assign all of its rights and obligations hereunder to (x) another Liquidity Provider or (y) another financial institution nominated by the related Co-Agent and acceptable to the related Conduit, and willing to participate in this Agreement through the Liquidity Termination Date in the place of such Affected Liquidity Provider; provided that the Affected Liquidity Provider receives payment in full, pursuant to an Assignment and Acceptance, of an amount equal to such Liquidity Provider's Pro Rata Share of the Capital and Yield owing to the Liquidity Providers and all accruing but unpaid fees and other costs and expenses payable in respect of its Pro Rata Share of the Receivable Interests. Section 12.02 Participations. A Liquidity Provider may, in the ordinary -------------- course of its business at any time sell to one or more Persons (each, a "Participant") participating interests in its Pro Rata Share of the Receivable Interests of the Liquidity Providers, or any other interest of such Liquidity Provider hereunder. Notwithstanding any such sale by a Liquidity Provider of a participating interest to a Participant, such Liquidity Provider's rights and obligations under this Agreement shall remain unchanged, such Liquidity Provider shall remain solely responsible for the performance of its obligations hereunder, and the Seller, the Conduits and the Agents shall continue to deal solely and directly with such Liquidity Provider in connection with such Liquidity Provider's rights and obligations under this Agreement. Each Liquidity Provider agrees that any agreement between such Liquidity Provider and any such Participant in respect of such participating interest shall not restrict such Liquidity Provider's right to agree to any amendment, supplement, waiver or modification to this Agreement, except for any amendment, supplement, waiver or modification described in clause (i) of Section 13.01(b) and except as set forth in the Liquidity Agreements. ARTICLE XIII. MISCELLANEOUS Section 13.01 Waivers and Amendments. ----------------------- (a) No failure or delay on the part of any party hereto in exercising any power, right or remedy under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or remedy preclude any other further exercise thereof or the exercise of any other power, right or remedy. The rights and remedies herein provided shall be cumulative and nonexclusive of any rights or remedies provided by law. Any waiver of this Agreement shall be effective only in the specific instance and for the specific purpose for which given. (b) No provision of this Agreement may be amended, supplemented, modified or waived except in writing in accordance with the provisions of this Section 13.01(b). The Conduits, the Seller, the Administrative Agent and, with the consent of their respective Voting 60 Blocks, the Co-Agents may enter into written modifications or waivers of any provisions of this Agreement, provided, however, that no such modification or waiver shall: (i) without the consent of each affected Purchaser: (A) extend the Liquidity Termination Date or the date of any payment or deposit of Collections by the Seller or the Servicer, (B) reduce the rate or extend the time of payment of Yield (or any component thereof), (C) reduce any fee payable to the Agents for the benefit of the Purchasers or extend the time for payment thereof, (D) except pursuant to Article Xl hereof, change the amount of the Capital of any Purchaser, a Liquidity Provider's Pro Rata Share or a Liquidity Provider's Commitment, (E) amend, modify or waive any provision of this Section 13.01(b), (F) consent to or permit the assignment or transfer by the Seller of any of its rights and obligations under this Agreement, (G) change the definition of "Eligible Receivable," "Floating Dilution Ratio" "Dilution Reserve", "Discount Reserve," "Loss Reserve Percentage," "Aggregate Reserve Percentage," or "Obligor Overconcentration", (H) amend or modify Section 2.08 hereof or (I) amend or modify any defined term (or any defined term used directly or indirectly in such defined term) used in clauses (A) through (H) above in a manner which would circumvent the intention of the restrictions set forth in such clauses; or (ii) without the written consent of any Agent, amend, modify or waive any provision of this Agreement if the effect thereof is to affect the rights or duties of such Agent. Notwithstanding the foregoing, (i) the Agents may, with the consent of the Seller, amend this Agreement solely to increase the Purchase Limit and/or add additional Persons as Liquidity Providers hereunder and revise the definitions of "Available Funding Amount", "Purchase Limit", "Blue Ridge Purchase Limit", "Falcon Purchase Limit" and any other definition in order to increase the Purchase Limit and (ii) without the consent of the Seller, the Agents and the Conduits may enter into amendments to modify any of the terms or provisions of Article III, Article X, Article XI, Article XII or Section 13.13 provided that such amendment has no negative impact upon the Seller. Any modification or waiver made in accordance with this Section 13.01 shall apply to each of the Purchasers equally and shall be binding upon the Seller, the Purchasers and the Agents. (c) Neither the Seller nor the Co-Agents shall consent to any amendment of the Sale Agreement without the prior written consent of the applicable Voting Block if such amendment would have a material adverse effect on any Liquidity Provider. (d) The parties hereto acknowledge that, before entering into any amendment, supplement or modification or granting any waiver, each of the Co- Agents shall be required to obtain the approval of its respective Voting Block. Section 13.02 Notices. ------- (a) Except as provided in subsection (b) below, all communications and notices provided for hereunder shall be in writing (including bank wire, telecopy or electronic facsimile transmission or similar writing) and shall be given to the other parties hereto at their 61 respective addresses or telecopy numbers set forth on the signature pages hereof. All such communications and notices shall, when mailed, telecopied, telegraphed, telexed or cabled, be effective when received through the mails, transmitted by telecopy, delivered to the telegraph company, confirmed by telex answerback or delivered to the cable company, respectively, except that communications and notices to the Co-Agents or any Purchaser pursuant to Article II or III shall not be effective until received by the intended recipient. (b) The Seller hereby authorizes the Co-Agents to effect purchases and Tranche Period, CP Tranche Period and Discount Rate selections based on telephonic notices made by any Person whom the Co-Agents in good faith believes to be acting on behalf of the Seller. The Seller agrees to deliver promptly to the Co-Agents a written confirmation of each telephonic notice signed by an authorized officer of the Seller. However, the absence of such confirmation shall not affect the validity of such notice. If the written confirmation differs from the action taken by the Co-Agents, the records of the Co-Agents shall govern absent manifest error. Section 13.03 Ratable Payments. If any Purchaser, whether by setoff ---------------- or otherwise, has payment made to it with respect to any portion of the Aggregate Unpaids owing to such Purchaser (other than payments received pursuant to Section 9.02 or 9.03) in a greater proportion than that received by any other Purchaser entitled to receive a ratable share of such Aggregate Unpaids, such Purchaser agrees, promptly upon demand, to purchase for cash without recourse or warranty a portion of the Aggregate Unpaids held by the other Purchasers so that after such purchase each Purchaser will hold its ratable proportion of the Aggregate Unpaids; provided that if all or any portion of such excess amount is thereafter recovered from such Purchaser, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest. Section 13.04 Protection of Ownership Interests of the Administrative ------------------------------------------------------- Agent on behalf of the Purchasers and Co-Agents. - ----------------------------------------------- (a) The Seller agrees that from time to time, at its expense, it will promptly execute and deliver all instruments and documents, and take all actions, that may be necessary or desirable, or that any Agent may request, to perfect, protect or more fully evidence the Receivable Interests, or to enable the Agents or the Purchasers to exercise and enforce their rights and remedies hereunder. The Administrative Agent may, or the Administrative Agent may direct the Seller to, notify the Obligors of Receivables, at any time following the replacement of the Seller as Servicer and at the Seller's expense, of the ownership interests of the Purchasers under this Agreement and may also direct that payments of all amounts due or that become due under any or all Receivables be made directly to the Administrative Agent or its designee. The Seller shall, at any Purchaser's written request, withhold the identity of such Purchaser in any such notification. (b) If the Seller or the Servicer fails to perform any of its obligations hereunder, any Agent or any Purchaser may (but shall not be required to) perform, or cause performance of, such obligation; and the Agent's, the Co- Agents' or such Purchaser's costs and expenses incurred in connection therewith shall be payable by the Seller (if the Servicer that fails to so perform is the Seller or an Affiliate thereof) as provided in Section 9.03, as applicable. The 62 Seller and the Servicer each irrevocably authorizes the Administrative Agent at any time and from time to time in the sole discretion of the Administrative Agent, and appoints the Administrative Agent as its attorney-in-fact, to act on behalf of the Seller and the Servicer (i) to execute on behalf of the Seller as debtor and to file financing statements necessary or desirable in the Administrative Agent's sole discretion to perfect and to maintain the perfection and priority of the interest of the Purchasers in the Receivables and (ii) to file a carbon, photographic or other reproduction of this Agreement or any financing statement with respect to the Receivables as a financing statement in such offices as the Administrative Agent in its sole discretion deems necessary or desirable to perfect and to maintain the perfection and priority of the interests of the Purchasers in the Receivables. This appointment is coupled with an interest and is irrevocable. Section 13.05 Confidentiality. Each of the Seller, Federal-Mogul, the --------------- Servicer (if other than Federal-Mogul), the Agents and the Purchasers agrees to use it best efforts, and to cause its agents and representatives to use their best efforts, to hold in confidence all Confidential Information; provided that nothing herein shall prevent any Agent or any Purchaser from delivering copies of any financial statements and other documents constituting Confidential Information, or disclosing any other Confidential Information, to: (i) any Agent's, any Purchaser's or any Funding Source's respective directors, officers, employees, agents, accountants, professional consultants and enhancement providers, (ii) any other Purchaser, (iii) any other Funding Source or any Person to which such Purchaser offers to sell or assign or sells or assigns such Purchaser or any part thereof or any rights associated therewith so long as such other Funding Source or Person shall have agreed to hold in confidence all Confidential Information, (iv) any federal or state regulatory authority having jurisdiction over any Agent, such Purchaser or any Funding Source, (v) any nationally recognized rating agency that requires access to such Purchaser's investment portfolio and any Funding Source's investment portfolio, (vi) any other Person to which such delivery or disclosure may be necessary or appropriate: (a) in compliance with any law, rule, regulation or order applicable to any Agent, any Purchaser or any Funding Source, (b) in response to any subpoena or other legal process or (c) in connection with any litigation to which any Agent, any Purchaser or any Funding Source is a party, or (vii) if any Amortization Event has occurred and is continuing, to the extent any Agent or such Purchaser may reasonably determine that such delivery and disclosure is necessary or appropriate in the enforcement or for the protection of the rights and remedies under the Transaction Documents. The Agents and the Purchasers shall provide written notice to the Seller whenever any such disclosure is made except to the extent prohibited by law and shall use their best efforts to 63 provide the Seller with five day's advance notice of any disclosure pursuant to clause (vi) of this Section 13.05. Section 13.06 Bankruptcy Petition. Each of the Seller and the Agents ------------------- hereby covenants and agrees that, prior to the date which is one year and one day after the payment in full of all outstanding senior indebtedness of Blue Ridge or Falcon, it will not institute against, or join any other Person in instituting against, Blue Ridge or Falcon any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings or other similar proceeding under the laws of the United States or any state of the United States. Section 13.07 Limitation of Liability. Except with respect to any ----------------------- claim arising out of the willful misconduct or gross negligence of the Conduits or the Agents, no claim may be made by the Seller, the Servicer or any other Person against the Conduits, the Agents or their respective Affiliates, directors, officers, employees, attorneys or agents for any special, indirect, consequential or punitive damages in respect of any claim for breach of contract or any other theory of liability arising out of or related to the transactions contemplated by this Agreement, or any act, omission or event occurring in connection therewith; and the Seller hereby waives, releases, and agrees not to sue upon any claim for any such damages, whether or not accrued and whether or not known or suspected to exist in its favor. Section 13.08 CHOICE OF LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ------------- ACCORDANCE WITH THE INTERNAL LAWS (AND NOT THE LAW OF CONFLICTS) OF THE STATE OF NEW YORK. Section 13.09 CONSENT TO JURISDICTION. EACH OF THE SELLER AND THE ----------------------- SERVICER HEREBY: (A) IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION OF ANY UNITED STATES FEDERAL OR NEW YORK STATE COURT SITTING IN NEW YORK, NEW YORK IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THE TRANSACTION DOCUMENTS AND (B) IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN ANY SUCH COURT AND IRREVOCABLY WAIVES ANY OBJECTION IT MAY NOW OR HEREAFTER HAVE AS TO THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN SUCH A COURT OR THAT SUCH COURT IS AN INCONVENIENT FORUM. NOTHING HEREIN SHALL LIMIT THE RIGHT OF ANY AGENT OR ANY PURCHASER TO BRING PROCEEDINGS AGAINST THE SELLER OR THE SERVICER IN THE COURTS OF ANY OTHER JURISDICTION WHEREIN ANY ASSETS OF THE SELLER, THE SERVICER OR ANY ORIGINATOR MAY BE LOCATED. ANY JUDICIAL PROCEEDING BY THE SELLER OR THE SERVICER AGAINST ANY AGENT OR ANY PURCHASER OR ANY AFFILIATE OF ANY AGENT OR A PURCHASER INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH THE TRANSACTION DOCUMENTS SHALL BE BROUGHT ONLY IN A COURT IN NEW YORK, NEW YORK. Section 13.10 WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO -------------------- HEREBY WAIVES TRIAL BY JURY IN ANY JUDICIAL PROCEEDING 64 INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH THE TRANSACTION DOCUMENTS OR THE RELATIONSHIPS ESTABLISHED THEREUNDER. Section 13.11 Integration; Survival of Terms. The Transaction ------------------------------ Documents contain the final and complete integration of all prior expressions by the parties hereto with respect to the subject matter hereof and shall constitute the entire agreement among the parties hereto with respect to the subject matter hereof superseding all prior oral or written understandings. The provisions of Article IX and Section 13.06 shall survive any termination of this Agreement. Section 13.12 Counterparts; Severability. This Agreement may be -------------------------- executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute one and the same Agreement. Any provisions of this Agreement which are prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Section 13.13 Bank One Roles and Wachovia Roles. ---------------------------------- (a) Each of the Liquidity Providers acknowledges that Bank One and certain of its Affiliates including (Bank One Capital Markets, Inc.) act, or may in the future act, (i) as administrative agent for Falcon, (ii) as issuing and paying agent for Falcon, (iii) to provide credit or liquidity enhancement for the timely payment for Falcon's Commercial Paper and (iv) to provide other services from time to time for Falcon (collectively, the "Bank One Roles"). Without limiting the generality of this Section 13.13, each of the Agents and the Liquidity Providers hereby acknowledges and consents to any and all Bank One Roles and agrees that in connection with any Bank One Role, Bank One may take, or refrain from taking, any action which it, in its discretion, deems appropriate. (b) Each of the Liquidity Providers acknowledges that Wachovia and certain of its Affiliates act, or may in the future act, (i) as administrative agent for Blue Ridge, (ii) as issuing and paying agent for Blue Ridge, (iii) to provide credit or liquidity enhancement for the timely payment for Blue Ridge's Commercial Paper and (iv) to provide other services from time to time for Blue Ridge (collectively, the "Wachovia Roles"). Without limiting the generality of this Section 13.13, each of the Agents and the Liquidity Providers hereby acknowledges and consents to any and all Wachovia Roles and agrees that in connection with any Wachovia Role, Wachovia may take, or refrain from taking, any action which it, in its discretion, deems appropriate. Section 13.14 Characterization. ----------------- (a) It is the intention of the parties hereto that, except for tax purposes, each purchase hereunder shall constitute an absolute and irrevocable sale (for non-tax purposes), 65 which purchase shall provide the applicable Purchaser with the full benefits of ownership of the applicable Receivable Interest. Except as specifically provided in this Agreement, each sale (for non-tax purposes) of a Receivable Interest hereunder is made without recourse to the Seller; provided, however, that (i) the Seller shall be liable to each Purchaser and the Agents for all representations, warranties and covenants made by the Seller pursuant to the terms of this Agreement, and (ii) such sale (for non-tax purposes) does not constitute and is not intended to result in an assumption by any Purchaser or any Agent or any assignee thereof of any obligation of the Seller or any Originator or any other person arising in connection with the Receivables, the Related Security, or the related invoices, or any other obligations of the Seller or such Originator. (b) If the conveyance by the Seller to the Purchasers of interests in Receivables hereunder shall be characterized as a secured loan and not a sale for any purpose in addition to tax purposes, it is the intention of the parties hereto that this Agreement shall constitute a security agreement under applicable law, and that the Seller shall be deemed to have granted to the Administrative Agent for the ratable benefit of the Purchasers and the Agents a duly perfected security interest in all of the Seller's right, title and interest, now owned or hereafter acquired, in, to and under the Receivables, the Collections, each Collection Account, all Related Security, all payments on or with respect to such Receivables, all other rights relating to and payments made in respect of the Receivables, the Receivables Purchase Agreement, and all proceeds of any thereof prior to all other liens on and security interests therein. After an Amortization Event, the Administrative Agent, the Purchasers and the Co-Agents shall have, in addition to the rights and remedies which they may have under this Agreement, all other rights and remedies provided to a secured creditor after default under the UCC and other applicable law, which rights and remedies shall be cumulative. It is the intention of all parties hereto that each purchase hereunder shall be characterized as a secured loan for income tax purposes. It is the intention of all parties hereto that each party will act in a manner consistent with the treatment of each purchase as a secured loan for income tax purposes. Section 13.15 Acknowledgments. The Seller hereby acknowledges that: --------------- (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement; (b) none of the Agents or any Purchaser has any fiduciary relationship with or fiduciary duty to the Seller arising out of or in connection with this Agreement, and the relationship between the Agents and the Purchasers, on the one hand, and the Seller, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and (c) no joint venture is created hereby or otherwise exists by virtue of the transactions contemplated hereby among the Purchasers or among the Seller and the Purchasers or among the Seller and the Agents. 66 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their duly authorized officers as of the date hereof. Seller: FEDERAL-MOGUL FUNDING CORPORATION By:_____________________________________________ Name: Title: Address for Notices: Federal-Mogul Funding Corporation 26555 Northwestern Highway Southfield, Ml 48034 Attention: Treasury Department Phone: (248) 354-7700 Fax: (248) 354-6746 Servicer: FEDERAL-MOGUL CORPORATION By:_____________________________________________ Name: Title: Address for Notices: Federal-Mogul Corporation 26555 Northwestern Highway Southfield, MI 48034 Attention: Treasury Department Phone: (248) 354-7700 Fax: (248) 354-6746 Receivables Interest Purchase Agreement Agents: BANK ONE, NA (CHICAGO OFFICE) (formerly known as The First National Bank of Chicago), as Administrative Agent and as Falcon Agent By:_____________________________________________ Name: Title: Address for Notices: Bank One, NA Mail Code IL1-0079 1 Bank One Plaza Chicago, Illinois 60670-0079 Attention: Inge Serpe Phone: (312) 732-3419 Fax: (312) 732-1844 68 WACHOVIA BANK, N.A., as Blue Ridge Agent By:______________________________________ Name: Title: Address for Notices: 191 Peachtree Street 26/th/ Floor GA-423 Atlanta, Georgia 30303 Attention: Elizabeth Wagner Phone: (404) 332-1398 Fax: (404) 332-5152 69 The Conduits: FALCON ASSET SECURITIZATION CORPORATION By:______________________________________ Authorized Signatory Address for Notices: Falcon Asset Securitization Corporation c/o Bank One, NA Asset-Backed Finance Mail Code IL1-0594 1 Bank One Plaza Chicago, Illinois 60670-0594 Attention: Portfolio Management Fax: (312) 732-3600 70 BLUE RIDGE ASSET FUNDING CORPORATION By: Wachovia Bank, N.A. as Attorney-in-Fact By:______________________________________ Name: Title: Address for Notices: 100 North Main Street Winston-Salem, NC 27150 Attention: John Dillon Fax: (336) 732-5021 Phone: (336) 732-2690 with a copy to: Blue Ridge Asset Funding Corporation c/o AMACAR Group, L.L.C. 6525 Morrison Boulevard Suite 318 Charlotte, NC 28211 Attention: Douglas K. Johnson Fax: (704) 367-1362 Phone: (704) 367-0569 71 Falcon Liquidity Providers: Commitment BANK ONE, NA (CHICAGO OFFICE) (formerly known as The First National Bank of Chicago) $220,000,000 By:__________________________________ Name: Title: Address for Notices: Bank One, NA Mail Code IL1-0594 1 Bank One Plaza Chicago, Illinois 60670-0594 Attention: Portfolio Management Phone: (312) 732-3897 Fax: (312) 732-3600 72 Blue Ridge Liquidity Providers: Commitment WACHOVIA BANK, N.A. $204,000,000 By:_________________________________ Name: Title: Address for Notices: 191 Peachtree Street 26/th/ Floor GA-423 Atlanta, Georgia 30303 Attention: Elizabeth Wagner Phone: (404) 332-1398 Fax: (404) 332-5152 73 EXHIBIT A --------- FORM OF PURCHASE NOTICE [Date] Wachovia Bank, N.A., as Blue Ridge Agent for certain Purchasers parties to the Receivables Purchase Agreement referred to below 191 Peachtree Street 26/th/ Floor GA-423 Atlanta, Georgia 30303 Attention: Elizabeth Wagner Bank One, NA, as Falcon Agent for certain Purchasers parties to the Receivables Purchase Agreement referred to below 1 Bank One Plaza Mail Code Il1-0079 Chicago, Illinois 60670 Attention: Asset-Backed Finance Gentlemen: The undersigned, Federal-Mogul Funding Corporation, refers to the Sixth Amended and Restated Receivables Interest Purchase Agreement, dated as of February 16, 2001 (the "Receivables Purchase Agreement", the terms defined therein being used herein as therein defined), among the undersigned, Federal- Mogul Corporation, Blue Ridge Asset Funding Corporation ("BLUE RIDGE"), Falcon Asset Securitization Corporation ("FALCON"), certain financial institutions from time to time parties thereto, as Liquidity Providers, Bank One, NA, as Administrative Agent and Falcon Agent, and Wachovia Bank, N.A., as Blue Ridge Agent, and hereby gives you notice, irrevocably, pursuant to Section 2.02 of the Receivables Purchase Agreement that the undersigned hereby requests a purchase of Receivables Interests under the Receivables Purchase Agreement, and in that connection sets forth below the information relating to such purchase (the "Proposed Purchase") as required by Section 2.02 of the Receivables Purchase Agreement: (i) The Business Day of the Proposed Purchase is , 20. (ii) The requested Purchase Price in respect of the Proposed Purchase is $ . (iii) The requested Purchaser[s] in respect of the Proposed Purchase [is FALCON $ amount] [Blue Ridge $ amount] [are the Falcon Liquidity Providers][are the Blue Ridge Liquidity Providers]. (iv) The duration of the initial Tranche Period for the Proposed Purchase is ____________ [days] [months]. (v) The Discount Rate related to such initial Tranche Period is requested to be the [LIBOR] [Base] Rate. (If Purchasers are the Liquidity Providers). The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the Proposed Purchase (before and after giving effect to the Proposed Purchase): (A) the representations and warranties set forth in Section 4.01 of the Receivables Purchase Agreement are correct on and as of such date, as though made on and as of such date; (B) no event has occurred, or would result from the Proposed Purchase that will constitute an Amortization Event, and no event has occurred and is continuing, or would result from such Proposed Purchase, that would constitute a Potential Amortization Event; and (C) the Facility Termination Date has not occurred, the aggregate Capital of all Receivable Interests does not and will not exceed the Purchase Limit and the aggregate Receivable Interests do not and will not exceed 100%. Very truly yours, FEDERAL-MOGUL FUNDING CORPORATION By:_____________________________________ Name: Title: 2 EXHIBIT B --------- FORM OF COLLECTION ACCOUNT AGREEMENT [Letterhead of Federal-Mogul Funding Corporation] _____________, 20__ [Date] [Collection Bank Name and Address] Attention: ________________ Re: Federal-Mogul Funding Corporation Federal-Mogul Corporation ---------------------------------- Ladies and Gentlemen: You have exclusive control of P.O. Box ___________, [city], [state] [zip] (the "Lock-Box") for the purpose of receiving mail and processing payments therefrom pursuant to that certain lock-box services agreement dated ____________, 20__ between you and Federal-Mogul Corporation (the "Agreement"). You hereby confirm your agreement to perform the services described therein. Among the services you have agreed to perform therein is to endorse all checks and other evidences of payment, and credit such payments to checking account no. _________ maintained with you in the name of Federal-Mogul Corporation (the "Existing Account"). _________________________ (the "Originator") hereby transfers and assigns all of its right, title and interest in and to, and exclusive ownership and control over, the Lock-Box to Federal-Mogul Funding Corporation ("SPC"). Originator and SPC hereby request that from and after June 26, 2000, the Existing Account be retitled in the name of "Federal-Mogul Funding Corporation (so retitled, the "Lock-Box Account") for the purposes of certain Sixth Amended and Restated Receivable Interest Purchase Agreement dated as of February 16, 2001 among SPC, as seller, Federal-Mogul Corporation, as servicer, Blue Ridge Asset Funding Corporation, as a conduit, Falcon Asset Securitization Corporation, as a conduit, certain financial institutions from time to time a party thereto, as liquidity providers, Bank One, NA, as Administrative Agent and Falcon Agent, and Wachovia Bank, N.A., as Blue Ridge Agent, as amended, modified, supplemented or restated from time to time. SPC hereby irrevocably instructs you, and you hereby agree, that upon receiving notice from Bank One, NA, as Administrative Agent (the "Administrative Agent") in the form attached hereto as Annex A: (i) the name of the Lock-Box Account will be changed to "Bank One, NA, as Administrative Agent" (or any designee of the Administrative Agent), and the Administrative Agent will have exclusive ownership of and access to such Lock-Box Account, and neither Originator, SPC nor any of their respective affiliates will have any control of such Lock-Box Account or any access thereto, (ii) you will either continue to send the funds from the Lock-Box to the Lock-Box Account, or will redirect the funds as the Administrative Agent may otherwise request, (iii) you will transfer monies on deposit in the Lock-Box Account, at any time, as directed by the Administrative Agent, (iv) all services to be performed by you under the Agreement will be performed on behalf of the Administrative Agent, and (v) all correspondence or other mail which you have agreed to send to either Originator or SPC will be sent to the Administrative Agent at the following address: Bank One, NA, as Administrative Agent Mail Code IL1-0079 1 Bank One Plaza Chicago, Illinois 60670-0079 Attention: Garrett Ahitow Moreover, upon such notice, the Administrative Agent will have all rights and remedies given to Originator or SPC under the Agreement. Each of Originator and SPC agrees, however, to continue to pay all fees and other assessments due thereunder at any time. You hereby acknowledge that monies deposited in the Lock-Box Account or any other account established with you by the Administrative Agent for the purpose of receiving funds from the Lock-Box are subject to the liens of the Administrative Agent for itself and as agent under the Receivables Purchase Agreement, and will not be subject to deduction, set-off, banker's lien or any other right you or any other party may have against Originator or SPC, except that you may debit the Lock-Box Account for any items deposited therein that are returned or otherwise not collected and for all charges, fees, commissions and expenses incurred by you in providing services hereunder, all in accordance with your customary practices for the charge back of returned items and expenses. This letter agreement and the rights and obligations of the parties hereunder will be governed by and construed and interpreted in accordance with the laws of the State of Illinois. This letter agreement may be executed in any number of counterparts and all of such counterparts taken together will be deemed to constitute one and the same instrument. This letter agreement contains the entire agreement between the parties, and may not be altered, modified, terminated or amended in any respect, nor may any right, power or privilege of any party hereunder be waived or released or discharged, except upon execution by all parties hereto of a written instrument so providing. In the event that any provision in this letter agreement is in conflict with, or inconsistent with, any provision of the Agreement, this letter agreement will exclusively govern and control. Each party agrees to take all actions reasonably requested by any other party to carry out the purposes of this letter agreement or to preserve and protect the rights of each party hereunder. 2 Please indicate your agreement to the terms of this letter agreement by signing in the space provided below. This letter agreement will become effective immediately upon execution of a counterpart of this letter agreement by all parties hereto. Very truly yours, FEDERAL-MOGUL CORPORATION By:________________________________________ Name: Title: FEDERAL-MOGUL FUNDING CORPORATION By:________________________________________ Name: Title: Acknowledged and agreed to this _______ day of ___________, 20__: [COLLECTION BANK] By: ___________________________________ Name: Title: _________________________, as Agent By_____________________________________ Authorized Agent 3 ANNEX A FORM OF COLLECTION NOTICE [On letterhead of the Administrative Agent] [Date] [Collection Bank Name and Address] Attention: ________________ Re: Federal-Mogul Funding Corporation Federal-Mogul Corporation --------------------------------- Ladies and Gentlemen: We hereby notify you that we are exercising our rights pursuant to that certain letter agreement among Federal-Mogul Corporation, Federal-Mogul Funding Corporation, you and us, to have the name of, and to have exclusive ownership and control of, account number ________________ (the "Lock-Box Account") maintained with you, transferred to "_________________________, as Agent." [The Lock-Box Account will henceforth be a zero-balance account, and funds deposited in the Lock-Box Account should be sent at the end of each day to _________________]. You have further agreed to perform all other services you are performing under that certain agreement dated between you and Federal-Mogul Corporation on our behalf. We appreciate your cooperation in this matter. Very truly yours, BANK ONE, NA, as Administrative Agent By:________________________________________ Authorized Agent 4 EXHIBIT C --------- FORM OF SETTLEMENT DATE STATEMENT I. Receivables Rollforward Beginning Balance ---------------- + New Receivables ---------------- - Cash Collections ---------------- - Credit Memos ---------------- - Gross Chargeoffs ---------------- +/- Adjustments ---------------- +/- Unreconciled Balance ---------------- Ending Balance ---------------- II. Receivables Aging Amount Percent ------ ------- Total ---------------- Current ---------------- 0-30 days past due ---------------- 31-60 days past due ---------------- 61-90 days past due ---------------- 91-120 days past due ---------------- 120+ days past due ---------------- Placed accounts ---------------- III. Calculation of Funding (see Schedule A) Pool Balance Less Ineligibles (input all #s as negatives) : Balances * 90 dpd (incl. all Placed Accts) (48,970,000) Contra Accounts ** 91 dpd subject to 3% threshold Cross-agings ** 91 dpd (30%*91dpd) subject to 2% threshold (21,060,000) Terms over 90 but less than 180 ---------------- subject to 3% basket Terms over 180 ---------------- Deductions * 61 dpd & ** 91 dpd Less Intercompany Receivables ** 91 dpd Currencies other than US$ and CAN$ Non-OEM export receivables ---------------- Other ineligibles (e.g. unreconciled) ---------------- Eligible Receivables ---------------- Excess Concentrations ---------------- subject to 3% threshold Net Receivables Balance Contractual Dilution ---------------- Available Receivables Aggregate Reserve Percentage Aggregate Reserves Available Funding Amount (max $420 MM) ------------------ Falcon Available Funding (max $220 MM) Blue Ridge Available Funding (max $200 MM)
IV. Early Amortization Events * Greater than ** Less than Delinquency Ratio Trigger - greater than or equal to 9.0% for two consecutive months? Current Prior Month ------- ----------- * 60 dpd/Total Loss-to-Liquidation Ratio Trigger - 3-month rolling average greater than or equal to 6.00%?No Current Prior Month 2 months prior 3-month avg ------- ----------- -------------- ----------- 61-90 days past due Change in placed accounts Cash collections Loss/Liquidation Ratio Dilution Ratio Trigger - 3-month rolling average greater than or equal to 7.00%?No Current Prior Month 2 months prior 3-month avg ------- ----------- -------------- ----------- NAA Credit Memos OEM Credit Memos Dilutive adjustments Pool Balance Dilution Ratio Coverage Amount =Capital minus Available Funding Amount _______________ Capital Outstanding _______________ Available Funding Amount _______________ Coverage Amount to be paid on Distribution Date
V. Calculation of Capital
Falcon Blue Ridge ------ ---------- Available Funding Amount _______________ ______________ Outstanding Capital _______________ ______________ Required principal paydown Available Increase Requested Increase Optional Repayment ________________ _____________ Fees/Discount due ________________ _____________ ___________________________________ Net credit to FMFC Concentration Account Net paydown due to Conduits
* Greater than 2 VI. Payment Instructions Payment instructions to pay Interest and Fees Amounts due Conduits: --------------------- Falcon/Bank One to debit Federal-Mogul Funding Corp's account # 55-73688 39,829,890.22 FMFC to wire funds to Blue Ridge: ABA # Account # Ref: Federal-Mogul Funding Amount due Federal-Mogul Funding: --------------------------------- Falcon to Credit Federal-Mogul Funding II's account # 55-73688 - Blue Ridge to wire money to: ABA # 71000013 Account # 55-73688 Ref: Federal-Mogul Funding 3 Other wiring instructions: [insert] The undersigned hereby represents and warrants that the foregoing is a true and accurate accounting in accordance with the Sixth Amended and Restated Receivable Interest Purchase Agreement dated as of February 16, 2001, as amended, modified, supplemented or restated from time to time (the "Agreement") and that all representations and warranties are restated and reaffirmed with the exception that, information pertaining to months prior to May 2000 may contain good faith estimates and proforma numbers, which the undersigned believes to be accurate in all material respects for the purposes of calculating the financial ratios required under the Agreement. ___________________ Name: Title: 4 EXHIBIT D --------- PRINCIPAL PLACES OF BUSINESS, CHIEF EXECUTIVE OFFICE, OFFICES FOR RECORDS, FEDERAL EMPLOYEE IDENTIFICATION NUMBER Principal Place of Business, Chief Executive Office, and Offices for Records 26555 North Western Highway Southfield, MI 48034 Federal Employee Identification Number: 38-3055838 EXHIBIT E --------- Bank/Lox Box Location Account # Box # Comerica Bank 1000013027 148901 and 30401 P.O. Box Detroit, MI 48275-3265 BANK ONE CORPORATION 200011003677 771327 Dept. 771327 A E Goetze Inc. P.O. Box 77000 Detroit, MI 48277-1327 BANK ONE CORPORATION 182953 771128 Dept. 771128 Supermet Inc. P.O. Box 77000 Detroit, MI 48277-1128 First National Bank of Chicago 59-36047 730113 PO Box 730113 Dallas, TX 75373-0113 First National Bank of Chicago 55-56872 73696 P.O. Box 73696 Chicago, IL 60673-7696 First Maryland National Bank 171-8376-9 N/A 25 S Charles Baltimore, MD 21201 First Maryland National Bank 184-8841-1 64899 AE Goetze LaGrange P.O. Box 64899 Baltimore, MD 21264-4899 First Maryland National Bank 179-8459-5 64011 Deva Engineered Bearings P.O. Box 64011 Baltimore, MD 21264-4011 Bank of America 7304749 96347 Comtech Manufacturing Co. 96347 Collection Center Dr. Chicago, IL 60693 Bank of America 7311095 99543 Glacier Clevite Heavywall Bearings 99543 Collections Center Drive Chicago IL 60693 Comerica 185068964 108901 Glacier Clevite Heavywall Bearings P. O. Box 6700. Detroit, MI 48267-1089 Bank of America 7710925 98966 Weyburn Bartel Inc 98966 Collections Center Dr. Chicago IL 60693 Comerica 185068964 109001 Department 109001 Weyburn Bartel Inc P. O. Box 6700 Detroit, MI 48267-1090 Nations BankUS 3750324114 100220 P.O. Box 100220 Atlanta, GA 30384-0220 Nations BankUS 3750324114 277964 P.O. Box 277964 Atlanta, GA 30384-7964 Nations BankUS 3750324114 277969 P.O. Box 277969 Atlanta, GA 30384-7969 Royal Bank of Canada 1157189 2026 Federal-Mogul Funding Corp. P.O. Box 2026 Station Centre-Ville Montreal Quebec Canada H3B 4H4 2 Royal Bank of Canada 1157189 2676 Federal-Mogul Funding Corp. P.O. Box 2676 Post Station A Toronto Ontario Canada M5W 2N7 Royal Bank of Canada 1157189 6590 Federal-Mogul Funding Corp. P.O. Box 6590 Main Post Office Winnepeg Manitoba Canada R3C 4N6 Bank of America NT&SA 3751359162 2219 Federal-Mogul Funding Corp. 2219 Collections Center Drive Chicago, Illinois 60693 3 EXHIBIT F --------- FORM OF COMPLIANCE CERTIFICATE To: Bank One, NA, as Falcon Agent Wachovia Bank, N.A., as Blue Ridge Agent This Compliance Certificate is furnished pursuant to that certain Sixth Amended and Restated Receivable Interest Purchase Agreement dated as of February 16, 2001, among Federal-Mogul Funding Corporation (the "Seller"), Federal-Mogul Corporation, the Purchasers party thereto, the financial institutions from time to time party thereto, as liquidity providers, Bank One, NA, as Administrative Agent and Falcon Agent, and Wachovia Bank, N.A., as Blue Ridge Agent (as amended, modified, supplemented or restated from time to time, the "Agreement"). THE UNDERSIGNED HEREBY CERTIFIES THAT: 1. I am the duly elected of the Seller; 2. I have reviewed the terms of the Agreement and I have made, or have caused to be made under my supervision, a detailed review of the transactions and conditions of the Seller during the accounting period covered by the attached financial statements; 3. The examinations described in paragraph 2 did not disclose, and I have no knowledge of, the existence of any condition or event which constitutes an Amortization Event or potential Amortization Event, as each such term is defined under the Agreement, during or at the end of the accounting period covered by the attached financial statements or as of the date of this Certificate, except as set forth below. Described below are the exceptions, if any, to paragraph 3 by listing, in detail, the nature of the condition or event, the period during which it has existed and the action which the Seller has taken, is taking, or proposes to take with respect to each such condition or event: The foregoing certifications, together with the computations set forth in Schedule I hereto and the financial statements delivered with this Certificate in support hereof, are made and delivered this ____ day of _____________, 19__. FEDERAL-MOGUL FUNDING CORPORATION By__________________________________ Name: Title: 4 SCHEDULE I TO COMPLIANCE REPORT A. Schedule of Compliance of Federal-Mogul Funding Corporation, Sections _____ and _____ of the Agreement. Unless otherwise defined herein, the terms used in this Compliance Certificate have the meanings ascribed thereto in the Purchase Agreement. This schedule relates to the month ended: _____________________ EXHIBIT G --------- CREDIT POLICIES CUSTOMER CREDIT Purpose - ------- This policy outlines requirements for creation and monitoring customer credit. Customer Credit Limits - ---------------------- The establishment and monitoring of a limit or maximum level of credit sales to each individual customer serves to reduce the risk of a significant loss due to uncollectible accounts. A credit limit represents the level of credit sales (including previous outstanding accounts receivable) above which additional credit will not be extended. Credit limits should be established after consideration is given to the payment history of each customer and an assessment of the customer's financial condition. Independent outside sources of credit history available locally (e.g. Dun & Bradstreet in the U.S.), credit references and or customer financial statements should be evaluated to establish customer credit limits and for updating credit limits on a periodic basis. Credit Hold Routines - -------------------- Routines should be established to preclude shipping product to customers that exceeds the customer credit limit. Specific approval by a designated finance/customer credit individual of any deviation from the established routines. INTRODUCTION CENTRALIZED SOUTHFIELD ENVIRONMENT . Supporting the Following . OEM--United States . Aftermarket--United States . Aftermarket--Canada . Specific Responsibilities . Credit approval . Collection . Receivable management . Billing--NAA only . Dispute resolution . Department Organization Chart . 85 total employees . 5 part-time/associate . 80 full-time company employees (74% 4-year degrees) . Software Utilized . CARMS--receivable management . Lotus Notes--communication and dispute management . Maxretriever--document management . UPS--proof of deliveries . PRC--scanner utilization . Internally developed--AMS, MAPS, STRAP . Aggressive Reengineering Initiative . Relentless pursuit of superior customer service . Eliminate deductions . Continuous investigation of electronic options in our daily operations . Review of document delivery options for invoices and statements . Resolve customer inquiries with one call methodology . Investigation of order to cash possibilities at manufacturing plants CREDIT POLICY AND PROCEDURE . Determination of Credit Limits . Credit limits are set at approximately 2.5 times estimated month sales for new accounts. . Existing account credit limits are adjusted according to payment habits and financial stability. An account that shows a pattern of paying their account past due will have their credit limit adjusted downward to 1 - 1 1/2 times monthly sales. . New Account Procedure . The following information is requested for new open accounts: - trade credit references - bank credit reference - Credit reporting agency report (optional) - Verbal credit references from industry credit group members (optional) . Requests for additional credit are evaluated by reviewing payment history (prompt %/discount % vs. late %), review of current financial statements and amount of additional credit requested compared to the current year high credit. . Levels of Credit Granting Approval . Two step process for new credit approval, after Sales has requested the account be given open account status. Review and approval/reject is given first by the Credit Analyst, then by the Area Credit Manager. . Increases in credit for current customers are reviewed by the Credit Analyst. . Use of Security Documents and Personal Guarantees . Personal guarantees are included in the customer's Credit Application. While a personal guarantee is not required for all new accounts, it is required in cases of higher than usual financial risk. . UCC-1's, UCC-3's, and Purchase Money Security Agreements are taken (or continued) on customers with large projected or current sales volumes (*$150,000) or when a customer's financial condition is deteriorating. . Training of Credit Granting Personnel . Each Credit Analyst undergoes a 5 day training schedule, reviewing a formal training agenda with each of the Credit Analysts. Items covered include: - A/R management software and systems (CARMS, MAPS & STRAP) - New account/account maintenance procedures - Special payment terms request approval and rejection - Security documents - Credit and collection procedures * Greater than 2 . Credit Files . A file is kept for each customer account. An example of information in this file is: - Original credit application - Notes from phone conversations and meeting with customers - Copies of written correspondence - Information from creditor discussion groups - Personal guarantee (optional) . These files are kept in a central location in the Customer Financial Services Department . Additionally, notes are kept concerning Credit Analyst discussions with the customer on CARMS. Examples of this information are: - Customer commitments to send checks - Date customers are put on hold - Miscellaneous comments noted by the Credit Analyst that may be of value in future credit decisions 3 . Payment Terms . Standard terms for OEM customers are either net 10th and net 25th prox or net 30 days on the date in the month in which the product is shipped. For net 10th and net 25th prox, if the product is shipped in the first 15 days of the month, payment is due by the 10th day of the following month. If shipped later in the month, payment is due by the 25th day of the following month. Customers are sent an invoice or an ASN for each shipment. . Standard terms for the FM Aftermarket and Retail are based on a shipping month of the 26th to the 25th and qualify for a 2% prompt payment discount if the invoice is paid by the 10th of the following month, otherwise, full payment for the Aftermarket is due by the 25th of the following month and for Retail, full payment is due the 25th of the 2nd month following. Gasket, ignition, chassis and brake terms in general are 2% 2nd 10th net 25th prox. In addition, there are negotiated terms for Retailers and selected buying groups which can range from 2% 2nd 10th to net 90 days. . Determinants of Price . Prices for the Aftermarket are published on product line price sheets. . Prices for Retail and OEM accounts are negotiated and specified on a pricing agreement for a given period of time and are supported by a purchase order or vendor agreement. . Cash In Advance/Cash On Account . Used at the Credit Analyst's discretion in the following situations: - Account consistently pays past due and is judged to be a credit risk - Bankruptcy - New account with credit references judged unsatisfactory . Notes Receivable . Used at the Credit Analyst's discretion and reviewed monthly for payment. As of May, 1999 month end, there were 4 open Notes Receivable for a total of $463,604.45. 4 CREDIT AND COLLECTION . Account Maintenance . The Credit and Accounts Receivable Management System (CARMS) produces an action list on a daily basis, which lists accounts that require attention due to a change in status (account over credit limit, account past due, etc). . Action lists are reviewed by credit analysts for resolution. . Summary past due reports are generated on a monthly basis and are reviewed by the analysts for credit restriction. . Credit analysts continue follow up by making timely collection calls to customers on past due invoices until payment is received. . Sales is contacted to assist with collection of past due items and the resolution of customer disputes. . If payment is not received or a mutual payment arrangement cannot be made, the customer is sent a final demand notice, which details the debt and allows the customer ten working days to make acceptable payment arrangements. . If payment is still not received and no payment agreement has been made, the account is referred to the Area Credit Manager for further disposition. . Collection Agencies / Bankruptcies . Accounts which are seriously past due may be referred to FM's legal counsel for action or placed with an outside collection agency. Accounts are moved to a separate credit manager code for follow-up. . Accounts that have filed for bankruptcy are moved to a separate credit manager code for follow-up and are written off quarterly. 5 AFTERMARKET - CUSTOMER BASE OVERVIEW . Number of Aftermarket and Retail Accounts . 5,548 active Aftermarket accounts . 187 active Retail accounts . Product Portfolio . Powertrain Systems - power cylinder systems, engine bearings, pistons, piston rings, piston pins, piston liners, connecting rods, bushings, washers, spark plugs, ignition wires and cables, ignition coils, and ceramic insulators. . Sealing Systems - total engine sealing, total transmission sealing, total axle sealing, cylinder head gaskets, ancillary gaskets, dynamic seals, bonded pistons, wiper products, heat shields, noise and vibration sealing systems. . General Products - camshafts, brake and friction products, chassis products, driveline products, fuel pumps, carburetors, emission control products, strobes, marker lights, reflective tape, sintered products, and systems protection products. . Method of Order Placement and Shipment . Orders can be placed electronically via EDI or through Federal-Mogul's Customer Service/Order Entry via phone or fax. . Aftermarket orders are usually shipped from one of our Service Centers located in the U.S. and Canada. Larger orders may be shipped from one of three main Distribution Centers located in Jacksonville, AL, Maysville, KY and Skokie, IL. . Customer Operations . Aftermarket customers consist mainly of warehouse distributors that buy product for downstream sales to independent or warehouse owned auto parts stores. Examples are NAPA, MAWDI and Pittsburgh Crankshaft. . Retail customers buy product for resale in their own company owned store. Examples are CSK Automotive, Advance and AutoZone. 6 ORIGINAL EQUIPMENT MARKET AND EXPORT OVERVIEW . OE Export Customer Base . 1,344 active OEM accounts . 208 active Export accounts . Customer Operations . OE & Export customers consist primarily of automotive, heavy duty vehicle, farm equipment and industrial equipment manufacturers. . Major customers include Ford, General Motors and Chrysler. . Product Portfolio . Powertrain Systems - power cylinder systems, engine bearings, pistons, piston rings, piston pins, piston liners, connecting rods, bushings, washers, spark plugs, ignition wires and cables, ignition coils, and ceramic insulators. . Sealing Systems - total engine sealing, total transmission sealing, total axle sealing, cylinder head gaskets, ancillary gaskets, dynamic seals, bonded pistons, wiper products, heat shields, noise and vibration sealing systems. . General Products - camshafts, brake and friction products, chassis products, driveline products, fuel pumps, carburetors, emission control products, strobes, marker lights, reflective tape, sintered products, and system protection products. . Order Process . Decentralized customer service - one at each of our plant locations. . Orders are scheduled in advance by large OEM Customers (such as Ford, GM, Chrysler) and the accum's are adjusted as product is shipped, material release forecasts updated weekly. . Smaller OEM's send purchase orders in advance with date required. Purchase orders reviewed at plant before orders are scheduled. 7 ACCOUNTS RECEIVABLE DILUTIONS . Cash Discount . 1.8% of NAA Sales . Doubtful Accounts . Written off quarterly as approved by the department manager . Continual follow up until financial conclusion . Credit Memos . Stocklift returns . Obsolescence returns . 30 day returns . Warranty . Price . Policy allowance . Checks Issued . Rebates for volume incentives . Invoices/Statements . The invoices generated from a plant sale can be mailed or sent electronically through EDI. . The Aftermarket invoices that are not sent via EDI are mailed at least weekly. . Monthly statements are sent to customers based on the 25th or month- end cutoff based on the customer. . Reconciliations . monthly reconciliation is completed of CARMS to the General Ledger balance. . Typical reconciliation items can be cash or billings due to different closing schedules. 8 EXHIBIT H --------- FORM OF REDUCTION NOTICE [Date] Wachovia Bank, N.A. as Blue Ridge Agent for certain Purchasers parties to the Receivables Purchase Agreement referred to below 191 Peachtree Street 26/th/ Floor GA-423 Atlanta, Georgia 30303 Attention: Elizabeth Wagner Bank One, NA as Falcon Agent for the certain Purchasers parties to the Receivables Purchase Agreement referred to below Mail IL1-0079 1 Bank One Plaza Chicago, Illinois 60670 Attention: Asset-Backed Finance Gentlemen: The undersigned, Federal-Mogul Funding Corporation, refers to the Sixth Amended and Restated Receivable Interest Purchase Agreement, dated as of February 16, 2001 (the "Receivables Purchase Agreement", the terms defined therein being used herein as therein defined), among the undersigned, Federal- Mogul Corporation, Blue Ridge Asset Funding Corporation ("BLUE RIDGE"), Falcon Asset Securitization Corporation ("FALCON"), certain financial institutions from time to time party thereto, as Liquidity Providers, Bank One, NA, as Administrative Agent and Falcon Agent, and Wachovia Bank, N.A., as Blue Ridge Agent, and hereby gives you notice, irrevocably, pursuant to Section 2.03 of the Receivables Purchase Agreement that the undersigned hereby requests a reduction of Capital under the Receivables Purchase Agreement, and in that connection sets forth below the information relating to such reduction (the "Proposed Reduction") as required by Section 2.03 of the Receivables Purchase Agreement: (i) The Proposed Reduction Date is _________, ____. (ii) The Aggregate Reduction is $____________. The Falcon share of the Aggregate Reduction is $______________. The Blue Ridge share of the Aggregate Reduction is $____________. The undersigned hereby certifies that the following statements are true on the date hereof, and will be true on the date of the Proposed Reduction (before and after giving effect to the Proposed Reduction): (A) the representations and warranties set forth in Section 4.01 of the Receivables Purchase Agreement are correct on and as of such date, as though made on and as of such date; (B) no event has occurred, or would result from the Proposed Reduction that will constitute an Amortization Event, and no event has occurred and is continuing, or would result from such Proposed Reduction, that would constitute a Potential Amortization Event; and (C) the Facility Termination Date has not have occurred, the aggregate Capital of all Receivable Interests does not and will not exceed the Purchase Limit and the aggregate Receivable Interests do not and will not exceed 100%. Very truly yours, FEDERAL-MOGUL FUNDING CORPORATION By: _____________________________ Name: Title: 2 EXHIBIT I --------- FORM OF INTERIM SETTLEMENT DATE STATEMENT [LOGO] FEDERAL MOGUL Federal-Mogul Funding II Trade Receivable Interest Purchase Agreement Distribution Date Statement for Purchase Agreement dated June ____ 2000 The input fields are "boxed" and numbers are in blue. All other fields are calculated ---------------- Month Ended - ------------------------------------------------------------------------------------------------------- I. Receivables Rollforward (Updated/new numbers as of the 15th for Moog and S.F., Static numbers (from prior monthly report) for Aviation & Blazer) ________________ Beginning Balance ________________ + New Receivables ________________ - Cash Collections ________________ - Credit Memos ---------------- - Gross Chargeoffs +/- Adjustments ________________ +/- Unreconciled Balance - 0 Ending Balance ________________ 0 II. Receivables Aging - (Use Static Percentages from prior month's full report) Amount Percent ------------- ---------------- Total Current 0-30 days past due 31-60 days past due 61-90 days past due 91-120 days past due 120+ days past due Placed accounts III. Calculation of Funding (see Schedule A) Pool Balance - Less Ineligibles (input all #s as negatives) : Balances * 90 dpd (incl. all (To be updated from Section II above) Placed Accts) Contra Accounts ** 91 dpd #REF! subject to 3% Static #s from prior threshold monthly report Cross-agings ** 91 dpd #REF! subject to 2% Static #s from prior (30%*91dpd) threshold monthly report Terms over 90 but less than 180 subject to 3% Static #s from prior basket monthly report --------------- Terms over 180 Static #s from prior monthly report Deductions * 61 dpd & ** 91 dpd Static #s from prior monthly report --------------- Less Intercompany Receivables Static #s from prior ** 91 dpd monthly report Currencies other than US$ and Static #s from prior CAN$ monthly report --------------- Less Ineligible Export Static #s from prior Receivables ** 90 dpd monthly report Other ineligibles (e.g. Static #s from prior unreconciled) monthly report --------------- Eligible Receivables #REF! Exc . subject to 3% Static #s from prior ess Concentrations threshold monthly report --------------- Net Receivables Balance #REF! Contractual Dilution --------------- Available Receivables #REF! Aggregate Reserve Percentage Aggregate Reserves #REF! --------------------------- Available Funding Amount (max 0 $420 MM) --------------- Falcon Available Funding (max $220 MM) 0 Blue Ridge Available Funding (max 0 $200 MM)
*Greater than ** Less than
IV. Coverage Amount =Capital minus Available Funding Amount Capital Outstanding Available Funding Amount Coverage Amount to be paid on Distribution Date V. Calculation of Capital Falcon Blue Ridge Available Funding Amount - - -------------------------------------------- Outstanding Capital -------------------------------------------- Required principal paydown - - -------------------------------------------- Optional Repayment - - -------------------------------------------- Net paydown due to Conduits - -
VI. Payment Instructions Payment instructions to pay Interest and Fees Amounts due Conduits: -------------------- Falcon/Bank One to debit Federal-Mogul Funding Corp's account # 55-73688 FMFC II to wire funds to Blue Ridge: ABA # Account # Ref: Federal-Mogul Funding The undersigned hereby represents and warrants that the foregoing is a true and accurate accounting in accordance with the Amended and Restated Receivable Interest Purchase Agreement dated as of July 1, 1999, as amended, modified, supplemented or restated from time to time (the Agreement) and that all representations and warranties are restated and reaffirmed with the exception that, information pertaining to months prior to May 1999 may contain good faith estimates and proforma numbers, which the undersigned believes to be accurate in all material respects for the purposes of calculating the financial ratios required under the Agreement. - ------------------------------------------------------------------------------- Dave Bozynski Treasurer 2 SCHEDULE A LIST OF CLOSING DOCUMENTS List of Participants --------------------
Participant Abbreviation ----------- ------------ Federal-Mogul Corporation FMC Federal-Mogul Canada Limited FM Canada Federal-Mogul Piston Rings, Inc. FM Piston Federal-Mogul Flowery Branch, LLC FM Flowery Federal-Mogul Powertrain, Inc. FM Powertrain Federal-Mogul Sealing Systems, Inc. FM Sealing Federal-Mogul Carolina, Inc. FM Carolina Federal-Mogul South Bend, Inc. FM South Bend Federal-Mogul LaGrange, Inc. FM LaGrange Federal-Mogul Sintered Products, Inc. FM Sintered Federal-Mogul Sintered Products - Waupun, Inc. FM Waupun Federal-Mogul System Protection Group, Inc. FM System Federal-Mogul Engineered Bearings, Inc. FM Engineered Federal-Mogul Camshafts, Inc. FM Camshafts Federal-Mogul Aviation, Inc. FM Aviation Federal-Mogul Ignition Company "Blazer" FM Blazer Federal-Mogul Products, Inc. "Moog" FM Moog Federal-Mogul Funding Corporation FMFC Falcon Asset Securitization Corporation Falcon Financial Institutions Liquidity Providers Bank One, NA Administrative Agent/ Falcon Agent Baker & McKenzie B&M Brown & Wood B&W Latham & Watkins L&W Wachovia Bank, N.A. Blue Ridge Agent International Securitization Corporation ISC
Index of Closing Documents --------------------------
Document Tab No. Responsibility -------- ------- -------------- STEP I - Sale from the Originators to FMC ----------------------------------------- First Amended and Restated Receivables Purchase 1.0 B&W Agreement Subordinated Note executed by FMC in favor of each 2.0 B&W Originator (other than FMC) Secretary's Certificate for each Originator (other than 3.0 B&W FMC), as to organizational document certified by, and good standing certificate issued by, Secretary of State of the State of incorporation, By-Laws, resolutions and specimen signatures: FM Canada 3.1 B&W FM Piston 3.2 B&W FM Flowery 3.3 B&W FM Powertrain 3.4 B&W FM Sealing 3.5 B&W FM Carolina 3.6 B&W FM South Bend 3.7 B&W FM LaGrange 3.8 B&W FM Sintered 3.9 B&W FM Waupun 3.10 B&W FM System 3.11 B&W FM Engineered 3.12 B&W FM Camshafts 3.13 B&W FM Aviation 3.14 B&W FM Blazer 3.15 B&W
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Document Tab No. Responsibility -------- ------- -------------- FM Moog 3.16 B&W Officer's Certificate of each Originator (other than 4.0 B&W FMC), dated as of June __, 2000 Re: No Event of Purchase and Sale Termination or Potential Event of Purchase and Sale Termination, and absence of Material Adverse Effect since March 31, 2000. FM Canada 4.1 B&W FM Piston 4.2 B&W FM Flowery 4.3 B&W FM Powertrain 4.4 B&W FM Sealing 4.5 B&W FM Carolina 4.6 B&W FM South Bend 4.7 B&W FM LaGrange 4.8 B&W FM Sintered 4.9 B&W FM Waupun 4.10 B&W FM System 4.11 B&W FM Engineered 4.12 B&W FM Camshafts 4.13 B&W FM Aviation 4.14 B&W FM Blazer 4.15 B&W FM Moog 4.16 B&W UCC-3 Financing Statement to be filed in connection 5.0 L&W with First Amended and Restated Receivables Purchase Agreement, each Originator (other than FMC) as debtor and Bank One N.A., as secured party:
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Documnet Tab No. Responsibility -------- ------- -------------- FM Canada 5.1 L&W - Ontario FM Piston 5.2 L&W - Secretary of State of Michigan - Secretary of State of Wisconsin FM Flowery 5.3 L&W - Hall County (Georgia) FM Powertrain 5.4 L&W - Secretary of State of Minnesota - Secretary of State of Ohio - Morgan County FM Sealing 5.5 L&W - Secretary of State of Alabama FM Carolina 5.6 L&W - Secretary of State of South Carolina FM South Bend 5.7 L&W - Secretary of State of Indiana FM LaGrange 5.8 L&W - Troup County (Georgia) FM Sintered 5.9 L&W - Secretary of State of Ohio - Montgomery County FM Waupun 5.10 L&W - Secretary of State of Wisconsin FM System 5.11 L&W - Secretary of State of Pennsylvania - Chester County FM Engineered 5.12 L&W - Secretary of State of Ohio - Stark County - Summit County FM Camshafts 5.13 L&W - Secretary of State of Michigan
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Documnet Tab No. Responsibility -------- ------- -------------- FM Aviation 5.14 L&W - Secretary of State of South Carolina FM Blazer 5.15 L&W - Secretary of State of Illinois - Secretary of State Michigan FM Moog 5.16 L&W - Secretary of State of Missouri - St. Louis City UCC Lien and Related Searches for each Originator 6.0 B&W (other than FMC) FM Canada 6.1 B&W - Ontario FM Piston 6.2 B&W - Secretary of State of Michigan - Kent County - Secretary of State of Wisconsin - Marathon County - Manitowoc County FM Flowery 6.3 B&W - Secretary of State of Georgia (Central Index) - Hall County FM Powertrain 6.4 B&W - Secretary of State of Minnesota - Wabasha County - Goodhue County - Secretary of State of Ohio - Morgan County FM Sealing 6.5 B&W - Secretary of State of Alabama - Limestone County FM Carolina 6.6 B&W - Secretary of State of South Carolina - Sumter County
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Documnet Tab No. Responsibility -------- ------- -------------- FM South Bend 6.7 B&W - Secretary of State of Indiana - St. Joseph County FM LaGrange 6.8 B&W - Secretary of State of Georgia (Central Index) - Troup County FM Sintered 6.9 B&W - Secretary of State of Ohio - Montgomery County FM Waupun 6.10 B&W - Secretary of State of Wisconsin - Dodge County - Fond du Lac County FM System 6.11 B&W - Secretary of State of Pennsylvania - Chester County FM Engineered 6.12 B&W - Secretary of State of Ohio - Stark County - Summit County FM Camshafts 6.13 B&W - Secretary of State of Michigan - Ottawa County FM Aviation 6.14 B&W - Secretary of State of South Carolina - Pickens County FM Blazer 6.15 B&W - Secretary of State of Illinois - Cook County FM Moog 6.16 B&W - Secretary of State of Missouri - St. Louis County - St. Louis City
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Documnet Tab No. Responsibility -------- ------- -------------- STEP II - Sale from FMC to FMFC ------------------------------- Fourth Amended and Restated Receivables Sale and 7.0 L&W Contribution Agreement ("Receivables Sale Agreement"). -------------------------- Stockholder and Subscription Agreement 8.0 L&W Subordinated Note executed by FMC 9.0 L&W Secretary's Certificate of FMC, as to good standing 10.0 B&W certificate issued by, and Certificate of Incorporation certified by, Secretary of State of Michigan, By-Laws, resolutions and specimen signatures. Officer's Certificate of FMC Re: No Event of Purchase 11.0 B&W and Sale Termination or Potential Event of Purchase and Sale Termination, and absence of Material Adverse Effect since March 31, 2000. UCC-3 Financing Statement to be filed in connection 12.0 L&W with Receivables Sale Agreement, FMC as debtor and FMFC as secured party and Administrative Agent, as Assignee: - Secretary of State of Michigan UCC Lien and Related Searches for the FMC 13.0 B&W - Secretary of State of Michigan - Oakland County STEP III - Sale from FMFC to Falcon, Blue Ridge and the Liquidity Providers --------------------------------------------------------------------------- Fourth Amended and Restated Receivables Interest 14.0 L&W Purchase Agreement (the "Receivables Interest Purchase ----------------------------- Agreement") --------- Blue Ridge Liquidity Asset Purchase Agreement 15.0 L&W Falcon Liquidity Agreement 16.0 L&W Blue Ridge Fee Letter 17.0 L&W Falcon Fee Letter 18.0 L&W
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Documnet Tab No. Responsibility -------- ------- -------------- Assignment Agreement between ISC and Blue Ridge 19.0 L&W Assignment Agreement between Falcon and Blue Ridge 20.0 L&W Assignment Agreement between Bank One, Michigan and 21.0 L&W Wachovia Bank, N.A. Secretary's Certificate of FMFC, as to good standing 22.0 B&W certificate issued by, and Certificate of Incorporation certified by, Secretary of State of Michigan, By-Laws, resolutions and specimen signatures. Officer's Certificate of FMFC Re: No Amortization 23.0 B&W Event or Potential Amortization Event, and absence of Material Adverse Effect since March 31, 1999. Certificate Re: B&W True Sale/Nonconsolidation Opinion 24.0 B&W signed by each of the Originators (other than FMC) (Step I) FMC Certificate Re: B&W True Sale/Nonconsolidation 25.0 B&W Opinion (Step II) FMFC Certificate Re: B&W True Sale/Nonconsolidation 26.0 B&W Opinion (Step II) True Sale/Nonconsolidation Opinion of B&W (Step I and 27.0 B&W Step II). Corporate Opinion of B&W (including perfection and 28.0 B&W priority), counsel to Originators, FMC and FMFC (Step I, Step II and Step III) Corporate Opinion of in-house (including perfection and 29.0 B&W priority), counsel to Originators, FMC and FMFC (Step I, Step II and Step III) Corporate Opinion of B&M, Canadian counsel for FM 30.0 B&W/B&M Canada (Step I) UCC-3 Financing Statement to be filed in connection 31.0 L&W with Receivables Interest Purchase Agreement, FMFC as debtor and Agent as secured party: - Secretary of State of Michigan
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Documnet Tab No. Responsibility -------- ------- -------------- UCC Lien and Related Searches for FMFC 32.0 B&W - Secretary of State of Michigan - Oakland County
9 EX-10.24 9 0009.txt EMPLOYMENT AGREEMENT--MACHER Exhibit 10.24 EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement"), dated as of January 10, 2001 and amended as of January 31, 2001, is entered into between Federal-Mogul Corporation, a Michigan corporation (the "Company"), and Frank Macher (the "Executive"). WHEREAS, the Company desires to employ the Executive to serve as Chief Executive Officer of the Company, and the Executive desires to be employed by the Company, upon the terms and subject to the conditions set forth herein. NOW, THEREFORE, in consideration of the premises and the mutual agreements contained herein, the Company and the Executive hereby agree as follows: 1. Employment. The Company hereby agrees to employ the Executive and ---------- the Executive hereby agrees to be employed by the Company upon the terms and subject to the conditions contained in this Agreement. The term of employment of the Executive by the Company pursuant to this Agreement (the "Employment Period") shall commence on January 11, 2001 (the "Effective Date") and shall end on the second anniversary of the Effective Date, unless earlier terminated pursuant to Section 4 hereof. The Executive's services shall be performed in the Detroit, Michigan metropolitan area, subject to travel requirements consistent with his position. 2. Position and Duties; Responsibilities; Board Service. (a) ---------------------------------------------------- Position and Duties. For the period ending on the date which is 18 months - ------------------- following the Effective Date or such earlier date agreed upon in writing by the Executive and the Board of Directors of the Company (the "Transition Date"), the Company shall employ the Executive as its Chief Executive Officer. After the Transition Date and until the expiration of the Employment Period, the Company shall employ the Executive as its Chairman. The Executive shall report to the Board of Directors of the Company (the "Board"). During the Employment Period, the Executive shall perform faithfully and loyally and to the best of the Executive's abilities the duties assigned to the Executive hereunder and shall devote the Executive's full business time, attention and effort to the affairs of the Company and its subsidiaries and shall use the Executive's reasonable best efforts to promote the interests of the Company and its subsidiaries. The Executive may engage in charitable, civic or community activities and, with the prior approval of the Board, may serve as a director of any other business corporation, provided that such activities or service do not interfere with the Executive's duties hereunder or violate the terms of any of the covenants contained in Sections 6, 7 or 8 hereof. (b) Responsibilities. Subject to the powers, authority and ---------------- responsibilities vested in the Board, in duly constituted committees of the Board and, following the Transition Date, in the Chief Executive Officer of the Company, the Executive shall have the authority and responsibility for the management, operation and overall conduct of the business of the Company. The Executive shall also perform such other duties (not inconsistent with the positions described in Section 2(a) hereof) on behalf of the Company and its subsidiaries as may from time to time be authorized or directed by the Board. (c) Board Service. Promptly following the Effective Date, the ------------- Executive will be appointed as a member of the Board. Provided that the Executive's employment with the Company has not previously been terminated, the Executive will be nominated for election as a member of the Board at the first annual meeting of the Company's shareholders following the Effective Date. If so appointed and elected, the Executive agrees that he will serve as a member of the Board. 3. Compensation. (a) Base Salary. Until the Transition Date, the ------------ ----------- Company shall pay to the Executive a base salary ("Base Salary") at the rate of $1,000,000 per annum and thereafter a Base Salary in an amount commensurate with his duties, which amount shall be determined by the Compensation Committee of the Board, in each case payable in accordance with the Company's executive payroll policy. (b) Annual Bonus. The Executive shall, in the sole discretion of the ------------ Compensation Committee of the Board, be eligible as of the end of each fiscal year of the Company during the term of this Agreement to receive an annual bonus payable in cash for such fiscal year ("Annual Bonus"). For the 2001 fiscal year only and provided that the Transition Date occurs after the end of such fiscal year, the Executive shall receive a guaranteed Annual Bonus of $1,000,000 (the "Guaranteed Annual Bonus"), payable at the time other executives generally receive an annual bonus for such fiscal year in accordance with the Company's policies. (c) Signing Bonus, Special Bonus and Incentive Plan. Within five ----------------------------------------------- business days after the Effective Date, the Executive shall be paid a one-time lump-sum signing bonus of $500,000 and a special bonus for the 2001 fiscal year of $750,000. In addition, beginning with the 2001 fiscal year, the Executive shall be entitled to participate in the Company's 2001 Performance Unit Plan (the "Incentive Plan") in accordance with the terms of such plan. The target incentive bonus opportunity for the Executive for the 2001 fiscal year under the Incentive Plan shall be $750,000 with a maximum incentive bonus opportunity of $1,500,000. The actual incentive bonus payable for 2001 and for any subsequent year shall be based upon objective criteria established and approved by the Compensation Committee of the Board. (d) Other Benefits. During the Employment Period, the Executive shall -------------- be entitled to participate in the Company's employee benefit plans, including fringe benefits and perquisites, generally available to executives of the Company, including, without limitation, medical, dental, vision, life and personal liability insurance plans and programs (such benefits being hereinafter referred to as the "Employee Benefits"). The Executive shall be entitled to take time off for vacation (currently four weeks per year) or illness in accordance with the Company's policy for executives and to receive all other fringe benefits as are from time to time made generally available to executives of the Company, including, without limitation, the car lease program, the executive wellness program, financial and estate planning services and annual tax planning assistance. (e) Stock Options. On the Effective Date, subject to the approval of -------------- the Compensation Committee of the Board, the Executive shall be granted non- qualified stock options (the "Options") to purchase 150,000 shares of common stock, no par value, of the 2 Company (the "Common Stock"). The exercise price of the Options shall be the fair market value of the Common Stock on the date of grant, and one-third of the Options shall become exercisable on each anniversary of the Effective Date. If the Executive's employment is terminated pursuant to Section 4(a), 4(b), 4(d) or 4(f) hereof, any unexercisable Options shall immediately become exercisable and may thereafter be exercised in full until the expiration of the five-year term of the Options. If the Executive breaches any one or more of the covenants contained in Section 6, 7 or 8 hereof, any Options then outstanding shall terminate automatically on the date of any such breach by the Executive and the Executive shall pay the Company, within five business days of receipt by the Executive of a written demand therefor, an amount in cash equal to any gain realized by the Executive as a result of the exercise of any Options. The Options shall be subject to the terms and provisions of the Company's 1997 Amended and Restated Long-Term Incentive Plan and the stock option agreement relating to the Options, which stock option agreement shall, except as provided in this Section 3(e), be in the form customarily used by the Company. (f) Expense Reimbursement. During the Employment Period, the Company --------------------- shall reimburse the Executive, in accordance with the Company's policies and procedures, for all proper expenses incurred by the Executive in the performance of the Executive's duties hereunder. (g) Vesting of Retirement Benefits. Commencing on the Effective ------------------------------ Date, the Executive shall participate in the Company's Personal Retirement Account (the "PRA") and in the Company's Supplemental Executive Retirement Program (the "SERP") in accordance with the terms thereof and shall be fully vested in the benefits under the SERP. If the Executive forfeits any amount under the PRA as a result of the termination of his employment with the Company, the Executive shall receive an equivalent amount from the Company under the SERP. 4. Termination. (a) Death. Upon the death of the Executive, this ----------- ----- Agreement shall automatically terminate and all rights of the Executive and the Executive's heirs, executors and administrators to compensation and other benefits under this Agreement shall cease immediately, except that the Executive's heirs, executors or administrators, as the case may be, shall be entitled to: (i) accrued Base Salary through and including the Executive's date of death; (ii) accrued Annual Bonus based on the Guaranteed Annual Bonus through and including the Executive's date of death; and (iii) other Employee Benefits to which the Executive was entitled on the date of death in accordance with the terms of the plans and programs of the Company. (b) Disability. The Company may, at its option, terminate this ---------- Agreement upon written notice to the Executive if the Executive, because of physical or mental incapacity or disability, fails to perform the essential functions of the Executive's position, with or without reasonable accommodation, required of the Executive hereunder for a continuous period of 120 days or any 180 days within any 12-month period. Upon such termination, all obligations of the Company hereunder shall cease immediately, except that the Executive shall be entitled to: 3 (i) accrued Base Salary through and including the effective date of the Executive's termination of employment; (ii) accrued Annual Bonus based on the Guaranteed Annual Bonus through and including the effective date of the Executive's termination of employment; and (iii) other Employee Benefits to which the Executive is entitled upon termination of employment in accordance with the terms of the plans and programs of the Company. In the event of any dispute regarding the existence of the Executive's incapacity or disability hereunder, the matter shall be resolved by the determination of a physician selected by the Board. The Executive shall submit to appropriate medical examinations for purposes of such determination. (c) Cause. (i) The Company may, at its option, terminate the ----- Executive's employment under this Agreement for Cause (as hereinafter defined) upon written notice to the Executive (the "Cause Notice"). Any such termination for Cause shall be authorized by the Board. The Cause Notice shall state the particular action(s) or inaction(s) giving rise to termination for Cause. The Executive shall have five days after the Cause Notice is given to cure the particular action(s) or inaction(s), to the extent a cure is possible. If the Executive so effects a cure to the satisfaction of the Board, the Cause Notice shall be deemed rescinded and of no force or effect. (ii) As used in this Agreement, the term "Cause" shall mean any one or more of the following: (A) a continued and willful refusal by the Executive to perform the Executive's duties under this Agreement or to perform specific directives of the Board which are consistent with the scope and nature of the Executive's duties and responsibilities as set forth herein; (B) any intentional act of fraud, embezzlement or theft by the Executive in connection with the Executive's duties hereunder or in the course of the Executive's employment hereunder or any prior employment, or the Executive's admission or conviction of a felony or of any crime involving moral turpitude, fraud, embezzlement, theft or misrepresentation; (C) any gross negligence or willful misconduct of the Executive resulting in a loss to the Company or any of its subsidiaries, or damage to the reputation of the Company or any of its subsidiaries; (D) any breach by the Executive of any one or more of the covenants contained in Section 6, 7 or 8 hereof; or (E) any violation of any statutory duty of loyalty to the Company or any of its subsidiaries. 4 For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. (iii) The exercise of the right of the Company to terminate this Agreement pursuant to this Section 4(c) shall not abrogate the rights or remedies of the Company in respect of the breach giving rise to such termination. (iv) If the Company terminates the Executive's employment for Cause, all obligations of the Company hereunder shall cease, except that the Executive shall be entitled to the payments and benefits specified in Sections 4(b)(i) and 4(b)(iii) hereof. (d) Termination Without Cause. The Company may, at its option, ------------------------- terminate the Executive's employment under this Agreement upon written notice to the Executive for a reason other than a reason set forth in Section 4(a), 4(b) or 4(c). Any such termination shall be authorized by the Board. If the Company terminates the Executive's employment for any such reason, all obligations of the Company hereunder shall cease immediately, except that the Executive shall be entitled to: (i) the payments and benefits specified in Sections 4(b)(i) through 4(b)(iii) hereof, inclusive; (ii) a lump sum cash payment equal to the product of (x) two, and (y) the sum of the Base Salary and the Guaranteed Annual Bonus; and (iii) the continuation by the Company of health and welfare benefits for 24 months on the same basis as such benefits were provided to the Executive immediately prior to his termination of employment. (e) Voluntary Termination. Upon 60 days prior written notice to the --------------------- Company (or such shorter period as may be permitted by the Board), the Executive may voluntarily terminate the Executive's employment with the Company for any reason. If the Executive voluntarily terminates the Executive's employment pursuant to this Section 4(e), all obligations of the Company hereunder shall cease immediately, except that the Executive shall be entitled to the payments and benefits specified in Sections 4(b)(i) and 4(b)(iii) hereof. (f) Termination for Good Reason. (i) Upon 30 days prior written --------------------------- notice to the Company (or such shorter period as may be permitted by the Board), the Executive may voluntarily terminate the Executive's employment with Good Reason (as hereinafter defined). If the Executive voluntarily terminates the Executive's employment pursuant to this Section 4(f), all obligations of the Company hereunder shall cease immediately, except that the Executive shall be entitled to: 5 (A) the payments and benefits specified in Sections 4(b)(i) through 4(b)(iii) hereof, inclusive; (B) a lump sum cash payment equal to the product of (x) two, and (y) the sum of the Base Salary and the Guaranteed Annual Bonus; and (C) the continuation by the Company of health and welfare benefits for 24 months on the same basis as such benefits were provided to the Executive immediately prior to his termination of employment. (ii) As used in this Agreement, the term "Good Reason" shall mean, without the written consent of the Executive, any one or more of the following, provided that an isolated, insubstantial or inadvertent action not taken in bad faith or failure not occurring in bad faith which is remedied by the Company promptly after receipt of notice thereof given by the Executive shall not constitute Good Reason: (A) the assignment to the Executive of any duties materially inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by this Agreement or any other action by the Company which results in a material diminution in such position, authority, duties or responsibilities; (B) any failure by the Company to comply with any of the provisions of Section 3 hereof; (C) the Company's requiring the Executive to be based at any office or location other than as provided in Section 1 hereof; or (D) any other material breach by the Company of this Agreement, including, without limitation, a failure to appoint the Executive as Chairman of the Board after the Transition Date. 5. Federal and State Withholding. The Company shall deduct from the ----------------------------- amounts payable to the Executive pursuant to this Agreement the amount of all required federal, state and local withholding taxes in accordance with the Executive's Form W-4 on file with the Company, and all applicable federal employment taxes. 6. Noncompetition; Nonsolicitation. (a) General. The Executive ------------------------------- ------- acknowledges that in the course of the Executive's employment with the Company the Executive has and will become familiar with trade secrets and other confidential information concerning the Company and its subsidiaries and that the Executive's services will be of special, unique and extraordinary value to the Company and its subsidiaries. (b) Noncompetition. The Executive agrees that during the period of -------------- the Executive's employment with the Company and the longer of (i) one year after the Executive's termination of employment with the Company or (ii) the period, if any, for which the Executive 6 is entitled to payments from the Company pursuant to Section 4 (the "Noncompetition Period"), the Executive shall not in any manner, directly or indirectly, through any person, firm or corporation, alone or as a member of a partnership or as an officer, director, stockholder, investor or employee of or consultant to any other corporation or enterprise or otherwise, engage or be engaged, or assist any other person, firm, corporation or enterprise in engaging or being engaged, in any business, in which the Executive was involved or had knowledge, being conducted by, or contemplated by, the Company or any of its subsidiaries as of the termination of the Executive's employment in any geographic area in which the Company or any of its subsidiaries is then conducting such business. Notwithstanding the foregoing, for purposes of this Section 6(b) only, the Noncompetition Period shall cease as of the date of the Executive's termination of employment if such employment is terminated pursuant to Section 4(d) or 4(f) hereof. (c) Nonsolicitation. The Executive further agrees that during the --------------- Noncompetition Period the Executive shall not (i) in any manner, directly or indirectly, induce or attempt to induce any employee of the Company or any of its subsidiaries to terminate or abandon his or her employment for any purpose whatsoever or (ii) in connection with any business to which Section 6(b) applies, call on, service, solicit or otherwise do business with any customer of the Company or any of its subsidiaries. (d) Exceptions. Nothing in this Section 6 shall prohibit the ---------- Executive from being (i) a stockholder in a mutual fund or a diversified investment company or (ii) an owner of not more than two percent of the outstanding stock of any class of a corporation, any securities of which are publicly traded, so long as the Executive has no active participation in the business of such corporation. (e) Reformation. If, at any time of enforcement of this Section 6, a ----------- court or an arbitrator holds that the restrictions stated herein are unreasonable under circumstances then existing, the parties hereto agree that the maximum period, scope or geographical area reasonable under such circumstances shall be substituted for the stated period, scope or area and that the court or arbitrator shall be allowed to revise the restrictions contained herein to cover the maximum period, scope and area permitted by law. This Agreement shall not authorize a court or arbitrator to increase or broaden any of the restrictions in this Section 6. 7. Confidentiality. The Executive shall not, at any time during the --------------- Employment Period or thereafter, make use of or disclose, directly or indirectly, any (i) trade secret or other confidential or secret information of the Company or of any of its subsidiaries or (ii) other technical, business, proprietary or financial information of the Company or of any of its subsidiaries not available to the public generally or to the competitors of the Company or to the competitors of any of its subsidiaries ("Confidential Information"), except to the extent that such Confidential Information (a) becomes a matter of public record or is published in a newspaper, magazine or other periodical or on electronic or other media available to the general public, other than as a result of any act or omission of the Executive, (b) is required to be disclosed by any law, regulation or order of any court or regulatory commission, department or agency, provided that the Executive gives prompt notice of such requirement to the Company to enable the Company to seek an appropriate protective order, or (c) is required to be used or disclosed by the Executive to perform properly the Executive's duties under this Agreement. Promptly following the termination of the Employment Period, the Executive shall surrender to the Company all 7 records, memoranda, notes, plans, reports, computer tapes and software and other documents and data which constitute Confidential Information which the Executive may then possess or have under the Executive's control (together with all copies thereof). 8. Intellectual Property. The Executive shall not, at any time, have --------------------- or claim any right, title or interest in any trade name, patent, trademark, copyright, trade secret, intellectual property, methodologies, technologies, procedures, concepts, ideas or other similar rights (collectively, "Intellectual Property") belonging to the Company or any of its affiliates and shall not have or claim any right, title or interest in or to any material or matter of any kind prepared for or used in connection with the business or promotion of the Company or any of its affiliates, whether produced, prepared or published in whole or in part by the Executive or by the Company or any of its affiliates. All Intellectual Property that is conceived, devised, made, developed or perfected by the Executive, alone or with others, during the Executive's employment that is related in any way to the Company's or any of its affiliates' business or is devised, made, developed or perfected utilizing equipment or facilities of the Company or its affiliates shall be promptly disclosed to the Board, are works for hire and become the sole, absolute and exclusive property of the Company. If and to the extent that any of such Intellectual Property should be determined for any reason not to be a work for hire, the Executive hereby assigns to the Company all of the Executive's right, title and interest in and to such Intellectual Property. At the reasonable request and expense of the Company but without charge to the Company, whether during or at any time after the Executive's employment with the Company, the Executive shall cooperate fully with the Company and its affiliates in the securing of any trade name, patent, trademark, copyright or intellectual property protection or other similar rights in the United States and in foreign countries, including without limitation, the execution and delivery of assignments, patent applications and other documents or papers. 9. Enforcement. The parties hereto agree that the Company and its ----------- subsidiaries would be damaged irreparably in the event that any provision of Section 6, 7 or 8 of this Agreement were not performed in accordance with its terms or were otherwise breached and that money damages would be an inadequate remedy for any such nonperformance or breach. Accordingly, the Company and its successors and permitted assigns shall be entitled, in addition to other rights and remedies existing in their favor, to an injunction or injunctions to prevent any breach or threatened breach of any of such provisions and to enforce such provisions specifically (without posting a bond or other security). The Executive agrees that the Executive will submit to the personal jurisdiction of the courts of the State of Michigan in any action by the Company to enforce an arbitration award against the Executive or to obtain interim injunctive or other relief pending an arbitration decision. 10. Representations. The Executive represents and warrants to the --------------- Company that (a) the execution, delivery and performance of this Agreement by the Executive does not and will not conflict with, breach, violate or cause a default under any contract, agreement, instrument, order, judgment or decree to which the Executive is a party or by which the Executive is bound, and the Executive is not a party to or bound by any employment agreement, noncompetition agreement or confidentiality agreement with any other person or entity, except, in each case, for a noncompetition agreement between the Executive and Ford Motor Company, the restrictions of which have been waived in writing by Ford Motor Company with respect to the employment of the Executive by the Company and the service of the Executive as a director 8 of the Company and the execution, delivery and performance of this Agreement by the Executive and (b) upon the execution and delivery of this Agreement by the Company, this Agreement shall be the valid and binding obligation of the Executive, enforceable in accordance with its terms. 11. Survival. Sections 6, 7, 8 and 9 of this Agreement shall survive -------- and continue in full force and effect in accordance with their respective terms, notwithstanding any termination of the Employment Period. 12. Arbitration. Except as otherwise set forth in Section 9 hereof, ----------- any dispute or controversy between the Company and the Executive, whether arising out of or relating to this Agreement, the breach of this Agreement, or otherwise, shall be settled by arbitration in Detroit, Michigan administered by the American Arbitration Association, with any such dispute or controversy arising under this Agreement being so administered in accordance with its Commercial Rules then in effect, and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The arbitrator shall have the authority to award any remedy or relief that a court of competent jurisdiction could order or grant, including, without limitation, the issuance of an injunction. However, either party may, without inconsistency with this arbitration provision, apply to any court having jurisdiction over such dispute or controversy and seek interim provisional, injunctive or other equitable relief until the arbitration award is rendered or the controversy is otherwise resolved. Except as necessary in court proceedings to enforce this arbitration provision or an award rendered hereunder, or to obtain interim relief, neither a party nor an arbitrator may disclose the existence, content or results of any arbitration hereunder without the prior written consent of the Company and the Executive. The Company and the Executive acknowledge that this Agreement evidences a transaction involving interstate commerce. Notwithstanding any choice of law provision included in this Agreement, the United States Federal Arbitration Act shall govern the interpretation and enforcement of this arbitration provision. 13. Notices. All notices and other communications required or ------- permitted hereunder shall be in writing and shall be deemed given when (a) delivered personally or by overnight courier to the following address of the other party hereto (or such other address for such party as shall be specified by notice given pursuant to this Section) or (b) sent by facsimile to the following facsimile number of the other party hereto (or such other facsimile number for such party as shall be specified by notice given pursuant to this Section), with the confirmatory copy delivered by overnight courier to the address of such party pursuant to this Section 13: If to the Company, to: Federal-Mogul Corporation 26555 Northwestern Highway Southfield, Michigan 48034 Attention: Chairman of the Compensation Committee of the Board of Directors with a copy to: 9 Federal-Mogul Corporation 26555 Northwestern Highway Southfield, Michigan 48034 Attention: General Counsel If to the Executive, to: Frank Macher 2525 Country Club Road Ann Arbor, Michigan 48105 14. Severability. Whenever possible, each provision of this ------------ Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect the validity, legality or enforceability of any other provision of this Agreement or the validity, legality or enforceability of such provision in any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. 15. Change of Control. Simultaneously with the execution and ----------------- delivery of this Agreement, the parties also are executing and delivering an Employment Agreement in the form attached hereto as Exhibit A. In the event of a "Change of Control," as defined in the Employment Agreement attached hereto as Exhibit A, the annexed Employment Agreement shall exclusively govern the employment relationship between the Company and the Executive and this Agreement shall immediately terminate without any further obligations by either party; provided, however, that Section 3(g) hereof shall not terminate by reason of - -------- ------- said Change of Control and shall remain in full force and effect. 16. Entire Agreement. This Agreement and the Employment Agreement in ---------------- the form attached hereto as Exhibit A constitute the entire agreement and understanding between the parties with respect to the subject matter hereof or thereof and supersede and preempt any prior understandings, agreements or representations by or between the parties, written or oral, which may have related in any manner to the subject matter hereof or thereof. 17. Successors and Assigns. This Agreement shall be enforceable by ---------------------- the Executive and the Executive's heirs, executors, administrators and legal representatives, and by the Company and its successors and assigns. 18. Governing Law. This Agreement shall be governed by and construed ------------- and enforced in accordance with the internal laws of the State of Michigan without regard to principles of conflict of laws. 19. Amendment and Waiver. The provisions of this Agreement may be -------------------- amended or waived only by the written agreement of the Company and the Executive, and no course of conduct or failure or delay in enforcing the provisions of this Agreement shall affect the validity, binding effect or enforceability of this Agreement. 10 20. Counterparts. This Agreement may be executed in two ------------ counterparts, each of which shall be deemed to be an original and both of which together shall constitute one and the same instrument. 11 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. FEDERAL-MOGUL CORPORATION By: /s/ Richard P. Randazzo --------------------------------------------- Richard P. Randazzo Senior Vice President, Human Resources FRANK MACHER /s/ Frank Macher -------------------------------------------------- 12 EX-10.25 10 0010.txt CHANGE OF CONTROL AGREEMENT--MACHER Exhibit 10.25 EMPLOYMENT AGREEMENT AGREEMENT by and between Federal-Mogul Corporation, a Michigan corporation (the "Company"), and Frank Macher (the "Executive"), dated as of the 10th day of January, 2001 (this "Agreement"). The Board of Directors of the Company (the "Board") has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Certain Definitions. (a) The "Effective Date" shall mean the ------------------- first date during the Change of Control Period (as defined in Section 1(b)) on which a Change of Control (as defined in Section 2) occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (ii) otherwise arose in connection with or anticipation of a Change of Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment. (b) The "Change of Control Period" shall mean the period commencing on the date hereof and ending on the third anniversary of the date hereof; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), unless previously terminated, the Change of Control Period shall be automatically extended so as to terminate three years from such Renewal Date, unless at least 60 days prior to the Renewal Date the Company shall give notice to the Executive that the Change of Control Period shall not be so extended. 2. Change of Control. For the purpose of this Agreement, a "Change of ----------------- Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Company, (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (D) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. 2 3. Employment Period. The Company hereby agrees to continue the ----------------- Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the third anniversary of such date (the "Employment Period"). 4. Terms of Employment. (a) Position and Duties. (i) During the ------------------- ------------------- Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 120-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office or location less than 35 miles from such location. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) Compensation. (i) Base Salary. During the Employment Period, the ------------ ----------- Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at an annual rate at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) Annual Bonus. In addition to Annual Base Salary, the ------------ Executive shall be awarded, for each fiscal year ending during the Employment Period, an annual bonus (the "Annual Bonus") in cash at least equal to the Executive's highest bonus, including any bonus or portion thereof which has been earned but deferred, under the Company's 1997 Supplemental 3 Compensation Plan, as amended and restated, or any comparable bonus under any predecessor or successor plan, for the last three full fiscal years prior to the Effective Date (annualized in the event that the Executive was not employed by the Company for the whole of such fiscal year); provided, that if the Executive's highest bonus for one or more of such fiscal years is determined pursuant to the terms of the Company's Economic Value Added (EVA) Plan (the "EVA Plan"), and the Executive's bonus declared pursuant to the EVA Plan for such fiscal year is higher than the Executive's bonus paid pursuant to the EVA Plan for such fiscal year, the Executive's highest bonus for such fiscal year shall be the Executive's bonus declared for such fiscal year. The Executive's highest bonus for the last three full fiscal years prior to the Effective Date, as determined (and annualized, if applicable) pursuant to this Section 4(b)(ii), is hereinafter referred to as the "Recent Annual Bonus"). Each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus. (iii) Incentive, Savings and Retirement Plans. During the --------------------------------------- Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. Without limiting the generality of the foregoing, the Executive shall be entitled to the retirement benefits set forth in Section 3(g) of the Employment Agreement dated as of January 10, 2001 between the Company and the Executive, which benefits shall be benefits pursuant to a retirement plan of the Company for all purposes of this Agreement. (iv) Welfare Benefit Plans. During the Employment Period, the --------------------- Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (v) Expenses. During the Employment Period, the Executive -------- shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its 4 affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vi) Fringe Benefits. During the Employment Period, the --------------- Executive shall be entitled to fringe benefits, including, without limitation, tax and financial planning services, payment of club dues, and, if applicable, use of an automobile and payment of related expenses, in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vii) Office and Support Staff. During the Employment Period, ------------------------ the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (viii) Vacation. During the Employment Period, the Executive -------- shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. 5. Termination of Employment. (a) Death or Disability. The Executive's ------------------------- ------------------- employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full- time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative. (b) Cause. The Company may terminate the Executive's employment ----- during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean: 5 (i) the willful and continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail. (c) Good Reason. The Executive's employment may be terminated by ----------- the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean: (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) any failure by the Company to comply with any of the provisions of Section 4(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location other than as provided in Section 4(a)(i)(B) hereof or the Company's requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date; 6 (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section 11(c) of this Agreement. For purposes of this Section 5(c), any good faith determination of "Good Reason" made by the Executive shall be conclusive. (d) Notice of Termination. Any termination by the Company for Cause, --------------------- or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if the ------------------- Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 6. Obligations of the Company upon Termination. (a) Good Reason: ------------------------------------------- ------------ Other Than for Cause, Death or Disability. If, during the Employment Period, the - ----------------------------------------- Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: (A) the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the product of (x) the higher of (I) the Recent Annual Bonus and (II) the "Highest Annual Bonus," as such term is defined in the last sentence of Section 6(a) hereof, and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365 and (3) any 7 compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued and banked vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2), and (3) shall be hereinafter referred to as the "Accrued Obligations"); and (B) the amount equal to the product of (1) three and (2) the sum of (x) the Executive's Annual Base Salary and (y) the "Highest Annual Bonus," as such term is defined in the last sentence of Section 6(a) hereof; and (C) an amount equal to the excess of (a) the actuarial equivalent of the benefit under the Company's Personal Retirement Account (the "PRA") (utilizing actuarial assumptions no less favorable to the Executive than those in effect under the Company's PRA immediately prior to the Effective Date) and Supplemental Executive Retirement Program (the "SERP") which the Executive would receive if the Executive's employment continued for three years after the Date of Termination assuming for this purpose that all accrued benefits are fully vested, and, assuming that the Executive's compensation in each of the three years is that required by Section 4(b)(i) and Section 4(b)(ii), over (b) the actuarial equivalent of the Executive's actual benefit (paid or payable), if any, under the PRA and the SERP as of the Date of Termination; (ii) for three years after the Executive's Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(iv) of this Agreement if the Executive's employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until three years after the Date of Termination and to have retired on the last day of such period; (iii) the Company shall, at its sole expense as incurred, provide the Executive with outplacement services the scope and provider of which shall be selected by the Executive in his sole discretion; and (iv) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice 8 or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). For purposes of this Agreement, "Highest Annual Bonus" shall mean the Annual Bonus paid or payable, including any bonus or portion thereof which has been earned but deferred (and annualized for any fiscal year consisting of less than twelve full months or during which the Executive was employed for less than twelve full months), for the most recently completed fiscal year during the Employment Period, if any; provided, that if the Annual Bonus for such fiscal year is determined pursuant to the terms of the EVA Plan, and the Executive's bonus declared pursuant to the EVA Plan for such fiscal year is higher than the Executive's bonus paid pursuant to the EVA Plan for such fiscal year, the Annual Bonus for such fiscal year shall be the Executive's bonus declared for such fiscal year. (b) Death. If the Executive's employment is terminated by reason of ----- the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(b) shall include, without limitation, and the Executive's estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and affiliated companies to the estates and beneficiaries of peer executives of the Company and such affiliated companies under such plans, programs, practices and policies relating to death benefits, if any, as in effect with respect to other peer executives and their beneficiaries at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive's estate and/or the Executive's beneficiaries, as in effect on the date of the Executive's death with respect to other peer executives of the Company and its affiliated companies and their beneficiaries. (c) Disability. If the Executive's employment is terminated by ---------- reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and its affiliated companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families. (d) Cause; Other than for Good Reason. If the Executive's employment --------------------------------- shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (i) his 9 Annual Base Salary through the Date of Termination, (ii) the amount of any compensation previously deferred by the Executive, and (iii) Other Benefits, in each case to the extent theretofore unpaid. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and the timely payment or provision of Other Benefits. In such case, all Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. 7. Non-exclusivity of Rights. Nothing in this Agreement shall ------------------------- prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor, subject to Section 12(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 8. Full Settlement. The Company's obligation to make the payments --------------- provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). 9. Certain Additional Payments by the Company. ------------------------------------------ (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties 10 imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 9(a), if it shall be determined that the Executive is entitled to a Gross-Up Payment, but that the Executive, after taking into account the Payments and the Gross-Up Payment, would not receive a net after-tax benefit of at least $550,000 (taking into account both income taxes and any Excise Tax) as compared to the net after-tax proceeds to the Executive resulting from an elimination of the Gross-Up Payment and a reduction of the Payments, in the aggregate, to an amount (the "Reduced Amount") such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive and the Payments, in the aggregate, shall be reduced to the Reduced Amount. (b) Subject to the provisions of Section 9(c), all determinations required to be made under this Section 9, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Ernst & Young LLP or such other certified public accounting firm as may be designated by the Executive (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: 11 (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 9(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not 12 be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10. Confidential Information. The Executive shall hold in a ------------------------ fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 11. Successors. (a) This Agreement is personal to the Executive and ---------- without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 12. Miscellaneous. (a) This Agreement shall be governed by and ------------- construed in accordance with the laws of the State of Michigan, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: 13 If to the Executive: -------------------- Frank Macher 2525 Country Club Road Ann Arbor, Michigan 48105 If to the Company: ------------------ Federal-Mogul Corporation 26555 Northwestern Highway Southfield, Michigan 48034 Attention: Chairman of the Compensation Committee of the Board of Directors Federal-Mogul Corporation 26555 Northwestern Highway Southfield, Michigan 48034 Attention: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will" and, subject to Section 1(a) hereof, prior to the Effective Date, the Executive's employment and/or this Agreement may be terminated by either the Executive or the Company at any time prior to the Effective Date, in which case the Executive shall have no further rights under this Agreement. From and after the Effective Date this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof. 14 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. FEDERAL-MOGUL CORPORATION By: /s/ Richard P. Randazzo ---------------------------------------- FRANK MACHER By: /s/ Frank Macher ---------------------------------------- 15 EX-10.26 11 0011.txt EMPLOYMENT AGREEMENT--MCCLURE Exhibit 10.26 EMPLOYMENT AGREEMENT This Employment Agreement (this "Agreement"), dated as of January 10, 2001 and amended as of January 31, 2001, is entered into between Federal-Mogul Corporation, a Michigan corporation (the "Company"), and Charles McClure (the "Executive"). WHEREAS, the Company desires to employ the Executive to serve as President and Chief Operating Officer of the Company, and the Executive desires to be employed by the Company, upon the terms and subject to the conditions set forth herein. NOW, THEREFORE, in consideration of the premises and the mutual agreements contained herein, the Company and the Executive hereby agree as follows: 1. Employment. The Company hereby agrees to employ the Executive and ---------- the Executive hereby agrees to be employed by the Company upon the terms and subject to the conditions contained in this Agreement. The term of employment of the Executive by the Company pursuant to this Agreement (the "Employment Period") shall commence on January 11, 2001 (the "Effective Date") and shall end on the second anniversary of the Effective Date, unless earlier terminated pursuant to Section 4 hereof. The Executive's services shall be performed in the Detroit, Michigan metropolitan area, subject to travel requirements consistent with his position. 2. Position and Duties; Responsibilities; Board Service. (a) ---------------------------------------------------- Position and Duties. For the period ending on the date which is 18 months - ------------------- following the Effective Date or such earlier date that the Executive is elected by the Board of Directors of the Company (the "Board") as the Chief Executive Officer of the Company (the "Transition Date"), the Company shall employ the Executive as its President and Chief Operating Officer. After the Transition Date and until the expiration of the Employment Period, the Company shall employ the Executive as its Chief Executive Officer. The Executive shall report to the Board and, prior to the Transition Date, the Chief Executive Officer of the Company. During the Employment Period, the Executive shall perform faithfully and loyally and to the best of the Executive's abilities the duties assigned to the Executive hereunder and shall devote the Executive's full business time, attention and effort to the affairs of the Company and its subsidiaries and shall use the Executive's reasonable best efforts to promote the interests of the Company and its subsidiaries. The Executive may engage in charitable, civic or community activities and, with the prior approval of the Board, may serve as a director of any other business corporation, provided that such activities or service do not interfere with the Executive's duties hereunder or violate the terms of any of the covenants contained in Sections 6, 7 or 8 hereof. (b) Responsibilities. Subject to the powers, authority and ---------------- responsibilities vested in the Board, in duly constituted committees of the Board and, prior to the Transition Date, in the Chief Executive Officer of the Company, the Executive shall have the authority and responsibility for the management, operation and overall conduct of the business of the Company. The Executive shall also perform such other duties (not inconsistent with the positions described in Section 2(a) hereof) on behalf of the Company and its subsidiaries as may from time to time be authorized or directed by the Board and, prior to the Transition Date, by the Chief Executive Officer of the Company. (c) Board Service. Promptly following the Effective Date, the ------------- Executive will be appointed as a member of the Board. Provided that the Executive's employment with the Company has not previously been terminated, the Executive will be nominated for election as a member of the Board at the first annual meeting of the Company's shareholders following the Effective Date. If so appointed and elected, the Executive agrees that he will serve as a member of the Board. 3. Compensation. (a) Base Salary. During the Employment Period, ------------ ----------- the Company shall pay to the Executive a base salary at the rate of $850,000 per annum ("Base Salary"), payable in accordance with the Company's executive payroll policy. Such Base Salary shall be reviewed on the Transition Date, and shall be subject to such increase, if any, as determined by the Compensation Committee of the Board. (b) Annual Bonus. The Executive shall, in the sole discretion of the ------------ Compensation Committee of the Board, be eligible as of the end of each fiscal year of the Company during the term of this Agreement to receive an annual bonus payable in cash for such fiscal year ("Annual Bonus"). For the 2001 fiscal year only, the Executive shall receive a guaranteed Annual Bonus of $850,000 (the "Guaranteed Annual Bonus"), payable at the time other executives generally receive an annual bonus for such fiscal year in accordance with the Company's policies. (c) Signing Bonus, Special Bonus and Incentive Plan. Within five ----------------------------------------------- business days after the Effective Date, the Executive shall be paid a one-time lump-sum signing bonus of $375,000 and a special bonus for the 2001 fiscal year of $625,000. In addition, beginning with the 2001 fiscal year, the Executive shall be entitled to participate in the Company's 2001 Performance Unit Plan (the "Incentive Plan") in accordance with the terms of such plan. The target incentive bonus opportunity for the Executive for the 2001 fiscal year under the Incentive Plan shall be $625,000 with a maximum incentive bonus opportunity of $1,250,000. The actual incentive bonus payable for 2001 and for any subsequent year shall be based upon objective criteria established and approved by the Compensation Committee of the Board. (d) Other Benefits. During the Employment Period, the Executive shall -------------- be entitled to participate in the Company's employee benefit plans, including fringe benefits and perquisites, generally available to executives of the Company, including, without limitation, medical, dental, vision, life and personal liability insurance plans and programs (such benefits being hereinafter referred to as the "Employee Benefits"). The Executive shall be entitled to take time off for vacation (currently four weeks per year) or illness in accordance with the Company's policy for executives and to receive all other fringe benefits as are from time to time made generally available to executives of the Company, including, without limitation, the car lease program, the executive wellness program, financial and estate planning services and annual tax planning assistance. 2 (e) Stock Options. On the Effective Date, subject to the approval of -------------- the Compensation Committee of the Board, the Executive shall be granted non- qualified stock options (the "Options") to purchase 125,000 shares of common stock, no par value, of the Company (the "Common Stock"). The exercise price of the Options shall be the fair market value of the Common Stock on the date of grant, and one-third of the Options shall become exercisable on each anniversary of the Effective Date. If the Executive's employment is terminated pursuant to Section 4(a), 4(b), 4(d) or 4(f) hereof, any unexercisable Options shall immediately become exercisable and may thereafter be exercised in full until the expiration of the five-year term of the Options. If the Executive breaches any one or more of the covenants contained in Section 6, 7 or 8 hereof, any Options then outstanding shall terminate automatically on the date of any such breach by the Executive and the Executive shall pay the Company, within five business days of receipt by the Executive of a written demand therefor, an amount in cash equal to any gain realized by the Executive as a result of the exercise of any Options. The Options shall be subject to the terms and provisions of the Company's 1997 Amended and Restated Long-Term Incentive Plan and the stock option agreement relating to the Options, which stock option agreement shall, except as provided in this Section 3(e), be in the form customarily used by the Company. (f) Expense Reimbursement. During the Employment Period, the Company --------------------- shall reimburse the Executive, in accordance with the Company's policies and procedures, for all proper expenses incurred by the Executive in the performance of the Executive's duties hereunder. (g) Vesting of Retirement Benefits. Commencing on the Effective Date, ------------------------------ the Executive shall participate in the Company's Personal Retirement Account (the "PRA") and in the Company's Supplemental Executive Retirement Program (the "SERP") in accordance with the terms thereof and shall be fully vested in the benefits under the SERP. If the Executive forfeits any amount under the PRA as a result of the termination of his employment with the Company, the Executive shall receive an equivalent amount from the Company under the SERP. 4. Termination. (a) Death. Upon the death of the Executive, this ----------- ----- Agreement shall automatically terminate and all rights of the Executive and the Executive's heirs, executors and administrators to compensation and other benefits under this Agreement shall cease immediately, except that the Executive's heirs, executors or administrators, as the case may be, shall be entitled to: (i) accrued Base Salary through and including the Executive's date of death; (ii) accrued Annual Bonus based on the Guaranteed Annual Bonus through and including the Executive's date of death; and (iii) other Employee Benefits to which the Executive was entitled on the date of death in accordance with the terms of the plans and programs of the Company. (b) Disability. The Company may, at its option, terminate this ---------- Agreement upon written notice to the Executive if the Executive, because of physical or mental incapacity or disability, fails to perform the essential functions of the Executive's position, with or without 3 reasonable accommodation, required of the Executive hereunder for a continuous period of 120 days or any 180 days within any 12-month period. Upon such termination, all obligations of the Company hereunder shall cease immediately, except that the Executive shall be entitled to: (i) accrued Base Salary through and including the effective date of the Executive's termination of employment; (ii) accrued Annual Bonus based on the Guaranteed Annual Bonus through and including the effective date of the Executive's termination of employment; and (iii) other Employee Benefits to which the Executive is entitled upon termination of employment in accordance with the terms of the plans and programs of the Company. In the event of any dispute regarding the existence of the Executive's incapacity or disability hereunder, the matter shall be resolved by the determination of a physician selected by the Board. The Executive shall submit to appropriate medical examinations for purposes of such determination. (c) Cause. (i) The Company may, at its option, terminate the ----- Executive's employment under this Agreement for Cause (as hereinafter defined) upon written notice to the Executive (the "Cause Notice"). Any such termination for Cause shall be authorized by the Board. The Cause Notice shall state the particular action(s) or inaction(s) giving rise to termination for Cause. The Executive shall have five days after the Cause Notice is given to cure the particular action(s) or inaction(s), to the extent a cure is possible. If the Executive so effects a cure to the satisfaction of the Board, the Cause Notice shall be deemed rescinded and of no force or effect. (ii) As used in this Agreement, the term "Cause" shall mean any one or more of the following: (A) a continued and willful refusal by the Executive to perform the Executive's duties under this Agreement or to perform specific directives of the Board which are consistent with the scope and nature of the Executive's duties and responsibilities as set forth herein; (B) any intentional act of fraud, embezzlement or theft by the Executive in connection with the Executive's duties hereunder or in the course of the Executive's employment hereunder or any prior employment, or the Executive's admission or conviction of a felony or of any crime involving moral turpitude, fraud, embezzlement, theft or misrepresentation; (C) any gross negligence or willful misconduct of the Executive resulting in a loss to the Company or any of its subsidiaries, or damage to the reputation of the Company or any of its subsidiaries; (D) any breach by the Executive of any one or more of the covenants contained in Section 6, 7 or 8 hereof; or 4 (E) any violation of any statutory duty of loyalty to the Company or any of its subsidiaries. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. (iii) The exercise of the right of the Company to terminate this Agreement pursuant to this Section 4(c) shall not abrogate the rights or remedies of the Company in respect of the breach giving rise to such termination. (iv) If the Company terminates the Executive's employment for Cause, all obligations of the Company hereunder shall cease, except that the Executive shall be entitled to the payments and benefits specified in Sections 4(b)(i) and 4(b)(iii) hereof. (d) Termination Without Cause. The Company may, at its option, ------------------------- terminate the Executive's employment under this Agreement upon written notice to the Executive for a reason other than a reason set forth in Section 4(a), 4(b) or 4(c). Any such termination shall be authorized by the Board. If the Company terminates the Executive's employment for any such reason, all obligations of the Company hereunder shall cease immediately, except that the Executive shall be entitled to: (i) the payments and benefits specified in Sections 4(b)(i) through 4(b)(iii) hereof, inclusive; (ii) a lump sum cash payment equal to the product of (x) two, and (y) the sum of the Base Salary and the Guaranteed Annual Bonus; and (iii) the continuation by the Company of health and welfare benefits for 24 months on the same basis as such benefits were provided to the Executive immediately prior to his termination of employment. (e) Voluntary Termination. Upon 60 days prior written notice to the --------------------- Company (or such shorter period as may be permitted by the Board), the Executive may voluntarily terminate the Executive's employment with the Company for any reason. If the Executive voluntarily terminates the Executive's employment pursuant to this Section 4(e), all obligations of the Company hereunder shall cease immediately, except that the Executive shall be entitled to the payments and benefits specified in Sections 4(b)(i) and 4(b)(iii) hereof. (f) Termination for Good Reason. (i) Upon 30 days prior written --------------------------- notice to the Company (or such shorter period as may be permitted by the Board), the Executive may voluntarily terminate the Executive's employment with Good Reason (as hereinafter defined). If the Executive voluntarily terminates the Executive's employment pursuant to this Section 4(f), 5 all obligations of the Company hereunder shall cease immediately, except that the Executive shall be entitled to: (A) the payments and benefits specified in Sections 4(b)(i) through 4(b)(iii) hereof, inclusive; (B) a lump sum cash payment equal to the product of (x) two, and (y) the sum of the Base Salary and the Guaranteed Annual Bonus; and (C) the continuation by the Company of health and welfare benefits for 24 months on the same basis as such benefits were provided to the Executive immediately prior to his termination of employment. (ii) As used in this Agreement, the term "Good Reason" shall mean, without the written consent of the Executive, any one or more of the following, provided that an isolated, insubstantial or inadvertent action not taken in bad faith or failure not occurring in bad faith which is remedied by the Company promptly after receipt of notice thereof given by the Executive shall not constitute Good Reason: (A) the assignment to the Executive of any duties materially inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by this Agreement or any other action by the Company which results in a material diminution in such position, authority, duties or responsibilities; (B) any failure by the Company to comply with any of the provisions of Section 3 hereof; (C) the Company's requiring the Executive to be based at any office or location other than as provided in Section 1 hereof; or (D) any other material breach by the Company of this Agreement, including, without limitation, a failure to appoint the Executive as Chief Executive Officer after the Transition Date. 5. Federal and State Withholding. The Company shall deduct from the ----------------------------- amounts payable to the Executive pursuant to this Agreement the amount of all required federal, state and local withholding taxes in accordance with the Executive's Form W-4 on file with the Company, and all applicable federal employment taxes. 6. Noncompetition; Nonsolicitation. (a) General. The Executive ------------------------------- ------- acknowledges that in the course of the Executive's employment with the Company the Executive has and will become familiar with trade secrets and other confidential information concerning the Company and its subsidiaries and that the Executive's services will be of special, unique and extraordinary value to the Company and its subsidiaries. 6 (b) Noncompetition. The Executive agrees that during the period of -------------- the Executive's employment with the Company and the longer of (i) one year after the Executive's termination of employment with the Company or (ii) the period, if any, for which the Executive is entitled to payments from the Company pursuant to Section 4 (the "Noncompetition Period"), the Executive shall not in any manner, directly or indirectly, through any person, firm or corporation, alone or as a member of a partnership or as an officer, director, stockholder, investor or employee of or consultant to any other corporation or enterprise or otherwise, engage or be engaged, or assist any other person, firm, corporation or enterprise in engaging or being engaged, in any business, in which the Executive was involved or had knowledge, being conducted by, or contemplated by, the Company or any of its subsidiaries as of the termination of the Executive's employment in any geographic area in which the Company or any of its subsidiaries is then conducting such business. Notwithstanding the foregoing, for purposes of this Section 6(b) only, the Noncompetition Period shall cease as of the date of the Executive's termination of employment if such employment is terminated pursuant to Section 4(d) or 4(f) hereof. (c) Nonsolicitation. The Executive further agrees that during the --------------- Noncompetition Period the Executive shall not (i) in any manner, directly or indirectly, induce or attempt to induce any employee of the Company or any of its subsidiaries to terminate or abandon his or her employment for any purpose whatsoever or (ii) in connection with any business to which Section 6(b) applies, call on, service, solicit or otherwise do business with any customer of the Company or any of its subsidiaries. (d) Exceptions. Nothing in this Section 6 shall prohibit the ---------- Executive from being (i) a stockholder in a mutual fund or a diversified investment company or (ii) an owner of not more than two percent of the outstanding stock of any class of a corporation, any securities of which are publicly traded, so long as the Executive has no active participation in the business of such corporation. (e) Reformation. If, at any time of enforcement of this Section 6, a ----------- court or an arbitrator holds that the restrictions stated herein are unreasonable under circumstances then existing, the parties hereto agree that the maximum period, scope or geographical area reasonable under such circumstances shall be substituted for the stated period, scope or area and that the court or arbitrator shall be allowed to revise the restrictions contained herein to cover the maximum period, scope and area permitted by law. This Agreement shall not authorize a court or arbitrator to increase or broaden any of the restrictions in this Section 6. 7. Confidentiality. The Executive shall not, at any time during the --------------- Employment Period or thereafter, make use of or disclose, directly or indirectly, any (i) trade secret or other confidential or secret information of the Company or of any of its subsidiaries or (ii) other technical, business, proprietary or financial information of the Company or of any of its subsidiaries not available to the public generally or to the competitors of the Company or to the competitors of any of its subsidiaries ("Confidential Information"), except to the extent that such Confidential Information (a) becomes a matter of public record or is published in a newspaper, magazine or other periodical or on electronic or other media available to the general public, other than as a result of any act or omission of the Executive, (b) is required to be disclosed by any law, regulation or order of any court or regulatory commission, department or agency, provided that the Executive gives prompt notice of such requirement to the Company to enable the 7 Company to seek an appropriate protective order, or (c) is required to be used or disclosed by the Executive to perform properly the Executive's duties under this Agreement. Promptly following the termination of the Employment Period, the Executive shall surrender to the Company all records, memoranda, notes, plans, reports, computer tapes and software and other documents and data which constitute Confidential Information which the Executive may then possess or have under the Executive's control (together with all copies thereof). 8. Intellectual Property. The Executive shall not, at any time, have --------------------- or claim any right, title or interest in any trade name, patent, trademark, copyright, trade secret, intellectual property, methodologies, technologies, procedures, concepts, ideas or other similar rights (collectively, "Intellectual Property") belonging to the Company or any of its affiliates and shall not have or claim any right, title or interest in or to any material or matter of any kind prepared for or used in connection with the business or promotion of the Company or any of its affiliates, whether produced, prepared or published in whole or in part by the Executive or by the Company or any of its affiliates. All Intellectual Property that is conceived, devised, made, developed or perfected by the Executive, alone or with others, during the Executive's employment that is related in any way to the Company's or any of its affiliates' business or is devised, made, developed or perfected utilizing equipment or facilities of the Company or its affiliates shall be promptly disclosed to the Board, are works for hire and become the sole, absolute and exclusive property of the Company. If and to the extent that any of such Intellectual Property should be determined for any reason not to be a work for hire, the Executive hereby assigns to the Company all of the Executive's right, title and interest in and to such Intellectual Property. At the reasonable request and expense of the Company but without charge to the Company, whether during or at any time after the Executive's employment with the Company, the Executive shall cooperate fully with the Company and its affiliates in the securing of any trade name, patent, trademark, copyright or intellectual property protection or other similar rights in the United States and in foreign countries, including without limitation, the execution and delivery of assignments, patent applications and other documents or papers. 9. Enforcement. The parties hereto agree that the Company and its ----------- subsidiaries would be damaged irreparably in the event that any provision of Section 6, 7 or 8 of this Agreement were not performed in accordance with its terms or were otherwise breached and that money damages would be an inadequate remedy for any such nonperformance or breach. Accordingly, the Company and its successors and permitted assigns shall be entitled, in addition to other rights and remedies existing in their favor, to an injunction or injunctions to prevent any breach or threatened breach of any of such provisions and to enforce such provisions specifically (without posting a bond or other security). The Executive agrees that the Executive will submit to the personal jurisdiction of the courts of the State of Michigan in any action by the Company to enforce an arbitration award against the Executive or to obtain interim injunctive or other relief pending an arbitration decision. 10. Representations. The Executive represents and warrants to the --------------- Company that (a) the execution, delivery and performance of this Agreement by the Executive does not and will not conflict with, breach, violate or cause a default under any contract, agreement, instrument, order, judgment or decree to which the Executive is a party or by which the Executive is bound, (b) the Executive is not a party to or bound by any employment agreement, noncompetition agreement or confidentiality agreement with any other person or entity and (c) 8 upon the execution and delivery of this Agreement by the Company, this Agreement shall be the valid and binding obligation of the Executive, enforceable in accordance with its terms. 11. Survival. Sections 6, 7, 8 and 9 of this Agreement shall survive -------- and continue in full force and effect in accordance with their respective terms, notwithstanding any termination of the Employment Period. 12. Arbitration. Except as otherwise set forth in Section 9 hereof, ----------- any dispute or controversy between the Company and the Executive, whether arising out of or relating to this Agreement, the breach of this Agreement, or otherwise, shall be settled by arbitration in Detroit, Michigan administered by the American Arbitration Association, with any such dispute or controversy arising under this Agreement being so administered in accordance with its Commercial Rules then in effect, and judgment on the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The arbitrator shall have the authority to award any remedy or relief that a court of competent jurisdiction could order or grant, including, without limitation, the issuance of an injunction. However, either party may, without inconsistency with this arbitration provision, apply to any court having jurisdiction over such dispute or controversy and seek interim provisional, injunctive or other equitable relief until the arbitration award is rendered or the controversy is otherwise resolved. Except as necessary in court proceedings to enforce this arbitration provision or an award rendered hereunder, or to obtain interim relief, neither a party nor an arbitrator may disclose the existence, content or results of any arbitration hereunder without the prior written consent of the Company and the Executive. The Company and the Executive acknowledge that this Agreement evidences a transaction involving interstate commerce. Notwithstanding any choice of law provision included in this Agreement, the United States Federal Arbitration Act shall govern the interpretation and enforcement of this arbitration provision. 13. Notices. All notices and other communications required or ------- permitted hereunder shall be in writing and shall be deemed given when (a) delivered personally or by overnight courier to the following address of the other party hereto (or such other address for such party as shall be specified by notice given pursuant to this Section) or (b) sent by facsimile to the following facsimile number of the other party hereto (or such other facsimile number for such party as shall be specified by notice given pursuant to this Section), with the confirmatory copy delivered by overnight courier to the address of such party pursuant to this Section 13: If to the Company, to: Federal-Mogul Corporation 26555 Northwestern Highway Southfield, Michigan 48034 Attention: Chairman of the Compensation Committee of the Board of Directors 9 with a copy to: Federal-Mogul Corporation 26555 Northwestern Highway Southfield, Michigan 48034 Attention: General Counsel If to the Executive, to: Charles McClure 55 Cabot Place Bloomfield Hills, Michigan 48105 14. Severability. Whenever possible, each provision of this ------------ Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability shall not affect the validity, legality or enforceability of any other provision of this Agreement or the validity, legality or enforceability of such provision in any other jurisdiction, but this Agreement shall be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision had never been contained herein. 15. Change of Control. Simultaneously with the execution and ----------------- delivery of this Agreement, the parties also are executing and delivering an Employment Agreement in the form attached hereto as Exhibit A. In the event of a "Change of Control," as defined in the Employment Agreement attached hereto as Exhibit A, the annexed Employment Agreement shall exclusively govern the employment relationship between the Company and the Executive and this Agreement shall immediately terminate without any further obligations by either party; provided, however, that Section 3(g) hereof shall not terminate by reason of - -------- ------- said Change of Control and shall remain in full force and effect. 16. Entire Agreement. This Agreement and the Employment Agreement in ---------------- the form attached hereto as Exhibit A constitute the entire agreement and understanding between the parties with respect to the subject matter hereof or thereof and supersede and preempt any prior understandings, agreements or representations by or between the parties, written or oral, which may have related in any manner to the subject matter hereof or thereof. 17. Successors and Assigns. This Agreement shall be enforceable by ---------------------- the Executive and the Executive's heirs, executors, administrators and legal representatives, and by the Company and its successors and assigns. 18. Governing Law. This Agreement shall be governed by and construed ------------- and enforced in accordance with the internal laws of the State of Michigan without regard to principles of conflict of laws. 19. Amendment and Waiver. The provisions of this Agreement may be -------------------- amended or waived only by the written agreement of the Company and the Executive, and no 10 course of conduct or failure or delay in enforcing the provisions of this Agreement shall affect the validity, binding effect or enforceability of this Agreement. 20. Counterparts. This Agreement may be executed in two ------------ counterparts, each of which shall be deemed to be an original and both of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. FEDERAL-MOGUL CORPORATION By: /s/ Richard P. Randazzo --------------------------------- Richard P. Randazzo Senior Vice President, Human Resources CHARLES McCLURE /s/ Charles McClure -------------------------------------- 11 EX-10.27 12 0012.txt CHANGE OF CONTROL AGREEMENT--MCCLURE Exhibit 10.27 EMPLOYMENT AGREEMENT AGREEMENT by and between Federal-Mogul Corporation, a Michigan corporation (the "Company"), and Charles McClure (the "Executive"), dated as of the 10th day of January, 2001 (this "Agreement"). The Board of Directors of the Company (the "Board") has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control and to encourage the Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change of Control, and to provide the Executive with compensation and benefits arrangements upon a Change of Control which ensure that the compensation and benefits expectations of the Executive will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Certain Definitions. (a) The "Effective Date" shall mean the ------------------- first date during the Change of Control Period (as defined in Section l(b)) on which a Change of Control (as defined in Section 2) occurs. Anything in this Agreement to the contrary notwithstanding, if a Change of Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change of Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change of Control or (ii) otherwise arose in connection with or anticipation of a Change of Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment. (b) The "Change of Control Period" shall mean the period commencing on the date hereof and ending on the third anniversary of the date hereof; provided, however, that commencing on the date one year after the date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), unless previously terminated, the Change of Control Period shall be automatically extended so as to terminate three years from such Renewal Date, unless at least 60 days prior to the Renewal Date the Company shall give notice to the Executive that the Change of Control Period shall not be so extended. 2. Change of Control. For the purpose of this Agreement, a "Change ----------------- of Control" shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (A) any acquisition directly from the Company, (B) any acquisition by the Company, (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (D) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section 2; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. 2 3. Employment Period. The Company hereby agrees to continue the ----------------- Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the third anniversary of such date (the "Employment Period"). 4. Terms of Employment. (a) Position and Duties. (i) During the ------------------- ------------------- Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 120-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office or location less than 35 miles from such location. (ii) During the Employment Period, and excluding any periods of vacation and sick leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) Compensation. (i) Base Salary. During the Employment Period, ------------ ----------- the Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at an annual rate at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) Annual Bonus. In addition to Annual Base Salary, the Executive ------------ shall be awarded, for each fiscal year ending during the Employment Period, an annual bonus (the "Annual Bonus") in cash at least equal to the Executive's highest bonus, including any bonus or portion thereof which has been earned but deferred, under the Company's 1997 Supplemental 3 Compensation Plan, as amended and restated, or any comparable bonus under any predecessor or successor plan, for the last three full fiscal years prior to the Effective Date (annualized in the event that the Executive was not employed by the Company for the whole of such fiscal year); provided, that if the Executive's highest bonus for one or more of such fiscal years is determined pursuant to the terms of the Company's Economic Value Added (EVA) Plan (the "EVA Plan"), and the Executive's bonus declared pursuant to the EVA Plan for such fiscal year is higher than the Executive's bonus paid pursuant to the EVA Plan for such fiscal year, the Executive's highest bonus for such fiscal year shall be the Executive's bonus declared for such fiscal year. The Executive's highest bonus for the last three full fiscal years prior to the Effective Date, as determined (and annualized, if applicable) pursuant to this Section 4(b)(ii), is hereinafter referred to as the "Recent Annual Bonus"). Each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus. (iii) Incentive, Savings and Retirement Plans. During the Employment --------------------------------------- Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. Without limiting the generality of the foregoing, the Executive shall be entitled to the retirement benefits set forth in Section 3(g) of the Employment Agreement dated as of January 10, 2001 between the Company and the Executive, which benefits shall be benefits pursuant to a retirement plan of the Company for all purposes of this Agreement. (iv) Welfare Benefit Plans. During the Employment Period, the --------------------- Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, disability, employee life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (v) Expenses. During the Employment Period, the Executive shall be -------- entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its 4 affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vi) Fringe Benefits. During the Employment Period, the Executive --------------- shall be entitled to fringe benefits, including, without limitation, tax and financial planning services, payment of club dues, and, if applicable, use of an automobile and payment of related expenses, in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vii) Office and Support Staff. During the Employment Period, the ------------------------ Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (viii) Vacation. During the Employment Period, the Executive shall -------- be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. 5. Termination of Employment. (a) Death or Disability. The ------------------------- ------------------- Executive's employment shall terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 12(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative. (b) Cause. The Company may terminate the Executive's employment ----- during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean: 5 (i) the willful and continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail. (c) Good Reason. The Executive's employment may be terminated by the ----------- Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean: (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) any failure by the Company to comply with any of the provisions of Section 4(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location other than as provided in Section 4(a)(i)(B) hereof or the Company's requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date; 6 (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section 11(c) of this Agreement. For purposes of this Section 5(c), any good faith determination of "Good Reason" made by the Executive shall be conclusive. (d) Notice of Termination. Any termination by the Company for Cause, --------------------- or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 12(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) if the ------------------- Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 6. Obligations of the Company upon Termination. (a) Good Reason: ------------------------------------------- ------------- Other Than for Cause, Death or Disability. If, during the Employment Period, - ----------------------------------------- the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: (A) the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the product of (x) the higher of (I) the Recent Annual Bonus and (II) the "Highest Annual Bonus," as such term is defined in the last sentence of Section 6(a) hereof, and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365 and (3) any 7 compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued and banked vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2), and (3) shall be hereinafter referred to as the "Accrued Obligations"); and (B) the amount equal to the product of (1) three and (2) the sum of (x) the Executive's Annual Base Salary and (y) the "Highest Annual Bonus," as such term is defined in the last sentence of Section 6(a) hereof; and (C) an amount equal to the excess of (a) the actuarial equivalent of the benefit under the Company's Personal Retirement Account (the "PRA") (utilizing actuarial assumptions no less favorable to the Executive than those in effect under the Company's PRA immediately prior to the Effective Date) and Supplemental Executive Retirement Program (the "SERP") which the Executive would receive if the Executive's employment continued for three years after the Date of Termination assuming for this purpose that all accrued benefits are fully vested, and, assuming that the Executive's compensation in each of the three years is that required by Section 4(b)(i) and Section 4(b)(ii), over (b) the actuarial equivalent of the Executive's actual benefit (paid or payable), if any, under the PRA and the SERP as of the Date of Termination; (ii) for three years after the Executive's Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(iv) of this Agreement if the Executive's employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until three years after the Date of Termination and to have retired on the last day of such period; (iii) the Company shall, at its sole expense as incurred, provide the Executive with outplacement services the scope and provider of which shall be selected by the Executive in his sole discretion; and (iv) to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice 8 or contract or agreement of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). For purposes of this Agreement, "Highest Annual Bonus" shall mean the Annual Bonus paid or payable, including any bonus or portion thereof which has been earned but deferred (and annualized for any fiscal year consisting of less than twelve full months or during which the Executive was employed for less than twelve full months), for the most recently completed fiscal year during the Employment Period, if any; provided, that if the Annual Bonus for such fiscal year is determined pursuant to the terms of the EVA Plan, and the Executive's bonus declared pursuant to the EVA Plan for such fiscal year is higher than the Executive's bonus paid pursuant to the EVA Plan for such fiscal year, the Annual Bonus for such fiscal year shall be the Executive's bonus declared for such fiscal year. (b) Death. If the Executive's employment is terminated by reason of ----- the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(b) shall include, without limitation, and the Executive's estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and affiliated companies to the estates and beneficiaries of peer executives of the Company and such affiliated companies under such plans, programs, practices and policies relating to death benefits, if any, as in effect with respect to other peer executives and their beneficiaries at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive's estate and/or the Executive's beneficiaries, as in effect on the date of the Executive's death with respect to other peer executives of the Company and its affiliated companies and their beneficiaries. (c) Disability. If the Executive's employment is terminated by ---------- reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and its affiliated companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families. (d) Cause; Other than for Good Reason. If the Executive's employment --------------------------------- shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (i) his 9 Annual Base Salary through the Date of Termination, (ii) the amount of any compensation previously deferred by the Executive, and (iii) Other Benefits, in each case to the extent theretofore unpaid. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for Accrued Obligations and the timely payment or provision of Other Benefits. In such case, all Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. 7. Non-exclusivity of Rights. Nothing in this Agreement shall ------------------------- prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor, subject to Section 12(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 8. Full Settlement. The Company's obligation to make the payments --------------- provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986, as amended (the "Code"). 9. Certain Additional Payments by the Company. ------------------------------------------ (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 9) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties 10 imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 9(a), if it shall be determined that the Executive is entitled to a Gross-Up Payment, but that the Executive, after taking into account the Payments and the Gross-Up Payment, would not receive a net after-tax benefit of at least $550,000 (taking into account both income taxes and any Excise Tax) as compared to the net after-tax proceeds to the Executive resulting from an elimination of the Gross-Up Payment and a reduction of the Payments, in the aggregate, to an amount (the "Reduced Amount") such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive and the Payments, in the aggregate, shall be reduced to the Reduced Amount. (b) Subject to the provisions of Section 9(c), all determinations required to be made under this Section 9, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Ernst & Young LLP or such other certified public accounting firm as may be designated by the Executive (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 9, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 9(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten business days after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: 11 (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 9(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 9(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 9(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not 12 be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 10. Confidential Information. The Executive shall hold in a ------------------------ fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 10 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 11. Successors. (a) This Agreement is personal to the Executive and ---------- without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 12. Miscellaneous. (a) This Agreement shall be governed by and ------------- construed in accordance with the laws of the State of Michigan, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: 13 If to the Executive: -------------------- Charles McClure 55 Cabot Place Bloomfield Hills, Michigan 48105 If to the Company: ------------------ Federal-Mogul Corporation 26555 Northwestern Highway Southfield, Michigan 48034 Attention: Chairman of the Compensation Committee of the Board of Directors Federal-Mogul Corporation 26555 Northwestern Highway Southfield, Michigan 48034 Attention: General Counsel or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will" and, subject to Section l(a) hereof, prior to the Effective Date, the Executive's employment and/or this Agreement may be terminated by either the Executive or the Company at any time prior to the Effective Date, in which case the Executive shall have no further rights under this Agreement. From and after the Effective Date this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof. 14 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. FEDERAL-MOGUL CORPORATION By: /s/ Richard P. Randazzo ---------------------------------------- CHARLES MCCLURE By: /s/ Charles McClure ------------------------------------------ 15 EX-10.28 13 0013.txt SEVERANCE AGREEMENT Exhibit 10.28 September 21, 2000 Mr. Richard A. Snell 459 Martell Drive Bloomfield Hills, MI 48304 Dear Dick: The Board of Directors has carefully reviewed your Employment Agreement, dated as of December 1, 1996 and amended and restated as of September 29, 1999. In connection with your separation from Federal-Mogul Corporation ("F-M") on September 19, 2000 (the "Separation Date"), the Board is prepared to offer the following separation benefits in accordance with the terms of your Employment Agreement: 1. Severance Compensation. F-M will pay you the following severance ---------------------- compensation, less applicable tax withholdings and other normal payroll deductions in accordance with F-M's payroll practices: a. $2,000,000, which is equivalent to two times your base salary as of the Separation Date. This amount will be reduced by any compensation you receive between the Separation Date and the date on which F-M receives your executed Separation and General Release Agreement. b. $1,900,244, which is equivalent to two times the average of the bonus compensation you received over the three-year period 1997 through 1999. c. $209,030 as payment in full of your EVA bonus bank. d. $76,923, which is equivalent to four weeks' vacation pay. 2. Supplemental Key Executive Pension Plan (SKEPP). You will receive an ----------------------------------------------- estimated net pay replacement of 26.3%, which equals approximately $483,000 per year calculated on a single life annuity basis. In accordance with the terms of the SKEPP, this amount will be offset by (i) the amount you are entitled to receive under the F-M Personal Retirement Account, calculated on a single life annuity basis; (ii) the pension benefit you are entitled to receive from Tenneco, calculated on a single life annuity basis; and (iii) all applicable taxes. The exact amount of your SKEPP payment will be subject to final confirmation by the Plan actuary (Mercer). Mr. Richard A. Snell September 21, 2000 Page 2 3. Other Benefits. In accordance with the terms of Employment Agreement, -------------- you will also receive the following benefits for a period of two years following the Separation Date: a. Supplemental death and disability coverage. b. F-M will continue to maintain $400,000 of additional term life insurance for your benefit. c. You will be entitled to lease two vehicles in accordance with the terms of F-M's Executive Lease Car Program. 4. Additional Benefits. In addition to the benefits set forth above ------------------- provided for in your Employment Agreement, the Board is prepared to offer you the following benefits: a. Welfare Benefits Coverage. F-M will maintain, at its expense, your ------------------------- participation in F-M's CHOICE Benefit Plan to the extent of and in accordance with your 2000 CHOICE plan coverage elections. Any changes F-M makes to its CHOICE Benefit Plan during the two years following the Separation Date will similarly affect your CHOICE Benefits. b. Tax Preparation and Financial Planning. For two years following the -------------------------------------- Separation Date, you will be entitled to financial planning services and tax planning services in accordance with F-M's policies regarding these services for executives. c. Stock Options. At the time of your hire, you received 150,000 ------------- performance based and 150,000 time based non-qualified stock options issued on November 1, 1996, with an exercise price of $22.625. You are fully vested in the performance based options, and based on your length of employment, you have vested in 3/5th or 90,000 of the time based options. An additional 30,000 time based options would have vested on each of November 1, 2000 and November 1, 2001. Solely for purposes of vesting in the remaining 60,000 time based options, your term of employment shall be deemed to continue until September 19, 2002. In the event of your death prior to vesting in full, your spouse will be immediately vested in all of the time based options. All 300,000 options granted on November 1, 1996 will be exercisable by you, to the extent vested, until November 1, 2004, on which date they will expire, notwithstanding any contrary terms in the 1989 Performance Incentive Stock Plan or otherwise. d. Outplacement Services. F-M will provide reasonable executive level --------------------- outplacement services for a period not to exceed one year. Your receipt of these severance benefits is dependent upon your execution of the Separation and General Release Agreement attached hereto, which is also attached to your Employment Agreement as Exhibit "D". F-M will make the payments provided herein to Mr. Richard A. Snell September 21, 2000 Page 3 you within ten business days of receipt of your executed Separation and General Release Agreement. If you have any questions or wish to discuss the terms of your severance benefits, please do not hesitate to contact me. Very truly yours, John J. Fannon cc: F-M Board of Directors R.P. Randazzo J.J. Zamoyski EX-21 14 0014.txt SUBSIDIARIES Exhibit 21 FEDERAL-MOGUL CORPORATION SUBSIDIARIES The direct and indirect subsidiaries of the Company and their respective States or other jurisdictions of incorporation as of December 31, 2000 are as follows:
Percentage of Voting Stock Owned Jurisdiction directly and indirectly Name of Subsidiary of Incorporation by Federal-Mogul ------------------ ---------------- ----------------------- Federal-Mogul Canada, Ltd. Canada 100% Federal-Mogul, S.A. France 100% Federal-Mogul Holdings Deutschland GmbH Germany 100% Federal-Mogul Weisbaden GmbH Germany 100% Federal-Mogul Burscheid GmbH Germany 100% Federal-Mogul Ignition SpA Italy 100% Federal-Mogul S.p.A. Italy 100% Federal-Mogul Aftermarket Italia SRL Italy 100% Federal-Mogul Holding SRL Italy 100% Federal-Mogul Sealing Systems SpA Italy 100% Federal-Mogul de Mexico S.A. de C.V. Mexico 94% Servicios de Componentes Automotrices, S.A. Mexico 100% Servicios Administrativos Industriales, S.A. Mexico 100% Federal-Mogul Netherlands B.V. Netherlands 100% Federal-Mogul Global B.V. Netherlands 100% Federal-Mogul Growth B.V. Netherlands 100% Federal-Mogul Holdings B.V. Netherlands 100% Federal-Mogul Investments B.V. Netherlands 100% T & N Holdings Ltd. South Africa 100% Federal-Mogul, SARL Switzerland 100% Federal-Mogul Acquisition Company Limited United Kingdom 100% Federal-Mogul Global Growth Limited United Kingdom 100% F-M UK Holding Ltd. United Kingdom 100% T & N Limited United Kingdom 100% T & N Trademarks Ltd. United Kingdom 100% Federal-Mogul World Wide, Inc. Michigan 100% Federal-Mogul Funding Corporation Michigan 100% Federal-Mogul Ignition Company Delaware 100%
Page 1 of 2 FEDERAL-MOGUL CORPORATION SUBSIDIARIES (cont.)
Percentage of Voting Stock Owned Jurisdiction directly and indirectly Name of Subsidiary of Incorporation by Federal-Mogul ------------------ ---------------- ----------------------- Federal-Mogul Products, Inc. Missouri 100% Federal-Mogul UK Holdings Inc. Delaware 100% Federal-Mogul Global Inc. Delaware 100% Federal-Mogul Dutch Holdings Inc. Delaware 100% FM International LLC Delaware 100% Felt Products Manufacturing Co. Delaware 100% T & N Industries Inc. Delaware 100% Federal-Mogul Piston Rings, Inc. Delaware 100% Ferodo America, Inc. Delaware 100% Federal-Mogul Powertrain Inc. Michigan 100%
Page 2 of 2 EX-23.1 15 0015.txt CONSENT OF ERNST & YOUNG Exhibit 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statements (33-55135, 33-54717, 333-56725, 333-53853, 333-67805 and 333-74661) on Form S-3, the Registration Statement (333-81943) on Form S-4, and the Registration Statements (333-38961, 33-54301, 33-51403, 33-32429, 33-32323, 33-30171, 2-93179 and 333-50370) on Form S-8 of our report dated February 1, 2001, except for Note 6 as to which the date is March 22, 2001, with respect to the consolidated financial statements and schedule of Federal-Mogul Corporation, our report dated February 1, 2001 with respect to the consolidated statements of Federal-Mogul Ignition Company (and the Cooper Automotive Division of Cooper Industries, its predecessor), our report dated February 1, 2001 with respect to the consolidated financial statements of Federal-Mogul Products, Inc. (and the Moog Automotive Division of Cooper Industries, its predecessor), our report dated March 1, 2001 with respect to the financial statements of Federal-Mogul Aviation, Inc. (and the Aviation Division of the Cooper Automotive Division of Cooper Industries, its predecessor), our report dated March 22, 2001 with respect to the consolidated financial statements of T&N Industries, Inc. and our report dated March 22, 2001 with respect to the consolidated financial statements of Federal-Mogul Powertrain, Inc., all of which are included in Federal-Mogul Corporation's Annual Report on Form 10-K for the year ended December 31, 2000. /s/ Ernst & Young LLP Detroit, Michigan March 22, 2001 EX-24 16 0016.txt POWER OF ATTORNEY Exhibit 24 POWER OF ATTORNEY ----------------- KNOW ALL MEN BY THESE PRESENTS, that each one of the undersigned directors of FEDERAL-MOGUL CORPORATION, a Michigan corporation, which is about to file with the Securities and Exchange Commission, Washington D.C. under the provisions of the Securities Exchange Act of 1934, as amended, the Corporation's Annual Report on Form 10-K for the year ended December 31, 2000, hereby nominates, constitutes and appoints James J. Zamoyski and David M. Sherbin, or either of them, as his true and lawful attorney-in-fact, with full power to act and with full power of substitution, for him and in his name, place and stead, to sign such Report and any and all amendments thereto, and to file said Report and each Amendment so signed, with all Exhibits thereto, with the Securities and Exchange Commission. IN WITNESS WHEREOF, each of the undersigned has executed this Power of Attorney this 21/st/ day of February, 2001. /s/ ROBERT S. MILLER, JR. -------------------------------- Robert S. Miller, Jr. Chairman of the Board /s/ JOHN J. FANNON /s/ FRANK E. MACHER - ------------------------ ------------------------ John J. Fannon Frank E. Macher Director Director /s/ RODERICK M. HILLS /s/ CHARLES G. MCCLURE - ------------------------ ------------------------ Roderick M. Hills Charles G. McClure Director Director /s/ PAUL SCOTT LEWIS /s/ JOHN C. POPE - ------------------------ ------------------------ Paul Scott Lewis John C. Pope Director Director /s/ SIR GEOFFREY WHALEN C.B.E -------------------------------------- Sir Geoffrey Whalen C.B.E. Director -----END PRIVACY-ENHANCED MESSAGE-----