-----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, MV6Ug+9LNOz9bR89ejCIKMWP2RKnsH20VaFTTIOekZjofXwKQ0Wm53mf5h/P9s2q 5cW6uoAPh+t7lh9wVSqLYw== 0001067312-99-000093.txt : 19990412 0001067312-99-000093.hdr.sgml : 19990412 ACCESSION NUMBER: 0001067312-99-000093 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 DATE AS OF CHANGE: 19990409 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FEDERAL MOGUL CORP CENTRAL INDEX KEY: 0000034879 STANDARD INDUSTRIAL CLASSIFICATION: 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: 99583946 BUSINESS ADDRESS: STREET 1: 26555 NORTHWESTERN HGWY CITY: SOUTHFIELD STATE: MI ZIP: 48034 BUSINESS PHONE: 2483547700 10-K 1 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, 1998 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 $3,140,433,537 as of March 30, 1999 based on the reported last sale price as published for the New York Stock Exchange-- Composite Transactions for such date. The Registrant had 70,494,095 shares of common stock outstanding as of March 30, 1999. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement for its 1999 Annual Meeting of Shareholders filed with the Securities and Exchange Commission pursuant to Regulation 14A on March 24, 1999, 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 integrate the businesses of T&N, Fel-Pro and Cooper Automotive into Federal-Mogul, plans to address computer software issues related to the approach of the year 2000, plans to address the issue related to the conversion to the Euro, and the scope of the effect of T&N asbestos liability. Forward-Looking statements may involve known and unknown risks, uncertainties and other factors, which may cause the actual results, performance or achievements of Federal-Mogul to differ materially from any future results, performance or achievements expressed or implied by such Forward-Looking statements. Such risks, uncertainties and other factors include, without limitation, those relating to the combination of Federal- Mogul's business with those of T&N, Fel-Pro and Cooper Automotive and the anticipated synergies and operating efficiencies and restructuring charges in connection with such acquisitions, conditions in the automotive components industry, certain global and regional economic conditions and other factors detailed herein and from time to time in the documents incorporated by reference herein. Moreover, Federal-Mogul's plans, objectives and intentions are subject to change based on these and other factors, some of which are beyond Federal-Mogul's control. 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 a global manufacturer and distributor of a broad range of vehicular components for automobiles and light trucks, heavy duty trucks, farm and construction vehicles and industrial products. The Company manufactures engine bearings, sealing systems, fuel systems, lighting products, pistons, 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. Federal-Mogul 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, engineering and distribution by concentrating efforts and resources on complimentary acquisitions of manufacturing companies that will enhance its product base and expand its global reach. 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 Latin America, Eastern Europe and the Asian markets. The Company intends to couple its expansion of OE business in new geographic markets with growth in global aftermarket sales. In February 1998, the Company acquired Fel-Pro, Incorporated ("Fel-Pro"), a privately owned manufacturer headquartered in Skokie, Illinois for $722 million. The transaction involved $225 million in equity and $497 million in cash. Fel-Pro is the leading gasket manufacturer for the North American aftermarket and OE heavy-duty market. Fel-Pro's primary product lines consist of gaskets, heavy-duty diesel engine products, diesel products, high performance gaskets and other equipment and chemical products. Fel-Pro's products including cylinder head and molded rubber gaskets, and marine and performance gaskets, are marketed under various brand names including Permatorque Blue (R) , Fel-Coprene (R) , Print-O-Seal (R) and PermaDry Plus (R). In 1997, Fel-Pro had sales of approximately $500 million. Fel-Pro had more than 2,700 employees in 16 locations. In March 1998, Federal-Mogul acquired T&N plc ("T&N"), a supplier of engine and transmission products for a total purchase price of approximately $2.4 billion. T&N, based in Manchester, England, manufactures and supplies high technology engineered automotive components and industrial materials including pistons, friction products, bearings, composites, camshafts and sealing products servicing OE customers and the aftermarket. In 1997, T&N had sales of approximately $2.9 billion with about 80% of such sales relating to the global automotive industry. T&N operated in approximately 200 manufacturing locations in 24 countries, employing approximately 28,000 people worldwide. In October 1998, the Company acquired the automotive division of Cooper Industries, Inc. ("Cooper Automotive"), headquartered in St. Louis, Missouri for an initial purchase price of approximately $1.9 billion. Cooper Automotive is a leading supplier of aftermarket parts for repair and maintenance and serves OE automobile manufacturers worldwide. Cooper Automotive manufactures and distributes brakes and friction products, chassis parts, ignition and wiper blades under well-known brand names including Champion (R), Moog (R), Abex (R) , Wagner (R) and Zanxx (R) . In 1997, Cooper Automotive had sales of approximately $1.9 billion and employed approximately 14,500 employees in 63 locations. The above acquisitions are major steps toward Federal-Mogul's strategic goals of focusing on its core competencies of manufacturing, engineering and distribution and expanding the Company's product base, geographic reach and market penetration. Federal-Mogul maintains technical centers in Europe and North America to develop and provide advanced materials, products and manufacturing processes for all of its manufacturing units, including facilities acquired with T&N and Fel-Pro. 1 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, --------------------------- 1998 1997 1996 ------- -------- -------- Net Sales by Operating Segment: Powertrain Systems............................... 42% 43% 36% Sealing Systems.................................. 20% 19% 15% General Products................................. 37% 32% 33% Divested Activities.............................. 1% 6% 16% ------- -------- -------- 100% 100% 100% ======= ======== ======== YEAR ENDED DECEMBER 31, --------------------------- 1998 1997 1996 ------- -------- -------- Net Sales by Geographic Region: United States.................................... 52% 62% 59% Mexico........................................... 3% 5% 3% Canada........................................... 2% 3% 2% ------- -------- -------- Total North America............................ 57% 70% 64% ------- -------- -------- United Kingdom................................... 12% 1% 1% Germany.......................................... 11% 7% 9% France........................................... 7% 2% 1% Italy............................................ 4% 4% 4% Other Europe..................................... 4% 6% 6% ------- -------- -------- Total Europe................................... 38% 20% 21% ------- -------- -------- Rest of World.................................... 5% 10% 15% ------- -------- -------- 100% 100% 100% ======= ======== ========
The Company is directing its efforts and resources to expand its core competencies in manufacturing and distribution by growing the manufacturing base globally while capitalizing on the aftermarket distribution network. Some of the growth in connection with the new strategy is expected to come through acquisitions, which the Company will be exploring on an ongoing basis. OPERATING DIVISIONS The Company's integrated operations are conducted under three operating units corresponding to major product areas: Powertrain Systems, Sealing Systems and General Products. The operating units and the products associated with each are described as follows: POWERTRAIN SYSTEMS products are used primarily in automotive, light truck, heavy duty, industrial, marine, agricultural, power generation and small air- cooled engine applications. These components consist primarily of engine bearings, bushings, washers, large bearings, pistons, piston pins, rings, liners and ignition products. Powertrain Systems sales accounted for 42% of the Company's total sales for 1998. Powertrain Systems products are marketed under the brand names Federal-Mogul(R), Glyco(R), AE Goetze(R), Sterling(R), Champion(R), PowerPath (R), and Belden (R). SEALING SYSTEMS products are used in automotive, light truck, heavy-duty diesel, agricultural, off-highway, marine, railroad, high performance and industrial applications. These components consist of dynamic seals, gaskets and wiper blades. Sealing Systems sales accounted for 20% of the Company's total sales for 1998. Sealing Systems products are marketed under the brand names National(R), Mather(R), STS(R), Redi-Seal(R), Redi-Sleeve(R), Unipiston(R), Engine Seal(R), Fel-Pro(R), Payen(R), McCord (R) and Anco (R). 2 GENERAL PRODUCTS includes camshafts, brake and friction products, sintered products, systems protection products, fuel systems components, lighting products, chassis products, and heat transfer products. General Products' sales accounted for 37% of the Company's total sales in 1998. General Products are marketed under the brand names Weyburn-Bartel(R), Weyburn-Lydmet(R), Brico(R), Sintertech(R), Bentley-Harris(R), Silverton(R), FHE(R), Connoisseur Auto Air Conditioning(R), Carter(R), Signal-Stat(R), Abex(R), Blazer(R), Zanxx(R), Moog(R), Precision(R) and Wagner(R). CUSTOMERS Federal-Mogul markets its products to many of the world's major OE manufacturers. Federal-Mogul also manufactures and supplies its products and related parts to aftermarket customers for each category of equipment described above. Among Federal-Mogul's largest customers are Auto Value, BMW, CarQuest, Caterpillar, Cummins, DaimlerChrysler, Fiat, Ford, General Motors, LucasVarity, NAPA, Peugeot, PSA, Renault and Volkswagen/Audi. ORIGINAL EQUIPMENT The Company supplies OE customers with a wide variety of precision engineered parts including engine bearings, oil seals, fuel system components, lighting products, and pistons. The Company manufactures 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 farm and 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, some pre-existing and others resulting from the acquisitions of T&N, Cooper Automotive and Fel-Pro. In 1998, approximately 14% of the Company's net sales were to the three major automotive manufacturers in the United States, with General Motors Corporation accounting for approximately 6% of the Company's net sales, Ford Motor Company accounting for approximately 6% of the Company's net sales and DaimlerChrysler accounting for approximately 2% of the Company's net sales. In addition, the Company sells OE products to most of the major automotive manufacturers headquartered outside the United States. Management believes there are additional system opportunities with OE manufacturers in the Asia-Pacific and Latin American regions. In addition, management believes that the acquisitions of T&N, Cooper Automotive and Fel- Pro have positioned Federal-Mogul to take advantage of developing OE customer demand for single supplier systems and modules in the future, particularly in light of Federal-Mogul's global reach and capabilities. AFTERMARKET Federal-Mogul's domestic 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. Internationally, the Company sells aftermarket products to jobbers, local retail parts stores and independent warehouse distributors. 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 product to market. Federal-Mogul provides its customers with real-time engineering capabilities and design development in their home countries. Technological activities are conducted at facilities Federal-Mogul acquired from T&N including, in particular, its central technical center at Cawston, England, its facility at Burscheid, Germany and its technical center at Plymouth, Michigan and at Fel- Pro's facilities in Skokie, Illinois as well as at Federal-Mogul's major pre- existing technological centers, in Ann Arbor, Michigan, Logansport, Indiana, Malden, Missouri, and Wiesbaden, Germany. Each of the Company's operating units is engaged in various engineering, research and development efforts working side by side with customers to develop custom solutions unique to their needs. 3 Total expenditures for research and development activities were approximately $85.0 million in 1998, $13.1 million in 1997 and $14.4 million in 1996. Expenditures for research and development have increased due to the acquisitions of T&N, Cooper Automotive and Fel-Pro. RECENT ACQUISITIONS AND DIVESTITURES Acquisitions 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 automotive parts manufacturer for total consideration of approximately $722 million. Fel-Pro is a premier gasket manufacturer for the North American aftermarket and OE heavy- duty market. In March 1998, the Company acquired T&N plc ("T&N"), a U.K.-based supplier of engine and transmission products for a total purchase price of approximately $2.4 billion. T&N manufactures and supplies high technology engineered automotive components and industrial materials including pistons, friction products, bearings, systems protection, camshafts and sealing products. In October 1998, the Company acquired Cooper Automotive for an initial purchase price of approximately $1.9 billion. Cooper Automotive is a leading supplier of aftermarket parts for repair and maintenance and serves OE automotive manufacturers worldwide. Cooper Automotive is a premier provider of leading brand name automotive products to the aftermarket and OE market. Management believes that Federal-Mogul's acquisitions of Fel-Pro, T&N and Cooper Automotive will: .establish the Company as a highly competitive Tier I worldwide automotive supplier ; .expand the Company's manufactured product portfolio to offer systems and modules; .enhance the Company's position as a global supplier of engine and transmission parts; . reinforce the Company's ability to provide a high quality service to both its original equipment and aftermarket customers; .extend the Company's international presence and accelerate its worldwide aftermarket growth; and .broaden the Company's brake/friction and ignition system capabilities. In December 1998, the Company acquired Glockler Dichtsysteme Gunter Hemmrich GmbH, a German manufacturer of rubber sealing components and acoustic decoupling for valve covers, intake manifolds and oil pans with annual sales of approximately $40 million. In January 1999, the Company completed the acquisition of Tri-Way Machine Limited, a privately owned manufacturer of machines and machining systems for the world's metal cutting industry headquartered in Windsor, Ontario, Canada with annual sales of approximately $35 million. In January 1999, the Company announced an agreement to acquire the piston division of Alcan Deutschland GmbH in Germany, a subsidiary of Alcan Aluminum Ltd. in Canada. Alcan's piston division manufactures high quality pistons for passenger cars and commercial vehicles under the highly regarded Nural (R) brand name. The piston division employs approximately 1,100 people with annual sales of approximately $150 million. The transaction is subject to regulatory approval and is expected to close in the second quarter of 1999. In January 1999, the Company completed its acquisition of two camshaft- machining plants from Crane Technologies Group, Inc. to expand the capacity of its automotive products lines. The two plants located in Orland, Indiana and Jackson, Michigan employ approximately 230 people and have annual sales of approximately $36 million. In addition, the Company increased it's ownership to 100% in it's Summerton, South Carolina gasket manufacturing plant and also increased its ownership in KFM Bearing Company Ltd., a Korean joint venture with Kukje Special Metal Co., from 30% to 87%. In addition, the Company acquired Bimet, a Polish Manufacturer of engine bearings, bushings and related products. The Company also increased its ownership from 50.6% to 100% in T&N Holdings Limited located in South Africa. Divestitures and Closings In February 1998, the Company sold its minority interest in Dichtungstechnik G. Bruss GmbH & Co. KG, a German manufacturer of seals and gaskets. As part of this transaction, the Company increased its ownership in a related U. S. partnership to 100%. 4 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. In December 1998, Federal-Mogul sold T&N's thin wall and dry bearings operations and certain other engine hard part assets to Dana Corporation for a purchase price of $430 million. Furthermore, the Company also expects to realize additional net proceeds of approximately $13 million for the collection of receivables of the businesses sold. Net proceeds to the Company from the 1998 divestitures were subsequently used to pay down debt. OTHER ACTIVITIES In January 1999, the Company issued $1.0 billion of bonds ("Notes"), $400,000,000 of which were 7 3/8% Notes due 2006, and $600,000,000 of which were 7 1/2% Notes due 2009. The Notes, exempt from registration in reliance on Rule 144A under the Securities Act, were initially sold to a syndicate of underwriters led by Merrill Lynch & Co. and Chase Securities Inc. each of whom agreed to offer or sell such Notes only to qualified institutional buyers in reliance on to Rule 144A under the Securities Act; to non U.S. persons in reliance on Regulation S of the Securities Act; and to a limited number of institutional accredited investors pursuant to Regulation D of the Securities Act. Net proceeds to the Company, after paying underwriters' discounts of 1.5% on the 7 3/8% Notes and 1.65% on the 7 1/2% Notes, were used to refinance bank indebtedness. The Company will file, within 180 days of the date of issuance of the Notes, a registration statement under the Securities Act to exchange the Notes for new notes of the Company with substantially identical terms, and cause the exchange offer to be competed with 270 days after the date of the original issuance of the Notes. SUPPLIERS Federal-Mogul sells its manufactured parts as well as parts manufactured by other manufacturers to the aftermarket. The products not manufactured by Federal-Mogul are supplied by numerous companies. In 1998, no outside supplier of the Company provided products that accounted for more than 5% of the Company's net sales. EMPLOYEE RELATIONS On December 31, 1998, the Company had approximately 54,350 full-time employees, of whom approximately 25,500 were employed in the United States. Approximately 36% of the Company's United States employees and approximately 55% of the Company's foreign employees are represented by various unions. Each of the Company's unionized manufacturing facilities has its own contract with its own expiration date, and as a result, no contract expiration date affects more than one facility. 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 environment control activities did not have a material impact on the Company's financial position or results of operations in 1998 and are not expected to have a material impact on the Company's financial position or results of operations in 1999 or 2000. RAW MATERIALS The Company does not normally experience supply shortages of raw materials. Certain of the Company's relationships with its long-term suppliers are contractual. No outside supplier of the Company provides more than 5% of products purchased. 5 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 1999 sales volumes. Patents and Licenses 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 (non U.S.) and U.S. patents and pending patent applications which relate to a wide variety of products and processes. 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, customer service and the breadth of products offered by a given supplier. The Company has attempted to meet these competitive challenges through more efficiently integrating its manufacturing and distribution operations, expanding its product coverage within its core businesses, and expanding its worldwide distribution network. Information About International and Domestic Operations and Export Sales The Company has both manufacturing and distribution facilities for its products, principally in the United States, Europe, Latin America, Mexico and Canada. International operations are subject to certain risks inherent in carrying on business abroad, including expropriation and nationalization, currency exchange rate fluctuations and currency controls, and export and import restrictions. The likelihood of such occurrences and their potential effect on the Company vary from country to country and are unpredictable. Detailed results of operations and assets by geographic area for each of the years ended December 31, 1998, 1997 and 1996 appear in Note 19 of Notes to Consolidated Financial Statements contained in Item 8 of this Report. Executive Officers of the Registrant The executive officers of the Company are its elected officers, other than its assistant officers. Set forth below are the names, ages, positions and offices held, and a brief account of the business experience during the past 5 years of each executive officer. Richard A. Snell, (57). Chairman of the Board and Chief Executive Officer of Federal-Mogul Corporation. Mr. Snell has served as Chairman of the Board, Chief Executive Officer and a director of the Corporation since November 1996. He also served as President from November 1996 to February 1998. Mr. Snell was previously employed by Tenneco, Inc., from November 1987 to November 1996, most recently having served as President and Chief Executive Officer of Tenneco Automotive from September 1993, until he was employed by the Company. Mr. Snell is also a member of the Board of Directors of Schneider National, Inc. Alan R. Begg (44). Vice President--Technology since February 1998. Prior thereto, Mr. Begg served as Managing Director of T&N Technology and was a member of the T&N Management Committee from 1993 to February 1998. He first became an executive officer in 1998. 6 DAVID A. BOZYNSKI (44). Vice President and Treasurer since May 1996. Prior thereto, Mr. Bozynski was employed by Unisys Corporation as Vice President and Assistant Treasurer from October 1994 to April 1996; and Vice President, Finance--Lines of Business from April 1993 to September 1993. He first became an executive officer in 1996. CHARLES B. GRANT (54). Vice President--Corporate Development since December 1992; and Vice President and Controller from May 1988 to December 1992. He first became an executive officer in 1985. ALAN C. JOHNSON (50). Executive Vice President--Powertrain Systems since February 1998. Mr. Johnson has been with Federal-Mogul since 1970, serving as Executive Vice President responsible for Federal-Mogul's worldwide manufacturing and international aftermarket operations from January 1997 to February 1998; President--Operations from January 1995 to January 1997; and Vice President and President--Powertrain Operations--Americas from 1993 to January 1995. He first became an executive officer in 1993. RICHARD P. RANDAZZO (55). Senior Vice President--Human Resources since February 1999 and Vice President-Human Resources since January 1997. Prior thereto, Mr. Randazzo was employed by Nextel Communications, Inc. as Senior Vice President--Human Resources from December 1994 to December 1996; and Senior Vice President, Human Resources--Americas Region of Asea Brown Boveri, Inc., from December 1990 to December 1994. He first became an executive officer in 1997. THOMAS W. RYAN (52). Executive Vice President since March 1998 and Chief Financial Officer since February 1997. Prior thereto, Mr. Ryan was employed by Tenneco Automotive, a division of Tenneco, Inc. as Chief Financial Officer from January 1995 to February 1997; and Vice President, Treasurer and Controller of A. O. Smith Corporation from March 1985 to January 1995. He first became an Federal-Mogul executive officer in 1997. WILHELM A. SCHMELZER (58). Executive Vice President--Sealing Systems since February 1998. Since joining Federal- Mogul in 1969, Mr. Schmelzer has served as Vice President and Group Executive--Engine and Transmission Products from April 1995 to February 1998; and Vice President and Group Executive--Engine and Transmission Products--Europe from January 1992 to April 1995. He first became an executive officer in 1992. KENNETH P. SLABY (47). Vice President and Controller since April 1996. Prior thereto, Mr. Slaby held various positions at General Electric Company for 23 years, including Manager--Financial Operations for the global silicones business from November 1990 to April 1996. He first became an executive officer in 1996. FRANK TOMES (56). Executive Vice President--General Products since February 1998. Prior thereto, Mr. Tomes served as Chief Executive--Composites and Camshafts Group of T&N plc from January 1996 to February 1998; and Chief Executive of T&N's Industrial Products and Materials Group. He first became an executive officer in 1998. GORDON A. ULSH (53). President and Chief Operating Officer since February 1999. Prior thereto, Mr. Ulsh served as Executive Vice President--Worldwide Aftermarket since October 1998. He previously served in a number of positions at Cooper Automotive including President of the Cooper Automotive Division; Executive Vice President of Operations for the automotive products segment of Cooper Industries; Vice President of Operations, North America for Cooper Automotive; and Vice President and General Manager of Wagner Lighting. He first became an executive officer in 1998. JAMES J. ZAMOYSKI (51). Senior Vice President, General Counsel and Secretary since February 1999; Vice President--Strategic Planning from June 1997 to February 1999; Vice President and General Manager, April 1995 to June 1997; Worldwide Aftermarket Operation--International, November 1993 to April 1996. He first became an executive officer in 1980. 7 Generally, officers of the Company are elected at the time of the Annual Meeting of Shareholders, but the Board of Directors of the Company may also appoint officers at various other times during the year. Each officer holds office until his or her successor is elected or appointed or until his or her resignation or removal. ITEM 2. PROPERTIES. The Company conducts its business from its World Headquarters complex in Southfield, Michigan, which is leased pursuant to a sale/leaseback arrangement. The principal manufacturing and other materially important physical properties of the Company at December 31, 1998, are listed below. All properties are owned in fee except where otherwise noted. At December 31, 1998, the Company had 474 manufacturing, distribution and sales and administration office facilities worldwide. Approximately 50% of the facilities are leased, and the majority of which are distribution, sales and administration offices. The Company owns the remainder of the facilities.
REST NORTH OF TYPE OF FACILITY AMERICA EUROPE WORLD TOTAL ---------------- ------- ------ ----- ----- Manufacturing........................................ 90 71 66 227 Distribution......................................... 105 43 20 168 Sales and Administration Offices..................... 29 28 22 79 --- --- --- --- Total................................................ 224 142 108 474 === === === ===
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 property and equipment is 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 In the United States, the Company's United Kingdom subsidiary, T&N Ltd., and two of T&N's 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 is also subject to asbestos-disease litigation, to a lesser extent, in the United Kingdom and to property damage litigation in the United States based upon asbestos products allegedly installed in buildings. Because of the slow onset of asbestos-related diseases, management anticipates that similar claims will be made in the future. It is not known how many such claims may be made nor the expenditure which may arise therefrom. As of December 31, 1998, the Company has provided approximately $1.3 billion as its best estimate for future costs related to resolving asbestos claims. The Company estimates claims will be filed and paid in excess of the next 20 years. This estimate is based in part on recent and historical claims experience, medical information and the current legal environment. As of December 31, 1998, the T&N Companies had approximately 105,000 claims pending. During 1998, approximately 85,000 new claims were filed and 54,000 claims were settled, dismissed or otherwise resolved. In addition to the pending cases above, the T&N Companies have approximately 41,000 claims that have been settled but will be paid over time. There are a number of factors that could affect the settlement costs into the future, including but not limited to: changes in legal environment; possible insolvency of co- defendants; and the establishment of an acceptable administrative (non- litigation) claims resolution mechanism. As of December 31, 1998, T&N is one of a large number of defendants named in three pending property damage cases pending in two jurisdictions. Provision has been made in the asbestos reserve for anticipated expenditures in relation to such cases. 8 The $1.3 billion total provision held for the T&N Companies is comprised of an estimate for known claims (pending and settled but not paid) and possible future claims (IBNR). As of December 31, 1998, the $1.3 billion total provision is comprised of approximately $460 million related to known claims and approximately $840 million related to IBNR claims. In arriving at the IBNR provision, assumptions have been made regarding the total number of claims which it is anticipated may be received in the future, the 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 and the timing of settlement and, in the United Kingdom, the level of subrogation claims brought by insurance companies. The T&N Companies have appointed the Center for Claims Resolution (CCR) as their exclusive representative in relation to all asbestos-related personal injury claims made against the T&N Companies in the United States. The CCR provides to its 20 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 is entitled to appoint a representative as one of the five voting directors on the CCR's Board of Directors. Members of the CCR contribute towards indemnity payments in each claim in which the member is named. Contributions to such indemnity payments are calculated on a case-by-case basis according to sharing agreements among the CCR's members. In 1996, T&N purchased a (Pounds)500 million (approximately $845 million at the insurance agreement exchange rate of $1.69/(Pounds)) layer of insurance which will be triggered should the aggregate amount of claims filed after June 30, 1996, where the exposure occurred prior to that date, exceed (Pounds)690 million (approximately $1,166 million at the $1.69/(Pounds) exchange rate). The Company's reserve for claims filed after June 30, 1996 approximates the trigger point of the insurance. The Company has reviewed the financial viability and legal obligations of the three reinsurance companies involved and has concluded at this time that there is little risk of the reinsurers not being able to meet their obligation to pay, should the claims filed after June 30, 1996 exceed the (Pounds)690 million trigger point. While management believes that reserves are appropriate for anticipated losses arising from T&N's asbestos-related claims, given the nature and complexity of the factors affecting the estimated liability, the actual liability may differ. No absolute assurances can be given that T&N will not be subject to material additional liabilities and significant additional litigation relating to asbestos. In the possible, but unlikely, event that such liabilities exceed the reserves recorded by the Company and the additional (Pounds)500 million of insurance coverage, the Company's results of operations, business, liquidity and financial condition could be materially adversely affected. The T&N Companies reserves will be reevaluated periodically as additional information becomes available. The Company also is one of a large number of defendants in a number of lawsuits brought by claimants alleging injury due to exposure to asbestos. Fel-Pro has been named as a defendant in a number of product liability cases involving asbestos, primarily involving gasket or packing products sold to ship owners. In addition, subsidiaries of Cooper Automotive have been named as defendants in a number of product liability cases involving asbestos, primarily involving friction products. The Company is defending all such claims vigorously and believes that it, Fel-Pro and the Cooper Automotive subsidiaries have substantial defenses to liability and adequate 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, Fel-Pro and the Cooper Automotive subsidiaries as of December 31, 1998, will not have a material effect on the Company's financial position. At December 31, 1998, approximately $20 million in related reserves have been provided in respect of the possible uninsured portion of the expenditures on asbestos claims pending against the Company, Fel-Pro and the Cooper Automotive subsidiaries. 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". 9 There were no material legal proceedings that were terminated during the fourth quarter of 1998. ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS. No matter was submitted to a vote of security holders through the solicitation of proxies or otherwise during the fourth quarter of 1998. 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 30, 1999 was 20,527 . 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:
1998 1997 ------------- ------------- HIGH LOW HIGH LOW QUARTER ------ ------ ------ ------ First............................................... $54.37 $39.00 $26.75 $21.63 Second.............................................. $69.25 $52.62 $35.38 $24.50 Third............................................... $72.00 $46.62 $39.94 $32.75 Fourth.............................................. $63.00 $33.00 $47.63 $36.75
The closing price of the Company's common stock as reported on the New York Stock Exchange-Composite Tape on March 30, 1999 was $45.125. Quarterly dividends of $.12 per common share were declared for the first quarter of 1998 and during 1997 and 1996. In May 1998, the Company's Board of Directors reduced the quarterly dividend of $.12 per common share and subsequently declared cash dividends payable in the second, third and fourth quarters of 1998 in the amount of $.0025 per share of common stock. The Company, consistent with its growth strategy, intends to retain future earnings in the business and therefore anticipates paying dividends at a comparable level in the foreseeable future. 10 ITEM 6. SELECTED FINANCIAL DATA The following table presents information from the Company's consolidated financial statements for the five years ended December 31, 1998. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the "Financial Statements and Supplementary Data."
1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- (MILLIONS OF DOLLARS, EXCEPT PER SHARE AMOUNTS) CONSOLIDATED STATEMENT OF OPERATIONS DATA Net sales............... $ 4,468.7 $ 1,806.6 $ 2,032.7 $ 1,999.8 $ 1,889.5 Costs and expenses...... (4,266.9)(1) (1,703.7)(2) (2,258.0)(3) (2,000.7)(4) (1,795.5) Other expense........... (16.3) (3.4) (3.4) (2.4) (2.5) Income tax (expense) benefit................ (93.6) (27.5) 22.4 (2.5) (31.8) --------- --------- --------- --------- --------- Net earnings (loss) before extraordinary items.................. 91.9 72.0 (206.3) (5.8) 59.7 Extraordinary items -- loss on early retirement of debt, net of applicable income tax benefit............ (38.2) (2.6) -- -- -- --------- --------- --------- --------- --------- Net earnings (loss)..... $ 53.7 $ 69.4 $ (206.3) $ (5.8) $ 59.7 ========= ========= ========= ========= ========= COMMON SHARE SUMMARY (DILUTED) Average shares and equivalents outstanding (in thousands)......... 53,748 41,854 34,659 34,642 41,800 Earnings (loss) per share: Before extraordinary items................. $ 1.67 $ 1.67 $ (6.20) $ (.42) $ 1.38 Extraordinary items -- loss on early retirement of debt, net of applicable income tax benefit.... (.71) (.06) -- -- -- --------- --------- --------- --------- --------- Net earnings (loss) per share.................. $ .96 $ 1.61 $ (6.20) $ (.42) $ 1.38 ========= ========= ========= ========= ========= Dividends declared per share.................. $ .1275 $ .48 $ .48 $ .48 $ .48 ========= ========= ========= ========= ========= CONSOLIDATED BALANCE SHEET DATA Total assets............ $ 9,940.1 $ 1,802.1 $ 1,455.2 $ 1,701.1 $ 1,481.7 Short-term debt(5)...... 211.0 28.6 280.1 111.9 74.0 Long-term debt.......... 3,130.7 273.1 209.6 481.5 319.4 Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely convertible subordinated debentures of the Company......... 575.0 575.0 -- -- -- Shareholders' equity.... 1,986.2 369.3 318.5 550.3 588.5 OTHER FINANCIAL INFORMATION Net cash provided from (used by) operating activities............. $ 325.5 $ 215.7 $ 149.0 $ (34.7) $ 24.3 Expenditures for property, plant, equipment and other long-term assets....... 228.5 49.7 54.2 78.5 74.9 Depreciation and amortization expense... 228.0 51.5 61.9 59.2 54.6
- - ----------------- (1) 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. (2) 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. (3) 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. (4) Includes a $26.9 million restructuring charge, a $51.8 million charge for adjustment of assets held for sale and other long-lived assets to fair value, and $13.9 million relating to reengineering and other related charges. (5)Includes current maturities of long-term debt (see Note 6 to the consolidated financial statements). 11 MANAGEMENT'S DISCUSSION AND ANALYSIS Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Federal-Mogul is a leading global manufacturer and distributor of a broad range of vehicular components for automobiles and light trucks, heavy-duty trucks, farm and construction vehicles and industrial products. The Company's principal customers include many of the world's major original equipment (OE) manufacturers of such vehicles and industrial products. The Company also manufactures and supplies its products and related parts to the aftermarket. Acquisitions In 1998, the Company acquired T&N plc (T&N), the automotive division of Cooper Industries, Inc. (Cooper Automotive), Fel-Pro, Incorporated and certain affiliated entities, which constitute the operating businesses of the Fel-Pro group of companies (Fel-Pro), and various other acquisitions. For certain acquisitions, principally Cooper Automotive, the purchase price allocation may be adjusted as further information becomes available. Goodwill recognized in connection with these transactions, which were accounted for as purchases, is being amortized on a straight-line basis over 40 years. T&N In March 1998, the Company acquired T&N, a manufacturer 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. T&N manufactures and supplies high technology engineered automotive components and industrial materials. In 1997, T&N had sales of approximately (Pounds)1.8 billion ($2.9 billion at the 1997 average exchange rate) with about 80% of such sales relating to the global automotive industry. At the time of its acquisition, T&N's major product lines consisted of piston products, bearings, friction products, composites and camshafts (incorporating sintered products) and sealing products servicing OE customers and the aftermarket. T&N operated in approximately 200 locations in 24 countries, employed over 28,000 people worldwide and served customers globally. T&N's operations included technical centers in the United Kingdom, Germany and North America. Cooper Automotive In October 1998, the Company acquired Cooper Automotive, headquartered in St. Louis, Missouri, for initial consideration of approximately $1.9 billion. Cooper Automotive is a leading supplier of aftermarket parts for repair and maintenance and serves OE automobile manufacturers worldwide. In 1997, Cooper Automotive had sales of approximately $1.9 billion. At the time of the acquisition, Cooper Automotive's principal products consisted of brakes and friction, lighting, chassis parts, ignition and wiper blades. Cooper Automotive employed approximately 14,500 employees in 63 locations. Fel-Pro In February 1998, the Company acquired Fel-Pro, a privately owned gasket manufacturer headquartered in Skokie, Illinois, for total consideration of approximately $722 million, which included 1,030,325.6 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 for the North American aftermarket and the OE heavy-duty market. In 1997, Fel-Pro had sales of approximately $500 million. At the time of the acquisition, Fel-Pro's primary product lines consisted of gaskets, heavy-duty diesel engine products, diesel products, high performance gaskets and other equipment and chemical products. Fel-Pro employed approximately 2,700 employees in 16 locations. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued Other Acquisitions During 1998, the Company acquired other complementary businesses and increased its ownership in certain joint ventures in order to expand its manufacturing and distribution capabilities. In the first quarter of 1998, the Company increased its ownership to 100% in its Summerton, South Carolina gasket manufacturing plant and also increased its ownership in KFM Bearing Company Ltd., a Korean joint venture with Kukje Special Metal Co., from 30% to 87%. In addition, the Company acquired Bimet, a Polish manufacturer of engine bearings, bushings and related products. During the fourth quarter of 1998, the Company acquired Tri-Way Machine Limited, a Canadian manufacturer of machining systems for the metal-cutting industry and Glockler Dichtsysteme Gunter Hemmrich GmbH, a manufacturer of rubber sealing components and acoustic decoupling for valve covers, intake manifolds and oil pans. Additionally, the Company increased its ownership from 50.6% to 100% in T&N Holdings Limited located in South Africa. 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 provide for $180.0 million and $36.8 million in severance and exit costs, respectively, and were recorded as a component of goodwill in the purchase price allocation. The components of the integration plan include: closure of certain manufacturing facilities worldwide; relocation of highly manual manufacturing product lines to lower cost regions or more suitable locations; consolidation of overlapping manufacturing, technical and sales facilities and joint ventures; consolidation of overlapping aftermarket warehouses; consolidation of aftermarket marketing and customer support functions; and streamlining of administrative, sales, marketing and product engineering staffs worldwide. An anticipated result of the integration plan and the restructuring will be a reduction of approximately 5,300 full-time employees. The Company paid $61.6 million related to these rationalization reserves in 1998. 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. On December 18, 1998, the Company completed the sale of 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 also expects to realize 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. 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. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued Results of Operations Net Sales Sales by operating segment were:
1998 1997 1996 ---- ---- ---- (Millions of Dollars) Powertrain Systems................................... $ 1,883 $ 782 $ 739 Sealing Systems...................................... 925 333 295 General Products..................................... 1,636 577 665 Divested Activities.................................. 25 115 334 ------- ------- ------- Total Sales........................................ $ 4,469 $ 1,807 $ 2,033 ======= ======= =======
Powertrain Systems sales increased 141% from 1997 to 1998 primarily due to the acquisitions of T&N and Cooper Automotive. Excluding the impact of these and other acquisitions, sales decreased 3% due to lower aftermarket sales and the impact of foreign exchange rate fluctuations, partially offset by certain original equipment volume increases. Sales in the aftermarket were impacted by an overall decrease in the engine parts market size due to improved original equipment quality, and the bankruptcy of a major customer in North America. Sealing Systems sales increased 178% from 1997 to 1998 primarily due to the acquisitions of T&N, Cooper Automotive and Fel-Pro. Taking out the impact of these acquisitions, sales were essentially flat. Original equipment sales increased slightly due to certain model volume increases while aftermarket sales decreased primarily due to the bankruptcy of a major customer in North America. General Products sales increased 184% from 1997 to 1998 primarily due to the acquisitions of T&N and Cooper Automotive. Excluding the impact of these acquisitions, sales decreased 4% primarily due to the impact of foreign exchange rates and the bankruptcy of a major customer in the North American aftermarket, slightly offset by certain original equipment volume increases. Operational EBIT The accounting policies of the business segments are consistent with those described in Note 1, "Accounting Policies." Operational EBIT is defined as Operational Earnings before certain nonrecurring items (such as certain purchase accounting adjustments and integration costs associated with new acquisitions), interest and income taxes.
1998 1997 1996 ---- ---- ---- (Millions of Dollars) Powertrain Systems................................. $ 223 $ 68 $ 75 Sealing Systems.................................... 133 26 9 General Products................................... 154 44 31 Divested Activities................................ (8) 1 (22) ------- ------- ------- Operational EBIT................................. $ 502 $ 139 $ 93 ======= ======= =======
Operational EBIT in Powertrain Systems increased 228% in 1998 from 1997 due to the increase in sales noted above, as well as the streamlining of product engineering costs and the implementation of Federal-Mogul's constraint management programs across the combined companies. Sealing Systems 1998 operational EBIT rose 412% as compared to 1997 due to higher sales, reduced administrative costs and material sourcing savings as a result of the acquisitions. 14 MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued General Products operational EBIT in 1998 increased 250% versus 1997 due to increased sales, material sourcing savings and implementation of constraint management practices as a result of the acquisitions. Purchased In-Process Research and Development Charge In connection with the T&N acquisition, the Company recognized an $18.6 million charge in 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. Restructuring Charges (Credits) 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 result from planned terminations in various business operations of the Company. 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 foreign governmental regulations. The Company anticipates that the actions related to the 1998 restructuring plan will be substantially completed in 1999. 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. Primarily as a result of the amendments to the 1996 restructuring plan, (refer to Note 4, "Restructuring Charges"), the Company's 1997 operating results were increased by $23.1 million for the reversal of previously recognized 1996 and 1995 restructuring charges. Offsetting this reversal was a $22.0 million charge for new 1997 restructuring programs. The net impact on 1997 operations, as a result of the restructuring activities, was a credit of $1.1 million. The 1997 charge includes $3.1 million for exiting certain European aftermarket product lines and the related employment reductions, $6.8 million for termination of certain European administrative and support personnel, $7.5 million for additional exit and severance costs related to the Puerto Rican retail operations, $2.6 million for consolidation and reconfiguration of the North American aftermarket service branch network and $2.0 million for other actions. The Company's 1997 progress and actual implementation of the 1996 restructuring plan resulted in 1997 operating results being increased by $20.8 million for severance and $1.4 million of exit and consolidation costs being reversed. In the fourth quarter of 1996, the Company recognized a restructuring charge of $57.6 million for costs associated with employee severance, exit and consolidation costs for 132 international retail operations and 30 wholesale aftermarket operations, rationalization of European manufacturing operations, consolidation of lighting products, consolidation or closure of certain North American warehouse facilities, consolidation of customer support functions in the United States and streamlining of administrative and operational staff functions worldwide. The charge consists of $22.7 million for the sale of 132 international retail aftermarket and 30 wholesale aftermarket operations, $14.7 million for corporate employee severance costs, $7.7 million for the rationalization of European manufacturing operations, $5.3 million for consolidation or closure of certain North American warehouse facilities, $2.8 million for consolidation of customer support functions in the United States, $2.5 million for closure of the Leiters Ford facility and $1.9 million for other miscellaneous actions, including the consolidation of the European aftermarket management function into the European manufacturing headquarters. Reengineering and Other Related Charges (Credits) In 1996, the Company initiated an extensive effort to strategically review its businesses and focus on its competencies of manufacturing, engineering and distribution. As a result of this process, the Company 15 MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued recognized a charge of $11.4 million for professional fees and personnel costs related to the strategic review of the Company and changes in management and related costs. Operating results for 1997 include a credit of $1.6 million relating to the reversal of certain 1996 reengineering and other related charges, as the actual costs were less than the initial estimates. Adjustment of Assets Held for Sale and Other Long-Lived Assets to Fair Value In 1998, the Company decided to sell its subsidiary, Bertolotti Pietro e Figli, S.r.l. (Bertolotti), an Italian aftermarket operation. The carrying value of Bertolotti's long-lived assets was reduced to fair value based on estimates of selling values, less costs to sell, calculated using multiples of earnings similar to recent automotive industry transactions in Italy. The Company recognized a $20.0 million charge primarily associated with the write- down of Bertolotti's assets to the estimated fair value. Also in 1998, the Company recognized a $1.0 million benefit associated with the sale of certain international retail assets previously written down to their realized fair value. In 1997, the Company recognized a charge of $2.4 million to write down certain long-lived assets of the international retail aftermarket to fair value. These assets were sold in 1998 for approximately their adjusted value and no gain or loss was recorded. During 1996, management designed a restructuring plan to aggressively improve the Company's cost structure, streamline operations and divest the Company of underperforming assets. As part of this plan, the Company decided to sell 132 international retail aftermarket operations, sell or restructure 30 wholesale aftermarket operations and consolidate a North American manufacturing operation. The carrying value of assets held for sale was reduced to fair value based on estimates of selling values less costs to sell. Selling values used to determine the fair value of assets held for sale were determined using market prices (i.e., valuation multiples) of comparable companies from other 1996 transactions. The resulting adjustment of $148.5 million to reduce assets held for sale to fair value was recorded in the fourth quarter of 1996. The Company has substantially completed the 1996 restructuring plan, selling its South Africa, Australia, Chile and Puerto Rico retail operations during 1997 and 1998. Also in 1996, based upon the final sale, the Company recognized an additional write-down of $2.8 million to the net asset value of the United States ball bearings operations. Integration Costs The Company recognized $22.4 million of integration costs in 1998 in connection with the previously discussed acquisitions. These expenses included 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. Interest Expense Interest expense increased $170.7 million in 1998 to $204.0 million due to debt financing of the T&N, Cooper Automotive, Fel-Pro and other acquisitions, offset slightly by debt reductions from cash flow generated from operations. Interest expense decreased $11.1 million in 1997 to $33.3 million. The decrease was primarily due to a $188 million reduction of debt which resulted from improvements in working capital and the sale of the South African and Australian businesses. Interest Income The increase in interest income of $3.5 million in 1998 to $10.6 million and the increase of $4.2 million in 1997 are due to interest earned on the proceeds of the December 1997 sale of Company-obligated mandatorily redeemable preferred securities, which were used in March 1998 to finance a portion of the T&N acquisition. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued International Currency Exchange Losses International currency exchange losses increased to $4.7 million in 1998 due primarily to the weakening of the Mexican peso. The decrease of $3.1 million from 1996 to 1997 is due to the 1997 sale of the Turkish operation and a devalued Venezuelan bolivar. Net (Gain) Loss on British Pound Currency Option and Forward Contract In the fourth quarter of 1997, in anticipation of the then-pending T&N acquisition, the Company purchased a British pound currency option for $28.1 million with a notional amount of $2.5 billion. The cost of the option and its change in fair value have 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. Also in January 1998, in anticipation of the then-pending T&N acquisition, the Company entered into a forward contract to purchase (Pounds)1.5 billion for 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 transactions to serve as economic hedges for the purchase of T&N. Such transactions, however, do not qualify for hedge accounting under GAAP, and therefore both the loss on the British pound currency option and the gain on the British pound forward contract are reflected in the consolidated statement of operations caption "Net (gain) loss on British pound currency option and forward contract." Other Expense, net The increase in other expense, net, of $12.9 million in 1998 to $16.3 million is due to the expense related to the Company-obligated mandatorily redeemable preferred securities, issued in December 1997, partially offset by an increase in earnings from equity investments acquired in the T&N acquisition and a gain on the divestiture of its minority interest in G. Bruss GmbH & Co. KG. Income Taxes The effective tax rate for 1998 was 50.5% compared to 27.6% in 1997. This difference was primarily due to non-deductible goodwill, the one-time charge for purchased in-process research and development and foreign tax rate differences. The effective tax rate on the loss in 1996 was 9.8% due to losses in foreign countries where no tax benefit was recorded. At December 31, 1998, the Company had deferred tax assets, net of a $66.2 million valuation allowance, of $894.0 million and deferred tax liabilities of $842.5 million. The valuation allowance reserve increased from $44.4 million in 1997 to $66.2 million in 1998 due to valuation allowances recorded on net operating loss carryforwards acquired with the acquisitions of T&N, Cooper Automotive and Fel-Pro. Future reductions to these valuation allowances, if any, will be applied to reduce goodwill related to the respective acquisitions. The net deferred tax asset of $51.5 million included deferred tax assets of $429.1 million for asbestos liabilities and $165.2 million for postemployment benefit obligations and deferred tax liabilities of $379.4 million and $326.2 million for fixed asset and intangible asset basis differences, respectively. The Company expects to realize the assets and liabilities related to these items over the next 40 years. Extraordinary Items The Company incurred extraordinary losses on the early retirement of debt of $38.2 million and $2.6 million, net of related tax benefits, in 1998 and 1997, respectively. 17 MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued Liquidity and Capital Resources Cash Flow Provided from Operating Activities Cash flow provided from operating activities was $325.5 million in 1998. Cash flow was generated primarily from operations, a decrease in inventories of $55.9 million and a decrease in accounts receivable of $37.5 million. Partially offsetting these items were payments against the asbestos liability of $89.2 million and restructuring and rationalization payments of $78.0 million. Cash Flow Used by Investing Activities Cash flow used by investing activities was primarily related to the acquisitions of T&N, Cooper Automotive and Fel-Pro, net of proceeds from sales of the T&N Bearings Business and the Fel-Pro Chemical Business. The Company expects to pay approximately $50 million in taxes related to the sale of the T&N Bearings Business during the first quarter of 1999. In addition, capital expenditures of $228.5 million were made for property, plant and equipment to implement process improvements, information technology, replacement of existing machinery and equipment and introductions of new products. Capital expenditures are expected to be approximately $300 million in 1999. The Cooper Automotive purchase agreement includes a price adjustment based upon acquired net assets, as defined in the agreement, as of the acquisition date. The Company anticipates that an additional cash payment of approximately $100 million will be paid in 1999. Cash Flow Provided from Financing Activities Cash flow provided from financing activities was primarily from debt issued to fund the acquisitions of T&N, Cooper Automotive and Fel-Pro and the issuance of common stock, partially offset by principal payments on long-term debt. The Company had total debt of $3,341.7 million at December 31, 1998 compared to $301.7 million at December 31, 1997. At December 31, 1998, the Company had $400 million available under its revolving credit facility expiring on December 31, 2003. As of December 31, 1998, there were no borrowings outstanding against this facility. The Company entered into Senior Credit Agreements in connection with its acquisitions of T&N and Cooper Automotive totaling $4.625 billion and a Senior Subordinated Credit Agreement in connection with its acquisition of T&N of $500 million in 1998. The Senior Credit Agreements had $1.894 billion outstanding at December 31, 1998 with maturities ranging from 1999 through 2005. There were no borrowings outstanding against the Senior Subordinated Credit Agreement at December 31, 1998. The Company issued 26.75 million shares of common stock, including 2.1 million shares which were converted to Series E Preferred Stock, in two equity offerings in 1998 generating proceeds of $1.373 billion. Proceeds were used to repay borrowings under the Senior Credit Agreements and Senior Subordinated Credit Agreement. The Company issued $1.0 billion of bonds with maturities ranging from six to twelve years, a weighted-average yield of 7.76% and a weighted-average coupon of 7.73% in 1998, and $1.0 billion in bonds with maturities ranging from seven to ten years, a weighted-average yield of 7.53% and a weighted-average coupon of 7.45% in January 1999. Proceeds from these transactions were used to repay borrowings under the Senior Credit Agreements. As a result of the 1999 transaction, the Company will recognize an extraordinary charge in the first quarter of 1999 of approximately $8 million, net of tax, related to early extinguishment of debt. On February 24, 1999, the Company entered into a new $1.75 billion Senior Credit Agreement at variable interest rates, which contains a $1.0 billion multicurrency revolving credit facility and two term loan components. 18 MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued The revolving credit facility has a five-year maturity. The term loan components of $400 million and $350 million mature in five and six years, respectively. The proceeds of this Senior Credit Agreement were used to refinance the prior Senior Credit Agreements entered into in connection with the T&N and Cooper Automotive acquisitions as well as the $400 million multicurrency revolving credit facility related to the T&N acquisition. As a result of these transactions, the Company will recognize an extraordinary charge in the first quarter of 1999 of approximately $15 million, net of tax, related to the early extinguishment of debt. The Company believes that cash flows from operations, together with borrowings available under the Company's multicurrency revolving credit facility, will continue to be sufficient to meet its ongoing working capital requirements. Litigation and Environmental Matters T&N Asbestos Litigation In the United States, the Company's United Kingdom subsidiary, T&N Ltd., and two of T&N's 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 is also subject to asbestos-disease litigation, to a lesser extent, in the United Kingdom and to property damage litigation in the United States based upon asbestos products allegedly installed in buildings. Because of the slow onset of asbestos-related diseases, management anticipates that similar claims will be made in the future. It is not known how many such claims may be made nor the expenditure which may arise therefrom. As of December 31, 1998, the Company has provided approximately $1.3 billion as its best estimate for future costs related to resolving asbestos claims. The Company estimates claims will be filed and paid in excess of the next 20 years. This estimate is based in part on recent and historical claims experience, medical information and the current legal environment. As of December 31, 1998, the T&N Companies had approximately 105,000 claims pending. During 1998, approximately 85,000 new claims were filed and 54,000 claims were settled, dismissed or otherwise resolved. In addition to the pending cases above, the T&N Companies have approximately 41,000 claims that have been settled but will be paid over time. There are a number of factors that could impact the settlement costs into the future, including but not limited to: changes in legal environment; possible insolvency of co- defendants; and the establishment of an acceptable administrative (non- litigation) claims resolution mechanism. As of December 31, 1998, T&N is one of a large number of defendants named in three pending property damage cases pending in two jurisdictions. Provision has been made in the asbestos reserve for anticipated expenditures in relation to such cases. The $1.3 billion total provision held for the T&N Companies is comprised of an estimate for known claims (pending and settled but not paid) and possible future claims (IBNR). As of December 31, 1998, the $1.3 billion total provision is comprised of approximately $460 million related to known claims and approximately $840 million related to IBNR claims. In arriving at the IBNR provision, assumptions have been made regarding the total number of claims which it is anticipated may be received in the future, the 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 and the timing of settlement and, in the United Kingdom, the level of subrogation claims brought by insurance companies. The T&N Companies have appointed the Center for Claims Resolution (CCR) as their exclusive representative in relation to all asbestos-related personal injury claims made against the T&N Companies in the United States. The CCR provides to its 20 member companies a litigation defense, claims-handling and 19 MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued administration service in respect to United States asbestos-related disease claims. Pursuant to the CCR Producer Agreement, T&N is entitled to appoint a representative as one of the five voting directors on the CCR's Board of Directors. Members of the CCR contribute towards indemnity payments in each claim in which the member is named. Contributions to such indemnity payments are calculated on a case-by-case basis according to sharing agreements among the CCR's members. In 1996, T&N purchased a (Pounds)500 million (approximately $845 million at the insurance agreement exchange rate of $1.69/(Pounds)) layer of insurance which will be triggered should the aggregate amount of claims filed after June 30, 1996, where the exposure occurred prior to that date, exceed (Pounds)690 million (approximately $1,166 million at the $1.69/(Pounds) exchange rate). The Company's reserve for claims filed after June 30, 1996 approximates the trigger point of the insurance. The Company has reviewed the financial viability and legal obligations of the three reinsurance companies involved and has concluded at this time that there is little risk of the reinsurers not being able to meet their obligation to pay, should the claims filed after June 30, 1996 exceed the (Pounds)690 million trigger point. While management believes that reserves are appropriate for anticipated losses arising from T&N's asbestos-related claims, given the nature and complexity of the factors affecting the estimated liability, the actual liability may differ. No absolute assurances can be given that T&N will not be subject to material additional liabilities and significant additional litigation relating to asbestos. In the possible, but unlikely, event that such liabilities exceed the reserves recorded by the Company and the additional (Pounds)500 million of insurance coverage, the Company's results of operations, business, liquidity and financial condition could be materially adversely affected. The T&N Companies reserves will be reevaluated periodically as additional information becomes available. Federal-Mogul, Fel-Pro and Cooper Automotive Asbestos Litigation The Company also is one of a large number of defendants in a number of lawsuits brought by claimants alleging injury due to exposure to asbestos. Fel-Pro has been named as a defendant in a number of product liability cases involving asbestos, primarily involving gasket or packing products sold to ship owners. In addition, subsidiaries of Cooper Automotive have been named as defendants in a number of product liability cases involving asbestos, primarily involving friction products. The Company is defending all such claims vigorously and believes that it, Fel-Pro and the Cooper Automotive subsidiaries have substantial defenses to liability and adequate 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, Fel-Pro and the Cooper Automotive subsidiaries as of December 31, 1998, will not have a material effect on the Company's financial position. At December 31, 1998, approximately $20 million in related reserves have been provided in respect of the possible uninsured portion of the expenditures on asbestos claims pending against the Company, Fel-Pro and the Cooper Automotive subsidiaries. Environmental Matters The Company is a defendant in lawsuits filed 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 which 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 20 MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued 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 CERLCA and some of the other laws pertaining to these sites, the Company's share of the total waste is usually quite 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 and legal reserve was approximately $50 million at December 31, 1998 and $11 million at December 31, 1997. The majority of the 1998 increase is attributable to the acquisitions of T&N and Cooper Automotive. Management believes that such accruals will be adequate to cover the Company's estimated liability for its exposure in respect of 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 A substantial portion of the Company's operations consists of manufacturing and sales activities in foreign jurisdictions. The Company manufactures and sells its products in North America, Europe, South America, Africa and Asia. 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 United States dollar and European currencies. As currency exchange rates change, translation of the income statements 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. As of December 31, 1998, the Company's net assets (defined as current assets less current liabilities) subject to foreign currency translation risk are $146.8 million. The potential decrease in net assets from a hypothetical 10% adverse change in quoted foreign currency exchange rates would be approximately $14.7 million. 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 monitors certain aspects of its foreign currency activities and larger transactions through the use of foreign currency options or forwards. The Company generally tries to utilize natural hedges within their foreign currency activities, including the matching of revenues and costs. The Company has entered into foreign currency forward contracts to hedge the British pound against the United States dollar in the amount of $66 million with an average contract rate of $1.62/(Pounds) and an unrealized loss of $3.5 million at December 31, 1998. The Company has also entered into foreign currency forward contracts to hedge the British pound against the South African rand in the amount of $19 million with an average contract rate of 9.99 rand/(Pounds) and an unrealized loss of $4.3 million at December 31, 1998. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS -- CONTINUED The Company has also entered into foreign currency forward contracts to hedge foreign currency debt exposures from the British pound to the Australian dollar, Swiss franc, German mark, Danish krone, Spanish peseta, French franc, Hong Kong dollar, Italian lira, Japanese yen and Swedish krona whose notional amounts and related unrealized gains or losses are not material. All foreign currency forward contracts purchased will expire within the next twelve months. Interest Rate Risk The Company's variable interest expense is sensitive to changes in the general level of United States interest rates. Some 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 (MILLIONS OF DOLLARS)
FAIR VALUE AT 1999 2000 2001 2002 2003 THEREAFTER TOTAL DECEMBER 31, 1998 ---- ---- ---- ---- ---- ---------- ----- ----------------- LIABILITIES Long-term debt, including current portion Fixed rate............. $ 52.1 $ 65.2 $52.7 $ 10.8 $ 23.7 $1,141.1 $1,345.6 $1,381.2 Average interest rate.. 7.80% 7.84% 7.88% 7.86% 7.86% 7.85% 7.85% Variable rate.......... $ 56.4 $409.9 $86.4 $115.9 $116.0 $1,109.0 $1,893.6 $1,893.6 Average interest rate.. 7.33% 7.33% 7.33% 7.33% 7.33% 7.33% 7.33% RATE SENSITIVE DERIVATIVE FINANCIAL INSTRUMENTS Interest rate locks purchased.............. $300.0 -- -- -- -- -- $ 300.0 $ (0.9) Average strike rate.... 4.69% -- -- -- -- -- -- -- Forward rate........... 4.66% -- -- -- -- -- -- --
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 and nickel. The Company uses forward contracts to hedge against the changes in certain specific commodity prices of the purchase commitments outstanding. The net unrealized losses at December 31, 1998 for commodity contracts were $1.4 million. OTHER MATTERS Year 2000 Costs The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. The Company has established a team that has completed an awareness program and assessment project to address the Year 2000 issue including information technology (IT) and non-IT systems. In addition, the Board of Directors has received status reports related to the Company's progress in addressing the Year 2000 issue. The Company has determined that it will be required to modify or replace portions of its software so that its computer systems will properly utilize dates beyond December 31, 1999. The Company has initiated remediation and testing, and is implementing the action plan to address the Year 2000 issue and 22 MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued estimates that the majority of testing will be completed by the end of the first quarter of 1999. A number of independent third-party reviews have been performed and others are planned. The Company presently believes that with modifications to existing software and conversions to new software, the Year 2000 issue can be mitigated. However, if such modifications and conversions are not made, or are not completed in a timely manner, the Year 2000 issue could cause production interruptions that could have a material impact on the operations of the Company. The Company has initiated development of contingency plans and will continue to do so throughout the program. The Company has initiated formal communications with a substantial majority of its significant suppliers and large customers to determine their plans to address the Year 2000 issue. While the Company expects a successful resolution of all issues, there can be no guarantee that the systems of other companies on which the Company's systems rely will be converted in a timely manner, or that a failure to convert by a supplier or customer, or a conversion that is incompatible with the Company's systems, would not have a material adverse effect on the Company. The Company has determined it has no exposure to contingencies related to the Year 2000 issue for the products it has sold. The Company has contracts in place with external resources and has allocated internal resources to reprogram or replace, and test the hardware and software for Year 2000 modifications. The total cost of the Year 2000 project is estimated to be $25 million and is being funded through operating cash flows. These estimates have been verified by independent third-party audit. Of the total project cost, approximately $10 million is attributable to the purchase of new hardware and software which will be capitalized. Maintenance and repair of existing systems to be expensed as incurred is expected to be approximately $15 million. As of December 31, 1998, the Company has incurred and expensed approximately $8 million and capitalized approximately $3 million. The costs of the project and the date which the Company plans to complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third-party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those plans. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes and similar uncertainties. Management of the Company believes it has an effective program in place to resolve the Year 2000 issue in a timely manner. As noted above, the Company has not yet completed all necessary phases of the Year 2000 program. In the event that the Company does not complete any additional phases, the Company would be unable to take customer orders, manufacture and ship products, invoice customers or collect payments. In addition, disruptions in the economy generally resulting from Year 2000 issues could also materially adversely affect the Company. The Company could be subject to litigation for computer systems product failure, for example, equipment shutdown or failure to properly date business records. The amount of potential liability and lost revenue cannot be reasonably estimated at this time. The Company has contingency plans for certain critical applications and is working on such plans for others. These contingency plans involve, among other actions, manual workarounds, increasing inventories, and adjusting staffing strategies. Euro Conversion On January 1, 1999, certain member countries of the European Union irrevocably fixed the conversion rates between their national currencies and a common currency, the "Euro," which became their legal currency on that date. The participating countries' former national currencies continue to exist as denominations of the Euro 23 MANAGEMENT'S DISCUSSION AND ANALYSIS -- Continued until January 1, 2002. The Company has established a steering committee that is monitoring the business implications of conversion to the Euro, including the need to adapt internal systems to accommodate Euro-denominated transactions. The acquisition of T&N has provided the Company with a strong knowledge base in which to assist with the conversion. While the Company is still in various stages of assessment and implementation, the Company does not expect the conversion to the Euro to have a material affect on its financial condition or results of operations. Effect of Accounting Pronouncements 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 is 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 unamortized balance of start-up costs will be written off as a cumulative effect of an accounting change of approximately $13 million, net of tax, as of January 1, 1999. In 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. The Company expects to adopt the new statement effective January 1, 2000. The statement requires the Company to recognize all derivatives on the balance sheet at fair value. The Company does not anticipate that the adoption of this statement will have a significant effect on its results of operations or financial condition. 24 CONSOLIDATED STATEMENTS OF OPERATIONS Item 8. Financial Statements and Supplemental Data
Year Ended December 31 ---------------------------- 1998 1997 1996 ---- ---- ---- (Millions of Dollars, Except Per Share Amounts) Net sales....................................... $4,468.7 $1,806.6 $2,032.7 Cost of products sold........................... 3,290.2 1,381.8 1,660.5 -------- -------- -------- Gross margin.................................... 1,178.5 424.8 372.2 Selling, general and administrative expenses.... 640.8 276.0 320.0 Amortization.................................... 83.8 8.9 12.0 Purchased in-process research and development charge......................................... 18.6 -- -- Restructuring charges (credits)................. 7.3 (1.1) 57.6 Reengineering and other related charges (credits)...................................... -- (1.6) 11.4 Adjustment of assets held for sale and other long-lived assets to fair value................ 19.0 2.4 151.3 Integration costs............................... 22.4 -- -- Interest expense................................ 204.0 33.3 44.4 Interest income................................. (10.6) (7.1) (2.9) International currency exchange losses.......... 4.7 0.6 3.7 Net (gain) loss on British pound currency option and forward contract........................... (13.3) 10.5 -- Other expense, net.............................. 16.3 3.4 3.4 -------- -------- -------- Earnings (loss) before income taxes and extraordinary items......................... 185.5 99.5 (228.7) Income tax expense (benefit).................... 93.6 27.5 (22.4) -------- -------- -------- Net earnings (loss) before extraordinary items....................................... 91.9 72.0 (206.3) Extraordinary items -- loss on early retirement of debt, net of applicable income tax benefit.. 38.2 2.6 -- -------- -------- -------- Net earnings (loss).......................... 53.7 69.4 (206.3) Preferred dividends............................. 3.6 5.5 8.7 -------- -------- -------- Net Earnings (Loss) Available to Common Shareholders.................................. $ 50.1 $ 63.9 $ (215.0) ======== ======== ======== Earnings (Loss) Per Common Share: Income (loss) before extraordinary items....... $ 1.84 $ 1.81 $ (6.20) Extraordinary items............................ (.80) (.07) -- -------- -------- -------- Net Earnings (Loss) Per Common Share......... $ 1.04 $ 1.74 $ (6.20) ======== ======== ======== Earnings (Loss) Per Common Share Assuming Dilution: Income (loss) before extraordinary items....... $ 1.67 $ 1.67 $ (6.20) Extraordinary items............................ (.71) (.06) -- -------- -------- -------- Net Earnings (Loss) Per Common Share Assuming Dilution.................................... $ .96 $ 1.61 $ (6.20) ======== ======== ========
See accompanying Notes to Consolidated Financial Statements. 25 CONSOLIDATED BALANCE SHEETS
December 31 ---------------------- 1998 1997 ---- ---- (Millions of Dollars) ASSETS Cash and equivalents................................... $ 77.2 $ 541.4 Accounts receivable.................................... 1,025.0 158.9 Investment in accounts receivable securitization....... 91.1 48.7 Inventories............................................ 1,068.6 277.0 Prepaid expenses and income tax benefits............... 337.7 113.2 ---------- ---------- Total Current Assets................................ 2,599.6 1,139.2 Property, plant and equipment.......................... 2,477.5 313.9 Goodwill............................................... 3,398.4 143.8 Other intangible assets................................ 886.4 48.4 Other noncurrent assets................................ 578.2 156.8 ---------- ---------- Total Assets........................................ $ 9,940.1 $ 1,802.1 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Short-term debt, including current portion of long-term debt.................................................. $ 211.0 $ 28.6 Accounts payable....................................... 498.4 102.3 Accrued compensation................................... 200.3 36.8 Restructuring and rationalization reserves............. 178.9 33.9 Current portion of asbestos liability.................. 125.0 -- Income taxes payable................................... 142.2 10.2 Other accrued liabilities.............................. 673.7 117.8 ---------- ---------- Total Current Liabilities........................... 2,029.5 329.6 Long-term debt......................................... 3,130.7 273.1 Long-term portion of asbestos liability................ 1,176.7 -- Postemployment benefits................................ 677.0 190.9 Other accrued liabilities.............................. 327.0 50.6 Minority interest in consolidated subsidiaries......... 38.0 13.6 Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely convertible subordinated debentures of the Company(1)............................................ 575.0 575.0 Shareholders' Equity Series C ESOP preferred stock......................... 44.4 49.0 Series E preferred stock.............................. 132.7 -- Common stock.......................................... 336.8 201.0 Additional paid-in capital............................ 1,665.8 332.6 Accumulated deficit................................... (69.9) (123.6) Unearned ESOP compensation............................ (15.1) (21.8) Accumulated other comprehensive income................ (106.0) (65.7) Other................................................. (2.5) (2.2) ---------- ---------- Total Shareholders' Equity.......................... 1,986.2 369.3 ---------- ---------- Total Liabilities and Shareholders' Equity.......... $ 9,940.1 $ 1,802.1 ========== ==========
- - ------------------ (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, 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 -------------------------- 1998 1997 1996 ---- ---- ---- (Millions of Dollars) Cash Provided From (Used By) Operating Activities Net earnings (loss)............................... $ 53.7 $ 69.4 $(206.3) Adjustments to reconcile net earnings (loss) to net cash provided from operating activities: Depreciation and amortization.................... 228.0 51.5 61.9 Purchased in-process research and development charge.......................................... 18.6 -- -- Restructuring charges (credits).................. 7.3 (1.1) 57.6 Reengineering and other related charges (credits)....................................... -- (1.6) 11.4 Adjustment of assets held for sale and other long-lived assets to fair value................. 19.0 2.4 151.3 Loss on early retirement of debt................. 58.1 4.1 -- Vesting of restricted stock...................... 0.7 9.0 0.4 Postemployment benefits.......................... 10.9 (7.7) (2.0) Decrease in accounts receivable.................. 37.5 7.6 46.5 Decrease in inventories.......................... 55.9 59.9 54.5 Increase (decrease) in accounts payable.......... 5.4 (19.5) (25.5) Increase (decrease) in current liabilities and other........................................... (2.4) 67.9 16.8 Payments against restructuring and rationalization reserves........................ (78.0) (26.2) (17.6) Payments against asbestos liability.............. (89.2) -- -- --------- ------ ------- Net Cash Provided From Operating Activities..... 325.5 215.7 149.0 Cash Provided From (Used By) Investing Activities Expenditures for property, plant and equipment and other long-term assets........................... (228.5) (49.7) (54.2) Proceeds from sale of business investments........ 53.4 73.6 42.0 Proceeds from sale of options..................... 39.1 -- -- Businesses acquisitions, net of cash acquired..... (4,225.2) (30.5) (0.3) Other............................................. -- 1.1 -- --------- ------ ------- Net Cash Used By Investing Activities........... (4,361.2) (5.5) (12.5) Cash Provided From (Used By) Financing Activities Issuance of common stock.......................... 1,382.2 14.2 0.6 Proceeds from issuance of long-term debt.......... 6,197.5 179.6 -- Principal payments on long-term debt.............. (3,927.6) (127.4) (29.4) Increase (decrease) in short-term debt............ 0.5 (235.8) (61.4) Fees paid for debt issuance and other securities.. (76.6) (42.8) -- Fees for early retirement of debt................. (27.4) (4.1) -- Investment in accounts receivable securitization.. 42.6 (31.8) -- Issuance of Company-obligated mandatorily redeemable preferred securities.................. -- 575.0 -- Dividends......................................... (10.4) (24.8) (26.9) Other............................................. (9.3) (4.0) (5.7) --------- ------ ------- Net Cash Provided From (Used By) Financing Activities..................................... 3,571.5 298.1 (122.8) --------- ------ ------- Increase (Decrease) in Cash and Equivalents..... (464.2) 508.3 13.7 Cash and equivalents at beginning of year.......... 541.4 33.1 19.4 --------- ------ ------- Cash and Equivalents at End of Year............. $ 77.2 $541.4 $ 33.1 ========= ====== =======
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 Income Other Total --------- ------------ ------ ---------- ------------ ------------ ------------- ----- -------- (Millions of Dollars) Balance at December 31, 1995............ $56.8 $ 76.6 $175.2 $ 280.8 $ 40.2 $(34.3) $ (37.3) $(7.7) $ 550.3 Net loss............. (206.3) (206.3) Currency translation......... (4.3) (4.3) Other................ 1.5 1.5 -------- Total Comprehensive Income............. $ (209.1) Issuance of stock.... 0.5 1.3 (1.2) 0.6 Retirement of Series C ESOP preferred stock............... (3.7) (3.7) Amortization of unearned ESOP compensation........ 5.9 5.9 Dividends............ (26.9) (26.9) Preferred dividend tax benefits........ 1.4 1.4 ----- ------ ------ -------- ------- ------ ------- ----- -------- Balance at December 31, 1996............ 53.1 76.6 175.7 283.5 (193.0) (28.4) (40.1) (8.9) 318.5 Net earnings......... 69.4 69.4 Currency translation......... (27.4) (27.4) Other................ 1.8 1.8 -------- Total Comprehensive Income............. $ 43.8 Conversion of Series D preferred stock... (76.6) 22.3 54.3 -- Issuance of stock.... 3.0 14.7 6.7 24.4 Retirement of Series C ESOP preferred stock............... (4.1) (4.1) Amortization of unearned ESOP compensation........ 6.6 6.6 Dividends............ (24.8) (24.8) Preferred dividend tax benefits........ 4.9 4.9 ----- ------ ------ -------- ------- ------ ------- ----- -------- Balance at December 31, 1997............ 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 ===== ====== ====== ======== ======= ====== ======= ===== ========
See accompanying Notes to Consolidated Financial Statements. 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Accounting Policies Organization: Headquartered in Southfield, Michigan, Federal-Mogul is a global manufacturer and distributor of a broad range of vehicular components for automobiles and light trucks, heavy-duty trucks, farm and construction vehicles and industrial products. The Company's principal customers include many of the world's major original equipment (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 53% and 55% of the inventory at December 31, 1998 and 1997, respectively. The remaining inventories are costed using the first-in, first-out (FIFO) method. If inventories had been valued at current cost, amounts reported at December 31 would have been increased by $39.0 million in 1998 and $44.5 million in 1997. Inventory quantity reductions resulting in liquidations of certain LIFO inventory layers increased net earnings by $3.4 million, $3.2 million and $3.1 million ($.06, $.08 and $.09 per diluted share) in 1998, 1997 and 1996, respectively. At December 31, inventories consisted of the following:
1998 1997 ---- ---- (Millions of Dollars) Finished products.................................... $ 737.9 $ 254.6 Work-in-process...................................... 147.1 21.8 Raw materials........................................ 208.5 15.7 ----------- --------- 1,093.5 292.1 Reserve for inventory valuation...................... (24.9) (15.1) ----------- --------- $ 1,068.6 $ 277.0 =========== =========
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 1998 1997 ----------- ---- ---- (Millions of Dollars) Goodwill................................. 40 years $ 3,481.8 $ 163.8 Accumulated amortization................. (83.4) (20.0) ----------- --------- Total Goodwill......................... $ 3,398.4 $ 143.8 =========== ========= Trademarks............................... 40 years $ 417.6 $ 56.5 Developed technology..................... 12-30 years 390.1 -- Assembled workforce...................... 15 years 88.1 -- Other.................................... 5-20 years 39.9 20.8 ----------- --------- 935.7 77.3 Accumulated amortization................. (49.3) (28.9) ----------- --------- Total Other Intangible Assets.......... $ 886.4 $ 48.4 =========== =========
29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued Intangible assets are periodically reviewed for impairment based on an assessment of future cash flows, or fair value for assets held for sale, to ensure that they are appropriately valued. Intangible assets are amortized on a straight-line basis over their estimated useful lives. Impairment charges recorded in 1998, 1997 and 1996 related primarily to assets held for sale. Revenue Recognition: The Company recognizes revenue and estimated returns from product sales and the related customer incentive and warranty expense when goods are shipped to the customer. Research and Development and Advertising Costs: The Company expenses research and development costs as incurred. Research and development expense was $85.0 million, $13.1 million and $14.4 million for 1998, 1997 and 1996, respectively. Costs associated with advertising and promotion are expensed as incurred. Advertising and promotion expense was $45.9 million, $31.8 million and $34.0 million for 1998, 1997 and 1996, 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. Effect of Accounting Pronouncements: In April 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 is 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 unamortized balance of start-up costs will be written off as a cumulative effect of an accounting change of approximately $13 million, net of tax, as of January 1, 1999. In 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. The Company expects to adopt the new statement effective January 1, 2000. The statement requires the Company to recognize all derivatives on the balance sheet at fair value. The Company does not anticipate that the adoption of this statement will have a significant effect on its results of operations or financial condition. Environmental Liabilities: The Company recognizes environmental liabilities when a loss is probable and estimable. Such liabilities are generally not subject to insurance coverage. Each environmental obligation is estimated by engineering and legal specialists within the Company based on current law and existing technologies. Such estimates are based primarily upon the estimated cost of investigation and remediation required and the likelihood that other potentially responsible parties will be able to fulfill their commitments at the sites where the Company may be jointly and severally liable with such parties (refer to Note 20, "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: Incremental direct costs associated with integrating material acquisitions 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. Derivative Financial Instruments: The Company uses 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, forward foreign exchange contracts to minimize and lock the amount 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued 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 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. 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. 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 1998. 2. Acquisitions of Businesses T&N In March 1998, the Company acquired T&N plc (T&N), a manufacturer 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. In connection with the acquisition of T&N, the Company entered into a $2.675 billion floating rate Senior Credit Agreement (consisting of a $2.275 billion term loan facility and a $400 million revolving loan facility) and a $500 million floating rate Senior Subordinated Credit Agreement. In addition, the Company funded a portion of the T&N acquisition through the December 1997 sale of 11.5 million shares of Company-obligated mandatorily redeemable preferred securities (generating gross proceeds of $575 million) by Federal-Mogul Financing Trust, a wholly owned subsidiary of the Company. T&N manufactures and supplies high technology engineered automotive components and industrial materials. In 1997, T&N had sales of approximately (Pounds)1.8 billion ($2.9 billion at the 1997 average exchange rate) with about 80% of such sales relating to the global automotive industry. At the time of its acquisition, T&N's major product lines consisted of piston products, bearings, friction products, composites and camshafts (incorporating sintered products) and sealing products servicing OE customers and the aftermarket. T&N operated in approximately 200 locations in 24 countries, employed over 28,000 people worldwide and served customers globally. T&N's operations included technical centers in the United Kingdom, Germany and North America. 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. 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued 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 includes a price adjustment based upon acquired net assets, as defined in the agreement, as of the acquisition date. The Company anticipates additional cash payments of approximately $100 million will be paid. Cooper Automotive is a leading supplier of aftermarket parts for repair and maintenance and serves OE automobile manufacturers worldwide. In 1997, Cooper Automotive had sales of approximately $1.9 billion. At the time of the acquisition, Cooper Automotive's principal products consisted of brakes and friction, lighting, chassis parts, ignition and wiper blades. Cooper Automotive employed approximately 14,500 employees in 63 locations. 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 included 1,030,325.6 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 for the North American aftermarket and OE heavy-duty market. In 1997, Fel-Pro had sales of approximately $500 million. At the time of the acquisition, Fel-Pro's primary product lines consisted of gaskets, heavy-duty diesel engine products, diesel products, high performance gaskets and other equipment and chemical products. Fel-Pro employed approximately 2,700 employees in 16 locations. The T&N, Cooper Automotive and Fel-Pro 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 statement of operations for the year ended December 31, 1998 includes 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 the acquisition dates. In connection with the acquisition of Cooper Automotive, the Company is in the process of having valuations of acquired property, plant and equipment and identifiable intangible assets completed. The related purchase price allocation will be finalized when such valuations and the final purchase price adjustment are completed in 1999. 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 provide for $180.0 million and $36.8 million in severance and exit costs, respectively, and were recorded as a component of goodwill in the purchase price allocation. The components of the integration plan include: closure of certain manufacturing facilities worldwide; relocation of highly manual manufacturing product lines to lower cost regions or more suitable locations; consolidation of overlapping manufacturing, technical and sales facilities and joint ventures; consolidation of overlapping aftermarket warehouses; consolidation of aftermarket marketing and customer support functions; and streamlining of administrative, sales, marketing and product engineering staffs worldwide. An anticipated result of the integration plan and the restructuring will be a reduction of approximately 5,300 full-time employees. 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued The Company paid $61.6 million related to these rationalization reserves in 1998. 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. On December 18, 1998, the Company completed the sale of 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 also expects to realize additional net proceeds of approximately $13 million from the collection of receivables of the business sold. Prior to the sale of the T&N Bearing 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. 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 years ended December 31, 1998 and 1997 assume the T&N, Cooper Automotive and Fel-Pro acquisitions occurred as of the beginning of the respective periods, after giving effect to certain adjustments, including the amortization of intangible assets, interest expense on acquisition debt, divestitures of the T&N Bearings Business and Fel-Pro Chemical Business, 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 dates 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)
Year Ended December 31 ----------------------- 1998 1997 ---- ---- Net sales.......................................... $ 6,444.1 $ 6,644.7 Net earnings (loss)................................ $ 152.0 $ (4.9) Earnings (loss) per share.......................... $ 2.12 $ (.19) Earnings (loss) per share assuming dilution........ $ 1.95 $ (.19)
Other Acquisitions During 1998, the Company acquired other complementary businesses and increased its ownership in certain joint ventures in order to expand its manufacturing and distribution capabilities. In the first quarter of 1998, the 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued Company increased its ownership to 100% in its Summerton, South Carolina gasket manufacturing plant and also increased its ownership in KFM Bearing Company Ltd. (KFM), a Korean joint venture with Kukje Special Metal Co., from 30% to 87%. In addition, the Company acquired Bimet, a Polish manufacturer of engine bearings, bushings and related products. During the fourth quarter of 1998, the Company acquired Tri-Way Machine Limited (Tri-Way), a Canadian manufacturer of machining systems for the metal-cutting industry and Glockler Dichtsysteme Gunter Hemmrich GmbH (Glockler), a manufacturer of rubber sealing components and acoustic decoupling for valve covers, intake manifolds and oil pans. Additionally, the Company increased its ownership from 50.6% to 100% in T&N Holdings Limited located in South Africa. The Summerton, KFM, Bimet, Tri-Way, Glockler, and T&N Holdings Limited transactions have been accounted for as purchases and, accordingly, the total consideration was allocated to the acquired assets and assumed liabilities based on its estimated fair values as of the acquisition dates. The total cash consideration paid for these acquisitions approximated $93 million. The consolidated statement of operations for the year ended December 31, 1998 includes the operating results of the acquired businesses from the applicable date of acquisition. 3. Sales of Businesses Divestitures 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 (refer to Note 2, "Acquisitions of Businesses"). 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. In addition, the Company closed or sold substantially all its remaining retail aftermarket operations during 1998. During 1997, the Company received $73.6 million in net cash proceeds from the sale of its aftermarket operations in South Africa, Australia and Chile, and its heavy wall bearing operations in Germany and Brazil. During 1996, the Company received $42.0 million in net cash proceeds from the sale of its United States ball bearings and electrical products manufacturing operations. Except for the sales of Bruss and the electrical products manufacturing operations, sales of businesses in 1998, 1997 and 1996 relate to assets previously adjusted to fair value (refer to Note 7, "Adjustment of Assets Held for Sale and Other Long-Lived Assets to Fair Value"). Accordingly, no gain or loss was recognized on the date of sale related to these transactions. In addition, no gain or loss was recognized related to the sale of the electrical products manufacturing operations. 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued 4. Restructuring Charges The following is a summary of restructuring charges and related activity for 1996, 1997 and 1998 (in millions of dollars):
1995 Restructuring 1996 Restructuring 1997 Restructuring 1998 Restructuring Provision Provision Provision Provision ---------------------- --------------------- ---------------------- --------------------- Severance Exit Severance Exit Severance Exit Severance Exit Total ----------- --------- ----------- -------- ----------- --------- ----------- -------- ------ Balance of restructuring reserves at December 31, 1995............... $ 3.9 $ 6.8 -- -- $ 10.7 1996 restructuring charge................. -- -- $ 42.8 $ 14.8 57.6 Payments against restructuring reserves............... (3.9) (3.4) (4.8) (1.0) (13.1) --------- --------- --------- -------- --------- --------- --------- -------- ------ Balance of restructuring reserves at December 31, 1996............... -- 3.4 38.0 13.8 55.2 1997 restructuring charge................ -- -- -- -- $ 16.7 $ 5.3 22.0 Adjustment to restructuring reserves.............. -- (.9) (20.8) (1.4) -- -- (23.1) --------- --------- --------- -------- --------- --------- --------- -------- ------ 1997 restructuring charges (net).......... -- (.9) (20.8) (1.4) 16.7 5.3 (1.1) Payments against restructuring reserves............... -- (1.7) (11.6) (3.7) (0.1) -- (17.1) --------- --------- --------- -------- --------- --------- --------- -------- ------ Balance of restructuring reserves at December 31, 1997............... -- 0.8 5.6 8.7 16.6 5.3 37.0 1998 restructuring charges............... -- -- -- -- -- -- $ 16.0 $ 0.3 16.3 Adjustment to restructuring reserves.............. -- -- -- (2.4) (4.6) (2.0) -- -- (9.0) --------- --------- --------- -------- --------- --------- --------- -------- ------ 1998 restructuring charges (net).......... -- -- -- (2.4) (4.6) (2.0) 16.0 0.3 7.3 Payments against restructuring reserves............... -- (0.8) (1.1) (5.0) (6.1) (0.1) (3.3) -- (16.4) --------- --------- --------- -------- --------- --------- --------- -------- ------ Balance of restructuring reserves at December 31, 1998............... $ -- $ -- $ 4.5 $ 1.3 $ 5.9 $ 3.2 $ 12.7 $ 0.3 $ 27.9 ========= ========= ========= ======== ========= ========= ========= ======== ======
The Company's total restructuring reserves at December 31, 1998 of $27.9 million include $4.2 million of severance, which was anticipated to be paid over the next two years, and was classified as noncurrent other accrued liabilities in the balance sheet. 1998 Restructuring Provision 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. Employee severance costs result from planned terminations of approximately 1,800 employees in various business operations of the Company. 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 foreign governmental regulations. The Company anticipates that the actions related to the 1998 restructuring plan will be substantially completed in 1999. 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 1997 Restructuring Provision Results of operations in 1997 include a $22.0 million charge for 1997 severance and exit costs. The restructuring actions were designed to improve the Company's cost structure, streamline operations and divest the Company of underperforming assets. Employee severance costs for 1997 result from the planned termination of approximately 500 employees, in various business operations of the Company. The severance costs were based on the minimum levels that will be paid to the affected employees pursuant to the Company's workforce reduction policies and certain foreign governmental regulations. Exit costs for 1997 principally include lease termination costs for certain North American distribution service branches and retail aftermarket operations in Puerto Rico, and the consolidation of certain European distribution, and North American and European manufacturing operations. As of December 31, 1998, employee severance actions related to the 1997 charges resulted in the termination of approximately 200 employees. 1996 Restructuring Provision Primarily due to the anticipated T&N and Fel-Pro transactions (refer to Note 2, "Acquisitions of Businesses"), the Company elected not to fully implement the following actions under the 1996 restructuring plan: .Reductions to the operational and administrative staff were not made to the extent originally planned. .Reconfiguration of the North American distribution network was altered to accommodate the planned integration of T&N and Fel-Pro aftermarket operations. .Relocation of certain European manufacturing product lines to lower cost areas within Europe and related workforce reductions did not take place. Management of the Company decided not to pursue this action, primarily in anticipation of the integration of future acquisitions. Primarily as a result of actions not fully implemented under the 1996 restructuring plan, the Company's 1997 operating results were increased by $23.1 million for the reversal of previously recognized 1996 and 1995 restructuring charges. As of December 31, 1998, employee severance costs related to the 1996 charge have resulted in the termination of approximately 700 employees, primarily in the international retail aftermarket and wholesale aftermarket operations, the North American distribution business and a closed manufacturing operation. Exit costs for 1996 principally include lease termination costs of international retail aftermarket stores and certain international wholesale aftermarket operations, the consolidation of certain North American distribution facilities and the closing of a North American manufacturing operation. 5. British Pound Currency Option and Forward Contract In the fourth quarter of 1997, in anticipation of the then-pending T&N acquisition, the Company purchased a British pound currency option for $28.1 million with a notional amount of $2.5 billion. The cost of the option and its change in fair value have been reflected in the results of operations in the fourth quarter of 1997. At December 31, 1997, the Company 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. Also in January 1998, in anticipation of the then-pending T&N acquisition, the Company entered into a forward contract to purchase (Pounds)1.5 billion for 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. 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued The Company entered into the above transactions to serve as economic hedges for the purchase of T&N. Such transactions, however, do not qualify for hedge accounting under GAAP, and therefore both the loss on the British pound currency option and the gain on the British pound forward contract are reflected in the consolidated statement of operations caption "Net (gain) loss on British pound currency option and forward contract." 6. Debt Long-term debt at December 31 consists of the following:
1998 1997 ---- ---- (Millions of Dollars) Senior Credit Agreements................................ $ 1,893.6 $ -- Notes due 2004 -- 7.5%, issued in 1998.................. 249.5 -- Notes due 2006 -- 7.75%, issued in 1998................. 399.9 -- Notes due 2010 -- 7.875%, issued in 1998................ 349.2 -- Medium-term notes -- due between 1999 and 2005, average rate of 8.4%, issued in 1994 and 1995.................. 125.0 125.0 Senior notes -- due in 2007, rate of 8.8%, issued in 1997................................................... 124.7 124.6 ESOP obligation -- due in 1999 and 2000, average rate of 7.19%.................................................. 14.7 21.9 Other................................................... 82.6 11.8 ----------- --------- 3,239.2 283.3 Less current maturities included in short-term debt..... 108.5 10.2 ----------- --------- $ 3,130.7 $ 273.1 =========== =========
In 1998, in connection with the acquisitions of T&N and Cooper Automotive, the Company entered into Senior Credit Agreements. The Company had $1,893.6 outstanding under these Senior Credit Agreements as of December 31, 1998 which are due from 1999 to 2005 with an average interest rate of 7.33%. 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 12, "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 Company has pledged 100% of the capital stock of certain United States subsidiaries, 65% of capital stock of certain foreign subsidiaries and certain inter-company 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 22, "Audited Consolidating Condensed Financial Information of Guarantor Subsidiaries"). The ESOP obligation represents the unpaid principal balance on an 11-year loan entered into by the Company's ESOP in 1989. Proceeds of the loan were used by the ESOP to purchase the Company's Series C ESOP preferred stock. Payment of principal and interest on the notes is unconditionally guaranteed by the Company, and therefore, the unpaid principal balance of the borrowing is classified as long-term debt. Company contributions and dividends on the preferred shares held by the ESOP are used to meet semi-annual principal and interest obligations. The original ESOP obligation bore an annual interest rate of 11.5%. The obligation was refinanced on June 30, 1995 at a fixed interest rate of 7.2%. The ESOP obligation matures in December 2000. In June 1997, the Company entered into a new $350 million multicurrency revolving credit facility, with a consortium of international banks, which matures in June 2002 which was subsequently replaced by the $400 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued million multicurrency revolving credit facility related to the T&N acquisition. As of December 31, 1998 and 1997, there were no borrowings outstanding against the multicurrency revolving credit facility. The weighted average interest rate for the Company's short-term debt was approximately 7.75% and 9.9% as of December 31, 1998 and 1997, respectively. On February 24, 1999, the Company entered into a new $1.75 billion Senior Credit Agreement at variable interest rates, which contains a $1.0 billion multicurrency revolving credit facility and two term loan components. The revolving credit facility has a five-year maturity. The term loan components of $400 million and $350 million mature in five and six years, respectively. The proceeds of this Senior Credit Agreement were used to refinance the prior Senior Credit Agreements entered into in connection with the T&N and Cooper Automotive acquisitions as well as the $400 million multicurrency revolving credit facility related to the T&N acquisition. As a result of these transactions, the Company will recognize an extraordinary charge in the first quarter of 1999 of approximately $15 million, net of tax, related to the early extinguishment of debt. Aggregate maturities of long-term debt for each of the years following 1999 are, in millions: 2000 --$475.1; 2001 -- $139.1; 2002 -- $126.7; 2003 -- $139.7 and thereafter $2,250.1. Interest paid in 1998, 1997 and 1996 was $173.4 million, $30.7 million and $43.5 million, respectively. 7. Adjustment of Assets Held For Sale and Other Long-Lived Assets to Fair Value In 1998, the Company decided to sell its subsidiary, Bertolotti Pietro e Figli, S.r.l. (Bertolotti), an Italian aftermarket operation. The carrying value of Bertolotti's long-lived assets was reduced to fair value based on estimates of selling values, less costs to sell, calculated using multiples of earnings similar to recent automotive industry transactions in Italy. The Company recognized a $20.0 million first quarter charge primarily associated with the write-down of Bertolotti's assets to the estimated fair value. Also in 1998, the Company recognized a $1.0 million benefit associated with the sale of certain international retail assets previously written down to their realized fair value. In 1997, the Company recognized a charge of $2.4 million to write down certain long-lived assets of the international retail aftermarket to fair value. These assets were sold in 1998 for approximately their adjusted value and no gain or loss was recorded. During 1996, management designed a restructuring plan to aggressively improve the Company's cost structure, streamline operations and divest the Company of underperforming assets. As part of this plan, the Company decided to sell 132 international retail aftermarket operations, sell or restructure 30 wholesale aftermarket operations and consolidate a North American manufacturing operation. The carrying value of assets held for sale was reduced to fair value based on estimates of selling values less costs to sell. Selling values used to determine the fair value of assets held for sale were determined using market prices (i.e., valuation multiples) of comparable companies from other 1996 transactions. The resulting adjustment of $148.5 million to reduce assets held for sale to fair value was recorded in the fourth quarter of 1996. The Company has substantially completed the 1996 restructuring plan, selling its South Africa, Australia, Chile and Puerto Rico retail operations during 1997 and 1998. Also in 1996, based upon the final sale, the Company recognized an additional write-down of $2.8 million to the net asset value of the United States ball bearings operations. 8. Reengineering and Other Related Charges (Credits) In 1996, the Company initiated an extensive effort to strategically review its businesses and focus on its competencies of manufacturing, engineering and distribution. As a result of this process, the Company recognized a charge of $11.4 million for professional fees and personnel costs related to the strategic review of the Company and changes in management and related costs. Operating results for 1997 include a credit of $1.6 million relating to the reversal of certain 1996 reengineering and other related charges, as the actual costs were less than the initial estimates. 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued 9. Changes in Accounting Estimates In 1996, the Company made certain changes in accounting estimates totaling $51 million ($34 million after tax, $.98 per share) attributable to 1996 events and new information becoming available. The changes in accounting estimates included increasing the provision for customer incentive programs and related sales initiatives by $18 million, increasing the provision for excess and obsolete inventory by $13 million, increasing the provision for bad debts by $3 million, increasing the provision for environmental and legal matters by $9 million and increasing various other provisions by approximately $8 million. 10. 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 currency option and forward contract discussed in Note 5, the Company does not hold or issue derivative financial instruments for trading purposes. As of December 31, 1998, the Company has foreign exchange forward contracts principally for British pound exposures relating to the United States dollar and the South African rand totaling a notional amount of $127 million. At December 31, 1998, there was an unrealized loss of $9.1 million related to foreign exchange contracts. The Company did not have foreign exchange forward contracts or currency option contracts at December 31, 1997. The Company enters into copper contracts to hedge against the risk of price increases. These contracts are expected to offset the effects of price changes on the firm purchase commitments for copper. Under the agreements, the Company was committed to purchase 7.3 million pounds of copper. The net unrealized loss on these firm purchase commitments was $0.8 million at December 31, 1998. In addition, in 1998, the Company had also entered into aluminum and nickel contracts as a hedge to offset the effects of price changes. The net unrealized losses at December 31, 1998 were $0.4 million and $0.2 million for aluminum and nickel contracts, respectively. 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. Interest Rate Locks The Company had $300 million of interest rate locks outstanding as of December 31, 1998 with an unrealized loss of $0.9 million. These interest rate locks were entered into as a hedge in anticipation of the bond issuance of $1.0 billion in January 1999 (refer to Note 23, "Subsequent Events"). Accounts Receivable Securitization During 1998, the Company replaced an existing accounts receivable securitization program with a new program which provides up to $150 million of financing. On an ongoing basis, the Company sells certain accounts receivable to Federal-Mogul Funding Corporation (FMFC), a wholly owned subsidiary of the Company, which then sells such receivables, without recourse, to a financial conduit. Amounts excluded from the balance sheets under these arrangements were $105.8 million and $63.2 million at December 31, 1998 and 1997, 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." 39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued 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 $60.4 million and $18.7 million at December 31, 1998 and 1997, 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, accounts payable and short-term debt approximate their fair values. The carrying amounts and estimated fair values of the Company's long-term debt were $3,130.7 million and $3,166.3 million, respectively, at December 31, 1998. The fair value of the long-term debt is estimated using discounted cash flow analysis and the Company's current incremental borrowing rates for similar types of arrangements. 11. Property, Plant and Equipment Property, plant and equipment are stated at cost and include expenditures which materially extend the useful lives of existing buildings, machinery and equipment. Depreciation is computed principally by the straight-line method for financial reporting purposes and by accelerated methods for income tax purposes. Depreciation expense for the years ended December 31, 1998, 1997 and 1996, was $144.2 million, $42.6 million and $49.8 million, respectively. At December 31, property, plant and equipment consisted of the following:
Estimated Useful Life 1998 1997 ----------- ---- ---- (Millions of Dollars) Land................................... -- $ 139.4 $ 29.1 Buildings and building improvements.... 24-40 years 560.1 124.0 Machinery and equipment................ 3-12 years 2,097.6 363.4 ----------- ---------- 2,797.1 516.5 Accumulated depreciation............... (319.6) (202.6) ----------- ---------- $ 2,477.5 $ 313.9 =========== ==========
Future minimum payments under noncancelable operating leases with initial or remaining terms of more than one year are, in millions: 1999 -- $52.9; 2000 -- $40.3; 2001 -- $33.6; 2002 -- $27.2; 2003 -- $24.0 and thereafter $73.8. Future minimum lease payments have been reduced by approximately $29.2 million for amounts to be received under sublease agreements. Total rental expense under operating leases was $46.5 million in 1998, $29.1 million in 1997 and $33.8 million in 1996, exclusive of property taxes, insurance and other occupancy costs generally payable by the Company. 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued 12. 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 67,233,216 shares, 40,196,603 shares and 35,130,359 shares were outstanding at December 31, 1998, 1997 and 1996, respectively. In February 1998, in connection with the Fel-Pro acquisition, the Company issued 1,030,325.6 shares Series E Stock with an imputed value of $225 million. The shares of Series E Stock are exchangeable into shares of the Company's common stock at a rate of five shares of common stock per share of Series E Stock. Subsequently, in conjunction with the June 1998 common stock offering described below, the Company converted 422,581 shares of Series E Stock into approximately 2.1 million shares of common stock. In February 1999, all outstanding shares of the Company's Series E Stock were exchanged into the Company's common stock (refer to Note 23, "Subsequent Events"). 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 (refer to Note 2, "T&N" in "Acquisitions"). 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 August 1997, the Company announced a call for the redemption of all its outstanding $3.875 Series D Convertible Exchangeable Preferred Stock. These preferred stockholders elected to convert each preferred share into 2.778 shares of common stock. The Company issued 4.4 million shares of common stock in exchange for all the outstanding Series D Convertible Exchangeable Preferred Stock. The Company's ESOP covers substantially all domestic salaried employees and allocates Series C ESOP Convertible Preferred Stock to eligible employees based on their contributions to the Salaried Employees' Investment Program. There were 724,644, 762,939 and 835,898 shares of Series C ESOP preferred stock outstanding at December 31, 1998, 1997 and 1996, respectively. The Series C ESOP preferred shares pay dividends at a rate of 7.5%. The Company repurchased and retired 38,295 Series C ESOP preferred shares valued at $4.6 million during 1998 and 72,959 Series C ESOP preferred shares valued at $4.1 million during 1997, all of which represent plan distributions or fund transfers for participants of the plan. The Series C ESOP preferred stock is convertible into shares of the Company's common stock at a rate of two shares of common stock for each share of preferred stock. The Series C ESOP preferred stock may be issued only to a trustee acting on behalf of an employee stock ownership plan or other employee benefit plan of the Company. These shares are automatically converted into shares of common stock in the event of any transfer to any person other than the plan trustee. The Series C ESOP preferred stock is redeemable, in whole or in part, at the option of the Company. The charge to operations for the cost of the ESOP was $5.2 million in 1998, $5.2 million in 1997 and $4.2 million in 1996. The Company made cash contributions to the plan of $8.2 million in 1998 and $8.1 million in 1997 and 1996, including preferred stock dividends of $3.6 million in 1998, $3.8 million in 1997 and $4.1 million in 1996. ESOP shares are released as principal and interest on the debt is paid. The ESOP Trust uses the preferred dividends not allocated to employees to make principal and interest payments on the debt. Compensation expense is measured based on the fair value of shares committed to be released to employees. Dividends on ESOP shares are treated as a reduction of retained earnings in the period declared. The number of allocated shares and suspense shares held by the ESOP were 563,995 and 160,649 at December 31, 1998, and 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued 512,147 and 250,792 at December 31, 1997, respectively. There were no committed-to-be-released shares at December 31, 1998 and December 31, 1997. Any repurchase of the ESOP shares is strictly at the option of the Company. In 1988, the Company's Board of Directors authorized the distribution of one Preferred Share Purchase Right (Right) for each outstanding share of common stock of the Company. Each Right entitles shareholders to buy one-half of one- hundredth of a share of a new series of preferred stock at a price of $70. These Rights will expire on April 30, 1999, after which they will be replaced by Rights authorized under a new Shareholder Rights Plan adopted by the Board of Directors in February of 1999. Under the new plan, each Right will entitle shareholders to buy one-one thousandth of a share of a newly created Series F preferred stock at a price of $250. As distributed, the Rights trade together with the common stock of the Company. They may be exercised or traded separately only after the earlier to occur of (i) ten days following a public announcement that a person or group of persons has obtained the right to acquire 10% or more of the outstanding common stock of the Company (20% in the case of certain institutional investors), or (ii) ten business days (or such later date as may be determined by action of the Board of Directors) following the commencement or announcement of an intent to make a tender offer or exchange offer which would result in beneficial ownership by a person or group of persons of 10% or more of the Company's outstanding common stock. Additionally, if the Company is acquired in a merger or other business combination, each Right will entitle its holder to purchase, at the Right's exercise price, shares of the acquiring Company's common stock (or stock of the Company if it is the surviving corporation) having a market value of twice the Right's exercise price. The Rights may be redeemed at the option of the Board of Directors for $.01 per Right at any time before a person or group of persons acquires 10% or more of the Company's common stock. The Board may amend the Rights at any time without shareholder approval. The Rights will expire by their terms on April 30, 2009. 13. 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 will be redeemable, at the option of the Company, on or after December 6, 2000 at a redemption price, expressed as a percentage of principal which is added to accrued and unpaid interest. The redemption price range is from 104.2% on December 6, 2000 to 100.0% after December 1, 2007. All outstanding TCP Securities and Debentures are required to be redeemed by December 1, 2027. 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued 14. Accumulated Other Comprehensive Income The components of other comprehensive income are as follows:
Currency Translation Other Total ----------- ----- ----- (Millions of Dollars) Balance at December 31, 1996.................... $ (38.2) $(1.9) $ (40.1) Current period change........................... (27.4) 1.8 (25.6) ------- ----- ------- Balance at December 31, 1997.................... (65.6) (0.1) (65.7) Current period change........................... (36.7) (3.6) (40.3) ------- ----- ------- Balance at December 31, 1998.................... $(102.3) $(3.7) $(106.0) ======= ===== =======
The earnings associated with the Company's investment in its foreign subsidiaries are considered to be permanently invested and no provision for United States Federal and state income taxes on those earnings or translation adjustments have been provided. 15. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share (in millions, except per share data):
1998 1997 1996 ---- ---- ---- Numerator: Net earnings (loss) after extraordinary items.......... $53.7 $69.4 $(206.3) Extraordinary items -- loss on early retirement of debt net of applicable tax benefit......................... 38.2 2.6 -- ----- ----- ------- Net earnings (loss) before extraordinary items......... 91.9 72.0 (206.3) Series C preferred dividend requirement................ (2.3) (2.4) (2.5) Series D preferred dividend requirement................ -- (3.1) (6.2) Series E preferred dividend requirement................ (1.3) -- -- ----- ----- ------- Numerator for basic earnings per share -- income (loss) available to common shareholders before extraordinary items................................................. $88.3 $66.5 $(215.0) Effect of dilutive securities: Series C preferred dividend requirement............... 2.3 2.4 -- Series D preferred dividend requirement............... -- 3.1 -- Series E preferred dividend requirement............... 1.3 -- -- Additional required ESOP contribution................. (2.1) (1.9) -- ----- ----- ------- Numerator for diluted earnings per share -- income (loss) available to common shareholders after assumed conversions, before extraordinary item................ $89.8 $70.1 $(215.0) Numerator for basic earnings per share -- income (loss) available to common shareholders after extraordinary item.................................................. $50.1 $63.9 $(215.0) Numerator for diluted earnings per share -- income (loss) available to common shareholders after extraordinary item.................................... $51.6 $67.5 $(215.0)
43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
1998 1997 1996 ---- ---- ---- Denominator: Denominator for basic earnings per share -- weighted average shares........................................... $48.1 $36.6 $ 34.7 Effect of dilutive securities: Dilutive stock options outstanding....................... 0.8 0.4 -- Nonvested stock.......................................... 0.1 0.3 -- Conversion of Series C preferred stock................... 1.5 1.6 -- Conversion of Series D preferred stock................... -- 3.0 -- Conversion of Series E preferred stock................... 3.2 -- -- ----- ----- ------ Dilutive potential common shares.......................... 5.6 5.3 -- Denominator for dilutive earnings per share -- adjusted weighted average shares and assumed conversions.......... 53.7 41.9 34.7 ===== ===== ====== Basic earnings (loss) per share before extraordinary items..................................................... $1.84 $1.81 $(6.20) ===== ===== ====== Basic earnings (loss) per share after extraordinary items.. $1.04 $1.74 $(6.20) ===== ===== ====== Diluted earnings (loss) per share before extraordinary items..................................................... $1.67 $1.67 $(6.20) ===== ===== ====== Diluted earnings (loss) per share after extraordinary items..................................................... $ .96 $1.61 $(6.20) ===== ===== ======
For additional disclosures regarding the Series C, Series D and Series E preferred stock, the employee stock options and nonvested stock shares, refer to Note 12, "Capital Stock and Preferred Share Purchase Rights," and Note 16, "Incentive Stock Plans". Convertible preferred securities (refer to Note 13, "Company-Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Convertible Subordinated Debentures of the Company") redeemable for 11.2 million shares of common stock were outstanding for 1998 and a portion of 1997 but were not included in the computation of diluted earnings per share because the effect would be antidilutive. 16. 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, 1998, there were 2,752,952 shares available for future grants under the plans. In October 1997, the Company met certain share price performance criteria under the 1989 Long-Term Incentive Plan which resulted in the recognition of $5.4 million in compensation expense relating to the vesting of restricted stock awards. The total compensation cost that has been charged to operations for vesting of restricted stock awards was $0.7 million, $9.0 million and $0.4 million in 1998, 1997 and 1996, 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 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued No. 123 (Statement 123) Accounting for Stock Based Compensation, the Company's net earnings (loss), in millions, and earnings (loss) per share would have been adjusted to the pro forma amounts indicated below:
1998 1997 1996 ---- ---- ---- Net earnings (loss) as reported........................ $53.7 $69.4 $(206.3) Pro forma.............................................. $48.3 $70.7 $(207.1) Basic earnings (loss) per share as reported............ $1.04 $1.74 $ (6.20) Pro forma.............................................. $0.93 $1.78 $ (6.22) Diluted earnings (loss) per share as reported.......... $0.96 $1.61 $ (6.20) Pro forma.............................................. $0.86 $1.64 $ (6.22)
Pro forma information regarding net income and earnings per share is required by Statement 123 as if the Company had accounted for its employee stock options under the fair value method. The fair value for options is estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1998, 1997 and 1996, respectively: risk-free interest rates of 6.5%; dividend yields of 0.2%, 1.5% and 2.3%; volatility factors of the expected market price of the Company's common stock of 30.1%, 27.2% and 11.2% and a weighted average expected life of the option of five years. The fair value of nonvested stock awards is equal to the market price of the stock on the date of the grant. Since the above pro forma disclosures of results are required to consider only grants awarded in 1995 and thereafter, the pro forma effects during this initial phase-in period may not be representative of the effects on the reported results for future years. The weighted-average fair value and the total number (in millions) of options granted was $22.36, $9.99 and $3.34, and 1.1, 0.9 and 0.3 for 1998, 1997 and 1996, respectively. The weighted-average fair value and total number (in millions) of nonvested stock awards granted was $53.52, $24.47 and $18.90 and 0.1, 0.1 and 0.2 for 1998, 1997 and 1996, respectively. All options and stock awards that are not vested at December 31, 1998, vest solely on employees' rendering additional service. The following table summarizes the activity relating to the Company's incentive stock plans:
Number Weighted- of Shares Average (In Millions) Price ------------- --------- Outstanding at December 31, 1995........................ 2.6 $22.02 Options/stock granted.................................. .5 22.08 Options exercised...................................... -- -- Options/stock lapsed or canceled....................... (.6) 22.32 ---- ------ Outstanding at December 31, 1996........................ 2.5 $22.03 Options/stock granted.................................. 1.0 31.74 Options exercised/stock vested......................... (1.0) 21.94 Options/stock lapsed or canceled....................... (0.3) 22.29 ---- ------ Outstanding at December 31, 1997........................ 2.2 $26.46 Options/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 exercisable at December 31, 1998............... 0.6 $30.11 ==== ====== Options exercisable at December 31, 1997............... 0.9 $23.07 ==== ====== Options exercisable at December 31, 1996............... 1.3 $22.50 ==== ======
45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued 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, 1998:
Weighted-Average Outstanding --------------------- Range Awards Price Remaining Life ----- ----------- ------ -------------- Options: $15.69-$23.50............................. 0.5 $21.79 3 years $23.51-$35.25............................. 0.7 $28.16 3 years $35.26-$52.87............................. 0.4 $42.12 5 years $52.88-$70.69............................. 1.1 $59.32 5 years Nonvested stock............................ 0.1 --- Total.................................... 2.8 ===
17. Postemployment Benefits The Company sponsors several defined benefit pension plans (Pension Benefits) and health care and life insurance benefits (Other Benefits) for certain employees 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. Components of net periodic benefit cost for the year ended December 31:
United States Plans International Plans ------------------------------------------ ---------------------- Pension Benefits Other Benefits Pension Benefits ---------------------- ------------------ ---------------------- 1998 1997 1996 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- ---- ---- ---- (Millions of Dollars) Service cost............ $ 16.4 $ 7.8 $ 9.0 $ 4.4 $ 2.5 $2.8 $ 26.7 $ 0.3 $ 0.4 Interest cost........... 29.9 14.0 15.0 19.2 10.5 10.8 100.7 1.9 2.5 Expected return on plan assets................. (48.1) (24.2) (24.3) -- -- -- (123.6) -- -- Net amortization and deferral............... (4.3) (4.2) (3.2) (0.6) (0.5) (0.5) -- -- -- Curtailment loss (gains)................ 1.6 -- 3.7 -- -- (7.5) -- -- -- ------ ------ ------ ----- ----- ---- -------- ----- ----- Net periodic (benefit) cost................... $ (4.5) $ (6.6) $ 0.2 $23.0 $12.5 $5.6 $ 3.8 $ 2.2 $ 2.9 ====== ====== ====== ===== ===== ==== ======== ===== =====
Change in benefit obligation:
United States Plans International Plans ------------------------------------ ---------------------- Pension Benefits Other Benefits Pension Benefits ------------------ ---------------- ---------------------- 1998 1997 1998 1997 1998 1997 ---- ---- ---- ---- ---- ---- (Millions of Dollars) Benefit obligation at beginning of year...... $ 197.2 $ 211.1 $ 150.4 $ 150.8 $ 26.6 $ 34.5 Service cost............ 16.4 7.8 4.4 2.5 26.7 0.3 Interest cost........... 29.9 14.0 19.2 10.5 100.7 1.9 Acquisitions............ 496.7 -- 297.3 -- 1,834.3 -- Company contributions... -- -- -- -- 13.3 -- Benefits paid........... (26.0) (20.6) (15.0) (8.2) (124.3) (1.7) Plan amendments......... 9.9 -- -- -- -- -- Actuarial gains and losses and changes in actuarial assumptions.. 4.8 -- 12.6 (5.2) 161.3 (3.5) Settlements and curtailments........... (11.4) (15.1) -- -- -- (4.9) -------- -------- ------- ------- ----------- -------- Benefit obligation at end of year............ $ 717.5 $ 197.2 $ 468.9 $ 150.4 $ 2,038.6 $ 26.6 ======== ======== ======= ======= =========== ========
46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued Change in plan assets:
United States Plans International Plans ------------------------------------ --------------------- Pension Benefits Other Benefits Pension Benefits ------------------ ---------------- --------------------- 1998 1997 1998 1997 1998 1997 ---- ---- ---- ---- ---- --------- (Millions of Dollars) Fair value of plan assets at beginning of year................... $ 293.7 $ 262.6 $ -- $ -- $ -- $ -- Actual return on plan assets................. 25.3 61.8 -- -- 157.6 -- Acquisitions............ 487.1 -- -- -- 1,918.4 -- Company contributions... 7.9 5.0 -- -- 21.4 1.7 Benefits paid........... (26.0) (20.6) -- -- (124.3) (1.7) Settlements and curtailments........... (12.6) (15.1) -- -- -- -- -------- -------- ------- ------- ---------- -------- Fair value of plan assets at end of year.. $ 775.4 $ 293.7 $ -- $ -- $ 1,973.1 $ -- ======== ======== ======= ======= ========== ======== Funded status of the plan................... $ 57.9 $ 96.5 $(468.9) $(150.4) $ (65.5) $ (26.6) Unrecognized net asset at transition.......... 0.3 (2.0) -- -- -- -- Unrecognized net actuarial (gain) loss.. (30.1) (60.3) 8.9 (3.8) 129.6 2.8 Unrecognized prior service cost........... 17.6 9.7 (2.9) (3.5) -- -- -------- -------- ------- ------- ---------- -------- Prepaid (accrued) benefit cost........... $ 45.7 $ 43.9 $(462.9) $(157.7) $ 64.1 $ (23.8) ======== ======== ======= ======= ========== ========
Weighted-average assumptions as of December 31:
United States Plans International Plans --------------------------------------------------- Pension Benefits Other Benefits Pension Benefits --------------------------------------------------- 1998 1997 1998 1997 1998 1997 ---- ---- ---- ---- ---- ---- (Millions of Dollars) Discount rate............. 7.25% 7.5% 7.25% 7.5% 5.5-6% 6.5% Expected return on plan assets................... 10% 10% -- -- 7.5% -- Rate of compensation increase................. 4.25-5% 4.5% -- -- 2.5-3.9% 2.5%
Amounts applicable to the Company's pension plans with accumulated benefit obligations in excess of plan assets are as follows:
United States Plans 1998 1997 - - ------------------- ---- ---- Projected benefit obligation...................................... $138.1 $56.4 Accumulated benefit obligation.................................... 137.9 55.5 Fair value of plan assets......................................... 126.6 49.9
International Plans 1998 1997 - - ------------------- ---- ---- Projected benefit obligation...................................... $180.0 $26.6 Accumulated benefit obligation.................................... 171.0 26.6 Fair value of plan assets......................................... -- --
Amounts recognized in the balance sheet consist of:
Pension Benefits Other Benefits ------------------ ---------------- 1998 1997 1998 1997 ---- ---- ---- ---- Prepaid (accrued) benefit cost............ $ 109.8 $ 20.1 $(462.9) $(157.7) Accrued benefit liability................. (12.7) (1.3) -- -- Intangible asset.......................... 7.3 1.1 -- -- Accumulated other comprehensive income.... 3.4 0.1 -- -- -------- ------- ------- ------- Net amount recognized..................... $ 107.8 $ 20.0 $(462.9) $(157.7) ======== ======= ======= =======
47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued At December 31, 1998, the assumed annual health care cost trend used in measuring the APBO approximated 7.1% in 1998, declining to 6.7% in 1999 and to an ultimate annual rate of 5.5% estimated to be achieved in 2009. Increasing the assumed cost trend rate by 1% each year would have increased the APBO by approximately 11.5% and 8.3% at December 31, 1998 and 1997, respectively. Aggregate service and interest costs would have increased by approximately 13.3% for 1998 and 9.4% for 1997 and 1996. 18. Income Taxes Under the liability method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The components of earnings (loss) before income taxes and extraordinary items consisted of the following:
1998 1997 1996 ---- ---- ---- (Millions of Dollars) Domestic.............................................. $(73.4) $50.1 $ (88.3) International......................................... 258.9 49.4 (140.4) ------ ----- ------- $185.5 $99.5 $(228.7) ====== ===== =======
Significant components of the provision for income taxes (tax benefit) are as follows:
1998 1997 1996 ---- ---- ---- (Millions of Dollars) Current: Federal............................................... $(12.1) $ 9.6 $ (4.0) State and local....................................... 10.0 0.2 2.3 International......................................... 65.4 6.6 6.3 ------ ----- ------ Total current....................................... 63.3 16.4 4.6 Deferred: Federal................................................ 33.0 6.1 (25.2) State and local........................................ 2.1 0.7 (1.8) International.......................................... (4.8) 4.3 -- ------ ----- ------ Total deferred...................................... 30.3 11.1 (27.0) ------ ----- ------ $ 93.6 $27.5 $(22.4) ====== ===== ======
The reconciliation of income taxes (tax benefit) computed at the United States federal statutory tax rate to income tax expense (benefit) is:
1998 1997 1996 ---- ---- ---- (Millions of Dollars) Income taxes (tax benefits) at United States statutory rate.................................... $ 64.9 $34.9 $(80.1) Tax effect from: State income taxes................................ 7.9 0.8 0.7 Foreign operations, net of foreign tax credits.... 5.6 (2.7) 55.9 Sale of international retail/wholesale operations....................................... (11.5) (6.8) -- Goodwill amortization............................. 19.7 -- -- Purchased in-process research and development..... 6.5 -- -- Tax credits and other............................. 0.5 1.3 1.1 ------ ----- ------ $ 93.6 $27.5 $(22.4) ====== ===== ======
48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued The following table summarizes the Company's total provision for income taxes/(tax benefits):
1998 1997 1996 ---- ---- ---- (Millions of Dollars) Income tax expense (benefit)......................... $ 93.6 $27.5 $(22.4) Extraordinary items.................................. (19.8) (1.5) -- T&N Bearings Divestiture............................. 56.1 -- -- Allocated to equity: Currency translation................................ 15.3 (3.6) (4.9) Preferred dividends................................. (1.2) (1.3) (1.5) Incentive stock plans............................... (3.9) (3.4) -- Investment securities............................... -- (0.6) 0.8 Other............................................... 0.2 1.2 0.7 ------ ----- ------ $140.3 $18.3 $(27.3) ====== ===== ======
Significant components of the Company's deferred tax assets and liabilities as of December 31 are as follows:
1998 1997 ---- ---- (Millions of Dollars) Deferred tax assets: Asbestos................................................. $ 429.1 $ -- Postemployment benefits.................................. 165.2 58.2 Net operating loss carryforwards of international subsidiaries............................................ 121.5 45.0 Restructuring reserves................................... 98.8 -- Inventory basis.......................................... 34.2 10.3 Allowance for doubtful accounts.......................... 15.2 11.3 Other temporary differences.............................. 96.2 52.0 ------- ------ Total deferred tax assets.............................. 960.2 176.8 Valuation allowance for deferred tax assets............... (66.2) (44.4) ------- ------ Net deferred tax assets................................ 894.0 132.4 ------- ------ Deferred tax liabilities: Fixed asset basis differences............................ (379.4) (50.5) Intangible asset basis differences....................... (326.2) -- Deferred gains........................................... (130.0) -- Pension.................................................. (6.9) (17.3) ------- ------ Total deferred tax liabilities......................... (842.5) (67.8) ------- ------ $ 51.5 $ 64.6 ======= ====== Deferred tax assets and liabilities are recorded in the consolidated balance sheets as follows: 1998 1997 ---- ---- (Millions of Dollars) Assets: Prepaid expenses and income tax benefits................. $ 187.3 $ 46.6 Noncurrent assets........................................ -- 26.7 Liabilities: Other current accrued liabilities........................ -- (4.2) Other long-term accrued liabilities...................... (135.8) (4.5) ------- ------ $ 51.5 $ 64.6 ======= ======
49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued Income taxes paid in 1998, 1997 and 1996 were $34.7 million, $2.6 million and $6.7 million, respectively. Undistributed earnings of the Company's international subsidiaries amounted to approximately $229 million at December 31, 1998 and $77 million at December 31, 1997. Since these earnings are considered by the Company to be permanently reinvested, no taxes were provided in 1998 or 1997. 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, 1998, the Company has $159 million in net operating loss carryforwards in the United Kingdom and Germany with no expiration date or valuation allowance. Also, the Company has $174 million of additional foreign net operating loss carryforwards with a full valuation allowance and various expiration dates. Included in the previous amounts are $145 million of net operating loss carryforwards acquired with the purchases of T&N, Cooper Automotive and Fel-Pro. A valuation allowance was recorded on $64 million of these purchased net operating loss carryforwards, thereby increasing the balance in the valuation allowance reserve for 1998. The reduction in these valuation allowances, if any, will be applied to reduce goodwill related to the respective acquisitions. 19. Operations By Industry Segment and Geographic Area In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131 (Statement 131), Disclosures about Segments of an Enterprise and Related Information, for the year ended December 31, 1998. Statement 131 established standards for reporting information about operating segments in annual financial statements and requires selected information about operating segments in interim financial reports issued to stockholders. It also established standards for related disclosures about products, services and geographic areas. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Company, in deciding how to allocate resources and in assessing performance. The Company operates in three fundamental business segments (excluding Divested Activities): Powertrain Systems, Sealing Systems and General Products. Powertrain Systems, which consist of internal engine components directly involved in creating a vehicle's movement. These components consist primarily of engine bearings, bushings, pistons, piston pins, rings, liners and ignition products. Sealing Systems, which provide for the encapsulation of fluids and gases from the engine, transmission and axle and also prevent external objects from entering the systems. They consist of dynamic seals (found between components that move in relation to one another) and gaskets (located between components that are static in relation to one another). General Products, which consist of the Company's remaining product lines, primarily camshafts, sintered products (engine components made from powdered metal), chassis components and systems protection products (used for shielding against heat, noise, abrasion and stone impingement) and friction products. Divested Activities include the historical operating results and assets of aftermarket operations in South Africa, Australia, Chile and its heavy wall bearing operations in Germany and Brazil which were sold or closed in 1997. During 1996, the Company divested its United States ball bearings and electrical products manufacturing operations. In addition, the Company divested its minority interest in G. Bruss GmbH & Co. (refer to Note 3, "Sales of Businesses"). 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued The accounting policies of the business segments are consistent with those described in the summary of significant accounting policies. The Company evaluates segmental performance based on several factors, including both Economic Value Added (EVA) and Operational EBIT, as defined as Operational Earnings before certain nonrecurring items (such as certain purchase accounting adjustments and integration costs associated with new acquisitions), interest and income taxes. Pursuant to Statement 131, 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.
1998 1997 1996 ---- ---- ---- (Millions of Dollars) Net Sales: Powertrain Systems................................ $1,883 $ 782 $ 739 Sealing Systems................................... 925 333 295 General Products.................................. 1,636 577 665 Divested Activities............................... 25 115 334 ------ ------ ------ Total........................................... $4,469 $1,807 $2,033 ====== ====== ====== 1998 1997 1996 ---- ---- ---- (Millions of Dollars) Operational EBIT: Powertrain Systems................................ $ 223 $ 68 $ 75 Sealing Systems................................... 133 26 9 General Products.................................. 154 44 31 Divested Activities............................... (8) 1 (22) ------ ------ ------ Total........................................... $ 502 $ 139 $ 93 ====== ====== ====== 1998 1997 1996 ---- ---- ---- (Millions of Dollars) Reconciliation: Total segments operational EBIT................... $ 502 $ 139 $ 93 Net interest and other financing costs............ (233) (29) (39) Restructuring, impairment and other special charges.......................................... (20) (10) (283) Acquisition related costs......................... (63) -- -- ------ ------ ------ Earnings (loss) before income taxes and extraordinary item............................. $ 186 $ 100 $ (229) ====== ====== ====== 1998 1997 1996 ---- ---- ---- (Millions of Dollars) Assets: Powertrain Systems................................ $3,590 $ 786 $ 608 Sealing Systems................................... 1,640 382 243 General Products.................................. 4,687 508 456 Divested Activities............................... 23 126 148 ------ ------ ------ Total........................................... $9,940 $1,802 $1,455 ====== ====== ======
51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued
1998 1997 1996 ---- ---- ---- (Millions of Dollars) Capital Expenditures: Powertrain Systems........................................... $116 $28 $25 Sealing Systems.............................................. 33 13 10 General Products............................................. 80 9 10 Divested Activities.......................................... -- -- 9 ---- --- --- Total...................................................... $229 $50 $54 ==== === === 1998 1997 1996 ---- ---- ---- (Millions of Dollars) Depreciation and Amortization: Powertrain Systems........................................... $104 $28 $27 Sealing Systems.............................................. 43 11 10 General Products............................................. 81 12 14 Divested Activities.......................................... -- 1 11 ---- --- --- Total...................................................... $228 $52 $62 ==== === ===
Included in the consolidated financial statements are amounts relating to geographic locations listed below. This geographic information is based on the location of Federal-Mogul operations.
Net Property, Plant Net Sales and Equipment -------------------- ---------------- 1998 1997 1996 1998 1997 1996 ---- ---- ---- ---- ---- ---- (Millions of Dollars) United States............................. $2,345 $1,111 $1,177 $1,422 $166 $169 Mexico.................................... 124 87 73 30 7 7 Canada.................................... 76 58 57 39 1 1 ------ ------ ------ ------ ---- ---- Total North America.................... 2,545 1,256 1,307 1,491 174 177 United Kingdom............................ 516 21 18 312 9 11 Germany................................... 478 126 175 318 105 127 France.................................... 327 33 35 113 9 10 Italy..................................... 200 71 81 77 9 11 Other Europe.............................. 188 117 122 62 3 4 ------ ------ ------ ------ ---- ---- Total Europe........................... 1,709 368 431 882 135 163 Rest of World............................. 215 183 295 104 5 10 ------ ------ ------ ------ ---- ---- Total.................................. $4,469 $1,807 $2,033 $2,477 $314 $350 ====== ====== ====== ====== ==== ====
20. Litigation and Environmental Matters T&N Asbestos Litigation In the United States, the Company's United Kingdom subsidiary, T&N Ltd., and two of T&N's 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 is also subject to asbestos-disease litigation, to a lesser extent, in the United Kingdom and to property damage litigation in the United States based upon asbestos products allegedly installed in buildings. Because of the slow onset of asbestos-related diseases, management anticipates that similar claims will be made in the future. It is not known how many such claims may be made nor the expenditure which may arise therefrom. As of December 31, 1998, 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued the Company has provided approximately $1.3 billion as its best estimate for future costs related to resolving asbestos claims. The Company estimates claims will be filed and paid in excess of the next 20 years. This estimate is based in part on recent and historical claims experience, medical information and the current legal environment. As of December 31, 1998, the T&N Companies had approximately 105,000 claims pending. During 1998, approximately 85,000 new claims were filed and 54,000 claims were settled, dismissed or otherwise resolved. In addition to the pending cases above, the T&N Companies have approximately 41,000 claims that have been settled but will be paid over time. There are a number of factors that could impact the settlement costs into the future, including but not limited to: changes in legal environment; possible insolvency of co- defendants; and the establishment of an acceptable administrative (non- litigation) claims resolution mechanism. As of December 31, 1998, T&N is one of a large number of defendants named in three pending property damage cases pending in two jurisdictions. Provision has been made in the asbestos reserve for anticipated expenditures in relation to such cases. The $1.3 billion total provision held for the T&N Companies is comprised of an estimate for known claims (pending and settled but not paid) and possible future claims (IBNR). As of December 31, 1998, the $1.3 billion total provision is comprised of approximately $460 million related to known claims and approximately $840 million related to IBNR claims. In arriving at the IBNR provision, assumptions have been made regarding the total number of claims which it is anticipated may be received in the future, the 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 and the timing of settlement and, in the United Kingdom, the level of subrogation claims brought by insurance companies. The T&N Companies have appointed the Center for Claims Resolution (CCR) as their exclusive representative in relation to all asbestos-related personal injury claims made against the T&N Companies in the United States. The CCR provides to its 20 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 is entitled to appoint a representative as one of the five voting directors on the CCR's Board of Directors. Members of the CCR contribute towards indemnity payments in each claim in which the member is named. Contributions to such indemnity payments are calculated on a case by case basis according to sharing agreements among the CCR's members. In 1996, T&N purchased a (Pounds)500 million (approximately $845 million at the insurance agreement exchange rate of $1.69/(Pounds)) layer of insurance which will be triggered should the aggregate amount of claims filed after June 30, 1996, where the exposure occurred prior to that date, exceed (Pounds)690 million (approximately $1,166 million at the $1.69/(Pounds) exchange rate). The Company's reserve for claims filed after June 30, 1996, approximates to the trigger point of the insurance. The Company has reviewed the financial viability and legal obligations of the three reinsurance companies involved and has concluded at this time that there is little risk of the reinsurers not being able to meet their obligation to pay, should the claims filed after June 30, 1996 exceed the (Pounds)690 million trigger point. While management believes that reserves are appropriate for anticipated losses arising from T&N's asbestos-related claims, given the nature and complexity of the factors affecting the estimated liability, the actual liability may differ. No absolute assurances can be given that T&N will not be subject to material additional liabilities and significant additional litigation relating to asbestos. In the possible, but unlikely, event that such liabilities exceed the reserves recorded by the Company and the additional (Pounds)500 million of insurance coverage, 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued the Company's results of operations, business, liquidity and financial condition could be materially adversely affected. The T&N Companies reserves will be reevaluated periodically as additional information becomes available. Federal-Mogul, Fel-Pro and Cooper Automotive Asbestos Litigation The Company also is one of a large number of defendants in a number of lawsuits brought by claimants alleging injury due to exposure to asbestos. Fel-Pro has been named as a defendant in a number of product liability cases involving asbestos, primarily involving gasket or packing products sold to ship owners. In addition, subsidiaries of Cooper Automotive have been named as defendants in a number of product liability cases involving asbestos, primarily involving friction products. The Company is defending all such claims vigorously and believes that it, Fel-Pro and the Cooper Automotive subsidiaries have substantial defenses to liability and adequate 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, Fel-Pro and the Cooper Automotive subsidiaries as of December 31, 1998, will not have a material effect on the Company's financial position. At December 31, 1998, approximately $20 million in related reserves have been provided in respect of the possible uninsured portion of the expenditures on asbestos claims pending against the Company, Fel-Pro and the Cooper Automotive subsidiaries. Other The Company is involved in various other legal actions and claims, directly and through its subsidiaries (including T&N Limited and Fel-Pro). After taking into consideration legal counsel's evaluation of such actions, management is of the opinion that its outcomes are not reasonably likely to have a material adverse affect on the Company's financial position, operating results or cash flows. The Company is a defendant in lawsuits filed 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 which 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 CERLCA and some of the other laws pertaining to these sites, the Company's share of the total waste is usually quite 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 and legal reserve was approximately $50 million at December 31, 1998 and $11 million at December 31, 1997. The majority of the 1998 increase is attributable to the acquisitions of T&N and Cooper Automotive. Management believes that such accruals will be adequate to cover the Company's estimated liability for its exposure in respect of such matters. 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Continued 21. Quarterly Financial Data (Unaudited)
First(1) Second(2) Third(3) Fourth(4) Year -------- --------- -------- --------- ---- (Millions of Dollars, Except Per Share Amounts) Year ended December 31, 1998: Net sales..................... $658.0 $1,214.0 $1,121.2 $1,475.5 $4,468.7 Gross margin.................. 161.3 317.4 292.9 406.9 1,178.5 Net earnings before extraordinary items.......... (7.2) 28.4 34.6 36.1 91.9 Extraordinary item--loss on early retirement of debt, net of tax benefit............... -- (31.3) -- (6.9) (38.2) Net earnings (loss)........... (7.2) (2.9) 34.6 29.2 53.7 Diluted earnings per share.... (.20) (.07) .58 .48 .96 Stock price High.......................... $54.37 $ 69.25 $ 72.00 $ 63.00 Low........................... $39.00 $ 52.62 $ 46.62 $ 33.00 First Second(5) Third Fourth(6) Year ----- --------- ----- --------- ---- (Millions of Dollars, Except Per Share Amounts) Year ended December 31, 1997: Net sales..................... $485.6 $ 481.8 $ 424.2 $ 415.0 $1,806.6 Gross margin.................. 112.1 115.3 102.8 94.6 424.8 Net earnings before extraordinary item........... 13.9 28.5 17.4 12.2 72.0 Extraordinary item--loss on early retirement of debt, net of tax benefit............... -- (2.6) -- -- (2.6) Net earnings.................. 13.9 25.9 17.4 12.2 69.4 Diluted earnings per share.... .32 .61 .40 .28 1.61 Stock price High.......................... $26.75 $ 35.38 $ 39.94 $ 47.63 Low........................... $21.63 $ 24.50 $ 32.75 $ 36.75
- - ------------------ Dividends on the capital stock of the Company are payable at the discretion of the Company's Board of Directors. In May 1998, the Board of Directors reduced the quarterly dividend from $.12 per share and subsequently declared cash dividends payable in the second, third and fourth quarters of 1998 in the amount of $.0025 per share of common stock. The Company, consistent with its growth strategy, intends to retain future earnings in the business and therefore anticipates paying dividends at a comparable level in the foreseeable future. (1) Includes an $18.6 million charge for purchased in-process research and development, a $10.5 million restructuring charge, a $19.0 million net charge for an adjustment of assets held for sale and other long-lived assets to fair value and $1.0 million of integration costs. (2) Includes $3.7 million of integration costs. (3) Includes $9.0 million of integration costs and a $6.6 million restructuring credit. (4) Includes a $3.4 million net restructuring charge and $8.7 million of integration costs. (5) Includes an income tax benefit of $6.8 million related to the sales of the South African and Australian businesses. (6) Includes $1.1 million for a net restructuring credit, a $2.4 million charge for adjustment of assets held for sale to fair value, a $1.6 million credit for reengineering and other related charges, and a $10.5 million charge related to the British pound currency option. 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED 22. 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 Agreement with the Chase Manhattan Bank, NA ("Chase"). T&N HOLDING COMPANIES Federal-Mogul Dutch Holdings Inc. Federal-Mogul UK Holdings Inc. Federal-Mogul UK Holdings Limited Federal-Mogul Global Inc. FEDERAL-MOGUL SUBSIDIARIES Federal-Mogul Venture Corporation Federal-Mogul Global Properties Inc. Carter Automotive Company Federal-Mogul Worldwide Inc. COOPER AUTOMOTIVE SUBSIDIARIES Federal-Mogul Ignition Company Federal-Mogul Products, Inc. Federal-Mogul Aviation, Inc. The Company issued notes in 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. The T&N Holding Companies (as listed above) are wholly owned subsidiaries of the Company and were incorporated in January 1998 in order to effectuate the Company's acquisition of T&N plc. These subsidiaries have no operations and act solely as holding companies of subsidiaries which have guaranteed fully and unconditionally on a joint and several basis, the obligation to pay principal and interest of the Notes, Medium-term notes and Senior notes. (the "Guarantees"). In addition, certain other wholly owned subsidiaries of the Company, the Federal-Mogul Subsidiaries (as listed above), will provide the Guarantees. The Federal-Mogul Subsidiaries are included in the Company's consolidated financial statements for all periods. The Cooper Automotive Subsidiaries (as listed above) acquired on October 9, 1998, are wholly owned subsidiaries of the Company and also will provide the Guarantees. 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. 56 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 $ 437.4 $2,896.2 $(150.6) $4,468.7 Cost of products sold... 907.8 309.1 2,223.9 (150.6) 3,290.2 -------- ------- -------- ------- -------- Gross margin.......... 377.9 128.3 672.3 -- 1,178.5 Selling, general and administrative expenses............... 293.9 74.8 272.1 -- 640.8 Amortization............ 21.5 9.1 53.2 -- 83.8 Purchased in-process research and development charge..... -- -- 18.6 -- 18.6 Restructuring charges .. 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........ 215.0 1.5 221.4 (233.9) 204.0 Interest income......... (60.8) (107.2) (76.5) 233.9 (10.6) International currency exchange (losses)...... 1.0 1.1 2.6 -- 4.7 Net (gain) loss on British pound currency option and forward contract............... (13.3) -- -- -- (13.3) Other expense (income), net.................... (1.4) (22.2) 39.9 -- 16.3 -------- ------- -------- ------- -------- Earnings (loss) before income taxes and extraordinary items.. (109.8) 171.2 124.1 -- 185.5 Income tax expense ..... 20.6 1.3 71.7 -- 93.6 -------- ------- -------- ------- -------- Net earnings (loss) before extraordinary item................. (130.4) 169.9 52.4 -- 91.9 Extraordinary items-- loss on early retirement of debt, net of applicable income tax benefit............ 19.3 -- 18.9 -- 38.2 -------- ------- -------- ------- -------- Net earnings (loss) before equity in earnings (loss) of subsidiaries......... $ (149.7) $ 169.9 $ 33.5 $ -- $ 53.7 Equity in earnings (loss) of subsidiaries........... 203.4 74.7 -- (278.1) -- -------- ------- -------- ------- -------- Net earnings............ $ 53.7 $ 244.6 $ 33.5 $(278.1) $ 53.7 ======== ======= ======== ======= ========
57 FEDERAL-MOGUL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS DECEMBER 31, 1997 (MILLIONS OF DOLLARS)
(UNCONSOLIDATED) ---------------------- NON- GUARANTOR GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------ ------------ ------------ Net sales............... $1,092.4 $ -- $776.3 $(62.1) $1,806.6 Cost of products sold... 839.4 -- 604.5 (62.1) 1,381.8 -------- ----- ------ ------ -------- Gross margin.......... 253.0 -- 171.8 -- 424.8 Selling, general and administrative expenses............... 178.8 (0.2) 97.4 -- 276.0 Amortization............ 7.8 1.1 -- 8.9 Restructuring credits... (1.1) -- -- (1.1) Reengineering and other related charges (credits).............. (1.6) -- -- -- (1.6) Adjustment of assets held for sale and other long-lived assets to fair value............. 2.4 -- -- 2.4 Interest expense........ 27.5 9.8 (4.0) 33.3 Interest income......... (11.1) 4.0 (7.1) International currency exchange (losses)...... 9.7 -- (9.1) -- 0.6 Net (gain) loss on British pound currency option and forward contract............... 10.5 -- -- -- 10.5 Other expense (income), net.................... 16.1 (15.5) 2.8 -- 3.4 -------- ----- ------ ------ -------- Earnings (loss) before income taxes and extraordinary items.. 14.0 15.7 69.8 -- 99.5 Income tax expense ..... 5.8 5.3 16.4 -- 27.5 -------- ----- ------ ------ -------- Net earnings (loss) before extraordinary item................. 8.2 10.4 53.4 -- 72.0 Extraordinary items-- loss on early retirement of debt, net of applicable income tax benefit............ 2.6 -- -- -- 2.6 -------- ----- ------ ------ -------- Net earnings before equity in earnings (loss) of subsidiaries......... $ 5.6 $10.4 $ 53.4 $ -- $ 69.4 Equity in earnings (loss) of subsidiaries........... 63.8 -- -- (63.8) -- -------- ----- ------ ------ -------- Net earnings............ $ 69.4 $10.4 $ 53.4 $(63.8) $ 69.4 ======== ===== ====== ====== ========
58 FEDERAL-MOGUL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS DECEMBER 31, 1996 (MILLIONS OF DOLLARS)
(UNCONSOLIDATED) ---------------------- NON- GUARANTOR GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------ ------------ ------------ Net sales............... $1,200.0 $ -- $898.6 $(65.9) $2,032.7 Cost of products sold... 1,027.5 0.4 698.5 (65.9) 1,660.5 -------- ------ ------ ------ -------- Gross margin.......... 172.5 (0.4) 200.1 -- 372.2 Selling, general and administrative expenses............... 196.7 -- 123.3 -- 320.0 Amortization............ 10.0 -- 2.0 -- 12.0 Restructuring charges .. 57.6 -- -- -- 57.6 Reengineering and other related charges (credits).............. 11.4 -- -- -- 11.4 Adjustment of assets held for sale and other long-lived assets to fair value............. 151.3 -- -- 151.3 Interest expense........ 33.0 -- 20.3 (8.9) 44.4 Interest income......... (11.8) -- -- 8.9 (2.9) International currency exchange (losses)...... 2.4 1.3 -- 3.7 Other expense (income), net.................... (18.8) (17.3) 39.5 -- 3.4 -------- ------ ------ ------ -------- Earnings (loss) before income taxes and extraordinary items.. (259.3) 16.9 13.7 -- (228.7) Income tax expense (benefit).............. (50.9) 5.7 22.8 -- (22.4) -------- ------ ------ ------ -------- Net earnings (loss) before equity in earnings (loss) of subsidiaries......... $ (208.4) $ 11.2 $ (9.1) $ -- $ (206.3) Equity in earnings (loss) of subsidiaries........... 2.1 -- -- (2.1) -- -------- ------ ------ ------ -------- Net earnings............ $ (206.3) $ 11.2 $ (9.1) $ (2.1) $ (206.3) ======== ====== ====== ====== ========
59 FEDERAL-MOGUL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING CONDENSED BALANCE SHEET DECEMBER 31, 1998 (MILLIONS OF DOLLARS)
(UNCONSOLIDATED) ---------------------- NON- GUARANTOR GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED -------- ------------ ------------ ------------ ------------ ASSETS Cash and equivalents.... $ 25.3 $ 20.7 $ 31.2 -- $ 77.2 Accounts receivable..... 13.9 395.9 615.2 -- 1,025.0 Investment in accounts receivable securitization......... -- -- 91.1 -- 91.1 Inventories............. 186.8 441.2 440.6 -- 1,068.6 Prepaid expenses and income tax benefits.... 52.9 174.9 109.9 -- 337.7 -------- -------- -------- --------- -------- Total current assets.... 278.9 1,032.7 1,288.0 -- 2,599.6 Property, plant and equipment.............. 230.0 684.7 1,562.8 -- 2,477.5 Goodwill................ 589.4 676.4 2,132.6 -- 3,398.4 Other intangible assets................. 44.6 423.6 418.2 -- 886.4 Investment in subsidiaries........... 5,114.7 1,666.7 -- (6,781.4) -- Intercompany accounts, net.................... (515.2) 1,208.2 (693.0) -- -- Other non current assets................. 103.0 51.9 423.3 -- 578.2 -------- -------- -------- --------- -------- Total Assets............ $5,845.4 $5,744.2 $5,131.9 $(6,781.4) $9,940.1 ======== ======== ======== ========= ======== LIABILITIES Short-term debt, including current portion of long-term debt................... $ 90.7 $ 16.0 $ 104.3 -- $ 211.0 Accounts payable........ 82.0 149.5 266.9 -- 498.4 Accrued compensation.... 71.9 117.0 11.4 -- 200.3 Restructuring and rationalization reserves............... 5.8 -- 173.1 -- 178.9 Current portion of asbestos liability..... -- -- 125.0 -- 125.0 Income taxes payable.... 21.7 24.3 96.2 -- 142.2 Other accrued liabilities............ 271.4 115.7 286.6 -- 673.7 -------- -------- -------- --------- -------- Total current liabilities............ 543.5 422.5 1,063.5 -- 2,029.5 Long-term debt.......... 3,077.2 1.2 52.3 -- 3,130.7 Long-term portion of asbestos liability..... -- 20.0 1,156.7 -- 1,176.7 Postemployment benefits............... 218.2 207.6 251.2 -- 677.0 Other accrued liabilities............ 12.2 255.0 59.8 -- 327.0 Minority interest in consolidated subsidiaries........... 8.1 1.5 28.4 -- 38.0 Company-obligated mandatorily redeemable preferred securities of solely convertible subordinated debentures of the Company......... -- -- 575.0 -- 575.0 Shareholders' equity.... 1,986.2 4,836.4 1,945.0 (6,781.4) 1,986.2 -------- -------- -------- --------- -------- Total Liabilities and Shareholders' Equity... $5,845.4 $5,744.2 $5,131.9 $(6,781.4) $9,940.1 ======== ======== ======== ========= ========
60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING CONDENSED BALANCE SHEET December 31, 1997 (Millions of Dollars)
(Unconsolidated) -------------------- Non- Guarantor Guarantor Parent Subsidiaries Subsidiaries Eliminations Consolidated ------ ------------ ------------ ------------ ------------ ASSETS Cash and equivalents.... $504.9 $ 0.1 $ 36.4 -- $ 541.4 Accounts receivable..... 47.1 -- 111.8 -- 158.9 Investment in accounts receivable securitization......... -- -- 48.7 -- 48.7 Inventories............. 166.3 -- 110.7 -- 277.0 Prepaid expenses and income tax benefits.... 99.9 -- 13.3 -- 113.2 ------ ----- -------- ------- -------- Total current assets.... 818.2 0.1 320.9 -- 1,139.2 Property, plant and equipment.............. 162.5 2.0 149.4 -- 313.9 Goodwill................ 107.0 -- 36.8 -- 143.8 Other intangible assets................. 28.3 -- 20.1 -- 48.4 Investment in subsidiaries........... 503.1 5.8 (508.9) -- Intercompany accounts, net.................... (702.8) 9.7 693.1 -- -- Other non current assets................. 61.9 -- 94.9 -- 156.8 ------ ----- -------- ------- -------- Total Assets............ $978.2 $17.6 $1,315.2 $(508.9) $1,802.1 ====== ===== ======== ======= ======== LIABILITIES Short-term debt, including current portion of long-term debt................... $ 16.8 $ -- $ 11.8 $ -- $ 28.6 Accounts payable........ 60.5 -- 41.8 -- 102.3 Accrued compensation.... 27.7 -- 9.1 -- 36.8 Restructuring and rationalization reserves............... 22.3 -- 11.6 -- 33.9 Income taxes payable.... 10.2 -- -- -- 10.2 Other accrued liabilities............ 27.1 13.3 77.4 -- 117.8 ------ ----- -------- ------- -------- Total current liabilities............ 164.6 13.3 151.7 -- 329.6 Long-term debt.......... 266.7 -- 6.4 -- 273.1 Postemployment benefits............... 164.0 -- 26.9 -- 190.9 Other accrued liabilities............ -- 50.6 -- 50.6 Minority interest in consolidated subsidiaries........... 13.6 -- -- -- 13.6 Company-obligated mandatorily redeemable preferred securities of solely convertible subordinated debentures of the Company......... -- 575.0 -- 575.0 Shareholders' equity.... 369.3 4.3 504.6 (508.9) 369.3 ------ ----- -------- ------- -------- Total Liabilities and Shareholders' Equity... $978.2 $17.6 $1,315.2 $(508.9) $1,802.1 ====== ===== ======== ======= ========
61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS DECEMBER 31, 1998 (MILLIONS OF DOLLARS)
(UNCONSOLIDATED) ----------------------- NON- GUARANTOR GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED --------- ------------ ------------ ------------ ------------ Net Cash Provided From Operating Activities........... $ 131.5 $ 122.0 $ 72.0 $ -- $ 325.5 Expenditures for property, plant and equipment.............. (37.4) (7.6) (183.5) -- (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) (7.6) (1,950.3) -- (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 (1,689.2) 1,672.8 -- -- Contributions paid to affiliates............. (2,150.1) (565.4) -- 2,715.5 -- Contributions received from affiliates........ -- 2,150.1 565.4 (2,715.5) -- Investment in accounts receivable 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 (93.8) 1,873.1 -- 3,571.5 --------- -------- --------- -------- --------- Net Increase (Decrease) in Cash... $ (479.6) $ 20.6 $ (5.2) $ -- $ (464.2) ========= ======== ========= ======== =========
62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS DECEMBER 31, 1997 (MILLIONS OF DOLLARS)
(UNCONSOLIDATED) ----------------------- GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED --------- ------------ ------------- ------------ Net Cash Provided From Op- erating Activities............... $ (23.2) $ 5.9 $ 233.0 $ 215.7 Expenditures for property, plant and equipment........ (24.7) -- (25.0) (49.7) Proceeds from sale of business investments....... 61.5 -- 12.1 73.6 Business acquisitions, net of cash acquired........... -- -- (30.5) (30.5) Other....................... -- -- 1.1 1.1 --------- ------ ------- ------- Net Cash Used By Investing Activities............... 36.8 -- (42.3) (5.5) Issuance of common stock.... 14.2 -- -- 14.2 Proceeds from issuance of long-term debt............. 179.6 -- -- 179.6 Principal payments on long- term debt.................. (97.8) -- (29.6) (127.4) Increase (decrease) in short-term debt............ (227.4) -- (8.4) (235.8) Fees paid for debt issuance and other securities....... (42.8) -- -- (42.8) Fees for early retirement of debt....................... -- -- (4.1) (4.1) Change in intercompany accounts................... 675.2 2.6 (677.8) -- Investment in accounts receivable securitization.. (31.8) -- -- (31.8) Issuance of Company- obligated mandatorily redeemable preferred securities................. -- -- 575.0 575.0 Dividends................... (12.0) (8.5) (4.3) (24.8) Other....................... -- -- (4.0) (4.0) --------- ------ ------- ------- Net Cash Provided From (Used By) Financing Activities............... 457.2 (5.9) (153.2) 298.1 --------- ------ ------- ------- Net Increase (Decrease) in Cash..................... $ 470.8 -- $ 37.5 $ 508.3 ========= ====== ======= =======
63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS DECEMBER 31, 1996 (MILLIONS OF DOLLARS)
(UNCONSOLIDATED) ---------------------- GUARANTOR NON-GUARANTOR PARENT SUBSIDIARIES SUBSIDIARIES CONSOLIDATED -------- ------------ ------------- ------------ Net Cash Provided From Operating Activities........ $ (72.7) $ 4.3 $217.4 $ 149.0 Expenditures for property, plant and equipment......... (24.7) -- (29.5) (54.2) Proceeds from sale of business investments........ 42.0 -- -- 42.0 Business acquisitions, net of cash acquired............... -- -- (.3) (0.3) -------- ----- ------ ------- Net Cash Used By Investing Activities................ 17.3 -- (29.8) (12.5) Issuance of common stock..... 0.6 -- -- 0.6 Principal payments on long- term debt................... (26.4) -- (3.0) (29.4) Increase (decrease) in short- term debt................... (33.5) -- (27.9) (61.4) Change in intercompany accounts.................... 151.3 4.0 (155.3) -- Dividends.................... (23.8) (8.3) 5.2 (26.9) Other........................ -- -- (5.7) (5.7) -------- ----- ------ ------- Net Cash Provided From (Used By) Financing Activities................ 68.2 (4.3) (186.7) (122.8) -------- ----- ------ ------- Net Increase (Decrease) in Cash...................... $ 12.8 $ -- $ 0.9 $ 13.7 ======== ===== ====== =======
64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- Concluded 23. Subsequent Events On January 7, 1999, the Company announced that it has agreed to acquire the piston division of Alcan Deutschland GmbH in Germany, a subsidiary of Alcan Aluminum Limited in Canada. Alcan's piston division manufactures high quality pistons for passenger cars and commercial vehicles under the highly regarded Nural brand name. The piston division employs approximately 1,100 people at its manufacturing facility in Nuremberg, Germany with annual sales in excess of $150 million. On January 14, 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 Senior Credit Agreements. As a result of this transaction, the Company will recognize an extraordinary charge in the first quarter of 1999 of approximately $8 million, net of tax, related to early extinguishment of debt. On January 20, 1999, the Company completed its acquisition of two camshaft machining plants from Crane Technologies Group Inc. to expand the capacity of its automotive products lines. The two plants located in Orland, Indiana and Jackson, Michigan employ approximately 230 people and have annual sales of approximately $36 million. On February 24, 1999, the Company entered into a new $1.75 billion Senior Credit Agreement at variable interest rates which contains a $1.0 billion multicurrency revolving credit facility and two term loan components. The revolving credit facility has a five-year maturity. The term loan components of $400 million and $350 million mature in five and six years, respectively. The proceeds of this Senior Credit Agreement were used to refinance the prior Senior Credit Agreements entered into in connection with the T&N and Cooper Automotive acquisitions as well as the $400 million multicurrency revolving credit facility related to the T&N acquisition. As a result of these transactions, the Company will recognize an extraordinary charge in the first quarter of 1999 of approximately $15 million, net of tax, related to early extinguishment of debt. On February 24, 1999, all outstanding shares of the Company's Series E Stock were exchanged into shares of the Company's common stock. Each of the 607,745 remaining shares of the Series E Stock were exchanged into five shares of the Company's common stock. 65 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 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 four 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/ Dick Snell Dick Snell Chairman and Chief Executive Officer /s/ Tom Ryan Tom Ryan Executive Vice President and Chief Financial Officer 66 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, 1998 and 1997, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Federal-Mogul Corporation and subsidiaries at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements, taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Ernst and Young, LLP Detroit, Michigan February 3, 1999, except for Note 23, as to which the date is February 24, 1999 67 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 March 22, 1999 relating to its 1999 Annual Meeting of Shareholders (the "1999 Proxy Statement") (except for the information appearing under the caption "Compensation of Directors"), which information is incorporated herein by reference; (b) under the caption "Information on Securities--Section 16(a) Beneficial Ownership Reporting Compliance of the Exchange Act" in the 1999 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 1999 Proxy Statement (excluding the information appearing under the captions "Certain Related Transactions" and "Compensation Committee Report on Executive Compensation") and under the caption "Compensation of Directors" in the 1999 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 1999 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 1999 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. 68 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS FEDERAL-MOGUL CORPORATION AND SUBSIDIARIES (IN MILLIONS)
COLUMN COLUMN A COLUMN B COLUMN C COLUMN D E -------- --------- ------------------- ------------ ------- ADDITIONS ------------------- BALANCE CHARGED CHARGED TO BALANCE AT TO COSTS OTHER AT END BEGINNING AND ACCOUNTS-- DEDUCTIONS-- OF DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD ----------- --------- -------- ---------- ------------ ------- Year Ended December 31, 1998: Valuation allowance for trade receivable......... $18.7 $7.6 $34.1(1) -- $60.4 Reserve for inventory valuation................ 15.1 1.6 8.2(1) -- 24.9 Valuation allowance for deferred tax assets...... 44.4 -- 21.8(2) -- 66.2 Year Ended December 31, 1997: Valuation allowance for trade receivable......... 16.3 3.5 -- 1.1(3) 18.7 Reserve for inventory valuation................ 48.0 1.5 -- 34.4(4) 15.1 Valuation allowance for deferred tax assets...... 89.4 -- 45.0(5) 44.4 Year Ended December 31, 1996: Valuation allowance for trade receivable......... 18.7 10.9 13.3(3) 16.3 Reserve for inventory valuation................ 25.2 22.8 48.0 Valuation allowance for deferred tax assets...... 23.7 65.7 -- 89.4
- - ------------------ (1) Amounts related to the acquisition of business. (2) Increase due to purchased foreign net operating loss carryforwards. (3) Uncollectable accounts charged off net of recoveries. (4) Decrease due to the disposal of certain foreign subsidiaries and the disposal of slow moving and obsolete inventory that was fully reserved. (5) Disposition of certain international retail operations plus utilization of foreign net operating loss carryforwards. 69 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 Recommended Cash Offer for T&N plc, dated as of November 13, 1997. (Incorporated by reference to Exhibit 2.1 to the Company's Annual Report on Form 10-K for the year ended December 31, 1997 (the "1997 10-K") 2.2 Equity Purchase Agreement between the Company and The Sellers with respect to the acquisition of Fel-Pro Incorporated, dated as of January 9, 1998. (Incorporated by reference to Exhibit 2.2 to the Company's 1997 10-K.) 2.3 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 Second Restated Articles of Incorporation, as amended. (Incorporated by reference to Exhibit 3.1 to the Company's Registration Statement No. 333- 50413.) *3.2 The Company's Bylaws, as amended. 4.1 Rights Agreement (the "Rights Agreement") between the Company and National Bank of Detroit, as Rights Agent, with The Bank of New York as successor Rights Agent. (Incorporated by reference to Exhibit 1 to the Company's Registration Statement on Form 8-A, dated November 7, 1988.) 4.2 Amendment, dated November 13, 1998, to the Rights Agreement (Incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.) 4.3 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.) 4.4 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.) 4.5 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.) 4.6 Indenture between the Company 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.) 4.7 First Supplemental Indenture between the Company 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.) *4.8 Indenture among Federal-Mogul Corporation and The Bank of New York dated as of January 20, 1999. 4.9 Registration Agreement, dated as of January 9, 1998, by and among the Company and the Investors identified on Schedule 1 thereto relating to the Series E Mandatory Exchangeable Preferred Stock. (Incorporated by reference to Exhibit 4.10 to the Company's 1997 10-K.)
70 10.1 The Company's 1984 Stock Option Plan, as last amended. (Incorporated by reference to Exhibit 10.2 to the Company's 1994 10-K.) 10.2 Federal-Mogul Corporation 1989 Performance Incentive Stock Plan, as amended. (Incorporated by reference to Exhibit 10.14 to the Company's 1994 10-K.) 10.3 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.) 10.4 The Company's 1977 Supplemental Compensation Plan, as amended and restated. (Incorporated by reference to Exhibit 10.27 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1994.) 10.5 Form of Executive Severance Agreement between the Company and certain executive officers (Incorporated by reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K for the year ended December 31, 1996 (the "1996 10-K".) 10.6 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".) 10.7 Supplemental Executive Retirement Plan, as amended. (Incorporated by reference to Exhibit 10.10 to the Company's 1992 10-K.) 10.8 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.) 10.9 Federal-Mogul Corporation Executive Loan Program. (Incorporated by reference to Exhibit 10.26 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994.) 10.10 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) 10.11 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.) 10.12 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.) *10.13 Third Amended and Restated Credit Agreement, dated as of February 24, 1999, in the amount of $1,750,000,000 among the Company, The Foreign Subsidiary Borrowers, the Lenders and The Chase Manhattan Bank. *10.14 Receivables Sale And Contribution Agreement, dated as of November 20, 1998, among the Company, Carter Automotive Company, Inc., Federal-Mogul Canada Limited and Federal-Mogul Funding Corporation. *10.15 Receivable Interest Purchase Agreement, dated as of November 20, 1998, among the Company, Federal-Mogul Funding Corporation, Falcon Asset Securitization Corporation and The First National Bank of Chicago. *21 Subsidiaries of the Registrant.
71 *23.1 Consent of Ernst & Young LLP. *24 Powers of Attorney. *27 Financial Data Schedule.
- - ------------------ * Filed Herewith (b) Reports on Form 8-K: On November 24, 1998, the Company filed a Current Report on Form 8-K/A to report Item 7 historical and proforma financial information provided related to the acquisition of Cooper Automotive. On February 25, 1999, the Company filed a Current Report on Form 8-K to report the Rights Agreement dated as of February 24, 1999, between the Company and The Bank of New York, as Rights Agent. (c) Separate financial statements of affiliates whose securities are pledged as collateral. 1) 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, 1998 and 1997, and the related statements of operations and comprehensive income and cash flows for the periods January 1, 1998 through October 9, 1998, October 10, 1998 through December 31, 1998 and for each of the two years in the period ended December 31, 1997. 2) 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, 1998 and 1997, and the related statements of operations and comprehensive income and cash flows for the periods January 1, 1998 through October 9, 1998, October 10, 1998 through December 31, 1998 and for each of the two years in the period ended December 31, 1997. 3) Financial statements of Federal-Mogul Aviation, Inc. (and Champion Aviation, Inc., a subsidiary of Cooper Industries Inc., its predecessor) including consolidated balance sheets as of December 31, 1998 and 1997, and the related statements of operations and comprehensive income and cash flows for the periods January 1, 1998 through October 9, 1998, October 10, 1998 through December 31, 1998 and for each of the two years in the period ended December 31, 1997. 72 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 and the Moog Automotive division of Cooper Industries (the Predecessor) as of December 31, 1998 and 1997, respectively, and the related consolidated statements of operations and comprehensive income and cash flows for the period October 10, 1998 through December 31, 1998 and for the Predecessor for the period January 1, 1998 through October 9, 1998 and for each of the two years in the period ended December 31, 1997. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Federal-Mogul Products, Inc. and subsidiaries at December 31, 1998 and the Predecessor at December 31, 1997, and the consolidated results of their operations and their cash flows for the period October 10, 1998 through December 31, 1998 and for the Predecessor for the period January 1, 1998 through October 9, 1998, and for each of the two years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Detroit, Michigan January 29, 1999 73 FEDERAL-MOGUL PRODUCTS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
PREDECESSOR ------------------------------------------- PERIOD OCTOBER 10, PERIOD JANUARY 1, YEAR ENDED YEAR ENDED 1998 THROUGH 1998 THROUGH DECEMBER 31, DECEMBER 31, DECEMBER 31, 1998 OCTOBER 9, 1998 1997 1996 ------------------ ----------------- ------------ ------------ Revenues................ $170.2 $666.7 $842.0 $862.9 Cost of sales........... 120.1 428.4 573.1 589.9 Selling and administrative expenses............... 28.5 136.8 196.2 182.2 Amortization expense.... 2.9 11.9 15.1 19.3 Nonrecurring charges.... -- 27.3 101.5 Other expense, net...... 1.9 1.6 1.9 0.5 Interest expense........ 15.1 -- 0.4 0.4 ------ ------ ------ ------ Income/(loss) before income taxes......... 1.7 88.0 28.0 (30.9) Income taxes............ 1.0 38.4 16.0 5.3 ------ ------ ------ ------ Net income/(loss)... 0.7 49.6 12.0 (36.2) Components of Comprehensive Income: Minimum pension liability, net of tax.................. -- -- (1.6) (0.1) Translation adjustments, net of tax.................. (0.8) (1.6) 2.0 (0.8) ------ ------ ------ ------ Comprehensive income (loss)............. $ (0.1) $ 48.0 $ 12.4 $(37.1) ====== ====== ====== ======
See accompanying Notes to Consolidated Financial Statements. 74 FEDERAL-MOGUL PRODUCTS, INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, -------------------- PREDECESSOR ----------- 1998 1997 -------- ----------- (IN MILLIONS) ASSETS Cash..................................................... $ 7.7 $ -- Accounts receivable (net of allowance for doubtful accounts of $16.7 million and $31.8 million)............ 183.5 155.2 Inventories.............................................. 208.0 222.9 Other.................................................... 15.4 13.1 -------- -------- Total current assets................................... 414.6 391.2 Property, plant and equipment, less accumulated depreciation............................................ 294.3 196.3 Intangibles, less accumulated amortization............... 339.8 528.9 Other assets............................................. 19.2 2.9 -------- -------- Total assets........................................... $1,067.9 $1,119.3 ======== ======== LIABILITIES AND NET PARENT INVESTMENT Accounts payable......................................... $ 77.1 $ 73.9 Accrued liabilities...................................... 107.9 127.8 -------- -------- Total current liabilities.............................. 185.0 201.7 Long-term debt........................................... 0.8 3.5 Other long-term liabilities.............................. 71.6 61.7 Net parent investment.................................... 810.5 852.4 -------- -------- Liabilities and net parent investment.................. $1,067.9 $1,119.3 ======== ========
See accompanying Notes to Consolidated Financial Statements. 75 FEDERAL-MOGUL PRODUCTS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
PREDECESSOR PERIOD ------------------------------ OCTOBER 10, PERIOD 1998 JANUARY 1, YEAR YEAR THROUGH 1998 THROUGH ENDED ENDED DECEMBER 31, OCTOBER 9, DECEMBER DECEMBER 1998 1998 31, 1997 31, 1996 ------------ ------------ -------- -------- Cash flows from operating activities: Net income/(loss)............... $ 0.7 $ 49.6 $ 12.0 $(36.3) Adjustments to reconcile to net cash provided by operating activities: Depreciation expense............ 7.2 18.0 25.2 23.7 Amortization expense............ 2.9 11.8 15.1 17.9 Nonrecurring asset write-down... -- -- 36.2 -- Changes in assets and liabilities: Accounts receivable........... 16.7 (43.2) 11.5 (3.0) Inventories................... 31.0 (18.7) (18.1) (12.0) Accounts payable and accrued liabilities.................. (12.2) (28.6) (14.1) 7.4 Other assets and liabilities, net.......................... 1.5 (7.9) 14.4 47.1 ------ ------ ------ ------ Net cash provided by (used in) operating activities... 47.8 (19.0) 82.2 44.8 Cash flows from investing activities: Cash paid for acquired businesses..................... -- -- -- (5.1) Capital expenditures............ (4.9) (18.8) (36.3) (42.4) Proceeds from sales of property, plant and equipment............ 4.9 5.8 2.2 4.5 ------ ------ ------ ------ Net cash used in investing activities................. -- (13.0) (34.1) (43.0) Cash flows from financing activities: Net short-term borrowings....... -- -- -- 0.5 Repayments of long-term debt.... (0.3) (2.4) (3.5) (1.0) Transfers from (to) parent...... (40.6) 37.8 (45.1) (1.3) ------ ------ ------ ------ Net cash provided by (used in) financing activities... (40.9) 35.4 (48.6) (1.8) Effect of exchange rate changes on cash and cash equivalents........ (1.0) (1.6) 0.5 -- ------ ------ ------ ------ Increase in cash and cash equivalents...................... 5.9 1.8 -- -- Cash, beginning of period... 1.8 -- -- -- ------ ------ ------ ------ Cash, end of period......... $ 7.7 $ 1.8 $ -- $ -- ====== ====== ====== ======
See accompanying Notes to Consolidated Financial Statements. 76 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 subsidiaries ("Products"). Products is a wholly-owned subsidiary of Federal-Mogul Corporation ("Federal-Mogul"). Products was previously known as the Moog Automotive Division of Cooper Industries, Inc. ("Cooper"). Federal-Mogul purchased the automotive divisions of Cooper, including Products, on October 9, 1998 for approximately $2.0 billion of which approximately $750 million is attributable to Products. The assets and liabilities of Products have been adjusted to their fair values as of October 9, 1998. All related purchase accounting adjustments as recorded by Federal-Mogul and related to Products have been reflected herein. Such adjustments consist principally of the following: Increase in net book value to fair value (in millions): Inventory.................................. $ 8.0 Fixed Assets............................... 94.1 Identifiable intangible assets............. 147.2 Liabilities for severance and exit cost.... 99.2 Decrease in goodwill....................... 321.5
In connection with the acquisition, Federal-Mogul is in the process of having valuations of acquired property, plant and equipment and identifiable intangible assets completed. In addition, the related purchase agreement includes a price adjustment based upon acquired net assets, as defined in the agreement, as of the acquisition date. The purchase price allocations included in the accompanying financial statements are based upon management's best estimates and currently available information. Such purchase price allocations will be finalized when such valuations and the final purchase price adjustments are completed in 1999. Actual results could differ from the above estimates. Products operates with 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 Products for all direct costs incurred on behalf of Products. General corporate, accounting, tax, legal and other administrative costs that are not directly attributable to the operations of Products have been allocated based on a ratio of Products' revenues to consolidated revenues. Management believes that this allocation method is reasonable. . The accompanying consolidated financial statements include the accounts of Products as described above. These 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. Products' separate domestic debt related to industrial revenue bonds and related interest expense have been included in the consolidated financial statements. Because Products 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 Products is transferred to its parent. 77 FEDERAL-MOGUL PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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. 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. Through October 9, 1998 cost was determined using the first-in, first- out (FIFO) method. For October 10, 1998 and thereafter, cost was determined using the last-in, first-out method, which at December 31, 1998 approximated FIFO. Revenue Recognition: Products recognizes revenue and estimated returns from product sales and the related customer incentive and warranty expense when goods are shipped to the customer. Property, Plant and Equipment: Property, plant and equipment are stated at cost. Depreciation is provided over the estimated useful lives of the related assets using primarily the straight-line method. This method is applied to group asset accounts, which in general have the following lives: buildings--10 to 40 years and machinery and equipment--3 to 20 years. 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 1998 1997 ----------- ------ ------ (in millions) Goodwill...................................... 40 years $195.5 $603.4 Accumulated amortization...................... (1.1) (74.5) ------ ------ Total Goodwill................................ $194.4 $528.9 ====== ====== Trademarks.................................... 40 years $ 66.2 $ -- Developed technology.......................... 12-30 years 67.4 -- Assembled workforce........................... 15 years 13.6 -- ------ ------ 147.2 Accumulated amortization...................... (1.8) -- ------ ------ Total Other Intangible Assets................. $145.4 $ -- ====== ======
Intangible assets are periodically reviewed for impairment based on an assessment of future cash flows to ensure that they are appropriately valued. There were no impairment charges during 1998 or 1997. Intangible assets are amortized on a straight-line basis over their estimated useful lives. Net Parent Investment: The Net Parent Investment account reflects the balance of Products's historical earnings, intercompany debt, accrued and deferred income taxes and other transactions between Products and its parent. Effect of Accounting Pronouncements: In April 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 is 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 does not anticipate that the adoption of this statement will have a significant effect on its results of operations or financial position. 78 FEDERAL-MOGUL PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 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 cash and equivalents, accounts receivable and accounts payable approximate their fair value. Note 3: Nonrecurring Charges During 1997, the Products incurred charges of $14.7 million ($9.0 million after income taxes) for actions management committed to during the period after concluding an evaluation of certain sales, marketing and distribution activities and information systems relating to year 2000 compliance efforts. The 1997 charges include adjustments to the carrying value of assets of $23.8 million and expenditures for replaced systems of $3.5 million. During 1997, Cooper began negotiations with Standard Motor Products, Inc. ("SMP") to exchange their temperature control business for the brake products business owned by SMP. The 1997 nonrecurring charge includes adjustments to the carrying value of the assets of the remanufacturing businesses, including a portion of the temperature control business, which were in the process of being divested. Effective March 28, 1998, Products completed the exchange of the automotive temperature control business for the brake products business of Standard Motor Products. For accounting purposes, the exchange transaction is recorded as the sale of Products' temperature control business and the purchase of the Standard Motor Products' brake business. The fair market values of the temperature control business assets were equal to the net book value of the assets after the write-down of the assets in 1997. The acquisition cost of the brake business assets was approximately $81 million. In February 1998, Products also completed the sale of the constant velocity joint remanufacturing business for approximately $4 million. During 1997, the impact of existing system capabilities to function at the turn of the century was assessed. Products is implementing new enterprise systems to be year 2000 compliant. The rollout of new enterprise-wide software began in 1997 and was completed during 1998. Products recorded a $11.3 million charge in 1997 primarily related to the adjustment in the carrying value of abandoned hardware and software. Note 4: Inventories At December 31 inventories consisted of the following:
1998 1997 ------ ------ (in millions) Raw materials............................................. $ 59.0 $ 61.0 Work-in-process........................................... 19.0 19.4 Finished goods............................................ 130.0 156.4 Perishable tooling and supplies........................... -- 7.3 ------ ------ 208.0 244.1 Inventory valuation allowances............................ -- (21.2) ------ ------ Net inventories......................................... $208.0 $222.9 ====== ======
79 FEDERAL-MOGUL PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 5: PROPERTY, PLANT AND EQUIPMENT At December 31 property, plant and equipment consisted of the following:
1998 1997 ------- ------ (IN MILLIONS) Property, plant and equipment: Land and land improvements............................. $ 10.4 $ 9.8 Buildings.............................................. 89.4 68.1 Machinery and equipment................................ 201.7 220.4 ------- ------ 301.5 298.3 Accumulated depreciation............................... (7.2) (100.1) ------- ------ $ 294.3 $198.2 ======= ======
NOTE 6: COMMITMENTS AND CONTINGENCIES At December 31, 1998, Products had accruals of $.8 million with respect to potential product liability claims and $6.0 million with respect to potential environmental liabilities, including $4.0 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. The environmental liability accrual includes $5.9 million related to sites owned by Products and $.1 million for retained environmental liabilities related to sites previously owned by Products and third-party sites where Products were a contributor. Third-party sites usually involve multiple contributors where Products' liability will be determined based on an estimate of Products' 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. It has been Products' consistent practice to include the entire product liability accrual and a significant portion of the environmental liability accrual as current liabilities, although only approximately 10-20% of the balance classified as current will be spent on an annual basis. Products has not utilized any form of discounting in establishing its product or environmental liability accruals. 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 both of 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 product or 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. Products also is one of a large number of defendants in a number of lawsuits brought by claimants alleging injury due to exposure to asbestos. Products is defending all such claims vigorously and believes that it has substantial defenses to liability and adequate insurance coverage for defense and indemnity. While the outcome of litigation cannot be predicted with certainty, management believes that asbestos claims pending against Products as of December 31, 1998, will not have a material effect on its financial position. Approximately $20 million in related reserves have been provided in respect of the possible uninsured portion of the expenditures on pending asbestos claims. NOTE 7: RESTRUCTURING In connection with acquisitions accounted for using the purchase method of accounting, Products records, to the extent appropriate, accruals for the costs of closing duplicate facilities and severing redundant personnel 80 FEDERAL-MOGUL PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) as part of integrating the acquired business into existing operations. Significant accruals include plant shut-down and realignment costs, and facility relocations, and aggregated $25.0 million and $9.3 million at December 31, 1998 and 1997, respectively. Substantially all payments related to December 31, 1997 accruals were made in 1998. NOTE 8: LONG-TERM DEBT AND OTHER BORROWING ARRANGEMENTS Products' cash and indebtedness is managed on a worldwide basis by its parent. 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 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 Cooper. The specifically identifiable industrial revenue bonds (the "IRB") and specifically identifiable international debt was assigned to Products. Federal-Mogul financed the acquisition of Cooper Automotive through the issuance of long-term debt. As such, the net parent investment balance at December 31, 1998 represents intercompany debt. Federal-Mogul charges interest on this balance based on its incremental borrowing rate, which approximated 7.75% at December 31, 1998. 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 1998, 1997 and 1996 was $0.5 million, $0.5 million and $0.5 million, respectively. Federal-Mogul has pledged 100% of Products' capital stock 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 which approximates $3.1 billion at December 31, 1998. Such pledges and guarantees have also been made by certain other subsidiaries of Federal-Mogul. NOTE 9: NET PARENT INVESTMENT Changes in net parent investment were as follows:
(IN MILLIONS) Balance at January 1, 1996................................ $909.6 Comprehensive income.................................... (37.1) Intercompany transactions, net.......................... (.4) ------ Balance at December 31, 1996.............................. 872.1 Comprehensive income.................................... 12.4 Intercompany transactions, net.......................... (32.1) ------ Balance at December 31, 1997.............................. 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 income for the period October 10, 1998 through December 31, 1998.............................. (.1) Intercompany transactions, net.......................... (22.6) ------ Balance at December 31, 1998.............................. $810.5 ======
Intercompany transactions are principally cash transfers between Products and its parent. 81 FEDERAL-MOGUL PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 10: INCOME TAXES Products 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 OCTOBER 10, JANUARY 1, 1998 THROUGH 1998 THROUGH DECEMBER 31, OCTOBER 9, 1998 1998 1997 1996 ------------ ------------ ----- ---- Components of income tax expense: Current................. $1.0 $55.3 $24.6 $5.7 Deferred (credit)....... -- (16.9) (8.6) (0.4) ---- ----- ----- ---- Income Tax Expense...... $1.0 $38.4 $16.0 $5.3 ==== ===== ===== ====
A reconciliation between the statutory federal income tax rate and the effective tax rate is as follows:
PERIOD PERIOD OCTOBER 10, JANUARY 1, 1998 THROUGH 1998 THROUGH DECEMBER 31, OCTOBER 9, 1998 1998 1997 1996 ------------ ------------ ---- ---- U.S. Federal statutory rate..... 35% 35% 35% 35% State and Local Taxes........... 4 4 5 1 Nondeductible Goodwill.......... 24 5 15 (15) Automotive Asset write-down..... -- -- -- (40) Other........................... (6) -- (2) 2 --- --- --- --- Effective Tax Rate.............. 57% 44% 53% (17)% === === === ===
Deferred income taxes reflect the net tax effects of temporary differences between the carring 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 is non-deductible accruals and depreciation timing differences.
1998 1997 ------- ------ Current deferred tax assets............................. $ 76.6 $ 40.8 Long-term deferred tax assets/(liabilities)............. (115.4) (50.6) ------- ------ Net deferred liabilities................................ $(38.8) $ (9.8) ======= ======
As Products files a consolidated tax return with its parent, the net deferred tax liability at December 31, 1998 and 1997 is a component in the net parent investment. NOTE 11: PENSION PLANS In 1996 and 1997, as part of Cooper, employees of Products participated in numerous pension plans covering substantially all domestic employees and pension and similar arrangements in accordance with local customs covering employees at foreign locations. The assets of the various domestic and foreign plans were maintained in various trusts and consisted primarily of equity and fixed-income securities. Funding policies range 82 FEDERAL-MOGUL PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) from five to thirty years. Pension benefits for salaried employees were generally based upon career earnings. Benefits for hourly employees were generally based on a dollar unit, multiplied by years of service. The amount of expense and the funded status with respect to the defined benefit pension plans of Products, exclusive of the Cooper Salaried Employee Benefit Plan, is set forth in the table below. In addition, most U.S. salaried employees of Products participated in the Cooper Salaried Employee Benefit Plan. The amount of expense allocated to Products for this plan was $.3 million and $.7 million for the years ended December 31, 1997 and 1996, respectively. During 1997 and 1996, Products' expense with respect to domestic and foreign defined contribution plans (primarily related to various groups of hourly employees) amounted to $2.2 million and $1.8 million, respectively. Products' aggregate pension expense amounted to $3.7 million and $3.7 million during 1997 and 1996, respectively.
YEAR ENDED DECEMBER 31, -------------- 1997 1996 ------ ------ (IN MILLIONS) Components of defined benefit plan net pension expense: Service cost--benefits earned during the year......... $ 0.8 $ 0.7 Interest cost on projected benefit obligation......... 1.4 1.4 Actual return on assets............................... (1.8) (1.4) Net amortization and deferral......................... 0.8 0.5 ------ ------ Net pension expense................................. $ 1.2 $ 1.2 ====== ======
ASSETS ACCUMULATED EXCEED BENEFITS ACCUMULATED EXCEED BENEFITS ASSETS ----------- ----------- (IN MILLIONS) Funded status of the plans at December 31, 1997 Actuarial present value of: Vested benefit obligation..................... $(12.8) $(7.7) ====== ===== Accumulated benefit obligation................ $(12.8) $(9.9) ====== ===== Projected benefit obligation.................. $(12.8) $(9.9) Plan assets at fair value....................... 14.1 3.4 ------ ----- Projected benefit obligation less than (in excess of) plan assets......................... 1.3 (6.5) Unrecognized net loss (gain).................... (0.2) 4.2 Unrecognized net (asset) obligation from adoption date.................................. -- -- Unrecognized prior service cost................. -- 0.8 Adjustment required to recognize minimum liability...................................... -- (5.0) ------ ----- Pension asset (liability) at end of year........ $ 1.1 $(6.5) ====== =====
Actuarial assumptions used: Discount rate.................................................... 7 1/2% Rate of compensation increase.................................... 4 3/4% Expected long-term rate of return on assets...................... 8 1/2%
During 1998, the various pension plans of Products were merged into other plans of Cooper. As such, the related pension liabilities were recorded to net parent investment. These multi-employer plans were in-turn 83 FEDERAL-MOGUL PRODUCTS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) assumed by Federal-Mogul in its acquisition of the automotive division of Cooper. The expense charged to Products by Cooper during the period January 1, 1998 to October 9, 1998 was $2.2 million. The credit to Products from Federal- Mogul for the period October 10, 1998 to December 31, 1998 was approximately $450,000. Such plans were required to be fully funded by Cooper prior to the acquisition by Federal-Mogul. The fully funded aggregated projected benefit obligation of such plans of $352 million was based upon a discount rate of 7.25% at December 31, 1998. NOTE 12: POSTRETIREMENT BENEFITS OTHER THAN PENSIONS As part of Cooper and subsequently Federal-Mogul, benefits provided to employees of Products under various multi-employer 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 90% of the total. The majority of participants under such plans are retirees. The expense related to such plans approximated $1.3 million, $1 million, $1.7 million, and $0.6 million, for 1996, 1997, the period January 1, 1998 to October 9, 1998 and October 10, 1998 to December 31, 1998, respectively. The unfunded projected benefit obligation of these plans aggregated approximately $209 million at December 31, 1998 based upon a discount rate of 6.75%. NOTE 13: DOMESTIC AND INTERNATIONAL OPERATIONS Products operates in a single business segment, Automotive Products. Products manufactures and distributes wiper blades, lamps, brake friction materials and other products for use by the automotive aftermarket and in automobile assemblies. In addition, Products manufactures and distributes suspension, steering driveline and brake system components and material for the automotive aftermarket. No single customer accounted for 10% or more of revenues in 1998, 1997 or 1996. All revenues and assets of Products reside in North America, principally in the United States. NOTE 14: CONCENTRATIONS OF CREDIT RISK 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 do not require collateral. During the first quarter of 1998, a large customer filed for reorganization under Chapter 11 of the U.S. Bankruptcy Code. Products had receivables from the customer of approximately $12.5 million at the time of the filing which were written off in 1997. 84 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 and the Cooper Automotive Division of Cooper Industries (the Predecessor) as of December 31, 1998 and 1997, respectively and the related consolidated statements of operations and comprehensive income and cash flows for the period October 10, 1998 through December 31, 1998 and for the Predecessor for the period January 1, 1998 through October 9, 1998, and for each of the two years in the period ended December 31, 1997. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Federal-Mogul Ignition Company and subsidiaries at December 31, 1998 and the Predecessor at December 31, 1997, and the consolidated results of their operations and their cash flows for the period October 10, 1998 through December 31, 1998 and for the Predecessor for the period January 1, 1998 through October 9, 1998, and for each of the two years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Detroit, Michigan January 29, 1999 85 FEDERAL-MOGUL IGNITION COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (IN MILLIONS)
PREDECESSOR ----------------------------------------- PERIOD OCTOBER 10, PERIOD JANUARY 1, YEAR ENDED YEAR ENDED 1998 THROUGH 1998 THROUGH DECEMBER 31, DECEMBER DECEMBER 31, 1998 OCTOBER 9, 1998 1997 31, 1996 ------------------ ----------------- ------------ ---------- Revenues................ $233.1 $782.8 $1,031.3 $1,040.2 Cost of sales........... 169.1 557.9 721.3 727.1 Selling and administrative expenses............... 40.1 132.4 171.1 178.0 Amortization expense.... 4.4 13.7 17.6 14.4 Nonrecurring charges.... -- -- 16.2 0.5 Other expense, net...... 2.8 15.4 12.6 12.4 Interest expense........ 15.1 1.5 0.6 0.2 ------ ------ -------- -------- Income before income taxes................ 1.6 61.9 91.9 107.6 Income taxes ........... 1.0 26.8 38.3 43.8 ------ ------ -------- -------- Net income............ $ 0.6 $ 35.1 $ 53.6 $ 63.8 Components of comprehensive income Minimum pension liability, net of tax.. -- -- 5.6 (0.4) Translation adjustments, net of tax............. (2.4) 6.0 (23.0) (0.7) ------ ------ -------- -------- Comprehensive income.. $ (1.8) $ 41.1 $ 36.2 $ 62.7 ====== ====== ======== ========
See accompanying Notes to Consolidated Financial Statements 86 FEDERAL-MOGUL IGNITION COMPANY CONSOLIDATED BALANCE SHEETS
DECEMBER 31, -------------------- PREDECESSOR ----------- 1998 1997 -------- ----------- (IN MILLIONS) ASSETS Cash..................................................... $ 13.1 $ 1.5 Accounts receivable (net of allowance for doubtful accounts of $6.0 million and $6.7 million).............. 212.6 227.6 Inventories.............................................. 238.9 211.6 Other.................................................... 17.5 14.4 -------- -------- Total current assets................................... 482.1 455.1 -------- -------- Property, plant and equipment, less accumulated depreciation............................................ 410.2 329.2 Intangibles, less accumulated amortization............... 741.3 581.4 Other assets............................................. 19.7 14.1 -------- -------- Total assets........................................... $1,653.3 $1,379.8 ======== ======== LIABILITIES AND NET PARENT INVESTMENT Short-term debt.......................................... $ 16.0 $ 35.5 Accounts payable......................................... 75.8 97.5 Accrued compensation..................................... 21.7 30.0 Restructuring and rationalization reserves............... 32.9 19.5 Other accrued liabilities................................ 69.9 47.5 -------- -------- Total current liabilities.............................. 216.3 230.0 -------- -------- Other long-term liabilities.............................. 28.8 52.7 Net parent investment.................................... 1,408.2 1,097.1 -------- -------- Liabilities and net parent investment.................... $1,653.3 $1,379.8 ======== ========
See accompanying Notes to Consolidated Financial Statements. 87 FEDERAL-MOGUL IGNITION COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS (IN MILLIONS)
PREDECESSOR -------------------------------------------- YEAR PERIOD OCTOBER 10, PERIOD JANUARY 1, ENDED 1998 THROUGH 1998 THROUGH YEAR ENDED DECEMBER DECEMBER 31, 1998 OCTOBER 9, 1998 DECEMBER 31, 1997 31, 1996 ------------------ ----------------- ----------------- -------- Cash flows from operating activities: Net income ........... $ (0.6) $ 35.1 $ 53.6 $63.8 Adjustments to reconcile to net cash provided by operating activities: Depreciation expense.. 9.1 31.8 39.7 45.1 Loss on sale of assets............... -- 1.0 -- Amortization expense.. 4.4 13.7 17.6 14.4 Nonrecurring asset write-down........... -- -- 6.9 85.3 Changes in assets and liabilities: Accounts receivables........ (1.1) 12.4 (2.2) (17.7) Inventories......... 4.8 (27.1) (1.9) 19.6 Accounts payable and accrued liabilities........ 29.1 (9.3) (13.6) (22.9) Other assets and liabilities, net... (47.1) (0.8) (10.8) (74.8) ------ ------ ------ ------ Net cash provided by (used in) operating activities....... (0.2) 56.8 89.3 112.8 Cash flows from investing activities: Cash paid for acquired businesses........... -- (8.5) (20.1) (50.3) Capital expenditures.. (7.6) (29.8) (42.1) (44.7) Proceeds from sales of property, plant and equipment............ 1.4 0.4 0.9 5.4 ------ ------ ------ ------ Net cash used in investing activities....... (6.2) (37.9) (61.3) (89.6) Cash flows from financing activities: Net short-term borrowings (repayments)......... (2.4) (33.1) 30.6 -- Borrowings (repayments) of long- term debt............ (0.1) 0.3 -- (0.5) Transfers from (to) parent............... (23.8) 58.2 (62.5) (20.0) ------ ------ ------ ------ Net cash provided by (used in) financing activities....... (26.3) 25.4 (31.9) (20.5) Effect of exchange rate changes on cash and cash equivalents....... -- -- 2.1 (0.8) ------ ------ ------ ------ Increase (decrease) in cash and cash equivalents............ (32.7) 44.3 (1.8) 1.9 Cash beginning of period........... 45.8 1.5 3.3 1.4 ------ ------ ------ ------ Cash end of period........... $ 13.1 $ 45.8 $ 1.5 $3.3 ====== ====== ====== ======
See accompanying Notes to Consolidated Financial Statements. 88 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 subsidiaries (Ignition). Ignition is a wholly owned subsidiary of Federal-Mogul Corporation ("Federal-Mogul"). Ignition was previously known as the Cooper Divisions of Cooper Industries, Inc. ("Cooper"). Federal-Mogul purchased the automotive divisions of Cooper, including Ignition, on October 9, 1998 for approximately $2.0 billion, of which approximately $1.25 billion was attributable to Ignition. The assets and liabilities of Ignition have been adjusted to their fair values as of October 9, 1998. All related purchase accounting adjustments as recorded by Federal-Mogul and related to Ignition have been reflected herein. Such adjustments consist principally of the following: Increase in net book value to estimable fair value (in millions): Inventory..................................................... $ 10.0 Fixed assets.................................................. 114.5 Identifiable intangible assets................................ 264.9 Other liabilities ............................................ 125.1 Decrease in goodwill.......................................... 86.9
In connections with the acquisition, Federal-Mogul is in the process of having valuations of acquired property, plant and equipment and identifiable intangible assets completed. In addition, the related purchase agreement includes a price adjustment based upon acquired net assets, as defined in the agreement, as of the acquisition date. The purchase price allocations included in the accompanying financial statements are based upon management's best estimates and current available information. Such purchase price allocations will be finalized when such valuations and the final purchase price adjustments are completed in 1999. Actual results could differ from the above estimates. The business units that comprise Ignition (including Ignition's headquarters) operate 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. Ignition is billed for all direct costs incurred on its behalf. General corporate, accounting, tax, legal and other administrative costs that are not directly attributable to the operations of Ignition have been allocated based on a ratio of Ignition's revenues to consolidated revenues. Management believes that this allocation method is reasonable. The accompanying combined financial statements include the accounts of Ignition as described above. These 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. Ignition's separate domestic debt and related interest expense have been included in the consolidated financial statements. Because Ignition 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 Ignition is transferred to the parent. 89 FEDERAL-MOGUL IGNITION COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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. 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. Through October 9, 1998 cost was determined using the first-in, first- out (FIFO) method. For October 10, 1998 and thereafter, cost was determined using the last-in, first-out method, which as of December 31, 1998, approximated FIFO. Property, Plant and Equipment: Property, plant and equipment are stated at cost. Depreciation is provided over the estimated useful lives of the related assets using primarily the straight-line method. This method is applied to group asset accounts, which in general have the following lives: buildings--10 to 40 years; and machinery and equipment--3 to 20 years. 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 1998 1997 ----------- ------ ------- (MILLIONS OF DOLLARS) Goodwill..................................... 40 years $480.8 $ 718.5 Accumulated amortization..................... (2.7) (137.1) ------ ------- Total Goodwill............................... $478.1 $ 581.4 ====== ======= Trademarks................................... 40 years $176.5 $ -- Developed technology......................... 12-30 years 68.2 -- Assembled workforce.......................... 15 years 20.2 -- ------ ------- 264.9 Accumulated amortization..................... (1.7) -- ------ ------- Total Other Intangible Assets................ $263.2 $ -- ====== =======
Intangible assets are periodically reviewed for impairment based on an assessment of future cash flows to ensure that they are appropriately valued. There were no impairment charges during 1998 or 1997. Intangible assets are amortized on a straight-line basis over their estimated useful lives. Net Parent Investment: The Net Parent Investment account reflects the balance of Ignition's historical earnings, intercompany debt, accrued and deferred income taxes and other transactions between Ignition's and its parent. Revenue Recognition: Ignition recognizes revenue and estimated returns from product sales and the related customer incentive and warranty expense when goods are shipped to the customer. 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. 90 FEDERAL-MOGUL IGNITION COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Effect of Accounting Pronouncements: In April 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 is 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. Ignition does not anticipate that the adoption of this statement will have a significant effect on its results of operations or financial position. In 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. Ignition expects to adopt the new statement effective January 1, 2000. The statement requires Ignition to recognize all derivatives on the balance sheet at fair value. Ignition does not anticipate that the adoption of this statement will have a significant effect on its results of operations or financial condition. Fair Value of Financial Instruments: The carrying amounts of certain financial instruments such as cash and equivalents, accounts receivable, accounts payable and short-term debt approximate their fair values. 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 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: NONRECURRING CHARGES During 1997, Ignition incurred charges of $16.2 million ($9.9 million after income taxes) for actions management committed to during the period after concluding an evaluation of certain sales, marketing and distribution activities and information systems . The 1997 charges include adjustments to the carrying value of assets of $6.9 million and expenditures for replacing systems and facility consolidations of $9.3 million. Ignition has begun a consolidation of certain sales, marketing and distribution activities. Adjustments to the carrying value of assets and exit costs were recorded for projects committed to by management. Severance and certain other costs related to projects committed to by management are not expensed until the affected employees are notified. A majority of the consolidations have been announced and such costs were accrued and expensed during 1997. NOTE 4: ACQUISITIONS Ignition completed one product-line acquisition in 1998 which had an aggregate cost of $8.5 million and $5.5 of goodwill was recorded. During 1997 Ignition completed two product-line acquisitions and one small product-line acquisition in 1996. The 1997 acquisitions had an aggregate cost of $20.1 million and $14.0 million of goodwill was recorded, on a preliminary basis, with respect to the acquisitions. The total cost of the 1996 acquisition was approximately $50.3 million and $36.1 million of goodwill was recorded with respect to the acquisition. The operations of these businesses were not significant on a pro forma to historical operations of Ignition. The acquisitions have been accounted for as purchases and the results of the acquisitions are included in the consolidated income statements since the respective acquisition dates. 91 FEDERAL-MOGUL IGNITION COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 5: INVENTORIES At December 31 inventories consisted of the following:
1998 1997 ------ ------ (IN MILLIONS) Raw materials.............................................. $ 45.4 $ 42.2 Work-in-process............................................ 51.8 41.7 Finished goods............................................. 113.2 126.1 Perishable tooling and supplies............................ 28.5 28.6 ------ ------ 238.9 238.6 Inventory valuation allowances............................. -- (27.0) ------ ------ Net inventories.......................................... $238.9 $211.6 ====== ======
NOTE 6: PROPERTY, PLANT AND EQUIPMENT At December 31 property, plant and equipment consisted of the following:
1998 1997 ------ ------ (IN MILLIONS) Property, plant and equipment: Land and land improvements.............................. $ 10.3 $ 11.8 Buildings............................................... 105.4 126.9 Machinery and equipment................................. 303.6 463.5 ------ ------ 419.3 602.2 Accumulated depreciation................................ (9.1) (273.0) ------ ------ $410.2 $329.2 ====== ======
NOTE 7: COMMITMENTS AND CONTINGENCIES At December 31, 1998, Ignition had accruals of $15.7 million with respect to potential environmental liabilities, including $8.2 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 $6.6 million related to sites owned by Ignition and $9.1 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 utilized any form of discounting in establishing its environmental liability accrual. While the environmental liability accrual involves estimates that can have wide ranges of potential liability, Ignition has taken a proactive approach and have managed environmental costs over the years. Ignition does not believe that the nature of their products, production processes, or materials or other factors involved in the manufacturing process are 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. 92 FEDERAL-MOGUL IGNITION COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 8: RESTRUCTURING In connection with acquisitions accounted for using the purchase method of accounting, Ignition recorded, to the extent appropriate, accruals for the costs of closing duplicate facilities, severing redundant personnel and integrating the acquired business into existing operations of Ignition. Significant accruals include plant shut-down and realignment costs, and relocations, and aggregated $32.9 million, and $10.5 million at December 31, 1998 and 1997, respectively. Substantially all payments related to December 31, 1997 accruals were made in 1998. NOTE 9: BORROWING ARRANGEMENTS Ignition cash and indebtedness is managed on a worldwide basis by its parent. The majority of the cash provided by or used by a particular division, including Ignition is provided through this consolidated cash and debt management system. As a result, the amount of 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. Federal-Mogul funded the acquisition of Ignition through the issuance of long-term debt. As such, the net parent investment at December 31, 1998 represents intercompany debt. Federal-Mogul charges Ignition interest on this balance based on its incremental borrowing rate, which approximated 7.75% at December 31, 1998. Ignition has international short-term borrowing facilities under which $16.0 million and $35.5 million was outstanding at December 31, 1998 and 1997 respectively. 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 1998, 1997 and 1996 was $1.5 million, $.6 million and $.2 million, respectively. Federal-Mogul has pledged 100% of Ignition's capital stock to secure certain outstanding debt of Federal-Mogul. In addition, Ignition has guaranteed fully and unconditionally, on a joint and general basis, the obligation to pay principal and interest under Federal-Mogul's Senior Credit Agreement and its publicly registered debt which approximate $3.1 billion at December 31, 1998. Such pledges have also been made by certain other subsidiaries of Federal- Mogul. 93 FEDERAL-MOGUL IGNITION COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) NOTE 10: NET PARENT INVESTMENT Changes in net parent investment were as follows:
(IN MILLIONS) Balance at January 1, 1996................................ $1,103.1 Comprehensive income.................................... 62.7 Intercompany transactions, net.......................... (36.2) -------- Balance at December 31, 1996.............................. 1,129.6 Comprehensive income.................................... 36.2 Intercompany transactions, net.......................... (68.7) -------- Balance at December 31, 1997.............................. 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 income 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 ========
Intercompany transactions were principally cash transfers between Ignition and its parent. NOTE 11: 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 JANUARY 1, OCTOBER 10, 1998 1998 THROUGH THROUGH YEAR ENDED YEAR ENDED DECEMBER 31, OCTOBER 9, DECEMBER 31, DECEMBER 31, 1998 1998 1997 1996 ------------ ---------- ------------ ------------ Components of income tax expense: Current............... $2.4 $43.8 $39.1 $41.1 Deferred.............. -- (17.0) (0.8) 2.7 ---- ----- ----- ----- Income Tax Expense.... $2.4 $26.8 $38.3 $43.8 ==== ===== ===== ===== PERIOD PERIOD JANUARY 1, OCTOBER 10, 1998 1998 THROUGH THROUGH YEAR ENDED YEAR ENDED DECEMBER 31, OCTOBER 9, DECEMBER 31, DECEMBER 31, 1998 1998 1997 1996 ------------ ---------- ------------ ------------ Effective tax rate reconciliation: U.S. Federal statutory rate................. 35% 35% 35% 35% State and Local Taxes................ 4 4 4 3 Nondeductible Goodwill............. 50 8 7 6 Other................. (26) (4) (3) (3) ---- ----- ----- ----- Effective Tax Rate.... 63% 43% 43% 41% ==== ===== ===== =====
94 FEDERAL-MOGUL IGNITION COMPANY 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 Ignition net deferred tax asset is non-deductible accruals and depreciation timing differences.
1998 1997 ------ ------ Current deferred tax assets/(liabilities)................. $ 64.3 $ 17.2 Long term deferred tax assets/(liabilities................ (51.9) 113.0 ------ ------ Net deferred tax assets................................... $(12.4) $130.2 ====== ======
As Ignition files a consolidated tax return with its parent, the net deferred tax asset at December 31, 1998 and net deferred tax liability at 1997 is a component of the net parent investment. NOTE 12: PENSION PLANS In 1996 and 1997 as part of Cooper, employees of Ignition participated in numerous pension plans covering substantially all domestic employees and pension and similar arrangements in accordance with local customs covering employees at foreign locations. The assets of the various domestic and foreign plans were maintained in various trusts and consisted primarily of equity and fixed-income securities. Funding policies range from five to thirty years. Pension benefits for salaried employees were generally based upon career earnings. Benefits for hourly employees were generally based on a dollar unit, multiplied by years of service. The amount of expense and the funded status with respect to the defined benefit pension plans of the Ignition, exclusive of the Cooper Salaried Employee Benefit Plan, is set forth in the table below. In addition, most U.S. salaried employees of Ignition participated in the Cooper Salaried Employee Benefit Plan. The amount of expense allocated to Ignition for this plan was $0.4 million and $1.0 million for the years ended December 31, 1997 and 1996, respectively. During 1997 and 1996, Ignition expense with respect to domestic and foreign defined contribution plans (primarily related to various groups of hourly employees) amounted to $3.2 million and $2.6 million, respectively. Ignition aggregate pension expense amounted to $10.1 million and $10.6 million during 1997 and 1996, respectively.
YEAR ENDED DECEMBER 31, -------------- 1997 1996 ------ ------ (IN MILLIONS) Components of defined benefit plan net pension expense: Service cost--benefits earned during the year......... $ 3.5 $ 3.3 Interest cost on projected benefit obligation......... 18.0 17.5 Actual return on assets............................... (25.6) (17.8) Net amortization and deferral......................... 10.6 4.0 ------ ------ Net pension expense................................. $ 6.5 $ 7.0 ====== ======
95 FEDERAL-MOGUL IGNITION COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
ASSETS EXCEED ACCUMULATED BENEFITS ACCUMULATED BENEFITS EXCEED ASSETS -------------------- -------------------- (IN MILLIONS) Funded status of the plans at December 31, 1997 Actuarial present value of: Vested benefit obligation... $(5.8) $(218.7) ===== ======= Accumulated benefit obligation................. $(5.8) $(241.3) ===== ======= Projected benefit obligation................. $(8.2) $(247.8) Plan assets at fair value..... 7.8 209.0 ----- ------- Projected benefit obligation in excess of plan assets..... (0.4) (38.8) Unrecognized net loss......... 0.3 43.8 Unrecognized net (asset) obligation from adoption date......................... -- 0.1 Unrecognized prior service cost......................... -- 4.2 Adjustment required to recognize minimum liability.. -- (28.7) ----- ------- Pension liability at end of year......................... $(0.1) $ (19.4) ===== =======
---------------------- DOMESTIC INTERNATIONAL -------- ------------- Actuarial assumptions used: Discount rate................................... 7 1/2% 6-7 1/4% Rate of compensation increase................... 4 3/4% 4 1/2-6% Expected long-term rate of return on assets..... 8 1/2% 7 1/2-9 3/4%
In 1998, the various pension plans of Ignition were merged into other plans of Cooper. As such, the related pension liabilities were recorded to intercompany debt. These multi-employer plans were in-turn assumed by Federal-Mogul in its acquisition of Ignition. Such plans were required to be fully funded by Cooper prior to the acquisition by Federal- Mogul. The aggregated fully funded projected benefit obligation of such plans of $352,000,000 was based upon a discount rate of 7.25% at December 31, 1998. 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 $465,000. NOTE 13: POSTRETIREMENT BENEFITS OTHER THAN PENSIONS As part of Cooper and subsequently Federal-Mogul, benefits provided to employees of Ignition under various multi-employer 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 90% of the total. The majority of participants under such plans are retirees. The expense related to such plans approximated $12.1 million, $11.4 million, $4.4 million, and $2.8 million for 1996, 1997, the period January 1, 1998 to October 9, 1998, and October 10, 1998 to December 31, 1998, respectively. The unfunded projected benefit obligation of these plans aggregated approximately $209 million at December 31, 1998 based upon a discount rate of 6.75% 96 FEDERAL-MOGUL IGNITION COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED) NOTE 14: NORTH AMERICA, EUROPE AND OTHER OPERATIONS Ignition operates in a single business segment, Automotive Products. It manufactures and distributes spark plugs, wiper blades, lamps, and other products for use by the automotive aftermarket and in automobile assemblies. No single customer accounted for 10% or more of combined revenues in 1998, 1997 or 1996.
REVENUES ASSETS -------------------------------------------------------------- ----------------- PERIOD OCTOBER 10, PERIOD JANUARY 1, YEAR ENDED YEAR ENDED DECEMBER 31, 1998 THROUGH 1998 THROUGH DECEMBER 31, DECEMBER 31, ----------------- DECEMBER 31, 1998 OCTOBER 9, 1998 1997 1996 1998 1997 ------------------ ----------------- ------------ ------------ -------- -------- North America........... $150.8 $506.1 $ 711.4 $ 715.7 $1,025.1 $ 827.9 Europe.................. 59.1 195.1 253.8 258.5 463.0 469.1 Other................... 23.2 81.6 66.1 66.0 165.2 82.8 ------ ------ -------- -------- -------- -------- Consolidated.......... $233.1 $782.8 $1,031.3 $1,040.2 $1,653.3 $1,379.8 ====== ====== ======== ======== ======== ========
NOTE 15: CONCENTRATIONS OF CREDIT RISK 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 the customer base and their dispersion across many different countries. Ignition performs periodic credit evaluations of their customers and generally do not require collateral. NOTE 16: SUMMARY OF NONCASH INVESTING AND FINANCING ACTIVITIES The following noncash transactions have been excluded from the combined statements of cash flows:
1998 1997 1996 ----- ------ ------ (IN MILLIONS) Assets acquired and liabilities assumed or incurred from the acquisition of businesses: Fair value of assets acquired................. $11.3 $ 27.0 $ 50.7 Cash used to acquire businesses, net of cash acquired..................................... (8.5) (20.1) (50.3) ----- ------ ------ Liabilities assumed or incurred............. $ 2.8 $ 6.9 $ 0.4 ===== ====== ======
97 REPORT OF INDEPENDENT AUDITORS The Board of Directors Federal-Mogul Corporation: We have audited the accompanying balance sheets of Federal-Mogul Aviation, Inc. and the Aviation Division of the Cooper Automotive Division of Cooper Industries (the Predecessor) as of December 31, 1998 and 1997, respectively, and the related statements of operations and cash flows for the periods October 10, 1998 through December 31, 1998, and for the Predecessor for the period January 1, 1998 through October 9, 1998 and for each of the two years in the period ended December 31, 1997. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Federal-Mogul Aviation, Inc. at December 31, 1998 and the Predecessor at December 31, 1997, and the results of its operations and its cash flows for the period October 10, 1998 through December 31, 1998 and for the Predecessor for the period January 1, 1998 through October 9, 1998, and for each of the two years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Detroit, Michigan February 12, 1999 98 FEDERAL-MOGUL AVIATION, INC. STATEMENTS OF OPERATIONS (thousands)
Predecessor --------------------------- Year ended October 10- Janaury 1- December 31, December 31, October 9, ---------------- 1998 1998 1997 1996 ------------ ---------- ------- ------- Revenues.............................. $13,579 $46,836 $58,449 $52,461 Cost of sales......................... 8,977 31,738 36,918 35,062 Selling and administrative expenses... 995 3,808 6,448 5,500 Amortization expense.................. 289 309 168 376 Interest expense...................... 1,394 -- 9 -- Other (income)/expense, net........... 224 12 (290) 260 ------- ------- ------- ------- Income before income taxes.......... 1,700 10,969 15,196 11,263 Income taxes.......................... 776 4,314 6,034 4,480 ------- ------- ------- ------- Net income.......................... $ 924 $ 6,655 $ 9,162 $ 6,783 ======= ======= ======= =======
See accompanying Notes to Financial Statements. 99 FEDERAL-MOGUL AVIATION, INC. BALANCE SHEETS
December 31, ------------------- Predecessor 1998 1997 ------- ----------- (thousands) Assets Cash...................................................... $ 1 $ 1 Accounts receivable....................................... 7,104 6,086 Inventories............................................... 18,255 13,072 Other..................................................... -- 16 ------- ------- Total current assets.................................... 25,360 19,175 Property, plant and equipment, less accumulated depreciation............................................. 19,448 14,518 Goodwill, less accumulated amortization................... 28,546 16,488 Other intangibles, less accumulated amortization.......... 15,704 -- Other assets.............................................. -- 7 ------- ------- Total assets............................................ $89,058 $50,188 ======= ======= Liabilities and Net Parent Investment Accounts payable.......................................... $ 3,456 $ 2,481 Accrued compensation...................................... 607 603 Restructuring and rationalization reserves................ 119 2,192 Other accrued liabilities................................. 683 1,072 ------- ------- Total current liabilities............................... 4,865 6,348 Other long-term liabilities............................... -- 936 Net parent investment..................................... 84,193 42,904 ------- ------- Total liabilities and net parent investment............. $89,058 $50,188 ======= =======
See accompanying Notes to Financial Statements. 100 FEDERAL-MOGUL AVIATION, INC. STATEMENTS OF CASH FLOWS (THOUSANDS)
PREDECESSOR ----------------------------- YEAR ENDED OCTOBER 10- JANUARY 1- DECEMBER 31, DECEMBER 31, OCTOBER 9, ------------------ 1998 1998 1997 1996 ------------ ---------- -------- -------- Cash flows from operating activities: Net income...................... $ 924 $ 6,655 $ 9,162 $ 6,783 Adjustments to reconcile to net cash provided by operating activities: Depreciation expense............ 287 2,122 2,556 2,514 Amortization expense............ 289 309 168 376 Changes in assets and liabilities: Accounts receivable........... 600 (1,618) 1,228 (1,366) Inventories................... 300 (4,883) 45 4,650 Accounts payable and accrued liabilities.................. (795) (1,624) 36 162 Other assets and liabilities, net.......................... -- 23 151 44 ------- ------- -------- -------- Net cash provided by operating activities....... 1,605 984 13,346 13,163 Cash flows from investing activities: Capital expenditures............ (275) (420) (528) (323) Cash flows from financing activities: Net intercompany activity with parent......................... (1,330) (564) (12,819) (12,840) ------- ------- -------- -------- Decrease in cash ................. -- -- (1) -- Cash at beginning of period..................... 1 1 2 2 ------- ------- -------- -------- Cash at end of period....... $ 1 $ 1 $ 1 $ 2 ======= ======= ======== ========
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 for approximately $2.2 billion of which approximately $83 million is attributable to Aviation. The assets and liabilities of Aviation have been adjusted to their fair values as of October 9, 1998. All related purchase accounting adjustments as recorded by Federal-Mogul and related to Aviation have been reflected herein. Such adjustments consist principally of the following: Increase in net book value to fair value (in thousands): Inventory....................................................... $ 600 Property, plant and equipment................................... 6,900 Intangible assets (including goodwill).......................... 28,000
In connection with the acquisition, Federal-Mogul is in the process of having valuations of acquired property, plant and equipment and identifiable intangible assets completed. In addition, the related purchase agreement includes a price adjustment based upon acquired net assets, as defined in the agreement, as of the acquisition date. The purchase price allocations included in the accompanying financial statements are based upon management's best estimates and currently available information. Such purchase price allocations will be finalized when such valuations and the final purchase price adjustment are completed in 1999. Actual results could differ from the above estimates. 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 based on a ratio of Aviation's revenues to consolidated revenues. Management believes that this allocation method is reasonable. The accompanying financial statements include the accounts of Aviation as described above. These 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. 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. 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. 102 FEDERAL-MOGUL AVIATION, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) Inventories: Inventories are carried at cost or, if lower, net realizable value. Through October 9, 1998 cost determined using the first-in, first-out (FIFO) method. From October 10, 1998 and thereafter, cost was determined using the last-in, first-out (LIFO) method, which at December 31, 1998, approximated FIFO. Revenue Recognition: The Company recognizes revenue and estimated returns from product sales and the related customer incentive and warranty expense when goods are shipped to the customer. Property, Plant and Equipment: Property, plant and equipment are stated at cost. Depreciation is provided over the estimated useful lives of the related assets using primarily the straight-line method. This method is applied to group asset accounts, which in general have the following lives: buildings--10 to 40 years and machinery and equipment--3 to 20 years. Goodwill and Other Intangible Assets: At December 31, goodwill and other intangible assets which result principally from acquisitions, consisted of the following (in thousands):
Estimated Useful Life 1998 1997 ----------- ------- ------- Goodwill.................................... 40 years $28,710 $19,544 Accumulated amortization.................... (164) (3,056) ------- ------- Total Goodwill.............................. $28,546 $16,488 ======= ======= Trademarks.................................. 40 years $10,790 $ -- Developed technology........................ 12-30 years 3,825 -- Assembled workforce......................... 15 years 1,214 -- ------- ------- 15,829 -- Accumulated amortization.................... (125) -- ------- ------- Total other intangible assets............... $15,704 $ -- ======= =======
Intangible assets are periodically reviewed for impairment based on an assessment of future cash flows to ensure that they are appropriately valued. Intangible assets are amortized on a straight-line basis over their estimated useful lives. Net Parent Investment: The Net Parent Investment account reflects the balance of Aviation's historical earnings, intercompany debt, accrued and deferred income taxes and other transactions between Aviation and its parent. Effect of Accounting Pronouncements: In April 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 is 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 does not anticipate that the adoption of this statement will have a significant effect on its results of operations or financial position. Fair Value of Financial Instruments: The carrying amounts of certain financial instruments such as cash and equivalents, accounts receivable and accounts payable approximate their fair value. 103 FEDERAL-MOGUL AVIATION, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 3: INVENTORIES At December 31, inventories consisted of the following:
1998 1997 ------- ------- (THOUSANDS) Raw materials............................................ $ 5,100 $ 4,810 Work-in-process.......................................... 9,315 7,955 Finished goods........................................... 2,159 1,784 Perishable tooling and supplies.......................... 1,681 1,686 ------- ------- 18,255 16,235 Inventory valuation allowances........................... -- (3,163) ------- ------- Net inventories........................................ $18,255 $13,072 ======= =======
NOTE 4: PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost and include expenditures which materially extend the useful lives of existing buildings, machinery and equipment. At December 31, property, plant and equipment consisted of the following:
1998 1997 ------- ------- (THOUSANDS) Property, plant and equipment: Land and land improvements........................... $ 148 $ 268 Buildings............................................ 9,335 9,408 Machinery and equipment.............................. 10,253 23,814 ------- ------- 19,736 33,490 Accumulated depreciation............................. (288) (18,972) ------- ------- $19,448 $14,518 ======= =======
NOTE 5: COMMITMENTS AND CONTINGENCIES In connection with acquisitions accounted for using the purchase method of accounting, Aviation records, to the extent appropriate, accruals for the costs of closing duplicate facilities, severing redundant personnel and integrating the acquired business into existing operations of Aviation. Significant accruals include plant shut-down and realignment costs, and facility relocations, and aggregated $0.2 million and $2.2 million at December 31, 1998 and 1997, respectively. Amounts expended totaled $2.0 million, $1.1 million and $0 in 1998, 1997 and 1996, respectively. The spending related primarily to downsizing and consolidating facilities. Federal-Mogul has pledged 100% of Aviation's capital stock 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 Agreement and its publicly traded registered debt which approximate $3.1 billion at December 31, 1998. Such pledges and guarantees have also been made by certain other subsidiaries of Federal-Mogul. 104 FEDERAL-MOGUL AVIATION, INC. NOTES TO FINANCIAL STATEMENTS--(CONTINUED) NOTE 6: NET PARENT INVESTMENT Changes in net parent investment during the three years ended December 31, 1998 were as follows: Balance at January 1, 1996.................................... $ 48,530 Net intercompany transactions with parent................... (13,411) Net income.................................................. 6,783 -------- Balance at December 31, 1996.................................. 41,902 Net intercompany transactions with parent................... (8,160) Net income.................................................. 9,162 -------- Balance at December 31, 1997.................................. 42,904 Net intercompany transactions with parent................... (1,927) Net income for period from January 1, 1998 to October 10, 1998....................................................... 6,655 -------- Balance at October 9, 1998.................................... $ 47,632 ======== Federal-Mogul investment in Aviation.......................... $ 81,979 Net intercompany 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 ========
Federal-Mogul financed the acquisition of Cooper Automotive through the issuance of long-term debt. As such, the net parent investment balance at December 31, 1998 represents intercompany debt. Federal-Mogul charges interest on this balance based on its incremental borrowing rate, which approximated 7.75% at December 31, 1998. NOTE 7: 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 PERIOD JANUARY 1, OCTOBER 10, 1998 THROUGH 1998 THROUGH OCTOBER 9, DECEMBER 31, 1998 1998 1997 1996 ------------ ------------ ---- ---- Effective tax rate reconciliation: U.S. Federal statutory rate...... 35.0% 35.0% 35.0% 35.0% State and Local Taxes............ 4.0 4.0 4.0 4.0 Other............................ 0.3 6.6 0.7 0.7 ---- ---- ---- ---- Effective Tax Rate............... 39.3% 45.6% 39.7% 39.7% ==== ==== ==== ====
Deferred taxes and income taxes payable are a component of the net investment in parent. NOTE 8: PENSION PLANS Employees of Aviation participate in pension plans covering substantially all employees of its parent. The assets of the various domestic plans are maintained in various trusts and consist primarily of equity and fixed-income securities. Funding policies range from five to thirty years. Pension benefits for salaried employees are 105 FEDERAL-MOGUL AVIATION, INC. NOTES TO FINANCIAL STATEMENTS--(Continued) generally based upon career earnings. Benefits for hourly employees are generally based on a dollar unit, multiplied by years of service. The pension expense charged to Aviation by the plans during the period October 10, 1998 to December 31, 1998, January 1, 1998 to October 9, 1998, and the years ended December 31, 1997 and 1996 approximated 0, $0.3 million, $0.4 million and $0.4 million, respectively. Such plans were required to be fully funded by Cooper, prior to the acquisition by Federal-Mogul. The aggregated fully funded projected benefit obligation of such plans of $352 million was based upon a discount rate of 7.25% at December 31, 1998. In addition, most salaried employees of Aviation participate in the Cooper Salaried Employee Benefit Plan. The amount of expense allocated to Aviation during the period October 10, 1998 to December 31, 1998, January 1, 1998 to October 9, 1998, and the years ended December 31, 1997 and 1996 approximated $15,000, $0.2 million, $24,000 and $0.1 million, respectively. In addition, most hourly employees participate in various defined contribution plans. The amount of expense allocated to Aviation during the period October 10, 1998 to December 31, 1998, January 1, 1998 to October 9, 1998, and the years ended December 31, 1997 and 1996 approximated $0.1 million, $0.2 million, $0.2 million and $0.2 million, respectively. Note 9: Benefits Other Than Pensions Benefits provided to employees of Aviation under various multi-employer 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 90% of the total. Such benefit expenses charged to Aviation by the multi-employer plans during the period October 10, 1998 to December 31, 1998, January 1, 1998 to October 9, 1998 and for the years ended December 31, 1997 and 1996, approximated $0.2 million, $0.3 million, $0.7 million and $0.7 million, respectively. All full-time employees of Aviation, except for certain bargaining unit employees, were eligible to participate in the Cooper Savings Plan ("CO-SAV"). Under the terms of the Plan, employee savings deferrals were partially matched with contributions of Cooper Common stock consisting of either an allocation of shares in Cooper's Employee Stock Ownership Plan ("ESOP") or new shares issued to the ESOP. All assets of the CO-SAV and ESOP Plans shall be transferred to the multi-employer defined contribution plans which Aviation participates. The Aviation Division's compensation expense with respect to the CO-SAV plan and the ESOP was approximately $0.1 million, $0.2 million and $0.3 million in 1998, 1997 and 1996, respectively. Note 10: 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 internal engine parts for the aerospace industry. Aviation manufactures and distributes ignition parts for use in the aerospace aftermarket and original equipment industry. One customer, a distributor of these ignition parts, accounted for approximately 30% of sales ion the periods October 10, 1998 to December 31, 1998 and January 1, 1998 to October 9, 1998, and 26% and 25% for the years ended December 31, 1997 and 1996, respectively. No other customer accounted for 10% or more of revenues in 1998, 1997 or 1996. All of Aviation's operations are conducted in the United States. 106 SIGNATURES Pursuant to the requirements to 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/ Thomas W. Ryan By: _________________________________ Thomas W. Ryan Executive Vice President and Chief Financial Officer Dated: March 31, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in their capacities.
Signature Title --------- ----- /s/ Richard A. Snell Chairman and Chief Executive Officer ___________________________________________ Richard A. Snell /s/ Thomas W. Ryan Executive Vice President and Chief ___________________________________________ Financial Officer (Principal Financial Thomas W. Ryan Officer) /s/ Kenneth P. Slaby Vice President and Controller (Principal ___________________________________________ Accounting Officer) Kenneth P. Slaby
* Director ___________________________________________ John F. Fannon * Director ___________________________________________ Roderick M. Hills * Director ___________________________________________ Paul Scott Lewis * Director ___________________________________________ Antonio Madero * 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 2 EX-3.2 2 BYLAWS OF FEDERAL-MOGUL Exhibit 3.2 BYLAWS OF FEDERAL-MOGUL CORPORATION BYLAWS OF FEDERAL-MOGUL CORPORATION INDEX -----
PAGE ---- ARTICLE I - SHAREHOLDERS 1 - - ------------------------ /1/Section 1 - Annual Meeting 1 /2/Section 2 - Special Meeting 1 Section 3 - Place of Meeting 1 Section 4 - Notice of Meeting 1 /3/Section 5 - Adjourned Meetings 2 Section 6 - Voting Lists 2 Section 7 - Quorum 2 Section 8 - Manner of Acting 2 /4/Section 9 - Postponement of Annual or Special Meeting 3 /5/Section 10 - Nomination and Shareholder Business Bylaw 3 ARTICLE II - DIRECTORS 5 - - ---------------------- Section 1 - General Powers 5 /6/Section 2 - Number, Tenure, Qualifications, & Removal 6 Section 3 - Annual Meetings 6 Section 4 - Regular Meetings 6 Section 5 - Special Meetings 6 /7/Section 6 - Notice 7 Section 7 - Quorum 7 Section 8 - Manner of Acting 8 Section 9 - Vacancies 8 Section 10 - Compensation 8 Section 11 - Committees 8
______________________ /1/ Amended 5/21/85, 7/25/90 /2/ Amended 11/03/88 /3/ Amended 7/25/90 /4/ Amended 7/25/90 /5/ Amended 7/25/90, 2/24/99 /6/ Amended 8/01/84, 2/04/88, 2/08/89, 9/28/89, 7/24/91, 4/26/95, 2/04/98, 5/20/98, 2/24/99 /7/ Amended 7/25/90 -i-
PAGE ---- ARTICLE III - OFFICERS 9 - - ---------------------- Section 1 - Number 9 Section 2 - Election and Term of Office 9 Section 3 - Removal and Resignations 9 Section 4 - Vacancies 9 Section 5 - The Chief Executive Officer 10 Section 6 - Authority of Officers, Agents and Employees, Generally 10 Section 7 - The Chairman of the Board, The Vice Chairman of the Board and The President 11 /8/Section 8 - The Secretary 11 Section 9 - The Treasurer 11 Section 10 - Assistant Secretaries and Assistant Treasurers 12 Section 11 - Remuneration 12 /9/ARTICLE IV - INDEMNIFICATION OF DIRECTORS, OFFICERS, - - ------------------------------------------------------- EMPLOYEES AND AGENTS 13 -------------------- Section 1 - Non-Derivative Actions 13 Section 2 - Derivative Actions 13 Section 3 - Expenses or Successful Defense 14 Section 4 - Definition 14 Section 5 - Contract Right; Limitation on Indemnity 14 Section 6 - Right of Claimant to Bring Suit 15 Section 7 - Proportionate Indemnity 16 Section 8 - Expense Advance 16 Section 9 - Non-Exclusivity of Rights 16 Section 10 - Indemnification of Employees and Agents of the Corporation 16 Section 11 - Insurance 17 Section 12 - No Liability if Determination Made in Good Faith 17 Section 13 - Scope of Indemnity; Changes in Michigan Law 17 Section 14 - Severability 18 ARTICLE V - FIXING RECORD DATE 18 - - ------------------------------ ARTICLE VI - LOANS, CHECKS, DEPOSITS, ETC. 19 - - ------------------------------------------ Section 1 - Loans 19 Section 2 - Checks, Drafts, etc. 19 Section 3 - Deposits 19
___________________________ /8/ Amended 8/10/84 /9/ Amended 11/03/88 -ii-
PAGE ---- ARTICLE VII - CERTIFICATES FOR SHARES 19 - - ------------------------------------- /10/Section 1 - Certificates for Shares 19 Section 2 - Lost Certificates 20 Section 3 - Transfer of Shares 20 Section 4 - Regulations 20 Section 5 - Elimination of Certificates for Stock 20 ARTICLE VIII - FISCAL YEAR 20 - - -------------------------- ARTICLE IX - SEAL 21 - - ----------------- /11/ARTICLE X - EMERGENCY PROVISIONS 21 - - ------------------------------------ Section 1 - General 21 Section 2 - Unavailable Directors 21 Section 3 - Authorized Number of Directors 21 Section 4 - Quorum 22 Section 5 - Creation of Emergency Committee 22 Section 6 - Constitution of Emergency Committee 22 Section 7 - Powers of Emergency Committee 23 Section 8 - Directors Becoming Available 23 Section 9 - Election of Board of Directors 23 Section 10 - Termination of Emergency Committee 23 ARTICLE XI - AMENDMENTS 23 - - -----------------------
__________________________ /10/ Amended 7/28/90 /11/ Amended 8/01/84 -iii- 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 Directors - - --------- ----------------------------------------- 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 February 24, 1999, 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 - - --------- --------------------------- either the Chairman of the Board or the President as the Chief Executive Officer. Subject to the direction and under the supervision of the Board of Directors, the Chief Executive Officer 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. If the office of Chairman of the Board and Chief Executive Officer are combined, the President may act as the Chief Executive Officer in the case of the Chairman's sickness, disability or temporary absence from the Corporation's Registered Office, and whether or not the Chairman 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 President's sickness, disability or temporary absence from the Corporation's Registered Office, and whether or not the President 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 shall have no authority to execute on its behalf any (1) contract for the purchase or sale of lands or -10- 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 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 President 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. 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 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 -11- 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 domestic corporation, partnership, joint venture, trust or other enterprise, whether for profit or not, -13- 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 director, trustee, fiduciary, employee, agent or officer of another corporation, partnership, joint -14- 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 applicable law. -15- 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 person in connection therewith and such indemnification shall continue as to a person who has -17- 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-4.8 3 INDENTURE EXHIBIT 4.8 ____________________ FEDERAL-MOGUL CORPORATION, THE GUARANTORS PARTY HERETO FROM TIME TO TIME, AND THE BANK OF NEW YORK, AS TRUSTEE _______________ INDENTURE Dated as of January 20, 1999 _______________ ________________________________ TABLE OF CONTENTS
Page ---- ARTICLE I Definitions and Incorporation by Reference.............................................................1 SECTION 1.1. Definitions.........................................................................1 SECTION 1.2. Other Definitions...................................................................9 SECTION 1.3. Incorporation by Reference of Trust Indenture Act...................................9 SECTION 1.4. Rules of Construction..............................................................10 ARTICLE II The Securities.......................................................................................10 SECTION 2.1. Form, Dating and Terms.............................................................10 SECTION 2.2. Execution and Authentication.......................................................19 SECTION 2.3. Registrar and Paying Agent.........................................................20 SECTION 2.4. Paying Agent To Hold Money in Trust................................................20 SECTION 2.5. Securityholder Lists...............................................................21 SECTION 2.6. Transfer and Exchange..............................................................21 SECTION 2.7. Form of Certificate to be Delivered in Connection with Transfers to Institutional Accredited Investors..............................................................24 SECTION 2.8. Form of Transfers Pursuant to be Delivered in Connection with Transfers Pursuant to Regulation S...................................................................27 SECTION 2.9. Mutilated, Destroyed, Lost or Stolen Securities....................................29 SECTION 2.10. Temporary Securities...............................................................29 SECTION 2.11. Cancellation.......................................................................30 SECTION 2.12. Payment of Interest; Defaulted Interest............................................30 SECTION 2.13. Computation of Interest............................................................31 SECTION 2.14. CUSIP Numbers......................................................................31 ARTICLE III Covenants...........................................................................................31 SECTION 3.1. Payment of Principal, Premium, if any, and Interest, if any........................31 SECTION 3.2. Maintenance of Office or Agency....................................................32 SECTION 3.3. Money for Securities Payments to be Held in Trust; Unclaimed Money.................32 SECTION 3.4. Corporate Existence................................................................33 SECTION 3.5. Reports by the Company.............................................................33 SECTION 3.6. Annual Review Certificate; Notice of Defaults or Events of Default.................34 SECTION 3.7. Books of Record and Account........................................................34 SECTION 3.8. Limitation on Liens................................................................35 SECTION 3.9. Limitation on Sale and Lease-Back Transactions.....................................36
i ARTICLE IV Consolidation, Merger or Sale by the Company.........................................................37 SECTION 4.1. Consolidation, Merger or Sale of Assets Permitted..................................37 ARTICLE V Redemption of Securities..............................................................................38 SECTION 5.1. Applicability of Article...........................................................38 SECTION 5.2. Election to Redeem; Notice to Trustee..............................................38 SECTION 5.3. Selection of Securities to be Redeemed.............................................38 SECTION 5.4. Notice of Redemption...............................................................39 SECTION 5.5. Deposit of Redemption Price........................................................40 SECTION 5.6. Securities Payable on Redemption Date..............................................40 SECTION 5.7. Securities Redeemed in Part........................................................40 ARTICLE VI Defaults and Remedies................................................................................41 SECTION 6.1. Events of Default..................................................................41 SECTION 6.2. Acceleration; Rescission and Annulment.............................................42 SECTION 6.3. Collection of Indebtedness and Suits for Enforcement by Trustee....................43 SECTION 6.4. Trustee May File Proofs of Claim...................................................43 SECTION 6.5. Trustee May Enforce Claims Without Possession of Securities........................43 SECTION 6.6. Delay or Omission Not Waiver.......................................................44 SECTION 6.7. Waiver of Past Defaults............................................................44 SECTION 6.8. Control by Majority................................................................44 SECTION 6.9. Limitation on Suits by Holders.....................................................44 SECTION 6.10. Rights of Holders to Receive Payment...............................................45 SECTION 6.11. Application of Money Collected.....................................................45 SECTION 6.12. Restoration of Rights and Remedies.................................................46 SECTION 6.13. Rights and Remedies Cumulative.....................................................46 SECTION 6.14. Waiver of Usury, Stay or Extension Laws............................................46 SECTION 6.15. Undertaking for Costs..............................................................47 ARTICLE VII Trustee.............................................................................................47 SECTION 7.1. Certain Duties and Responsibilities of the Trustee.................................47 SECTION 7.2. Rights of Trustee..................................................................47 SECTION 7.3. Trustee May Hold Securities........................................................48 SECTION 7.4. Money Held in Trust................................................................48 SECTION 7.5. Trustee's Disclaimer...............................................................49 SECTION 7.6. Notice of Defaults.................................................................49 SECTION 7.7. Reports by Trustee to Holders......................................................49 SECTION 7.8. Securityholder Lists...............................................................49 SECTION 7.9. Compensation and Indemnity.........................................................49 SECTION 7.10. Replacement of Trustee.............................................................50 SECTION 7.11. Acceptance of Appointment by Successor.............................................52
ii SECTION 7.12. Eligibility; Disqualification......................................................53 SECTION 7.13. Merger, Conversion, Consolidation or Succession to Business........................53 SECTION 7.14. Appointment of Authenticating Agent................................................53 ARTICLE VIII Discharge of Indenture; Defeasance.................................................................55 SECTION 8.1. Termination of Company's and Guarantors' Obligations Under this Indenture...........55 SECTION 8.2. Application of Trust Funds.........................................................56 SECTION 8.3. Applicability of Defeasance Provisions; Company's Option to Effect Defeasance or Covenant Defeasance............................................................56 SECTION 8.4. Defeasance and Discharge...........................................................56 SECTION 8.5. Covenant Defeasance................................................................57 SECTION 8.6. Conditions to Defeasance or Covenant Defeasance....................................57 SECTION 8.7. Deposited Money and Government Obligations to be Held in Trust.....................59 SECTION 8.8. Repayment to Company................................................................59 SECTION 8.9. Indemnity for Government Obligations...............................................59 ARTICLE IX Supplemental Indentures..............................................................................59 SECTION 9.1. Supplemental Indentures Without Consent of Holders.................................59 SECTION 9.2. Supplemental Indentures with Consent of Holders....................................60 SECTION 9.3. Compliance With Trust Indenture Act................................................62 SECTION 9.4. Execution of Supplemental Indentures...............................................62 SECTION 9.5. Effect of Supplemental Indentures..................................................62 SECTION 9.6. Reference in Securities to Supplemental Indentures.................................62 ARTICLE X Guarantees............................................................................................62 SECTION 10.1. Guarantees.........................................................................62 SECTION 10.2 Obligations of Guarantors Unconditional............................................64 SECTION 10.3. Limitation on Guarantors' Liability.................................................64 SECTION 10.4. Releases of Guarantees.............................................................65 SECTION 10.5. Application of Certain Terms and Provisions to Guarantors..........................65 SECTION 10.6. Additional Guarantors..............................................................66 ARTICLE XI Miscellaneous........................................................................................66 SECTION 11.1. Trust Indenture Act Controls.......................................................66 SECTION 11.2. Notices............................................................................66 SECTION 11.3. Communication by Holders with other Holders........................................67 SECTION 11.4. Certificate and Opinion as to Conditions Precedent.................................67 SECTION 11.5. Statements Required in Certificate or Opinion......................................67 SECTION 11.6. When Securities Disregarded........................................................68 SECTION 11.7. Rules by Trustee, Paying Agent and Registrar.......................................68
iii SECTION 11.8. Legal Holidays.....................................................................68 SECTION 11.9. GOVERNING LAW......................................................................68 SECTION 11.10. No Recourse Against Others.........................................................68 SECTION 11.11. Successors.........................................................................68 SECTION 11.12. Multiple Originals.................................................................69 SECTION 11.13. Variable Provisions................................................................69 SECTION 11.14. Qualification of Indenture.........................................................69 SECTION 11.15. Table of Contents; Headings........................................................69 SECTION 11.16. Separability.......................................................................69 SECTION 11.17. Benefits of Indenture..............................................................69
EXHIBIT A Form of the Initial Security EXHIBIT B Form of the Exchange Security iv CROSS-REFERENCE TABLE ---------------------
TIA Section Indenture Section - - ----------- ----------------- 310(a)(1).............................................................................. 7.12 (a)(2............................................................................... 7.12 (a)(3).............................................................................. 1.3 (a)(4).............................................................................. 1.3 (b)................................................................................. 7.10; 7.12 311(a)................................................................................. 1.3 (b)................................................................................. 1.3 312(a)................................................................................. 7.8 (b)................................................................................. 11.3 (c)................................................................................. 11.3 313(a)................................................................................. 7.7 (b)................................................................................. 7.7 (c)................................................................................. 7.7 (d)................................................................................. 7.7 314(a)................................................................................. 3.5; 3.6 (b)................................................................................. 3.5 (c)................................................................................. 11.4 (d)................................................................................. 3.5 (e)................................................................................. 11.5 315(a)................................................................................. 7.1 (b)................................................................................. 7.6 (c)................................................................................. 7.1 (d)................................................................................. 7.1 (e)................................................................................. 6.15 316(a)(last............................................................................ 11.6 sentence) (a)(1)(A)........................................................................... 6.2; 6.8 (a)(1)(B)........................................................................... 6.7 (a)(2).............................................................................. 1.3 (b)................................................................................. 6.9; 6.10 317(a)(1).............................................................................. 6.3 (a)(2).............................................................................. 6.4 (b)................................................................................. 3.3 318(a)................................................................................. 11.1
Note: This Cross-Reference Table shall not, for any purpose, be deemed to be part of this Indenture. v INDENTURE dated as of January 20, 1999, among Federal-Mogul Corporation, a Michigan corporation (the "Company"), the companies listed on the signature pages hereto that are subsidiaries of the Company (the "Guarantors") and The Bank Of New York, a New York banking corporation, as trustee (the "Trustee"). Each party agrees as follows for the benefit of the other parties and for the equal and ratable benefit of the Holders of (i) the Company's 7 3/8% Notes due 2006 and the Company's 7 1/2% Notes due 2009 (together, the "Initial Securities"), (ii) if and when issued in exchange for Initial Securities as provided in the Registration Rights Agreement (as hereinafter defined), the Company's 7 3/8% Notes due 2006 and the Company's 7 1/2% Notes due 2009 (together, the "Exchange Securities") and (iii) if and when issued as provided in the Registration Rights Agreement, the Private Exchange Securities (as defined in the Registration Rights Agreement; together with Initial Securities and Exchange Securities, the "Securities"). ARTICLE I Definitions and Incorporation by Reference ------------------------------------------ SECTION 1.1. Definitions. ----------- "1997 Credit Agreement" means the Second Amended and Restated Credit Agreement among the Company, The Chase Manhattan Bank as Administrative Agent and the lenders thereunder, dated as of December 18, 1997, as amended from time to time. "1998 Credit Agreements" means (i) the Loan Agreement among the Company, The Chase Manhattan Bank as Administrative Agent and the lenders thereunder, dated as of September 30, 1998, as amended from time to time, and (ii) the 364-Day Revolving Credit Agreement among the Company, The Chase Manhattan Bank as Administrative Agent and the lenders thereunder, dated as of September 30, 1998, as amended from time to time. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Attributable Debt," when used in connection with a Sale and Lease- Back Transaction, shall mean, as of any particular time, the lesser of (i) the fair value (as determined by the Board of Directors) of the property subject to such arrangement and (ii) the then present value (computed by discounting at the Composite Rate) of the obligation of a lessee for net rental payments during the remaining term of any lease in respect of such property (including any period for which such lease has been extended or may, at the option of the lessor, be extended). The terms "net rental payments" under any lease for any period shall mean the sum of the rental payments required to be paid in such period by the lessee thereunder, not including, however, any amounts required to be paid by such lessee (whether or not designated as rental or additional rental) on account of maintenance and repairs, insurance, taxes, assessments, water rates or similar charges required to be paid by such lessee thereunder or any amounts required to be paid by such lessee thereunder contingent upon the amount of sales, maintenance and repairs, insurance, taxes, assessments, water rates or similar charges. "Authenticating Agent" means any authenticating agent appointed by the Trustee pursuant to Section 7.14. "Authorized Newspaper" means a newspaper in the official language of the country of publication or in the English language, customarily published on each Business Day whether or not published on Saturdays, Sundays or holidays, and of general circulation in the place in connection with which the term is used or in the financial community of such place. Whenever successive publications in an Authorized Newspaper are required hereunder they may be made on any Business Day and in the same or different Authorized Newspapers. "Board" or "Board of Directors" means the Board of Directors of the Company, the Executive Committee or any other duly authorized committee thereof. "Board Resolution" means a copy of a resolution of the Board of Directors or the equivalent body of any Guarantor, as applicable, certified by the Secretary or an Assistant Secretary of the Company, or the equivalent officer of any Guarantor, as applicable, to have been duly adopted by the Board of Directors or the equivalent body of any Guarantor, as applicable, and to be in full force and effect on the date of the certificate, and delivered to the Trustee. "Business Day", when used with respect to any Place of Payment or any other particular location referred to in this Indenture or in the Securities, means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in that Place of Payment or particular location are authorized or obligated by law or executive order to close. "Closing Date" means the date on which the Initial Securities are issued. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or, if at any time after the execution of this Indenture such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Company" means Federal-Mogul Corporation or a successor corporation. "Company Order" and "Company Request" mean, respectively, a written order or request signed in the name of the Company by two Officers, one of whom must be the Chairman of the Board, the President, the Chief Financial Officer, any Executive Vice President, Senior Vice President or Vice President, the Treasurer, any Assistant Treasurer or the Controller of the Company. 2 "Composite Rate" means, as of any particular time, the rate of interest, per annum, compounded semiannually, equal to the sum of the rates of interest borne by each of the Securities Outstanding under this Indenture, as specified on the face of each of the Securities. "Consolidated Assets" means the Company's assets, determined in accordance with GAAP and consolidated for financial reporting purposes in accordance with GAAP, such assets to be valued at book value. "Corporate Trust Office" means the office of the Trustee in which at any particular time its corporate trust business shall be principally administered, which office at the date hereof is located at 101 Barclay Street, New York, New York 10286, Attention: Corporate Trust Administration. "Credit Agreements" means the 1997 Credit Agreement and the 1998 Credit Agreements. "Debt" means indebtedness for money borrowed. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. "Defaulted Interest" shall have the meaning set forth in Section 2.12. "Definitive Securities" means certificated Securities, including Institutional Accredited Investor Notes. "DTC" means The Depository Trust Company, its nominees and their respective successors and assigns, or such other depository institution hereinafter appointed by the Company. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Exchange Offer" shall have the meaning set forth in the Registration Rights Agreement. "Exchange Securities" has the meaning ascribed to it in the second introductory paragraph of this Indenture. "Funded Indebtedness" means all Indebtedness of the Company and its Restricted Subsidiaries maturing by its terms more than one year after, or which is renewable or extendable at the option of the Company for a period ending more than one year after, the date as of which Funded Indebtedness is being determined. "GAAP" means such accounting principles as are generally accepted in the United States at the date of this Indenture. 3 "Government Obligations" means securities which are (i) direct obligations of the United States, for the payment of which its full faith and credit is pledged or (ii) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States, the payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States, which are not callable or redeemable at the option of the issuer thereof, and shall also include a depositary receipt issued by a bank or trust company as custodian with respect to any such Government Obligation or a specific payment of interest on or principal of any such Government Obligation held by such custodian for the account of the holder of a depositary receipt, provided that (except as required by law) such custodian is not authorized to - - -------- make any deduction from the amount payable to the holder of such depositary receipt from any amount received by the custodian in respect of the Government Obligation evidenced by such depositary receipt. "Guarantee" means the guarantee of the Securities by each Guarantor under Article X hereof. "Guarantors" means (i) the Subsidiaries of the Company which have executed this Indenture as a Guarantor as of the date hereof, and (ii) each of the Company's Subsidiaries, whether formed, created or acquired after the Closing Date, which become a guarantor of Securities pursuant to the provisions of this Indenture. "Holder" or "Securityholder" means the Person in whose name a Security is registered in the Note Register. "Indebtedness" means, without duplication, (i) all obligations in respect of borrowed money or for the deferred purchase or acquisition price of property (including all types of real, personal, tangible, intangible or mixed property) or services (excluding trade accounts payable, deferred taxes and accrued liabilities which arise in the ordinary course of business) which are, in accordance with GAAP, includible as a liability on a balance sheet consolidated for financial reporting purposes in accordance with GAAP, (ii) all amounts representing the capitalization of rental obligations in accordance with GAAP, and (iii) all Contingent Obligations with respect to the foregoing; for purposes of clause (iii), "Contingent Obligation" means, as to any Person, any obligation of such Person guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends or other obligations ("primary obligations") of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of such Person, whether or not contingent, (a) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (b) to advance or supply funds (1) for the purchase or payment of any such primary obligation or (2) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (c) to purchase property, securities or services primarily for the purpose of assuring the beneficiary of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (d) otherwise to assure or hold harmless the beneficiary of such primary obligation against loss in respect thereof; provided, however, that the term "Contingent Obligation" shall not -------- ------- include the endorsement of instruments for deposit or collection in the ordinary course of business. The term "Contingent Obligation" shall also 4 include the liability of a general partner in respect of the primary obligations of a partnership in which it is a general partner. The amount of any Contingent Obligation of a Person shall be deemed to be an amount equal to the principal amount of the primary obligation in respect to which such Contingent Obligation is made. "Indenture" means this Indenture as originally executed or as amended or supplemented from time to time and shall include the forms and terms of each series of Securities established as contemplated hereunder. "Initial Securities" means the Company's 7 3/8% Notes due 2006 and the Company's 7 1/2% Notes due 2009, each issued on the Closing Date. "Legal Holiday" has the meaning ascribed to it in Section 11.8. "Maturity", when used with respect to any Security, means the date on which the principal of such Security becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, call for redemption or otherwise. "Non-U.S. Person" means a person who is not a U.S. person, as defined in Regulation S. "Note Register" means the register of Securities, maintained by the Registrar, pursuant to Section 2.3. "Obligations" means any principal, premiums, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any indebtedness. "Officer" means the Chairman of the Board, the President, the Chief Financial Officer, any Executive Vice President, Senior Vice President or Vice President, the Treasurer, any Assistant Treasurer, the Controller, the Secretary or any Assistant Secretary. "Officers' Certificate", when used with respect to the Company, means a certificate signed by two Officers, one of whom must be the Chairman of the Board, the President, the Chief Financial Officer, any Executive Vice President, Senior Vice President or Vice President, the Treasurer, any Assistant Treasurer or the Controller of the Company. "Opinion of Counsel" means a written opinion from the General Counsel or the Associate General Counsel of the Company or other legal counsel who is reasonably acceptable to the Trustee. Such other counsel may be an employee of or counsel to the Company. "Outstanding", when used with respect to Securities, means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except: (a) Securities theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; 5 (b) Securities, or portions thereof, for whose payment or redemption money or Government Obligations in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust (if the Company shall act as its own Paying Agent) for the Holders of such Securities; provided that, if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture or provisions therefor satisfactory to the Trustee have been made; (c) Securities, except to the extent provided in Sections 8.4 and 8.5, with respect to which the Company has effected defeasance and/or covenant defeasance as provided in Article VIII; and (d) Securities which have been paid pursuant to Section 2.9 or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securities in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Securities are held by a bona fide purchaser in whose hands such Securities are valid obligations of the Company; provided, however, that in determining whether the Holders of the requisite - - -------- ------- principal amount of the Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder, or whether sufficient funds are available for redemption or for any other purpose and for the purpose of making the calculations required by Section 313 of the Trust Indenture Act, Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in making such calculation or in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities which the Trustee knows to be so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or of such other obligor. "Person" means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Place of Payment", when used with respect to the Securities of or within any series, means the place or places where the principal of, premium, if any, and interest, if any, and any other payments on such Securities are payable as specified as contemplated by Section 2.3. "Preferred Stock" means any and all shares of series and classes of stock of the Company designated as preferred stock, whether voting or non- voting, and whether now outstanding or issued after the date of this Indenture. "Principal Property" means the principal manufacturing facilities owned by the Company or a Restricted Subsidiary located in the United States, except such as the Board of 6 Directors, in its good faith opinion, reasonably determines is not significant to the business, financial condition and earnings of the Company and its consolidated Subsidiaries taken as a whole, as evidenced by a Board Resolution, and except for: (i) any and all personal property including, without limitation, (a) motor vehicles and other rolling stock, and (b) office furnishings and equipment and information and electronic data processing equipment, (ii) any property financed through obligations issued by state, territory or possession of the United States, or any political subdivision or instrumentality of the foregoing, or (iii) any real property held for development or sale. "Private Exchange Securities" shall have the meaning set forth in the Registration Rights Agreement relating to the Initial Securities. "QIB" means any "qualified institutional buyer" (as defined in Rule 144A under the Securities Act). "Redemption Date", when used with respect to any Security to be redeemed, means the date fixed for such redemption by or pursuant to this Indenture. "Redemption Price", when used with respect to any Security to be redeemed, in whole or in part, means the price at which it is to be redeemed pursuant to this Indenture. "Registration Rights Agreement" means the Registration Rights Agreement, dated as of January 20, 1999, as amended from time to time, among the Company, Merrill, Lynch, Pierce, Fenner & Smith Incorporated and Chase Securities Inc. "Responsible Officer", when used with respect to the Trustee, shall mean any officer within the corporate trust department of the Trustee, including any vice president, any assistant vice president, any assistant secretary, any assistant treasurer, any trust officer, or any other officer of the Trustee customarily performing functions similar to those performed by the persons who at the time shall be such officers, respectively, or to whom any corporate trust matter is referred because of such officer's knowledge of and familiarity with a particular subject and who shall have direct responsibility for the administration of this Indenture. "Restricted Period" means the 40 consecutive days beginning on and including the later of (A) the day on which the Initial Securities are offered to persons other than distributors (as defined in Regulation S under the Securities Act) and (B) the Closing Date. "Restricted Securities Legend" means the Private Placement Legend set forth in clause (A) of Section 2.1(c) or the Regulation S Legend set forth in clause (B) of Section 2.1(c), as applicable. "Restricted Subsidiary" means any consolidated Subsidiary that owns any Principal Property. "Securities" means the collective reference to the Initial Securities, Exchange Securities and Private Exchange Securities. 7 "Securities Act" means the Securities Act of 1933, as amended "Securities Custodian" means the custodian with respect to the Global Security (as appointed by DTC), or any successor Person thereto and shall initially be the Trustee. "Series", when used with respect to the Securities, means each of (i) the Initial Securities due 2006, the Exchange Securities due 2006 and the Private Exchange Securities due 2006, collectively; and (ii) the Initial Securities due 2009, the Exchange Securities due 2009 and the Private Exchange Securities due 2009, collectively. "Stated Maturity", when used with respect to any Security, means the date specified in such Security as the fixed date on which the principal of such Security is due and payable. "Subsidiary" means a corporation more than 50% of the outstanding voting stock of which is owned, directly or indirectly, by the Company or by one or more other Subsidiaries, or by the Company and one or more other Subsidiaries. For the purposes of this definition, "voting stock" means stock which ordinarily has voting power for the election of directors, whether at all times or only so long as no senior class of stock has such voting power by reason of any contingency. "TIA" or "Trust Indenture Act" means the Trust Indenture Act of 1939 as in effect on the date of this Indenture, except as provided in Section 9.3. "Total Assets" means, at any date, the total assets appearing on the most recently prepared consolidated balance sheet of the Company and its consolidated Subsidiaries as at the end of a fiscal quarter of the Company, prepared in accordance with generally accepted accounting principles. "Trustee" means the party named as such in the first paragraph of this Indenture until a successor Trustee replaces it pursuant to the applicable provisions of this Indenture, and thereafter means such successor Trustee and if, at any time, there is more than one Trustee, "Trustee" as used with respect to the Securities of any series shall mean the Trustee with respect to the Securities of that series. "United States" means the United States of America (including the States and the District of Columbia), its territories, its possessions and other areas subject to its jurisdiction. "Western Europe" means Austria, Belgium, Denmark, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom and Northern Ireland. 8 SECTION 1.2. Other Definitions. ----------------- Term Defined in ---- Section ------- "Agent Member"...................................... 2.1(d) "Bankruptcy Law".................................... 6.1 "Custodian"......................................... 6.1 "Definitive Securities"............................. 2.1(e) "Event of Default".................................. 6.1 "Exchange Global Note".............................. 2.1(a) "Global Securities"................................. 2.1(a) "IAIs".............................................. 2.1(a) "Institutional Accredited Investor Note"............ 2.1(a) "Notice of Default"................................. 6.1(c) "Paying Agent"...................................... 2.3 "Private Placement Legend".......................... 2.1(c) "Registrar"......................................... 2.3 "Regulation S"...................................... 2.1(a) "Regulation S Certificate".......................... 2.1(a) "Regulation S Global Note".......................... 2.1(a) "Regulation S Legend"............................... 2.1(c) "Regulation S Note"................................. 2.1(a) "Regulation S Permanent Global Note"................ 2.1(a) "Regulation S Temporary Global Note"................ 2.1(a) "Release Date"...................................... 2.1(a) "Resale Restriction Termination Date"............... 2.6 "Rule 144A"......................................... 2.1(a) "Rule 144A Global Note"............................. 2.1(a) "Rule 144A Note".................................... 2.1(a) "Sale and Lease-back Transaction"................... 3.9 "Special Record Date"............................... 2.12 SECTION 1.3. Incorporation by Reference of Trust Indenture Act. This Indenture is subject to the mandatory provisions of the TIA which are incorporated by reference in and made a part of this Indenture. The following TIA terms have the following meanings: "indenture securities" means the Securities. "indenture security holder" means a Securityholder. "indenture to be qualified" means this Indenture. "indenture trustee" or "institutional trustee" means the Trustee. 9 "obligor" on the indenture securities means the Company and any other obligor on the indenture securities. All other TIA terms used in this Indenture that are defined by the TIA, defined in the TIA by reference to another statute or defined by the Commission rules have the meanings assigned to them by such definitions. SECTION 1.4 Rules of Construction. For all purposes of this --------------------- Indenture, except as otherwise expressly provided or unless the context otherwise requires: (a) a term has the meaning assigned to it; (b) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP; (c) "or" is not exclusive; (d) "including" means including without limitation; (e) words in the singular include the plural and words in the plural include the singular; and (f) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. ARTICLE II The Securities -------------- SECTION 2.1. Form, Dating and Terms. (a) The Initial Securities ---------------------- are being offered and sold by the Company pursuant to a Purchase Agreement, dated January 14, 1999, among the Company, the Guarantors, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Chase Securities Inc. The Initial Securities will be resold initially only to (A) qualified institutional buyers (as defined in Rule 144A under the Securities Act ("Rule 144A")) in reliance on Rule 144A ("QIBs") (B) institutional "accredited investors" (as defined in Rules 501(a)(1), (2), (3) and (7) under the Securities Act) who are not QIBs ("IAIs")and (C) Persons other than U.S. Persons (as defined in Regulation S under the Securities Act ("Regulation S")) in reliance on Regulation S. Such Initial Securities may thereafter be transferred to among others, QIBs, purchasers in reliance on Regulation S and IAIs in accordance with Rule 501 of the Securities Act in accordance with the procedure described herein. Initial Securities of each series offered and sold to QIBs in the United States of America in reliance on Rule 144A (each, a "Rule 144A Note") will be issued on the Closing Date in the form of a permanent global Security, without interest coupons, substantially in the form of Exhibit A, which is hereby incorporated by reference and made a part of this Indenture, 10 including appropriate legends as set forth in Section 2.1(c) (each, a "Rule 144A Global Note"), deposited with the Trustee, as custodian for DTC, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The Rule 144A Global Note for each series may be represented by more than one certificate, if so required by DTC's rules regarding the maximum principal amount to be represented by a single certificate. The aggregate principal amount of the Rule 144A Global Note for each series may from time to time be increased or decreased by adjustments made on the records of the Trustee, as custodian for DTC or its nominee, as hereinafter provided. Initial Securities of each series offered and sold outside the United States of America (each, a "Regulation S Note") in reliance on Regulation S will be issued on the Closing Date in the form of a temporary global Security, without interest coupons, substantially in the form set forth in Exhibit A which is hereby incorporated by reference and made a part of this Indenture, including appropriate legends as set forth in Section 2.1(c) (each, a "Regulation S Temporary Global Note"). Beneficial interests in the Regulation S Temporary Global Note of each series will be exchangeable for beneficial interests in a single permanent global security for such series (each, a "Regulation S Permanent Global Note", together with the applicable Regulation S Temporary Global Note for such series, the "Regulation S Global Note" for such series) on or within a reasonable period after the expiration of the Restricted Period (the "Release Date") upon the receipt by the Trustee or its agent of a certificate (a "Regulation S Certificate") certifying that the Holder of the beneficial interest in the Regulation S Temporary Global Note of such series is a non- United States Person within the meaning of Regulation S. Upon receipt by the Trustee or Paying Agent of a Regulation S Certificate for any series, (i) with respect to the first such Regulation S Certificate, the Company shall execute and upon receipt of a Company Order for authentication, the Authenticating Agent shall authenticate and deliver to the custodian, the applicable Regulation S Permanent Global Note for such series and (ii) with respect to the first and all subsequent Regulation S Certificates, the custodian shall exchange on behalf of the applicable beneficial owners the portion of the applicable Regulation S Temporary Global Note of such series covered by such Regulation S Certificates for a comparable portion of the applicable Regulation S Permanent Global Note for such series. Upon any exchange of a portion of a Regulation S Temporary Global Note of any series for a comparable portion of a Regulation S Permanent Global Note for such series, the custodian shall endorse on the schedules affixed to each of such Regulation S Global Note (or on continuations of such schedules affixed to each of such Regulation S Global Note and made parts thereof) appropriate notations evidencing the date of transfer and (x) with respect to the applicable Regulation S Temporary Global Note for such series, a decrease in the principal amount thereof equal to the amount covered by the applicable certification and (y) with respect to the applicable Regulation S Permanent Global Note for such series, an increase in the principal amount thereof equal to the principal amount of the decrease in the applicable Regulation S Temporary Global Note pursuant to clause (x) above. The Regulation S Global Note of each series will be deposited with the Trustee, as custodian for DTC, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The Regulation S Global Note of each series may be represented by more than one certificate, if so required by DTC's rules regarding the maximum principal amount to be represented by a single certificate. The aggregate principal amount of the Regulation S Global 11 Note of each series may from time to time be increased or decreased by adjustments made on the records of the Trustee, as custodian for DTC or its nominee, as hereinafter provided. Initial Securities of each series offered and sold to IAIs in the United States of America will be issued on the Closing Date in non-global, fully registered form, without interest coupons, substantially in the form set forth in Exhibit A, which is hereby incorporated by reference and made a part of this Indenture, including appropriate legends as set forth in Section 2.1(c), duly executed by the Company and authenticated by the Trustee as hereinafter provided (each, an "Institutional Accredited Investor Note"). Upon such issuance, the Trustee shall register any such Institutional Accredited Investor Note in the name of the beneficial owner or owners of such note (or the nominee of such beneficial owner or owners) and deliver the certificates for such Institutional Accredited Investor Notes to the respective beneficial owner or owners. Upon transfer of such Institutional Accredited Investor Notes of any series to a QIB or to a Non-U.S. Person, such Institutional Accredited Investor Notes of such series will, unless the Rule 144A Global Note for such series, in the case of a transfer to a QIB, or the Regulation S Global Note for such series, in the case of a transfer to a Non-U.S. Person, has previously been exchanged for Definitive Securities of such series pursuant to Section 2.1(e), be exchanged for an interest in a Global Security of such series pursuant to the provisions of Section 2.6. Exchange Securities of each series exchanged for interests in the Rule 144A Note of such series, the Regulation S Note of such series and the Institutional Accredited Investor Notes of such series will be issued in the form of a permanent global Security substantially in the form of Exhibit B, which is hereby incorporated by reference and made a part of this Indenture, deposited with the Trustee as hereinafter provided, including the appropriate legend set forth in Section 2.1(c) (each, a "Exchange Global Note"). The Exchange Global Note for each series may be represented by more than one certificate, if so required by DTC's rules regarding the maximum principal amount to be represented by a single certificate. Each Rule 144A Global Note for any series, each Regulation S Global Note for any series and each Exchange Global Note for any series are sometimes collectively herein referred to as the "Global Securities" for such series. The principal of (and premium, if any) and interest on the Securities shall be payable at the office or agency of the Company maintained for such purpose in the Borough of Manhattan in the City of New York, or at such other office or agency of the Company as may be maintained for such purpose pursuant to Section 2.3; provided, however, that, at the option of the Company, each -------- ------- installment of interest may be paid by check mailed to addresses of the Persons entitled thereto as such addresses shall appear on the Note Register and; provided, further, that all payments with respect to the Securities, the Holders - - -------- ------- of which have given wire transfer instructions to the Company and the Paying Agent prior to the applicable record date for such payment, will be required to be made by wire transfer of immediately available funds to the accounts specified by the Holders thereof. Payments in respect of Securities represented by a Global Security (including principal, premium and interest) will be made by wire transfer of immediately available funds to the accounts specified by DTC. 12 The Private Exchange Securities of each series shall be in the form of Exhibit A. The Securities of each series may have notations, legends or endorsements required by law, stock exchange rule or usage, in addition to those set forth on Exhibits A and B and in Section 2.1(c). The Company and the Trustee shall approve the forms of the Securities and any notation, endorsement or legend on them. Each Security shall be dated the date of its authentication. The terms of the Securities set forth in Exhibit A and Exhibit B are part of the terms of this Indenture and, to the extent applicable, the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to be bound by such terms. (b) Denominations. The Securities of each series shall be issuable only ------------- in fully registered form, without interest coupons, and in denominations of $1,000 and any integral multiple thereof, provided, that each Institutional -------- Accredited Investor Note shall be in a minimum denomination of $250,000. (c) Restrictive Legends. Unless and until (i) an Initial Security of any ------------------- series is sold under an effective registration statement or (ii) an Initial Security of any series is exchanged for an Exchange Security of such series in connection with an effective registration statement, in each case pursuant to the Registration Rights Agreement or a similar agreement, (A) the Rule 144A Global Note of such series and the Institutional Accredited Investor Notes of such series shall bear the following legend (the "Private Placement Legend") on the face thereof: "THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE OR OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF (1) REPRESENTS THAT (A) IT IS A "QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B) IT IS AN INSTITUTIONAL ACCREDITED INVESTOR (AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT) (AN "ACCREDITED INVESTOR") THAT IS ACQUIRING THE SECURITIES FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, (2) AGREES THAT IT WILL NOT PRIOR TO (X) THE DATE WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF (OR 13 OF ANY PREDECESSOR OF THIS SECURITY) OR THE LAST DAY ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY OR ANY PREDECESSOR OF THIS SECURITY AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAWS (THE "RESALE RESTRICTION TERMINATION DATE"), OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES, PURSUANT TO RULE 904 OF REGULATION S, (E) TO AN ACCREDITED INVESTOR THAT IS ACQUIRING THE SECURITIES FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, IN EACH CASE IN A MINIMUM PRINCIPAL AMOUNT OF $250,000 OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE RIGHT OF THE COMPANY AND THE TRUSTEE TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATIONS AND/OR INFORMATION SATISFACTORY TO EACH OF THEM PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (D), (E) OR (F) AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. THIS LEGEND WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE TRANSACTION TERMINATION DATE. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION", "UNITED STATES" AND "U.S. PERSON" HAVE THE RESPECTIVE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT"; and (B) the Regulation S Global Note of each series shall bear the following legend (the "Regulation S Legend") on the face thereof: 14 "THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE OR OTHER SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, SUCH REGISTRATION. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF (1) REPRESENTS THAT IT IS NOT A U.S. PERSON OR PURCHASING FOR THE ACCOUNT OF A U.S. PERSON AND IS ACQUIRING THIS SECURITY IN AN "OFFSHORE TRANSACTION" PURSUANT TO RULE 903 OR 904 OF REGULATION S UNDER THE SECURITIES ACT, (2) AGREES THAT IT WILL NOT PRIOR TO (X) THE DATE WHICH IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF (OR OF ANY PREDECESSOR OF THIS SECURITY) OR THE LAST DAY ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY OR ANY PREDECESSOR OF THIS SECURITY AND (Y) SUCH LATER DATE, IF ANY, AS MAY BE REQUIRED BY APPLICABLE LAWS, OFFER, SELL OR OTHERWISE TRANSFER THIS SECURITY EXCEPT (A) TO THE COMPANY OR ANY SUBSIDIARY THEREOF, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE 144A, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES, PURSUANT TO RULE 904 OF REGULATION S, (E) TO AN INSTITUTIONAL ACCREDITED INVESTOR (AS DEFINED IN RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT) (AN "ACCREDITED INVESTOR") THAT IS ACQUIRING THE SECURITIES FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH INSTITUTIONAL ACCREDITED INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, IN EACH CASE IN A MINIMUM PRINCIPAL AMOUNT OF $250,000 OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE 15 REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE RIGHT OF THE COMPANY AND THE TRUSTEE TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATIONS AND/OR INFORMATION SATISFACTORY TO EACH OF THEM PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSE (D), (E) OR (F) AND (3) AGREES THAT IT WILL GIVE TO EACH PERSON TO WHOM THIS SECURITY IS TRANSFERRED A NOTICE SUBSTANTIALLY TO THE EFFECT OF THIS LEGEND. THIS LEGEND WILL BE REMOVED AFTER 40 CONSECUTIVE DAYS BEGINNING ON AND INCLUDING THE LATER OF (A) THE DAY ON WHICH THE SECURITIES ARE OFFERED TO PERSONS OTHER THAN DISTRIBUTORS (AS DEFINED IN REGULATION S) AND (B) THE DATE OF THE CLOSING OF THE ORIGINAL OFFERING. AS USED HEREIN, THE TERMS "OFFSHORE TRANSACTION", "UNITED STATES" AND "U.S. PERSON" HAVE THE RESPECTIVE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT." (C) The Global Securities of each series, whether or not an Initial Security, shall bear the following legend on the face thereof: "UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE REFERRED TO ON THE REVERSE HEREOF." 16 (D) The Regulation S Temporary Global Note of each series shall also bear the following legend on the face thereof: THIS GLOBAL NOTE IS A TEMPORARY GLOBAL NOTE FOR PURPOSES OF REGULATION S UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"). NEITHER THIS TEMPORARY GLOBAL NOTE NOR ANY INTEREST HEREIN MAY BE OFFERED, SOLD OR DELIVERED, EXCEPT AS PERMITTED UNDER THE INDENTURE REFERRED TO BELOW. NO BENEFICIAL OWNERS OF THIS TEMPORARY GLOBAL NOTE SHALL BE ENTITLED TO RECEIVE PAYMENT OF PRINCIPAL OR INTEREST HEREON UNLESS THE REQUIRED CERTIFICATIONS HAVE BEEN DELIVERED PURSUANT TO THE TERMS OF THE INDENTURE. (E) Each Institutional Accredited Investor Note shall also bear the following additional legend on the face thereof: IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS SUCH TRANSFER AGENT MAY REASONABLY REQUIRE TO CONFIRM THAT THE TRANSFER COMPLIED WITH THE FOREGOING RESTRICTIONS. (d) Book-Entry Provisions. (i) This Section 2.1(d) shall apply only to --------------------- Global Securities of each series deposited with the Trustee, as custodian for DTC. (ii) Each Global Security for any series initially shall (x) be registered in the name of DTC or the nominee of DTC, (y) be delivered to the Trustee as custodian for DTC and (z) bear legends as set forth in Section 2.1(c). (iii) Members of, or participants in, DTC ("Agent Members") shall have no rights under this Indenture with respect to any Global Security held on their behalf by DTC or by the Trustee as the custodian of DTC or under such Global Security, and DTC may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of such Global Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by DTC or impair, as between DTC and its Agent Members, the operation of customary practices of DTC governing the exercise of the rights of a holder of a beneficial interest in any Global Security. (iv) In connection with any transfer of a portion of the beneficial interest in a Global Security of any series pursuant to subsection (e) of this Section to beneficial 17 owners who are required to hold Definitive Securities or to IAIs who shall hold certificated Institutional Accredited Investor Notes pursuant to Section 2.1(a), the Securities Custodian shall reflect on its books and records the date and a decrease in the principal amount of such Global Security in an amount equal to the principal amount of the beneficial interest in the Global Security to be transferred, and the Company shall execute, and the Trustee shall authenticate and deliver, one or more Definitive Securities of like series, tenor and amount. (v) In connection with the transfer of an entire Global Security of any series to beneficial owners pursuant to subsection (e) of this Section, such Global Security shall be deemed to be surrendered to the Trustee for cancellation, and the Company shall execute, and the Trustee shall authenticate and deliver, to each beneficial owner identified by DTC in exchange for its beneficial interest in such Global Security, an equal aggregate principal amount of Definitive Securities of such series of authorized denominations. (vi) The registered holder of a Global Security of any series may grant proxies and otherwise authorize any person, including Agent Members and persons that may hold interests through Agent Members, to take any action which a Holder is entitled to take under this Indenture or the Securities of such series. (e) Definitive Securities. (i) Except as provided below, owners of --------------------- beneficial interests in Global Securities of any series will not be entitled to receive Definitive Securities of such series. Definitive Securities of any series shall be transferred to all beneficial owners in exchange for their beneficial interests in a Global Security of such series if (a) DTC notifies the Company that it is unwilling or unable to continue as depositary for such Global Security or DTC ceases to be a clearing agency registered under the Exchange Act, at a time when DTC is required to be so registered in order to act as depositary, and in each case a successor depositary is not appointed by the Company within 90 days of such notice or (b) the Company executes and delivers to the Trustee and Registrar an Officers' Certificate stating that such Global Security shall be so exchangeable or (c) an Event of Default has occurred and is continuing and the Registrar has received a request from DTC. (ii) Any Definitive Security of any series delivered in exchange for an interest in a Global Security of such series pursuant to Section 2.1 (d)(iv) or (v) shall, except as otherwise provided by Section 2.6(c), bear the applicable legend regarding transfer restrictions applicable to the Definitive Security set forth in Section 2.1(c). (iii) In connection with the exchange of a Definitive Security of any series for a beneficial interest in a Global Security of such series pursuant to a transfer of an Institutional Accredited Investor Note of such series to a QIB or a Non-U.S. Person, upon receipt by the Trustee of such Institutional Accredited Investor Note, duly endorsed or accompanied by appropriate instruments of transfer in accordance with Section 2.6(a), the Trustee shall cancel such Institutional Accredited Investor Note and cause, or direct the Securities Custodian to cause, in accordance with the standing instructions and 18 procedures existing between DTC and the Securities Custodian, the aggregate principal amount of Securities of such series represented by the Global Security of such series to be increased accordingly. If no Global Securities of such series are then Outstanding, the Company shall issue and the Trustee shall authenticate, upon written order of the Company in the form of an Officers' Certificate, a new Global Security for such series in the appropriate principal amount. The Trustee shall deliver copies of each certification and instruction received by it to DTC and, upon receipt thereof, the Securities Custodian shall reflect on its books and records the date and an increase in the principal amount of such Global Security of such series in an amount equal to the principal amount of the Institutional Accredited Investor Note of such series so transferred to reflect the exchange of such Institutional Accredited Investor Note for an interest in the Global Security. (iv) In connection with the exchange of a portion of a Definitive Security of any series for a beneficial interest in a Global Security of such series, the Trustee shall cancel such Definitive Security, and the Company shall execute, and the Trustee shall authenticate and deliver, to the transferring Holder a new Definitive Security representing the principal amount not so transferred. SECTION 2.2. Execution and Authentication. One Officer shall sign ---------------------------- the Securities for the Company by manual or facsimile signature. If an Officer whose signature is on a Security no longer holds that office at the time the Trustee authenticates the Security, the Security shall be valid nevertheless, after giving effect to any exchange of Initial Securities for Exchange Securities. A Security shall not be valid until an authorized signatory of the Trustee manually authenticates the Security. The signature of the Trustee on a Security shall be conclusive evidence that such Security has been duly and validly authenticated and issued under this Indenture. At any time and from time to time after the execution and delivery of this Indenture, the Trustee shall authenticate and make available for delivery: (1) the Initial Securities for issue on the Closing Date in an aggregate principal amount of $1,000,000,000, and (2) Exchange Securities for issue only in an Exchange Offer pursuant to the Registration Rights Agreement, and only in exchange for the applicable Initial Securities of the same series of an equal principal amount, in each case upon a Company Order. Such Company Order shall specify the amount of the Securities of each series to be authenticated and the date on which the original issue of Securities of such series are to be authenticated and whether the Securities of such series are to be Initial Securities or Exchange Securities. The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is limited to $1,000,000,000 outstanding, except for Securities authenticated and delivered upon registration or transfer of, or in exchange for, or in lieu of, other Securities of the same class pursuant to Section 2.6, Section 2.9, Section 2.10, Section 5.7, Section 9.6 and except for transactions similar to the Exchange Offer. 19 In case the Company, pursuant to Article IV, shall be consolidated or merged with or into any other Person or shall transfer or lease all or substantially all of its assets to any Person, and the successor Person formed by or surviving any such consolidation or any such merger, or to which such transfer or lease shall have been made, shall have executed an indenture supplemental hereto with the Trustee pursuant to Article IV, any of the Securities of any series authenticated or delivered prior to such consolidation, merger, conveyance, transfer or lease may, from time to time, at the request of the successor Person, be exchanged for other Securities of such series executed in the name of the successor Person with such changes in phraseology and form as may be appropriate, but otherwise in substance of like tenor as the Securities surrendered for such exchange and of like principal amount; and the Trustee, upon Company Order of the successor Person, shall authenticate and deliver Securities as specified in such order for the purpose of such exchange. If Securities of any series shall at any time be authenticated and delivered in any new name of a successor Person pursuant to this Section 2.2 in exchange or substitution for or upon registration of transfer of any Securities of such series, such successor Person, at the option of the Holders but without expense to them, shall provide for the exchange of all Securities of such series at the time Outstanding for Securities of such series authenticated and delivered in such new name. SECTION 2.3. Registrar and Paying Agent. The Company shall -------------------------- maintain an office or agency where Securities of each series may be presented for registration of transfer or for exchange (the "Registrar") and an office or agency where Securities of each series may be presented for payment (the "Paying Agent"). The Corporate Trust Office of the Trustee shall be such office or agency of the Company, unless the Company shall designate and maintain some other office or agency for one or more such purposes; provided, however, that -------- ------- the Company will maintain such an office or agency in a city in Western Europe so long as the Securities of any series are listed on the Luxembourg Stock Exchange and the rules of such Exchange so require. The Company initially appoints the Trustee as Registrar and Paying Agent for the Securities of each series. The Company shall cause each of the Registrar and the Paying Agent to maintain an office or agency in the Borough of Manhattan, The City of New York. The Registrar shall keep a register of the Securities of each series and of their transfer and exchange (the "Note Register"). The Company may have one or more co-registrars and one or more additional paying agents. The term "Paying Agent" includes any additional paying agent. The Company shall enter into an appropriate agency agreement with any Registrar, Paying Agent or co-registrar not a party to this Indenture, which shall incorporate the terms of the TIA. The agreement shall implement the provisions of this Indenture that relate to such agent. The Company shall notify the Trustee of the name and address of each such agent. If the Company fails to maintain a Registrar or Paying Agent, the Trustee shall act as such and shall be entitled to appropriate compensation therefor pursuant to Section 7.9. The Company may act as Paying Agent, Registrar, co-registrar or transfer agent. SECTION 2.4. Paying Agent To Hold Money in Trust. By at least ----------------------------------- 10:00 a.m. (New York City time) on the date on which any principal of or interest on any Security is due 20 and payable, the Company shall deposit with the Paying Agent a sum sufficient to pay such principal or interest when due. The Company shall require each Paying Agent (other than the Trustee) to agree in writing that such Paying Agent shall hold in trust for the benefit of Securityholders or the Trustee all money held by such Paying Agent for the payment of principal of or interest on the Securities of each series and shall notify the Trustee in writing of any default by the Company or any Guarantor in making any such payment. If the Company acts as Paying Agent, it shall segregate the money held by it as Paying Agent and hold it as a separate trust fund. The Company at any time may require a Paying Agent (other than the Trustee) to pay all money held by it to the Trustee and to account for any funds disbursed by such Paying Agent. Upon complying with this Section, the Paying Agent (if other than the Company) shall have no further liability for the money delivered to the Trustee. Upon any bankruptcy, reorganization or similar proceeding with respect to the Company, the Trustee shall serve as Paying Agent for the Securities of each series. SECTION 2.5. Securityholder Lists. The Trustee shall preserve in as -------------------- current a form as is reasonably practicable the most recent list available to it of the names and addresses of Securityholders of each series of Securities. If the Trustee is not the Registrar, or to the extent otherwise required under the TIA, the Company shall furnish to the Trustee, in writing at least seven Business Days before each interest payment date and at such other times as the Trustee may request in writing, a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of Securityholders of each series of Securities. SECTION 2.6. Transfer and Exchange. --------------------- (a) The following provisions shall apply with respect to any proposed transfer of a Rule 144A Note of any series or an Institutional Accredited Investor Note of any series prior to the date which is two years after the later of the date of its original issue and the last date on which the Company or any affiliate of the Company was the owner of such Securities (or any predecessor thereto) (the "Resale Restriction Termination Date"): (i) a transfer of a Rule 144A Note of any series or an Institutional Accredited Investor Note of any series or a beneficial interest therein to a QIB shall be made upon the representation of the transferee in the form of an assignment on the reverse of the certificate that it is purchasing the Security of such series for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon its foregoing representations in order to claim the exemption from registration provided by Rule 144A; (ii) a transfer of a Rule 144A Note of any series or an Institutional Accredited Investor Note of any series or a beneficial interest therein to an IAI shall be made upon receipt by the Trustee or its agent of a certificate substantially in the form set forth in 21 Section 2.7 from the proposed transferee and, if requested by the Company or the Trustee, the delivery of an opinion of counsel, certification and/or other information satisfactory to each of them; and (iii) a transfer of a Rule 144A Note of any series or an Institutional Accredited Investor Note of any series or a beneficial interest therein to a Non-U.S. Person shall be made upon receipt by the Trustee or its agent of a certificate from the proposed transferee either (x) substantially in the form set forth in Section 2.8, or (y) certifying that such transfer is being made in compliance with Rule 144 under the Securities Act and, in either case, if requested by the Company or the Trustee, the delivery of an opinion of counsel, certification and/or other information satisfactory to each of them. (b) The following provisions shall apply with respect to any proposed transfer of a Regulation S Note of any series prior to the expiration of the Restricted Period: (i) a transfer of a Regulation S Note of any series or a beneficial interest therein to a QIB shall be made upon the representation of the transferee, in the form of assignment on the reverse of the certificate, that it is purchasing the Security of such series for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon its foregoing representations in order to claim the exemption from registration provided by Rule 144A; (ii) a transfer of a Regulation S Note of any series or a beneficial interest therein to an IAI shall be made upon receipt by the Trustee or its agent of a certificate substantially in the form set forth in Section 2.7 from the proposed transferee and, if requested by the Company or the Trustee, the delivery of an opinion of counsel, certification and/or other information satisfactory to each of them; and (iii) a transfer of a Regulation S Note of any series or a beneficial interest therein to a Non-U.S. Person shall be made upon receipt by the Trustee or its agent of a certificate substantially in the form set forth in Section 2.8 hereof from the proposed transferee and, if requested by the Company or the Trustee, receipt by the Trustee or its agent of an opinion of counsel, certification and/or other information satisfactory to each of them. After the expiration of the Restricted Period, interests in the Regulation S Note of any series may be transferred without requiring certification set forth in Section 2.7, Section 2.8 or any additional certification. (c) Restricted Securities Legend. Upon the transfer, exchange or ---------------------------- replacement of Securities of any series not bearing a Restricted Securities Legend, the Registrar shall deliver Securities of any series that do not bear a Restricted Securities Legend. Upon the transfer, 22 exchange or replacement of Securities of any series bearing a Restricted Securities Legend, the Registrar shall deliver only Securities of any series that bear a Restricted Securities Legend unless there is delivered to the Registrar an Opinion of Counsel to the effect that neither such legend nor the related restrictions on transfer are required in order to maintain compliance with the provisions of the Securities Act. (d) The Company shall deliver to the Trustee an Officers' Certificate setting forth the Resale Restriction Termination Date and the Restricted Period. The Registrar shall retain copies of all letters, notices and other written communications received pursuant to Section 2.1 or this Section 2.6. The Company shall have the right to inspect and make copies of all such letters, notices or other written communications at any reasonable time upon the giving of reasonable written notice to the Registrar. (e) Obligations with Respect to Transfers and Exchanges of Securities. ----------------------------------------------------------------- (i) To permit registrations of transfers and exchanges, the Company shall, subject to the other terms and conditions of this Article II, execute and the Trustee shall authenticate Definitive Securities and Global Securities at the Registrar's or co-registrar's request. (ii) No service charge shall be made to a Holder for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any transfer tax, assessments, or similar governmental charge payable in connection therewith (other than any such transfer taxes, assessments or similar governmental charges payable upon exchange or transfer pursuant to Sections 2.10, 5.7 or 9.6). (iii) The Registrar or co-registrar shall not be required to register the transfer of or exchange of any Security for a period being: (1) 15 days before the mailing of a notice of an offer to repurchase or redeem Securities and ending at the close of business on the day of such mailing or (2) 15 days before an interest payment date and ending on such interest payment date. (iv) Prior to the due presentation for registration of transfer of any Security, the Company, the Trustee, the Paying Agent, the Registrar or any co-registrar may deem and treat the person in whose name a Security is registered as the absolute owner of such Security for the purpose of receiving payment of principal of and interest on such Security and for all other purposes whatsoever, whether or not such Security is overdue, and none of the Company, the Trustee, the Paying Agent, the Registrar or any co-registrar shall be affected by notice to the contrary. (v) Any Definitive Security of any series (including any Institutional Accredited Investor Note) delivered in exchange for an interest in a Global Security of such series pursuant to Section 2.1(d) shall, except as otherwise provided by Section 2.6(c), bear the applicable legend regarding transfer restrictions applicable to the Definitive Security set forth in Section 2.1(c). 23 (vi) All Securities of any series issued upon any transfer or exchange pursuant to the terms of this Indenture shall evidence the same debt and shall be entitled to the same benefits under this Indenture as the Securities of such series surrendered upon such transfer or exchange. (f) No Obligation of the Trustee. (i) The Trustee shall have no ---------------------------- responsibility or obligation to any beneficial owner of a Global Security of any series, a member of, or a participant in, DTC or other Person with respect to the accuracy of the records of DTC or its nominee or of any participant or member thereof, with respect to any ownership interest in the Securities of any series or with respect to the delivery to any participant, member, beneficial owner or other Person (other than DTC) of any notice (including any notice of redemption) or the payment of any amount or delivery of any Securities of any series (or other security or property) under or with respect to such Securities of such series. All notices and communications to be given to the Holders and all payments to be made to Holders in respect of the Securities of any series shall be given or made only to or upon the order of the registered Holders of the Securities of such series (which shall be DTC or its nominee in the case of a Global Security). The rights of beneficial owners in any Global Security shall be exercised only through DTC subject to the applicable rules and procedures of DTC. The Trustee may rely and shall be fully protected in relying upon information furnished by DTC with respect to its members, participants and any beneficial owners. (ii) The Trustee shall have no obligation or duty to monitor, determine or inquire as to compliance with any restrictions on transfer imposed under this Indenture or under applicable law with respect to any transfer of any interest in any Security of any series (including any transfers between or among DTC participants, members or beneficial owners in any Global Security of any series) other than to require delivery of such certificates and other documentation or evidence as are expressly required by, and to do so if and when expressly required by, the terms of this Indenture, and to examine the same to determine substantial compliance as to form with the express requirements hereof. SECTION 2.7. Form of Certificate to be Delivered in Connection with ------------------------------------------------------ Transfers to Institutional Accredited Investors. - - --------- ------------------------------------- [Date] Federal-Mogul Corporation c/o The Bank of New York, as Trustee 101 Barclay Street, Floor 21 West New York, New York 10286 Dear Sirs: 24 In connection with our proposed purchase of % Notes due (the "Securities") of Federal-Mogul Corporation, a Michigan corporation (the "Company"), we confirm that: l. We are an institutional "accredited investor" (as defined in Rule 50l(a)(l), (2), (3) or (7) of Regulation D under the Securities Act of 1933, as amended (the "Securities Act")), purchasing for our own account or for the account of such an institutional "accredited investor" in each case in a minimum principal amount of Securities of $250,000 and we are acquiring the Securities for investment purposes and not with a view to, or for offer or sale in connection with, any distribution in violation of the Securities Act or other applicable securities laws and we have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risk of our investment in the Securities, and we and any accounts for which we are acting are each able to bear the economic risk of our or its investment. 2. We understand and acknowledge that the Securities have not been registered under the Securities Act, or any other applicable securities law and may not be offered, sold or otherwise transferred except in compliance with the registration requirements of the Securities Act or any other applicable securities law, or pursuant to an exemption therefrom, and in each case in compliance with the conditions for transfer set forth below. We agree on our own behalf and on behalf of any investor account for which we are purchasing Securities to offer, sell or otherwise transfer such Securities prior to the date which is two years after the later of the date of original issue and the last date on which the Company or any affiliate of the Company was the owner of such Securities (or any predecessor thereto) (the "Resale Restriction Termination Date") only (a) to the Company, (b) pursuant to a registration statement which has been declared effective under the Securities Act, (c) for so long as the Securities are eligible for resale pursuant to Rule 144A under the Securities Act, to a person we reasonably believe is a "Qualified Institutional Buyer" within the meaning of Rule 144A (a "QIB") that purchases for its own account or for the account of a QIB and to whom notice is given that the transfer is being made in reliance on Rule 144A (d) pursuant to offers and sales to non-U.S. persons that occur outside the United States within the meaning of Regulation S under the Securities Act, (e) to an institutional "accredited investor" within the meaning of subparagraphs (a)(1), (a)(2), (a)(3) or (a)(7) of Rule 501 under the Securities Act that is acquiring the Securities for its own account or for the account of such institutional "accredited investor," for investment purposes and not with a view to, or for offer or sale in connection with, any distribution in violation of the Securities Act, and in each case, in a minimum principal amount of Securities of $250,000 or (f) pursuant to any other available exemption from the registration requirements of the Securities Act, subject in each of the foregoing cases to any requirement of law that the disposition of our property or the property of such investor account or accounts be at all times within our or their control and in compliance with any applicable state securities laws. The foregoing restrictions on resale will not apply subsequent to the Resale Restriction Termination Date. If any resale or other transfer of the Securities is proposed to be made pursuant to clause (e) above prior to the Resale Restriction Termination Date, the transferor shall deliver to the trustee (the "Trustee") under this Indenture pursuant to which the Securities are issued and to the Company a letter from the transferee substantially in the form of this letter, which shall provide, among other things, that the transferee is a person or entity defined in paragraph 1 of this letter and that it is acquiring 25 such notes for investment purposes and not for distribution in violation of the Securities Act. We acknowledges that the Company and the Trustee reserve the right prior to any offer, sale or other transfer of the Securities pursuant to clauses (d), (e) and (f) above prior to the Resale Restriction Termination Date to require the delivery of an opinion of counsel, certifications and/or other information satisfactory to the Company and the Trustee. 3. We are acquiring the notes purchased by us for our own account or for one or more accounts as to each of which we exercise sole investment discretion. 4. You are entitled to rely upon this letter and you are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceeding or official inquiry with respect to the matters covered hereby. Very truly yours, By: (Name of Purchaser) Date: Upon transfer, the Securities would be registered in the name of the new beneficial owner as follows: Name Address Taxpayer ID Number ---- ------- ------------------ 26 SECTION 2.8. Form of Transfers Pursuant to be Delivered in Connection -------------------------------------------------------- with Transfers Pursuant to Regulation S. - - --------------------------------------- [Date] Federal-Mogul Corporation c/o The Bank of New York, as Trustee 101 Barclay Street, Floor 21 West New York, New York 10286 Re: Federal-Mogul Corporation % Notes due (the "Securities") ------------------------------------------- Ladies and Gentlemen: In connection with our proposed sale of $_________ aggregate principal amount of the Securities, we confirm that such sale has been effected pursuant to and in accordance with Regulation S under the United States Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, we represent that: (a) the offer of the Securities was not made to a person in the United States; (b) either (i) at the time the buy order was originated, the transferee was outside the United States or we and any person acting on our behalf reasonably believed that the transferee was outside the United States or (ii) the transaction was executed in, on or through the facilities of a designated off- shore securities market and neither we nor any person acting on our behalf knows that the transaction has been pre-arranged with a buyer in the United States; (c) no directed selling efforts have been made in the United States in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S, as applicable; and (d) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act. In addition, if the sale is made during a restricted period and the provisions of Rule 903(c)(3) or Rule 904(c)(l) of Regulation S are applicable thereto, we confirm that such sale has been made in accordance with the applicable provisions of Rule 903(c)(3) or Rule 904(c)(l), as the case may be. 27 You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Terms used in this certificate have the meanings set forth in Regulation S. Very truly yours, [Name of Transferor] By:_________________________________ ____________________________________ Authorized Signature 28 SECTION 2.9. Mutilated, Destroyed, Lost or Stolen Securities. If a ----------------------------------------------- mutilated Security of any series is surrendered to the Registrar or if the Holder of a Security of any series claims that such Security has been lost, destroyed or wrongfully taken, the Company shall issue and the Trustee shall authenticate a replacement Security of such series if the requirements of Section 8-405 of the Uniform Commercial Code are met and the Holder satisfies any other reasonable requirements of the Trustee. If required by the Trustee or the Company, such Holder shall furnish an indemnity bond sufficient in the judgment of the Company and the Trustee to protect the Company, the Trustee, the Paying Agent, the Registrar and any co-registrar from any loss which any of them may suffer if a Security is replaced, and, in the absence of notice to the Company or the Trustee that such Security has been acquired by a bona fide purchaser, the Company shall execute and upon Company Order the Trustee shall authenticate and make available for delivery, in exchange for any such mutilated Security of any series or in lieu of any such destroyed, lost or stolen Security of any series, a new Security of like series, tenor and principal amount, bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Security of any series has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, pay such Security of such series. Upon the issuance of any new Security under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) in connection therewith. Every new Security of any series issued pursuant to this Section in lieu of any mutilated, destroyed, lost or stolen Security of such series shall constitute an original additional contractual obligation of the Company, any Guarantor (if applicable) and any other obligor upon the Securities of such series, whether or not the mutilated, destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all benefits of this Indenture equally and proportionately with any and all other Securities of such series duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities of any series. SECTION 2.10. Temporary Securities. Until Definitive Securities of -------------------- any series are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Securities for such series. Temporary Securities shall be substantially in the form of Definitive Securities but may have variations that the Company considers appropriate for temporary Securities. Without unreasonable delay, the Company shall prepare and the Trustee shall authenticate Definitive Securities. After the preparation of Definitive Securities of any series, the temporary Securities for such series shall be exchangeable such Definitive Securities upon surrender of such temporary Securities at any office or agency maintained by the Company for that purpose and such exchange shall be without charge to the Holder. Upon surrender for 29 cancellation of any one or more temporary Securities for any series, the Company shall execute, and the Trustee shall authenticate and make available for delivery in exchange therefor, one or more Definitive Securities for such series representing an equal principal amount of Securities of such series. Until so exchanged, the Holder of temporary Securities of any series shall in all respects be entitled to the same benefits under this Indenture as a holder of Definitive Securities of such series. At the end of the Restricted Period, the Regulation S Temporary Global Note for any series will be exchangeable for the Regulation S Permanent Global Note for such series as set forth in Section 2.1(a). SECTION 2.11. Cancellation. The Company at any time may deliver ------------ Securities to the Trustee for cancellation. The Registrar and the Paying Agent shall forward to the Trustee any Securities surrendered to them for registration of transfer exchange or payment. The Trustee and no one else shall cancel and return to the Company all Securities surrendered for registration of transfer, exchange, payment or cancellation. The Company may not issue new Securities to replace Securities it has paid or delivered to the Trustee for cancellation for any reason other than in connection with a transfer or exchange. SECTION 2.12. Payment of Interest; Defaulted Interest. Interest on --------------------------------------- any Security of any series which is payable, and is punctually paid or duly provided for, on any interest payment date shall be paid to the Person in whose name such Security (or one or more predecessor Securities) is registered at the close of business on the regular record date for such interest at the office or agency of the Company maintained for such purpose pursuant to Section 2.3. Any interest on any Security of any series which is payable, but is not punctually paid or duly provided for when the same becomes due and payable, shall forthwith cease to be payable to the Holder on the relevant regular record date by virtue of having been such a Holder, and such defaulted interest and (to the extent lawful) interest on such defaulted interest at the rate borne by the Securities of such series (such defaulted interest and interest thereon herein collectively called "Defaulted Interest") shall be paid by the Company, at its election in each case, as provided in clause (a) or (b) below: (a) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Securities of such series (or their respective predecessor Securities) are registered at the close of business on a Special Record Date (as defined below) for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause (a) provided. Thereupon the Trustee shall fix a record date (the "Special Record Date") for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date, and in the name and at the expense of the Company, shall cause 30 notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be given in the manner provided for in Section 11.2, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so given, such Defaulted Interest shall be paid to the Persons in whose names the Securities (or their respective predecessor Securities) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following clause (b). (b) The Company may make payment of such Defaulted Interest to the Persons in whose names such Securities are registered at the close of business on a specified date in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustee. (c) Subject to the foregoing provisions of this Section, each Security of any series delivered under this Indenture upon registration of, transfer of or in exchange for or in lieu of any other Security of such series shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security of such series. SECTION 2.13. Computation of Interest. Interest on the Securities of ----------------------- each series shall be computed on the basis of a 360-day year of twelve 30-day months. SECTION 2.14. CUSIP Numbers. The Company in issuing the Securities ------------- of each series may use "CUSIP" numbers and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to Holders; provided, however, -------- ------- that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Securities of each series or as contained in any notice of a redemption and that reliance may be placed only on the other identification numbers printed on the Securities of each series, and any such redemption shall not be affected by any defect in or omission of such CUSIP numbers. ARTICLE III Covenants --------- SECTION 3.1. Payment of Principal, Premium, if any, and Interest, if ------------------------------------------------------- any. The Company covenants and agrees for the benefit of the Holders of each - - --- series of Outstanding Securities that it will duly and punctually pay the principal of, premium, if any, and interest, if any, on the Securities of that series in accordance with the terms of the Securities of such series and this Indenture. An installment of principal, premium, if any, or interest, if any, shall be considered paid on the date it is due if the Trustee or Paying Agent holds on that date money designated for and sufficient to pay the installment. 31 SECTION 3.2. Maintenance of Office or Agency. ------------------------------- The Company will maintain in each Place of Payment for any series of Securities an office or agency where the Securities of that series may be presented or surrendered for payment, where the Securities of that series may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Securities of that series and this Indenture may be served. The Corporate Trust Office of the Trustee shall be such an office or agency of the Company, unless the Company may designate and maintain some other office or agency for one or more of such purposes; provided, -------- however, that the Company will maintain such an office or agency in a city in - - ------- Western Europe so long as the Securities of any series are listed on the Luxembourg Stock Exchange and the rules of such Exchange so require. The Company will give prompt written notice to the Trustee of any change in the location of any such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. The Company may also from time to time designate one or more other offices or agencies where the Securities of any series may be presented or surrendered for any or all such purposes and may from time to time rescind any such designation; provided, however, that no such designation or rescission -------- ------- shall in any manner relieve the Company of its obligation to maintain an office or agency in each Place of Payment for Securities of any series for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and any change in the location of any such other office or agency. SECTION 3.3. Money for Securities Payments to be Held in Trust; -------------------------------------------------- Unclaimed Money. If the Company shall at any time act as its own Paying Agent - - --------- ----- with respect to any series of Securities, it will, on or before each due date of the principal of, premium, if any, or interest, if any, on the Securities of that series, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal, premium, if any, or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee in writing of its action or failure so to act. The Company will cause each Paying Agent for any series other than the Trustee to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will: (a) hold all sums held by it for the payment of the principal of, premium, if any, or interest, if any, on the Securities of that series in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; (b) give the Trustee notice of any default by the Company or any Guarantor (or any other obligor upon the Securities of that series) in the making of any payment of principal, premium, if any, or interest, if any, on the Securities; and 32 (c) at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent. The Company may at any time, for the purpose of obtaining the satisfaction and discharge or defeasance of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same terms as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such money. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of any principal, premium or interest on any Security of any series and remaining unclaimed for two years after such principal, premium, if any, or interest, if any, has become due and payable shall be paid to the Company on Company Request or (if then held by the Company) shall be discharged from such trust, unless otherwise required by certain provisions of applicable law; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being -------- ------- required to make any such repayment, may at the expense of the Company cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in The City of New York, or cause to be mailed to such Holder, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company. SECTION 3.4. Corporate Existence. Subject to Article IV, the ------------------- Company will at all times do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and its rights and franchises; provided, that nothing in this Section 3.4 shall prevent -------- the abandonment or termination of any right or franchise of the Company if, in the opinion of the Company, such abandonment or termination is in the best interests of the Company and does not materially adversely affect the ability of the Company to fulfill its obligations hereunder. SECTION 3.5. Reports by the Company. The Company covenants: ---------------------- (a) to file with the Trustee, within 30 days after the Company is required to file the same with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribe) which the Company may be required to file with the Commission pursuant to Section 13 or Section 15(d) of the Exchange Act; or, if the Company is not required to file information, documents or reports pursuant to either of such Sections, then to file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such of the supplementary and periodic information, 33 documents and reports which may be required pursuant to Section 13 of the Exchange Act in respect of a security listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations; (b) to file with the Trustee and the Commission, in accordance with the rules and regulations prescribed from time to time by the Commission, such additional information, documents and reports with respect to compliance by the Company with the conditions and covenants provided for in this Indenture, as may be required from time to time by such rules and regulations; (c) to transmit to all Holders of Securities, within 30 days after the filing thereof with the Trustee, in the manner and to the extent provided in Section 313(c) of the Trust Indenture Act, such summaries of any information, documents and reports required to be filed by the Company pursuant to subsections (a) and (b) of this Section 3.5, as may be required by rules and regulations prescribed from time to time by the Commission; and (e) to comply with Sections 313(b) and 313(d) of the Trust Indenture Act, to the extent applicable. Delivery of such reports, information and documents to the Trustee is for informational purposes only and the Trustee's receipt of such shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including information concerning the Company's compliance with any of its covenants hereunder, provided that the foregoing shall not relieve the Trustee of any of its responsibilities hereunder. SECTION 3.6. Annual Review Certificate; Notice of Defaults or Events ------------------------------------------------------- of Default. (a) The Company covenants and agrees to deliver to the Trustee, - - ---------- within 120 days after the end of each fiscal year of the Company (beginning with the fiscal year next following the Closing Date), a certificate from the principal executive officer, principal financial officer or principal accounting officer as to his or her knowledge of the Company's compliance with all conditions and covenants under this Indenture. For purposes of this Section 3.6, such compliance shall be determined without regard to any period of grace or requirement of notice provided under this Indenture. (b) The Company covenants and agrees to deliver to the Trustee, within a reasonable time after the Company becomes aware of the occurrence of a Default or an Event of Default of the character specified in Section 6.1(d) hereof, written notice of the occurrence of such Default or Event of Default. SECTION 3.7. Books of Record and Account . The Company will keep --------------------------- proper books of record and account, either on a consolidated or individual basis. The Company shall cause its books of record and account to be examined either on a consolidated or individual basis, by one or more firms of independent public accountants not less frequently than annually. The Company shall prepare its financial statements in accordance with generally accepted accounting principles. 34 SECTION 3.8. Limitation on Liens. (a) So long as the Securities ------------------- shall be Outstanding, the Company will not create or assume, and will not permit any Restricted Subsidiary to create or assume, any notes, bonds, debentures or other similar evidences of Indebtedness secured by any mortgage, pledge, security interest or lien (any such mortgage, pledge, security interest or lien being referred to herein as a "Mortgage" or "Mortgages") of or upon any Principal Property owned by the Company or by any Restricted Subsidiary or on shares of capital stock or evidence of Indebtedness of any Restricted Subsidiary, whether owned at the date of this Indenture or hereafter acquired, without making effective provision, and the Company in such case will make or cause to be made effective provision, whereby all Securities (together with, if the Company shall so determine, any other Indebtedness of the Company or such Restricted Subsidiary, whether then existing or thereafter created which is not subordinated to the Securities) shall be secured by such a Mortgage equally and ratably with (or prior to) any and all other Indebtedness thereby secured, so long as such Indebtedness shall be so secured; provided, however, that the -------- ------- foregoing shall not apply to any of the following: (i) Mortgages on any Principal Property, shares of stock of Indebtedness of any corporation existing at the time such corporation becomes a Subsidiary; (ii) Mortgages on any Principal Property, shares of stock or Indebtedness acquired, constructed or improved by the Company or any Restricted Subsidiary after the date of this Indenture which are created or assumed prior to, or contemporaneously with, such acquisition, construction or improvement or within 365 days after the acquisition, completion of construction or improvement or commencement of commercial operation of such property, to secure or provide for the payment of all or any part of the purchase price or the cost of such construction or improvement thereof; (iii) Mortgages on any Principal Property, shares of stock or Indebtedness existing at the time of acquisition thereof (including acquisition through merger or consolidation); (iv) Mortgages on any Principal Property or shares of stock or Indebtedness acquired from a corporation which is merged with or into the Company or a Restricted Subsidiary; (v) Mortgages on any Principal Property, shares of stock or Indebtedness to secure Indebtedness to the Company or to a Restricted Subsidiary; (vi) Mortgages on any Principal Property, shares of stock or Indebtedness in favor of the United States of America or any State thereof or The Commonwealth of Puerto Rico, or any department, agency or instrumentality or political subdivision of the United States of America or any State thereof or The Commonwealth of Puerto Rico, to secure partial, progress, advance or other payments, or to secure any Indebtedness incurred for the purpose of financing all or any part of the cost of acquiring, constructing or improving any Principal Property, shares of stock or Indebtedness subject to such Mortgages (including Mortgages incurred in connection with pollution control, industrial 35 revenue, Title XI maritime financings or similar financings), or other Mortgages in connection with the issuance of tax-exempt industrial revenue bonds; (vii) Mortgages existing as of the date of this Indenture; (viii) Mortgages for taxes, assessments or other government charges, the validity of which is being contested in good faith by appropriate proceedings and materialmen's, mechanics' and other like Mortgages, or deposits to obtain the release of such Mortgages; (ix) Mortgages created or deposits made to secure the payment of workers' compensation claims or the performance of, or in connection with, tenders, bids, leases, public or statutory obligations, surety and appeal bonds, contracts, performance and return-of-money bonds or to secure (or in lieu of) surety or appeal bonds and Mortgages made in the ordinary course of business for similar purposes; and (x) any extension, renewal or replacement (or successive extensions, renewals or replacements), in whole or in part, of any Mortgage referred to in the foregoing clauses (i) to (ix), inclusive; provided, --------- however, that such extension, renewal or replacement shall be limited to ------- all or a part of the property, shares of stock or Indebtedness which secured the Mortgage so extended, renewed or replaced (plus improvements on such property). Notwithstanding the foregoing, the Company or any Restricted Subsidiary may create or assume Mortgages in addition to those permitted by the immediately preceding paragraph, and renew, extend or create such Mortgages, provided, that at the time of such creation, assumption, renewal or replacement, - - -------- and after giving effect thereto, the aggregate amount of all Indebtedness so secured by such a Mortgage as provided above (not including Indebtedness excluded as provided in clauses (i) through (x) of the immediately preceding paragraph), plus all Attributable Debt of the Company and its Restricted Subsidiaries in respect of Sale and Lease-Back Transactions (defined in Section 3.9 below) which would not be permitted by either clause (i) or (ii) of the first paragraph under Section 3.9 below, would not exceed 20% of Consolidated Assets. (b) So long as any Indebtedness under the 1998 Credit Agreements (or any other credit agreement renewing, refunding, replacing, restating, refinancing or extending the 1998 Credit Agreements) is secured by shares of capital stock or evidences of Indebtedness of any Restricted Subsidiary, the Securities shall also be secured by such collateral. In the event that the Indebtedness incurred under the 1998 Credit Agreements (or any other credit agreement renewing, refunding, replacing, restating, refinancing or extending the 1998 Credit Agreements) ceases for any reason to be secured by any collateral securing the Securities, the Securities shall also cease to be secured by such collateral, whether or not a Default or an Event of Default is then outstanding for any reason. SECTION 3.9. Limitation on Sale and Lease-Back Transactions. So ---------------------------------------------- long as the Securities shall be Outstanding, the Company will not, nor will it permit any Restricted Subsidiary to, enter into any arrangement with any Person (other than the Company or any 36 Restricted Subsidiary) providing for the leasing by the Company or a Restricted Subsidiary of any Principal Property owned by the Company or such Restricted Subsidiary (except for leases for a term of not more than three years), which property has been or is to be sold or transferred by the Company or such Restricted Subsidiary to such person on the security of such Principal Property more than 365 days after the acquisition thereof or the completion of construction and commencement of full operation thereof (a "Sale and Lease-Back Transaction"), unless either (a) the Company or such Restricted Subsidiary would be entitled pursuant to Section 3.8 to incur Indebtedness secured by a Mortgage on the Principal Property to be leased back equal in amount to the Attributable Debt with respect to such Sale and Lease-Back Transaction without equally and ratably securing the Securities, or (b) the Company shall, and in any such case the Company covenants that it will, apply or cause to be applied an amount equal to the greater of the net proceeds or the fair value (as determined by the Board of Directors of the Company) of the property so sold to the purchase of Principal Property or to the retirement (other than any mandatory retirement), within 365 days of the effective date of any such Sale and Lease-Back Transaction, of Securities or other Funded Indebtedness; provided, however, that -------- ------- any such retirement of Securities shall be made in accordance with this Indenture; and provided, further, that the amount to be applied to such -------- ------- retirement of Securities or other Funded Indebtedness shall be reduced by an amount equal to the sum of (i) an amount equal to the principal amount of any Securities delivered within 365 days after the effective date of such Sale and Lease-Back Transaction to the Trustee for retirement and cancellation, and (ii) the principal amount of other Funded Indebtedness voluntarily retired by the Company within such 365-day period, excluding, in each case, retirements pursuant to mandatory sinking fund or prepayment provisions and payments at Maturity. Notwithstanding the foregoing, the Company or any Restricted Subsidiary may enter into Sale and Lease-Back Transactions in addition to any permitted by the immediately preceding paragraph and without any obligation to retire any Securities or other Indebtedness; provided, that at the time of -------- entering into such Sale and Lease-Back Transaction and after giving effect thereto, Attributable Debt resulting from such Sale and Lease-Back Transaction, plus the aggregate amount of all Indebtedness secured by a Mortgage (not including Indebtedness excluded as provided in clauses (i) through (x) under Section 3.8 above), does not exceed 20% of Consolidated Assets. ARTICLE IV Consolidation, Merger or Sale by the Company -------------------------------------------- SECTION 4.1. Consolidation, Merger or Sale of Assets Permitted. ------------------------------------------------- The Company shall not consolidate or merge with or into, or transfer or lease all or substantially all of its assets to, any Person unless: (a) the Person formed by or surviving any such consolidation or any merger (if other than the Company), or to which such transfer or lease shall have been made, is a corporation 37 organized and existing under the laws of the United States, any State thereof or the District of Columbia; (b) the Person formed by or surviving any such consolidation or merger (if other than the Company), or to which such transfer or lease shall have been made, assumes by supplemental indenture all the obligations of the Company under the Securities and this Indenture; (c) immediately after giving effect to the transaction, no Default or Event of Default exists; and (d) if, as a result of any such consolidation or merger or such transfer or lease, properties or assets of the Company would become subject to a mortgage, pledge, lien, security interest or other encumbrance which would not be permitted by the Securities of any series, the Company or such successor Person, as the case may be, shall take such steps as shall be necessary to secure such Securities equally and ratably with all indebtedness secured thereby. The Company shall deliver to the Trustee prior to the proposed transaction an Officers' Certificate to the foregoing effect and an Opinion of Counsel stating that the proposed transaction and such supplemental indenture comply with this Indenture and that all conditions precedent to the consummation of the transaction under this Indenture have been met. In the event of the assumption by a successor corporation as provided in clause (b) above, such successor corporation shall succeed to and be substituted for the Company hereunder and under the Securities with the same effect as if it had been named hereunder and thereunder and all such obligations of the Company shall terminate. ARTICLE V Redemption of Securities ------------------------ SECTION 5.1. Applicability of Article. Securities of any series ------------------------ which are redeemable before their Stated Maturity shall be redeemable in accordance with their terms and in accordance with this Article. SECTION 5.2. Election to Redeem; Notice to Trustee. The election ------------------------------------- of the Company to redeem any Securities shall be evidenced by or pursuant to a Board Resolution. In the case of any redemption at the election of the Company of less than all the Securities of any series, the Company shall, at least 60 days prior to the Redemption Date fixed by the Company (unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee of such Redemption Date and Redemption Price, of the principal amount of Securities of such series to be redeemed. SECTION 5.3. Selection of Securities to be Redeemed. If less than --------------------------------------- all the Securities of a series are to be redeemed, the Trustee, not more than 45 days prior to the Redemption Date, shall select the Securities of the series to be redeemed in such a manner as the 38 Trustee shall deem fair and appropriate and which may provide for the selection for redemption of a portion of the principal amount of any Security of such series, provided that the unredeemed portion of the principal amount of any -------- Security shall be in an authorized denomination (which shall not be less than the minimum authorized denomination) for such Security. The Trustee shall make the selection from the Securities of the series that are Outstanding that have not previously been called for redemption and may provide for the selection for redemption of portions (equal to the minimum authorized denomination for Securities of that series, or any integral multiple of $1000 in excess thereof) of the principal amount of Securities of such series of a denomination larger than the minimum authorized denomination for Securities of that series. The Trustee shall promptly notify the Company in writing of the Securities selected for redemption and, in the case of any Securities selected for partial redemption, the principal amount thereof to be redeemed. If the Company shall so direct, Securities registered in the name of the Company, any Affiliate of the Company or any Subsidiary of the Company thereof shall not be included in the Securities selected for redemption. For purposes of this Indenture, unless the context otherwise requires, all provisions relating to the redemption of Securities shall relate, in the case of any Securities redeemed or to be redeemed only in part, to the portion of the principal amount of such Securities which has been or is to be redeemed. SECTION 5.4. Notice of Redemption. Notice of redemption shall be -------------------- given in the manner provided in Section 11.2 not less than 30 days nor more than 60 days prior to the Redemption Date to the Holders of the Securities to be redeemed. All notices of redemption shall state: (a) the Redemption Date; (b) the Redemption Price; (c) if less than all of the Outstanding Securities of a series are to be redeemed, the identification (and in the case of partial redemption, the principal amounts) of the particular Security or Securities to be redeemed; (d) in case any Security is to be redeemed in part only, the notice which relates to such Security shall state that on and after the Redemption Date, upon surrender of such Security, the Holder will receive, without charge, a new Security or Securities of authorized denominations for the principal amount thereof remaining unredeemed; (e) the Place of Payment where such Securities are to be surrendered for payment for the Redemption Price; (f) that Securities of the series called for redemption must be surrendered to the Paying Agent to collect the Redemption Price; 39 (g) that, on the Redemption Date, the Redemption Price will become due and payable upon each such Security, or the portion thereof, to be redeemed and, if applicable, that interest thereon will cease to accrue on and after said date; and (h) the CUSIP number, if any, of the Securities. Notice of redemption of Securities to be redeemed shall be given by the Company or, at the Company's request, by the Trustee in the name and at the expense of the Company. SECTION 5.5. Deposit of Redemption Price. On or prior to any --------------------------- Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 3.3) an amount of money sufficient to pay on the Redemption Date the Redemption Price of, and (unless the Redemption Date shall be an interest payment date) interest accrued to the Redemption Date on, all Securities or portions thereof which are to be redeemed on that date. SECTION 5.6. Securities Payable on Redemption Date. Notice of ------------------------------------- redemption having been given as aforesaid, the Securities so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified, and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest) such Securities shall cease to bear interest. Upon surrender of any such Security, for redemption in accordance with said notice, such Security shall be paid by the Company at the Redemption Price, together with accrued interest to the Redemption Date; provided, however, that installments of interest whose Stated -------- ------- Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Securities, or one or more predecessor Securities, registered as such at the close of business on the relevant record dates according to their terms. If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal (and premium, if any) shall, until paid, bear interest from the Redemption Date at the rate prescribed therefor in the Security. SECTION 5.7. Securities Redeemed in Part. Upon surrender of a --------------------------- Security that is redeemed in part at the office or agency of the Company maintained for such purpose pursuant to Section 3.2 (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or his attorney duly authorized in writing), the Company shall execute and the Trustee shall authenticate and deliver to the Holder of that Security, without service charge, a new Security or Securities of the same series, having the same form, terms and Stated Maturity, in any authorized denomination equal in aggregate principal amount to the unredeemed portion of the principal amount of the Security surrendered. 40 ARTICLE VI Defaults and Remedies --------------------- SECTION 6.1. Events of Default. An "Event of Default" occurs with ----------------- respect to the Securities of any series if (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) the Company defaults in the payment of interest on any Security of that series when the same becomes due and payable and such default continues for a period of 30 days; (b) the Company defaults in the payment of the principal of or any premium on any Security of that series when the same becomes due and payable at its Maturity or on redemption or otherwise; (c) the Company fails to comply in any material respect with any of its agreements or covenants in, or any of the provisions of, this Indenture with respect to any Security of that series (other than an agreement, covenant or provision for which non-compliance is elsewhere in this Section specifically dealt with), and such non-compliance continues for a period of 60 days after there has been given by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities of that series a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; (d) a default under any mortgage, agreement, indenture or instrument under which there may be issued, or by which there may be secured, guaranteed or evidenced any Debt of the Company (including this Indenture) whether such Debt now exists or shall hereafter be created, in an aggregate principal amount then outstanding of $25,000,000 or more, which default (a) shall constitute a failure to pay any portion of the principal of such Debt when due and payable after the expiration of an applicable grace period with respect thereto or (b) shall result in such Debt becoming or being declared due and payable prior to the date on which it would otherwise become due and payable, and such acceleration shall not be rescinded or annulled, or such Debt shall not be paid in full within a period of 30 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in aggregate principal amount of the Outstanding Securities of that series a written notice specifying such event of default and requiring the Company to cause such acceleration to be rescinded or annulled or to pay in full such Debt and stating that such notice is a "Notice of Default" hereunder; (it being understood however, that the Trustee shall not be deemed to have knowledge of such default under such agreement or instrument unless either (A) a Responsible Officer of the Trustee shall have actual knowledge of such default or (B) a Responsible Officer of the Trustee shall have received written notice thereof from the Company, from any Holder, from the holder of any such indebtedness or from the trustee under any such agreement or other instrument); provided, however, that if such default under such agreement - - -------- ------- 41 or instrument is remedied or cured by the Company or waived by the holders of such indebtedness, then the Event of Default hereunder by reason thereof shall be deemed likewise to have been thereupon remedied, cured or waived without further action upon the part of either the Trustee or any of such Holders; provided, further, that the foregoing shall not apply to any secured Debt under - - -------- ------- which the obligee has recourse (exclusive of recourse for ancillary matters such as environmental indemnities, misapplication of funds, costs of enforcement and the like) only to the collateral pledged for repayment so long as the fair market value of such collateral does not exceed 2% of Total Assets at the time of the default; (e) the Company, pursuant to or within the meaning of any Bankruptcy Law, (A) commences a voluntary case or proceeding, (B) consents to the entry of an order for relief against it in an involuntary case or proceeding, (C) consents to the appointment of a Custodian of it or for all or substantially all of its property, (D) makes a general assignment for the benefit of its creditors, (E) makes an admission in writing of its inability to pay its debts generally as they become due or (F) takes corporate action in furtherance of any such action; or (f) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that (A) is for relief against the Company, in an involuntary case, (B) adjudges the Company as bankrupt or insolvent, or approves as properly filed a petition seeking reorganization, arrangement, and adjustment or composition of or in respect of the Company, or appoints a Custodian of the Company, or for all or substantially all of its property, or (C) orders the liquidation of the Company and the decree remains unstayed and in effect for 60 days. The Company shall deliver to the Trustee, as soon as practicable, written notice in the form of an Officers' Certificate of any Default, its status and what action the Company is taking or proposes to take with respect thereto. As used in this Indenture, the term "Bankruptcy Law" means Title 11, U.S. Code, or any similar federal or state bankruptcy, insolvency, reorganization or other law for the relief of debtors. As used in this Indenture, the term "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. SECTION 6.2. Acceleration; Rescission and Annulment. If an Event -------------------------------------- of Default with respect to the Securities of any series at the time Outstanding occurs and is continuing, the Trustee or the Holders of at least 25% in aggregate principal amount of all of the Outstanding Securities of that series, by written notice to the Company (and if given by the Holders, to the Trustee), may declare the principal of and accrued interest, if any, on the Securities of that series to be due and payable and upon any such declaration such principal and interest, if any, shall be immediately due and payable. At any time after such a declaration of acceleration with respect to Securities of any series has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter in this Article provided, the Holders of a majority in aggregate principal amount of the Outstanding Securities of that series, by written notice to the Trustee, may rescind and annul such declaration and its consequences if all existing Defaults and Events of Default with respect to Securities of that series, other than the non-payment of the 42 principal of, premium, if any, and interest, if any, on Securities of that series which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 6.7. No such rescission shall affect any subsequent default or impair any right consequent thereon. SECTION 6.3. Collection of Indebtedness and Suits for Enforcement by ------------------------------------------------------- Trustee. The Company covenants that if: - - ------- (a) default is made in the payment of any interest on any Security, if any, when such interest becomes due and payable and such default continues for a period of 30 days, or (b) default is made in the payment of the principal of (or premium, if any, on) any Security at the Maturity thereof, the Company will, upon demand of the Trustee, pay to it, for the benefit of the Holder of such Security, the whole amount then due and payable on such Security for principal, premium, if any, and interest, if any, and, to the extent that payment of such interest shall be legally enforceable, interest on any overdue principal, premium, if any, and on any overdue interest, if any, at the rate or rates prescribed therefor in such Security and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If an Event of Default with respect to the Securities of any series occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders of Securities of such series by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to secure any other proper remedy including, without limitation seeking recourse against any Guarantor. SECTION 6.4. Trustee May File Proofs of Claim. The Trustee may -------------------------------- file such proofs of claim and other papers or documents and take such actions authorized under the Trust Indenture Act as may be necessary or advisable in order to have the claims of the Trustee and the Holders of Securities allowed in any judicial proceedings relating to the Company (or any other obligor upon the Securities, including any Guarantor), its creditors or its property. In particular, the Trustee shall be authorized to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 7.9. SECTION 6.5. Trustee May Enforce Claims Without Possession of ------------------------------------------------ Securities. All rights of action and claims under this Indenture or the - - ---------- Securities or any Guarantee may be 43 prosecuted and enforced by the Trustee, in its own name as an express trust, without the possession of any of the Securities or the production thereof in any proceeding relating thereto and any recovery of judgment shall, after provision for the reasonable fees and expenses of the Trustee and its counsel, be for the ratable benefit of the Holders of the Securities in respect to which judgment was recovered. SECTION 6.6. Delay or Omission Not Waiver. No delay or omission by ---------------------------- the Trustee or any Holder of any Securities to exercise any right or remedy accruing upon an Event of Default shall impair any such right or remedy or constitute a waiver of or acquiescence in any such Event of Default. SECTION 6.7. Waiver of Past Defaults. In addition to the ----------------------- provisions of Section 6.2, the Holders of a majority in aggregate principal amount of Outstanding Securities of any series by written notice to the Trustee may waive on behalf of the Holders of all Securities of such series a past Default or Event of Default with respect to that series and its consequences except (a) a Default or Event of Default in the payment of the principal of, premium, if any, or interest, if any, on any Security of such series or (b) in respect of a covenant or provision hereof which pursuant to Section 9.2 cannot be amended or modified without the consent of the Holder of each Outstanding Security of such series adversely affected. Upon any such waiver, such Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture. SECTION 6.8. Control by Majority. The Holders of a majority in ------------------- aggregate principal amount of the Outstanding Securities of each series affected (with each such series voting as a class) shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on it with respect to the Securities of that series; provided, however, that (a) the Trustee may refuse to -------- ------- follow any direction that conflicts with law or this Indenture (b) the Trustee may refuse to follow any direction that is unduly prejudicial to the rights of the Holders of Securities of such series not consenting or that would in the good faith judgment of the Trustee have a substantial likelihood of involving the Trustee in personal liability and (c) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction. Prior to the taking of any action hereunder, the Trustee shall be entitled to reasonable indemnification satisfactory to the Trustee against all losses and expenses caused by taking or not taking such action. This paragraph shall be in lieu of Section 316(a)(1)(A) of the Trust Indenture Act and such Section 316(a)(1)(A) is hereby expressly excluded from this Indenture, as permitted by the Trust Indenture Act. SECTION 6.9. Limitation on Suits by Holders. No Holder of any ------------------------------ Security of any series shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless: (a) the Holder has previously given written notice to the Trustee of a continuing Event of Default with respect to the Securities of that series; 44 (b) the Holders of at least 25% in aggregate principal amount of the Outstanding Securities of that series have made a written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (c) such Holder or Holders have offered to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense to be, or which may be, incurred by the Trustee in pursuing the remedy; (d) the Trustee for 60 days after its receipt of such notice, request and the offer of indemnity has failed to institute any such proceedings; and (e) during such 60 day period, the Holders of a majority in aggregate principal amount of the Outstanding Securities of that series have not given to the Trustee a direction inconsistent with such written request. No one or more Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other of such Holders, or to obtain or to seek to obtain priority or preference over any other of such Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all of such Holders. SECTION 6.10. Rights of Holders to Receive Payment. Notwithstanding ------------------------------------ any other provision of this Indenture, but subject to Section 3.2, the right of any Holder of a Security to receive payment of principal of, premium, if any, and, subject to Sections 2.1, 2.3 and 2.12, interest, if any, on the Security, on or after the respective due dates expressed in the Security (or, in case of redemption, on the redemption dates), or, subject to Section 6.9, to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such Holder. SECTION 6.11. Application of Money Collected. If the Trustee ------------------------------ collects any money pursuant to this Article, it shall pay out the money in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal, premium, if any, or interest, if any, upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: First: to the Trustee for amounts due under Section 7.9; Second: to Holders of Securities in respect of which or for the benefit of which such money has been collected for amounts due and unpaid on such Securities for principal of, premium, if any, and interest, if any, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for principal, premium, if any, and interest, if any, respectively; and 45 Third: to the Company. The Trustee may fix a record date and payment date for any payment to Holders pursuant to this Section 6.11. At least 15 days before such record date, the Trustee shall mail to each Holder and the Company a notice that states the record date, the payment date and the amount to be paid. SECTION 6.12. Restoration of Rights and Remedies. If the Trustee or ---------------------------------- any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Company, the Guarantors, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. SECTION 6.13. Rights and Remedies Cumulative. Except as otherwise ------------------------------ provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities in the last paragraph of Section 2.9, no right or remedy herein conferred upon or reserved to the Trustee or the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any existing right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. SECTION 6.14. Waiver of Usury, Stay or Extension Laws. Each of the --------------------------------------- Company and the Guarantors covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any usury, stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and each of the Company and the Guarantors (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. SECTION 6.15. Undertaking for Costs. In any suit for the enforcement --------------------- of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit having due regard to the merits and good faith of the claims or defenses made by the party litigant. 46 ARTICLE VII Trustee ------- SECTION 7.1. Certain Duties and Responsibilities of the Trustee. -------------------------------------------------- (a) Except during the continuance of an Event of Default, the Trustee's duties and responsibilities under this Indenture shall be governed by Section 315(a) of the Trust Indenture Act. (b) In case an Event of Default has occurred and is continuing with respect to the Securities of any series, the Trustee shall exercise the rights and powers vested in it by this Indenture with respect to the Securities of such series, and shall use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his own affairs. (c) No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: this subsection shall not be construed to limit the effect of subsection (a) of this Section; the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; and the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders in accordance with Section 6.8 relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under the Indenture. SECTION 7.2. Rights of Trustee. Subject to the provisions of the ----------------- Trust Indenture Act: (a) the Trustee may conclusively rely and shall be protected in acting or refraining from acting upon any document believed by it to be genuine and to have been signed or presented by the proper party or parties. The Trustee need not investigate any fact or matter stated in the document; (b) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution; (c) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, conclusively rely upon an Officers' Certificate; (d) the Trustee may consult with counsel of its selection and the advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in 47 respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (e) the Trustee may act through agents or attorneys and shall not be responsible for the misconduct or negligence of any agent or attorney appointed with due care; (f) the Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers; (g) the Trustee shall not be required to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of its rights or powers if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it; (h) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney; (i) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (j) whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section 7.2; (k) the rights, privileges, protections, immunities and benefits given to the Trustee, including, without limitation, its right to be indemnified, are extended to, and shall be enforceable by, the Trustee in each of its capacities hereunder, and to each agent, custodian and other Person employed to act hereunder. SECTION 7.3. Trustee May Hold Securities. The Trustee, any Paying --------------------------- Agent, any Registrar or any other agent of the Company in its in individual or any other capacity, may become the owner or pledgee of Securities and, subject to Sections 310(b) and 311 of the Trust Indenture Act, may otherwise deal with the Company, an Affiliate of the Company or Subsidiary of the Company with the same rights it would have if it were not Trustee, Paying Agent, Registrar or such other agent. SECTION 7.4. Money Held in Trust. Money held by the Trustee in ------------------- trust hereunder need not be segregated from other funds except to the extent required by law. The 48 Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed upon in writing with the Company. SECTION 7.5. Trustee's Disclaimer. The recitals contained herein -------------------- and in the Securities, except the Trustee's certificate of authentication, shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representation as to the validity or adequacy of this Indenture or the Securities or any coupon. The Trustee shall not be accountable for the Company's use of the proceeds from the Securities or for monies paid over to the Company pursuant to the Indenture. SECTION 7.6. Notice of Defaults. If a Default occurs and is ------------------ continuing with respect to the Securities of any series and if it is actually known to a Responsible Officer of the Trustee, the Trustee shall, within 90 days after it occurs, transmit by mail to the Holders of Securities of such series, in the manner and to the extent provided in Section 313(c) of the Trust Indenture Act, notice of all Defaults known to it unless such Default shall have been cured or waived; provided, however, that except in the case of a Default in -------- ------- payment on the Securities of any series, the Trustee may withhold the notice if and so long as its board of directors, its executive committee or a committee of its Responsible Officers in good faith determines that withholding such notice is in the interests of Holders of Securities of that series; and provided, -------- further, that in the case of any Default of the character specified in Section - - ------- 6.1(c) with respect to Securities of such series, no such notice to Holder shall be given until at least 30 days after the occurrence thereof. SECTION 7.7. Reports by Trustee to Holders. Within 60 days after ----------------------------- each May 15 of each year commencing with the first May 15 after Closing Date, the Trustee shall transmit by mail to all Holders of Securities as provided in Section 313(c) of the Trust Indenture Act a brief report dated as of such May 15 if required by and in compliance with Section 313(a) of the Trust Indenture Act. The Trustee shall also comply with Section 313(b) of the Trust Indenture Act, if applicable. A copy of each such report required pursuant to Section 313(a) or 313(b) of the Trust Indenture Act shall, at the time of such transmission to Holders, be filed by the Trustee with each stock exchange, if any, upon which the Securities are listed, with the Commission and with the Company. The Company will promptly notify the Trustee when the Securities are listed on, or delisted from, any stock exchange. SECTION 7.8. Securityholder Lists. The Trustee shall preserve in as -------------------- current a form as is reasonably practicable the most recent list available to it of the names and addresses of Holders of Securities of each series. If the Trustee is not the Registrar, the Company shall furnish to the Trustee semiannually on or before the last day of June and December in each year, and at such other times as the Trustee may request in writing, a list, in such form and as of such date as the Trustee may reasonably require containing all the information in the possession or control of the Registrar, the Company or any of its Paying Agents other than the Trustee as to the names and addresses of Holders of Securities of each such series. SECTION 7.9. Compensation and Indemnity. (a) The Company shall pay -------------------------- to the Trustee from time to time such reasonable compensation for its services as the Company and the 49 Trustee shall agree in writing from time to time. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee upon request for all reasonable out-of-pocket expenses incurred by it in connection with the performance of its duties under this Indenture. Such expenses shall include the reasonable compensation and expenses of the Trustee's agents and counsel. (b) The Company shall indemnify the Trustee or any Predecessor Trustee and their agents for, and hold them harmless against, any loss or liability damage, claim or reasonable expense including taxes (other than taxes based upon or determined or measured by the income of the Trustee) incurred by it arising out of or in connection with its acceptance or administration of the trust or trusts hereunder, including the reasonable costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The Trustee shall notify the Company promptly of any claim for which it may seek indemnity. The Company shall defend the claim and the Trustee shall cooperate in the defense. The Company need not pay for any settlement made without its consent. (c) The Company need not reimburse any expense or indemnify against any loss, liability, damage or claim incurred by the Trustee through negligence or bad faith or willful misconduct. (d) To secure the payment obligations of the Company pursuant to this Section, the Trustee shall have a lien prior to the Securities of any series on all money or property held or collected by the Trustee, except that held in trust to pay principal, premium, if any, and interest, if any, on particular Securities. When the Trustee incurs expenses or renders services in connection with an Event of Default specified in Section 6.1(e) or Section 6.1(f), the expenses (including the reasonable charges and expenses of its counsel) and the compensation for the services are intended to constitute expenses of administration under any applicable Federal or state bankruptcy, insolvency or other similar law. The provisions of this Section shall survive the termination of this Indenture. SECTION 7.10. Replacement of Trustee. (a) The resignation or removal of the Trustee and the appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in Section 7.11. (b) The Trustee may resign at any time with respect to the Securities of any series by giving written notice thereof to the Company. (c) The Holders of a majority in aggregate principal amount of the Outstanding Securities of any series may remove the Trustee with respect to that series by so notifying the Trustee and the Company and may appoint a successor Trustee for such series with the Company's consent. (d) If at any time: 50 (1) the Trustee fails to comply with Section 310(b) of the Trust Indenture Act after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six months; or (2) the Trustee shall cease to be eligible under Section 7.12 of this Indenture or Section 310(a) of the Trust Indenture Act and shall fail to resign after written request therefor by the Company or by any Holder of a Security who has been a bona fide Holder of a Security for at least six months; or (3) the Trustee becomes incapable of acting, is adjudged a bankrupt or an insolvent or a receiver or public officer takes charge of the Trustee or its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, (i) the Company by or pursuant to a Board Resolution may remove the Trustee with respect to all Securities, or (ii) subject to Section 315(e) of the Trust Indenture Act, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee with respect to all Securities and the appointment of a successor Trustee or Trustees. (e) If the instrument of acceptance by a successor Trustee required by Section 7.11 shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation or removal, the Trustee resigning or being removed may petition any court of competent jurisdiction for the appointment of a successor Trustee with respect to the Securities of such series. (f) If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, with respect to Securities of one or more series, the Company, by or pursuant to a Board Resolution, shall promptly appoint a successor Trustee with respect to the Securities of that or those series (it being understood that any such successor Trustee may be appointed with respect to the Securities of one or all of such series and that at any time there shall be only one Trustee with respect to the Securities of any particular series) and shall comply with the applicable requirements of Section 7.11. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee with respect to the Securities of any series shall be appointed by the Holders of a majority in principal amount of the Outstanding Securities of such series delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment in accordance with the applicable requirements of Section 7.11, become the successor Trustee with respect to the Securities of such series and to that extent supersede the successor Trustee appointed by the Company. If no successor Trustee with respect to the Securities of any series shall have been so appointed by the Company or the Holders and accepted appointment in the manner required by Section 7.11, any Holder who has been a bona fide Holder of a Security of such series for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee with respect to the Securities of such series. 51 SECTION 7.11. Acceptance of Appointment by Successor. (a) In case -------------------------------------- of the appointment hereunder of a successor Trustee with respect to all Securities, every such successor Trustee shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment. Thereupon, the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee, without further act, deed or conveyance, shall become vested with all the rights, powers and duties of the retiring Trustee; but, on the request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder. (b) In case of the appointment hereunder of a successor Trustee with respect to the Securities of one or more (but not all) series, the Company, the retiring Trustee and such successor Trustee shall execute and deliver an indenture supplemental hereto wherein such successor Trustee shall accept such appointment and which (i) shall contain such provisions as shall be necessary or desirable to transfer and confirm to, and to vest in, such successor Trustee all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates, (ii) if the retiring Trustee is not retiring with respect to all Securities, shall contain such provisions as shall be deemed necessary or desirable to confirm that all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series as to which the retiring Trustee is not retiring shall continue to be vested in the retiring Trustee, and (iii) shall add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, it being understood that nothing herein or in such supplemental indenture shall constitute such Trustees co-trustees of the same trust and that each such Trustee shall be trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder administered by any other such Trustee and upon the execution and delivery of such supplemental indenture the resignation or removal of the retiring Trustee shall become effective to the extent provided therein and each such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee with respect to the Securities of that or those series to which the appointment of such successor Trustee relates; but, on request of the Company or any successor Trustee, such retiring Trustee shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder with respect to the Securities of that or those series to which the appointment of such successor Trustee relates. (c) Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to the successor Trustee all such rights, powers and trusts referred to in paragraph (a) or (b) of this Section, as the case may be. (d) No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under the Trust Indenture Act. 52 (e) The Company shall give notice of each resignation and each removal of the Trustee with respect to the Securities of any series and each appointment of a successor Trustee with respect to the Securities of any series in the manner provided for notices to the Holders of Securities in Section 11.2. Each notice shall include the name of the successor Trustee with respect to the Securities of such series and the address of its Corporate Trust Office. SECTION 7.12. Eligibility; Disqualification. There shall at all ----------------------------- times be a Trustee hereunder which shall be eligible to act as Trustee under Section 310(a)(1) of the Trust Indenture Act and shall have a combined capital and surplus of at least $75,000,000. If such corporation publishes reports of condition at least annually, pursuant to law or the requirements of Federal, State, Territorial or District of Columbia supervising or examining authority, then, for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect heretofore specified in this Article. SECTION 7.13. Merger, Conversion, Consolidation or Succession to -------------------------------------------------- Business. Any corporation into which the Trustee may be merged or converted or - - -------- with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities. SECTION 7.14. Appointment of Authenticating Agent. The Trustee may ----------------------------------- appoint an Authenticating Agent with respect to one or more series of Securities which shall be authorized to act on behalf of the Trustee to authenticate Securities of such series issued upon original issue, exchange, registration of transfer or partial redemption thereof, and Securities so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder. Any such appointment shall be evidenced by an instrument in writing signed by a Responsible Officer of the Trustee, a copy of which instrument shall be promptly furnished to the Company. Wherever reference is made in this Indenture to the authentication and delivery of Securities by the Trustee or the Trustee's certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent. Each Authenticating Agent shall be acceptable to the Company and shall at all times be a bank or trust company or corporation organized and doing business and in good standing under the laws of the United States of America or of any State or the District of Columbia, authorized under such laws to act as Authenticating Agent, having a combined capital and surplus of not less than $25,000,000 and 53 subject to supervision or examination by Federal or State authorities. If such Authenticating Agent publishes reports of condition at least annually, pursuant to law or the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Authenticating Agent shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. In case at any time an Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, such Authenticating Agent shall resign immediately in the manner and with the effect specified in this Section. Any corporation into which an Authenticating Agent may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Authenticating Agent shall be a party, or any corporation succeeding to the corporate agency or corporate trust business of an Authenticating Agent, shall continue to be an Authenticating Agent, provided such corporation shall be otherwise eligible under this Section, without the execution or filing of any paper or further act on the part of the Trustee or the Authenticating Agent. An Authenticating Agent for any series of Securities may at any time resign by giving written notice of resignation to the Trustee for such series and to the Company. The Trustee for any series of Securities may at any time terminate the agency of an Authenticating Agent by giving written notice of termination to such Authenticating Agent and to the Company. Upon receiving such notice of resignation or upon such a termination, or in case at any time such Authenticating Agent shall cease to be eligible in accordance with the provisions of this Section, the Trustee for such series may appoint a successor Authenticating Agent which shall be acceptable to the Company and shall give notice of such appointment to all Holders of Securities of the series with respect to which such Authenticating Agent will serve in the manner set forth in Section 11.2. Any successor Authenticating Agent upon acceptance of its appointment hereunder shall become vested with all the rights, powers and duties of its predecessor hereunder, with like effect as if originally named as an Authenticating Agent herein. No successor Authenticating Agent shall be appointed unless eligible under the provisions of this Section. The Company agrees to pay to each Authenticating Agent from time to time reasonable compensation including reimbursement of its reasonable expenses for its services under this Section. If an appointment with respect to one or more series is made pursuant to this Section, the Securities of such series may have endorsed thereon, in addition to or in lieu of the Trustee's certificate of authentication, an alternate certificate of authentication substantially in the following form: 54 This is one of the Securities of the series described in the within- mentioned Indenture. _________________________________ as Trustee by _________________________________ as Authenticating Agent by _________________________________ Authorized Signatory ARTICLE VIII Discharge of Indenture; Defeasance ---------------------------------- SECTION 8.1. Termination of Company's and Guarantors' Obligations ---------------------------------------------------- Under this Indenture. This Indenture shall upon a Company Request cease to be - - -------------------- of further effect with respect to the Securities of or within any series (except as to any surviving rights of registration of transfer or exchange of such Securities and replacement of such Securities which may have been lost, stolen or mutilated as herein expressly provided for) and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture with respect to such Securities when (1) either (A) all such Securities previously authenticated and delivered (other than (i) such Securities which have been destroyed, lost or stolen and which have been replaced or paid, as provided in Section 2.9, and (ii) such Securities for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust as provided in Section 3.3) have been delivered to the Trustee for cancellation; or (B) all Securities of such series not theretofore delivered to the Trustee for cancellation (i) have become due and payable, or (ii) will become due and payable at their Stated Maturity within one year, or (iii) if redeemable at the option of the Company, are to be called for redemption within one year under arrangements satisfactory to the Trustee for the 55 giving of notice of redemption by the Trustee in the name, and at the expense, of the Company, and the Company, in the case of (i), (ii) or (iii) above, has irrevocably deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose an amount in the currency in which the Securities of such series are payable, sufficient to pay and discharge the entire indebtedness on such Securities not theretofore delivered to the Trustee for cancellation, for principal, premium, if any, and interest, if any, with respect thereto, on the date of such deposit (in the case of Securities which have become due and payable) or at the Stated Maturity or Redemption Date, as the case may be; (2) the Company has paid or caused to be paid all other sums payable hereunder by the Company; and (3) the Company delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture as to such series of Securities have been complied with. Notwithstanding the satisfaction and discharge of this Indenture, the obligation of the Company to the Trustee and any predecessor Trustee under Section 7.9, the obligations of the Company to any Authenticating Agent under Section 7.14 and, if money shall have been deposited with the Trustee pursuant to subclause (B) of clause (1) of this Section, the obligations of the Trustee under Section 8.2 and the last paragraph of Section 3.3 shall survive. SECTION 8.2. Application of Trust Funds. Subject to the provisions -------------------------- of the last paragraph of Section 3.3, all money deposited with the Trustee pursuant to Section 8.1 shall be held in trust and applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal, premium, if any, and interest, if any, for whose payment such money has been deposited with or received by the Trustee, but such money need not be segregated from other funds except to the extent required by law. SECTION 8.3. Company's Option to Effect Defeasance or Covenant ------------------------------------------------- Defeasance. The Company may at its option by or pursuant to Board Resolution, - - ---------- at any time, elect to have Section 8.4 or Section 8.5 be applied to such Outstanding Securities of any series upon compliance with the conditions set forth below in this Article. SECTION 8.4. Defeasance and Discharge. Upon the Company's exercise ------------------------ of the option specified in Section 8.3 applicable to this Section with respect to the Securities of or within a series, the Company and the Guarantors shall be deemed to have been discharged from its obligations with respect to such Securities on and after the date the conditions set forth in Section 8.6 are satisfied (hereinafter "defeasance"). For this purpose, such defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by such Securities which shall thereafter be deemed to be "Outstanding" only for the purposes of Section 8.7 and the other Sections of this Indenture referred to in clause (ii) of this Section, and to have satisfied all its other obligations under such Securities and this Indenture insofar as such 56 Securities are concerned (and the Trustee, at the expense of the Company, shall on a Company Order execute proper instruments acknowledging the same), except the following, which shall survive until otherwise terminated or discharged hereunder: (i) the rights of Holders of such Securities to receive, solely from the trust funds described in Section 8.6(a) and as more fully set forth in such Section, payments in respect of the principal of, premium, if any, and interest, if any, on such Securities when such payments are due; (ii) the Company's and the Guarantors' obligations with respect to such Securities under Sections 2.3, 2.6, 2.9, 3.2 and 3.3; (iii) the rights, powers, trusts, duties and immunities of the Trustee hereunder and (iv) this Article VIII. Subject to compliance with this Article VIII, the Company may exercise its option under this Section notwithstanding the prior exercise of its option under Section 8.5 with respect to such Securities. Following a defeasance, payment of such Securities may not be accelerated because of an Event of Default. SECTION 8.5. Covenant Defeasance. Upon the Company's exercise of ------------------- the option specified in Section 8.3 applicable to this Section with respect to any Securities of or within a series, the Company shall be released from its obligations under Sections 4.1, 3.4, 3.7, 3.8 and 3.9 (and with respect to Section 3.6, shall be required to certify only with respect to those covenants not defeased pursuant to this Section 8.5) with respect to such Securities on and after the date the conditions set forth in Section 8.6 are satisfied (hereinafter, "covenant defeasance"), and such Securities shall thereafter be deemed to be not "Outstanding" for the purposes of any direction, waiver, consent or declaration or Act of Holders (and the consequences of any thereof) in connection with Sections 4.1, 3.4, 3.7, 3.8 and 3.9, but shall continue to be deemed "Outstanding" for all other purposes hereunder. For this purpose, such covenant defeasance means that, with respect to such Securities, the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such Section or such other covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such Section or such other covenant or by reason of reference in any such Section or such other covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 6.1(c) or otherwise, but, except as specified above, the remainder of this Indenture and such Securities shall be unaffected thereby. SECTION 8.6. Conditions to Defeasance or Covenant Defeasance. The ----------------------------------------------- following shall be the conditions to the application of Section 8.4 or Section 8.5 to any Securities of or within a series: (a) The Company shall have deposited or caused to be deposited irrevocably with the Trustee (or another trustee satisfying the requirements of Section 7.12 who shall agree to comply with, and shall be entitled to the benefits of, the provisions of Sections 8.3 through 8.9 inclusive and the last paragraph of Section 3.3 applicable to the Trustee, for purposes of such Sections also a "Trustee") as trust funds in trust for the purpose of making the payments referred to in clauses (x) and (y) of this Section 8.6(a), specifically pledged as security for, and dedicated solely to, the benefit of the Holders of such Securities, with instructions to the Trustee as to the application thereof, (A) money in an amount, or (B) Government Obligations which through the payment of interest, if any, and principal in respect thereof in accordance with their terms will provide, not 57 later than one day before the due date of any payment referred to in clause (x) or (y) of this Section 8.6(a), money in an amount or (C) a combination thereof in an amount sufficient, in the opinion of a nationally recognized firm of independent certified public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge, and which shall be applied by the Trustee to pay and discharge the principal of, premium, if any, and interest, if any, on such Securities on the Maturity of such principal or installment of principal or interest, if any. Before such a deposit the Company may make arrangements satisfactory to the Trustee for the redemption or purchase of Securities at a future date or dates in accordance with Article V which shall be given effect in applying the foregoing. (b) Such defeasance or covenant defeasance shall not result in a breach or violation of, or constitute a Default or Event of Default under, this Indenture or result in a breach or violation of, or constitute a default under, any other material agreement or instrument to which the Company is a party or by which it is bound, in each case, on the date of such deposit pursuant to Section 8.6(a). (c) In the case of an election under Section 8.4, the Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel to the effect that (i) the Company has received from, or there has been published by, the Internal Revenue Service a ruling, or (ii) since the date of execution of this Indenture, there has been a change in the applicable Federal income tax law, in either case to the effect that, and based thereon such opinion shall confirm that, the Holders of such Securities will not recognize income, gain or loss for Federal income tax purposes as a result of such defeasance and will be subject to Federal income tax on the same amount and in the same manner and at the same times, as would have been the case if such deposit, defeasance and discharge had not occurred. (d) In the case of an election under Section 8.5, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders of such Securities will not recognize income, gain or loss for Federal income tax purposes as a result of such covenant defeasance and will be subject to Federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred. (e) The Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent to the defeasance under Section 8.4 or the covenant defeasance under Section 8.5 (as the case may be) have been complied with. (f) No Default or Event of Default under Section 6.1(e) or 6.1(f) with respect to such Securities shall have occurred and be continuing during the period commencing on the date of such deposit and ending on the 91st day after such date (it being understood that this condition shall not be deemed satisfied until the expiration of such period). (g) Such Defeasance or Covenant Defeasance shall not result in the trust arising from such deposit constituting an investment company within the meaning of the Investment Company Act of 1940 unless such trust shall be registered under such Act or exempt from registration thereunder. 58 SECTION 8.7. Deposited Money and Government Obligations to Be Held in -------------------------------------------------------- Trust. Subject to the provisions of the last paragraph of Section 3.3, all - - ----- money and Government Obligations (including the proceeds thereof) deposited with the Trustee pursuant to Section 8.6 in respect of any Securities of any series shall be held in trust and applied by the Trustee, in accordance with the provisions of such Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Holders of such Securities of all sums due and to become due thereon in respect of principal, premium, if any, and interest, if any, but such money need not be segregated from other funds except to the extent required by law. SECTION 8.8. Repayment to Company. To the extent permitted by the ------------------- Financial Accounting Standards Board Statement of Financial Accounting Standards No. 76, as amended or interpreted by the Financial Accounting Standards Board from time to time, or any successor thereto ("Standard No. 76"), or to the extent permitted by the Commission, the Trustee shall, from time to time, take one or more of the following actions as specified in a Company Request: (a) retransfer, reassign and deliver to the Company any securities deposited with the Trustee pursuant to Section 8.6(a), provided that the Company shall, in substitution therefor, simultaneously transfer, assign and deliver to the Trustee other Governmental Obligations appropriate to satisfy the Company's obligations in respect of the relevant Securities; and (b) the Trustee and Paying Agent shall promptly pay to the Company upon Company Request any excess money or securities held by them at any time, including, without limitation, any assets deposited with the Trustee pursuant to Section 8.6(a) exceeding those necessary for the purposes of Section 8.6(a). The Trustee shall not take the actions described in subsections (a) and (b) of this Section 8.8 unless it shall have first received a written report of Ernst & Young LLP, or another nationally recognized independent public accounting firm, (i) expressing their opinion that the contemplated action is permitted by Standard No. 76 or the Commission for transactions accounted for as extinguishment of debt under the circumstances described in paragraph 3.c of Standard No. 76 or any successor provision, and (ii) verifying the accuracy, after giving effect to such action or actions, of the computations which demonstrate that the amounts remaining to be earned on the Government Obligations deposited with the Trustee pursuant to Section 8.6(a) will be sufficient for purposes of Section 8.6(a). SECTION 8.9. Indemnity for Government Obligations. The Company ------------------------------------ shall pay, and shall indemnify the Trustee against, any tax, fee or other charge imposed on or assessed against Government Obligations deposited pursuant to this Article or the principal and interest, if any, and any other amount received on such Government Obligations. ARTICLE IX Supplemental Indentures ----------------------- SECTION 9.1. Supplemental Indentures Without Consent of Holders. -------------------------------------------------- Without the consent of any Holders, the Company, when authorized by or pursuant to a Board Resolution, the Guarantors and the Trustee at any time and from time to time, may enter into indentures 59 supplemental hereto, in form reasonably satisfactory to the Trustee, for any of the following purposes: (a) to evidence the succession of another corporation to the Company and the assumption by any such successor of the covenants and obligations of the Company herein and in the Securities; or (b) to add to the covenants of the Company or the Guarantors for the benefit of the Holders of all or any series of Securities (and if such covenants are to be for the benefit of less than all series of Securities, stating that such covenants are expressly being included solely for the benefit of such series) or to surrender any right or power herein conferred upon the Company or the Guarantors; provided, however, that in respect of any such additional -------- ------- covenant such supplemental indenture may provide for a particular period of grace after Default (which period may be shorter or longer than that allowed in the case of other Defaults) or may limit the remedies available to the Trustee upon such Default; or (c) to add any additional Events of Default with respect to all or any series of Securities (and if such Events of Default are to be for the benefit of less than all series of Securities, stating that such Events of Default are expressly included solely for the benefit of such series); or (d) to secure the Securities; or (e) to establish the form or terms of Securities of any series as permitted by Section 2.1; or (f) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee with respect to the Securities of one or more series and to add to or change any of the provisions of this Indenture as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Trustee, pursuant to the requirements of Section 7.11; or (g) to correct or supplement any provision herein which may be inconsistent with any other provision herein or to make any other provisions with respect to matters or questions arising under this Indenture, provided such -------- action shall not adversely affect the interests of the Holders of Securities of any series affected thereby; or (h) to cure an ambiguity or correct any mistake, provided such action -------- shall not adversely affect the interests of the Holders of Securities of any series; or (i) to add a Guarantor pursuant to Section 10.6 or remove a Guarantor in respect of any series which, in accordance with the terms of this Indenture, ceases to be liable in respect of its Guarantee. SECTION 9.2. Supplemental Indentures with Consent of Holders. With ----------------------------------------------- the written consent of the Holders of a majority of the aggregate principal amount of the Outstanding 60 Securities of each series adversely affected by such supplemental indenture (with each such series voting as a class), the Company, when authorized by or pursuant to a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto to add any provisions to or to change or eliminate any provisions of this Indenture or of any other indenture supplemental hereto or to modify the rights of the Holders of such Securities; provided, however, that without the consent of the Holder of each Outstanding - - -------- ------- Security affected thereby, a supplemental indenture under this Section may not: (a) change the Stated Maturity of the principal of, or premium, if any, on, or any installment of principal of or premium, if any, or interest, if any, on, any Security, or reduce the principal amount thereof or the rate of interest thereon or any premium payable upon the redemption, repurchase or repayment thereof, or change the manner in which the amount of any principal thereof or premium, if any, or interest, if any, thereon is determined, or change the Place of Payment where or the currency in which any Security or any premium or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof (or, in the case of redemption, on or after the Redemption Date); (b) reduce the percentage in principal amount of the Outstanding Securities of such series affected thereby, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver (of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences) provided for in this Indenture; (c) waive a default in the payment of principal of, premium, if any, or interest, if any, on, any Security of such series; (d) change any obligation of the Company to maintain an office or agency in the places and for the purposes specified in Section 3.2; or (e) make any change in Section 6.7 or this Section 9.2 except to increase any percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holders of each Outstanding Security of such series affected thereby. A supplemental indenture which changes or eliminates any covenant or other provision of this Indenture, which has expressly been included solely for the benefit of one or more particular series of Securities, or which modifies the rights of the Holders of Securities of such series with respect to such covenant or other provision, shall be deemed not to affect the rights under this Indenture of the Holders of Securities of any other series. It is not necessary under this Section 9.2 for the Holders to consent to the particular form of any proposed supplemental indenture, but it is sufficient if they consent to the substance thereof. 61 Upon the request of the Company, accompanied by an Officers' Certificate and a Board Resolution authorizing the execution of any such supplemental indenture, and upon the filing with the Trustee of evidence of the consent of Holders as aforesaid, the Trustee shall join with the Company in the execution of such supplemental indenture unless such supplemental indenture affects the Trustee's own rights, duties or immunities under this Indenture or otherwise, in which case the Trustee may, but shall not be obligated to, enter into such supplemental indenture. SECTION 9.3. Compliance with Trust Indenture Act. Every amendment to ----------------------------------- this Indenture or the Securities of each series shall be set forth in a supplemental indenture that complies with the Trust Indenture Act as then in effect. SECTION 9.4. Execution of Supplemental Indentures. In executing, ------------------------------------ or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modification thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. SECTION 9.5. Effect of Supplemental Indentures . Upon the --------------------------------- execution of any supplemental indenture under this article, this Indenture shall be modified in accordance therewith and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder and of any coupon appertaining thereto shall be bound thereby. SECTION 9.6. Reference in Securities to Supplemental Indentures. -------------------------------------------------- ARTICLE X Guarantees ---------- SECTION 10.1. Guarantees. (a) Subject to the provisions of this ---------- Article X, 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, 62 (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 this 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 X are guarantees of payment and not of collection. (b) 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 this Indenture, or as otherwise specifically provided therein and herein. (c) 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 this 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; 63 (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 VI, 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 Guarantees 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 this 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 10.2 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 or this 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 this 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 10.3. 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 64 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 irrevocable agree that the Obligations of such Guarantor under this Article X 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 X, result in the Obligations of such Guarantor under its Guarantee not constituting a fraudulent transfer or conveyance under applicable federal or state law. SECTION 10.4. Releases of Guarantees. (a) If the Securities are ---------------------- defeased in accordance with the terms of Article VIII of this Indenture, then each Guarantor shall be deemed to have been released from and discharged of its obligations under its Guarantee as provided in Article VIII hereof, subject to the conditions stated therein. (b) In the event an entity that is a Guarantor ceases to be a guarantor under the Credit Agreements, as amended (or any other credit agreement renewing, refunding, replacing, restating, refinancing or extending the Credit Agreements), 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 this Indenture as provided in this Article X. SECTION 10.5. Application of Certain Terms and Provisions to ---------------------------------------------- Guarantors. (a) For purposes of any provision of this Indenture which - - ---------- provides for the delivery by any Guarantor of an Officers' Certificate or an Opinion of Counsel or both, the definitions of such terms in Section 1.1 shall apply to such Guarantor as if references therein to the Company were references to such Guarantor. (b) Any request, direction, order or demand which by any provision of this Indenture is to be made by any Guarantor shall be sufficient if evidenced by a Company Order; provided that the definition of such term in Section 1.1 hereof -------- shall apply to such Guarantor as if references therein to the Company were references to such Guarantor. (c) Any notice or demand which by any provision of this 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 11.2 hereof. (d) Upon any demand, request or application by any Guarantor to the Trustee to take any action under this Indenture, such Guarantor shall furnish to the Trustee such certificates and opinions as are required in Section 7.2 hereof as if all references therein to the Company were references to such Guarantor. 65 SECTION 10.6. Additional Guarantors. The Company shall cause each --------------------- subsidiary of the Company that becomes a guarantor under the Credit Agreements, as amended (or any other credit agreement renewing, refunding, replacing, restating, refinancing or extending the Credit Agreements), after the Date of this 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 this 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). ARTICLE XI Miscellaneous ------------- SECTION 11.1. Trust Indenture Act Controls. If any provision of ---------------------------- this Indenture limits, qualifies or conflicts with another provision which is required to be included in this Indenture by the TIA, the provision required by the TIA shall control. Each Guarantor in addition to performing its obligations under its Guarantee shall perform such other obligations as may be imposed upon it with respect to this Indenture under the TIA. SECTION 11.2. Notices. Any notice or communication shall be in ------- writing, in the English language and delivered in person or mailed by first- class mail addressed as follows: if to the Company or any Guarantor: Federal-Mogul Corporation 26555 Northwestern Highway Southfield, Michigan 48034 Attention: General Counsel if to the Trustee: The Bank of New York 101 Barclay Street New York, New York 10286 Attention: Corporate Trust Administration The Company or the Trustee by notice to the other may designate additional or different addresses for subsequent notices or communications. Where this Indenture provides for notice to Securityholders of any event, such notice shall be sufficiently given (unless otherwise herein expressly provided) if (i) in writing and mailed, first-class postage prepaid, to each Securityholder affected by such event, at his 66 address as it appears in the Note Register, not later than the latest date (if any), and not earlier than the earliest date (if any), prescribed for the giving of such notice and (ii) published at least twice, in an Authorized Newspaper in Luxembourg, which is expected to be the Luxemburger Wort, so long as the Securities are listed on the Luxembourg Stock Exchange and the rules of the Luxembourg Stock Exchange so require or, if not practicable, elsewhere in Western Europe, on a Business Day the first such publication to be not earlier than the earliest date and the second such publication to be not later than the latest date herein prescribed for the giving of such notice. In any case where notice to Securityholders is given by mail, neither the failure to mail a notice or communication to a Securityholder nor any defect in any notice so mailed shall affect its sufficiency with respect to other Securityholders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it. If by reason of the suspension of regular mail service or by reason of any other cause it shall be impracticable to give such notice as provided above, then such notification as shall be made with the approval of the Trustee shall constitute a sufficient notification for every purpose hereunder. SECTION 11.3. Communication by Holders with other Holders. ------------------------------------------- Securityholders may communicate pursuant to TIA (S) 3l2(b) with other Securityholders with respect to their rights under this Indenture or the Securities. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA (S) 312(c). SECTION 11.4. Certificate and Opinion as to Conditions Precedent. -------------------------------------------------- Upon any request or application by the Company to the Trustee to take or refrain from taking any action under this Indenture, the Company shall furnish to the Trustee: (a) an Officers' Certificate in form and substance reasonably satisfactory to the Trustee stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (b) an Opinion of Counsel in form and substance reasonably satisfactory to the Trustee stating that, in the opinion of such counsel, all such conditions precedent have been complied with, except that in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. SECTION 11.5. Statements Required in Certificate or Opinion. Each --------------------------------------------- certificate or opinion with respect to compliance with a covenant or condition provided for in this Indenture shall include: (a) a statement that the individual making such certificate or opinion has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; 67 (c) a statement that, in the opinion of such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether or not, in the opinion of such individual, such covenant or condition has been complied with. In giving such Opinion of Counsel, counsel may rely as to factual matters on an Officers' Certificate or on certificates of public officials. SECTION 11.6. When Securities Disregarded. In determining whether --------------------------- the Holders of the required principal amount of Securities have concurred in any direction, waiver or consent, Securities owned by the Company or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Company shall be disregarded and deemed not to be Outstanding, except that, for the purpose of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Securities which the Trustee knows are so owned shall be so disregarded. Also, subject to the foregoing, only Securities Outstanding at the time shall be considered in any such determination. SECTION 11.7. Rules by Trustee, Paying Agent and Registrar. The -------------------------------------------- Trustee may make reasonable rules for action by, or a meeting of, Securityholders. The Registrar and the Paying Agent may make reasonable rules for their functions. SECTION 11.8. Legal Holidays. In any case where any interest -------------- payment date, Redemption Date, Stated Maturity or Maturity of any Security shall not be a Business Day, then (notwithstanding any other provision of this Indenture or of any Security) payment of principal, premium, if any, or interest, if any, need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on such date; provided that no interest shall accrue on the amount so payable for the period - - -------- from and after such interest payment date, Redemption Date, Stated Maturity or Maturity, as the case may be. SECTION 11.9. GOVERNING LAW. THIS INDENTURE, THE SECURITIES AND ------------- THE GUARANTEES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. SECTION 11.10. No Recourse Against Others. An incorporator, -------------------------- director, officer, employee, stockholder or controlling person, as such, of each of the Company or any Guarantors shall not have any liability for any obligations of the Company under the Securities, this Indenture or the Guarantees or for any claim based on, in respect of or by reason of such obligations or their creation. By accepting a Security, each Securityholder shall waive and release all such liability. The waiver and release shall be part of the consideration for the issue of the Securities. SECTION 11.11. Successors. All agreements of the Company and the ---------- Guarantors in this Indenture and the Securities shall bind their respective successors. All agreements of the Trustee in this Indenture shall bind its successors. 68 SECTION 11.12. Multiple Originals. The parties may sign any number ------------------ of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. One signed copy is enough to prove this Indenture. SECTION 11.13. Variable Provisions. The Company initially appoints ------------------- the Trustee as Paying Agent and Registrar and custodian with respect to any Global Securities. SECTION 11.14. Qualification of Indenture. The Company shall -------------------------- qualify this Indenture under the TIA in accordance with the terms and conditions of the Registration Rights Agreement and shall pay all reasonable costs and expenses (including attorneys' fees and expenses for the Company, the Trustee and the Holders) incurred in connection therewith, including, but not limited to, costs and expenses of qualification of this Indenture and the Securities and printing this Indenture and the Securities. The Trustee shall be entitled to receive from the Company any such Officers' Certificates, Opinions of Counsel or other documentation as it may reasonably request in connection with any such qualification of this Indenture under the TIA. SECTION 11.15. Table of Contents; Headings. The table of contents, --------------------------- cross-reference sheet and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not intended to be considered a part hereof and shall not modify or restrict any of the terms or provisions hereof. SECTION 11.16. Separability. In case any provision of this ------------ Indenture or the Securities or the Guarantees shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 11.17. Benefits of Indenture. Nothing in this Indenture or --------------------- in the Securities or the Guarantees, expressed or implied, shall give to any Person, other than the parties hereto and their successors hereunder and the Holders, any benefit or any legal or equitable right, remedy or claim under this Indenture. 69 IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. FEDERAL-MOGUL CORPORATION by: ______________________________ Name: Title: FEDERAL-MOGUL DUTCH HOLDINGS INC. by: _______________________________ Name: Title: FEDERAL-MOGUL GLOBAL INC. by: _______________________________ Name: Title: FEDERAL-MOGUL U.K. HOLDINGS INC. by: _______________________________ Name: Title: F-M U.K. HOLDINGS LIMITED by: _______________________________ Name: Title: 70 CARTER AUTOMOTIVE COMPANY, INC. by: ________________________________ Name: Title: FEDERAL MOGUL VENTURE CORPORATION by: _______________________________ Name: Title: FEDERAL-MOGUL WORLD WIDE, INC. by: _______________________________ Name: Title: FEDERAL-MOGUL GLOBAL PROPERTIES, INC. by: _______________________________ Name: Title: FELT PRODUCTS MFG. CO. by: _______________________________ Name: Title: FEL-PRO MANAGEMENT CO. by: _______________________________ Name: Title: 71 FEDERAL-MOGUL IGNITION COMPANY by: _______________________________ Name: Title: FEDERAL-MOGUL PRODUCTS, INC. by: _______________________________ Name: Title: FEDERAL-MOGUL AVIATION, INC. by: _______________________________ Name: Title: 72 THE BANK OF NEW YORK, as Trustee by: _______________________________ Name: Title: 73 EX-10.13 4 THIRD AMENDED CREDIT AGREEMENT EXHIBIT 10.13 ================================================================================ FEDERAL-MOGUL CORPORATION THE FOREIGN SUBSIDIARY BORROWERS __________________________ $1,750,000,000 THIRD AMENDED AND RESTATED CREDIT AGREEMENT DATED AS OF FEBRUARY 24, 1999 _______________________________ THE CHASE MANHATTAN BANK, as Lead Arranger, Book Manager and Administrative Agent ================================================================================ TABLE OF CONTENTS
Page ARTICLE I. DEFINITIONS.............................................................................................. 1 SECTION 1.01 Defined Terms..................................................................................... 1 SECTION 1.02 Other Definitional Provisions..................................................................... 28 ARTICLE II. AMOUNT AND TERMS OF REVOLVING CREDIT COMMITMENTS AND SWING LINE COMMITMENT.............................. 29 SECTION 2.01 US$ Revolving Credit Commitments.................................................................. 29 SECTION 2.02 Repayment of US$ Revolving Credit Loans; Evidence of Debt......................................... 29 SECTION 2.03 Procedure for US$ Revolving Credit Borrowing...................................................... 30 SECTION 2.04 Termination or Reduction of US$ Revolving Credit Commitments...................................... 31 SECTION 2.05 Swing Line Commitments............................................................................ 31 SECTION 2.06 Procedure for Swing Line Borrowings; Interest Rate................................................ 31 SECTION 2.07 Repayment of Swing Line Loans; Evidence of Debt................................................... 31 SECTION 2.08 Refunding of Swing Line Borrowings................................................................ 32 SECTION 2.09 Participating Interests........................................................................... 33 ARTICLE III. AMOUNT AND TERMS OF TERM LOAN COMMITMENTS.............................................................. 33 SECTION 3.01 Term Loan Commitments............................................................................. 33 SECTION 3.02 Repayment of Term Loans; Evidence of Debt......................................................... 34 SECTION 3.03 Procedure for Term Loan Borrowing................................................................. 36 ARTICLE IV. AMOUNT AND TERMS OF MULTICURRENCY REVOLVING CREDIT COMMITMENTS.......................................... 36 SECTION 4.01 Multicurrency Revolving Credit Commitments........................................................ 36 SECTION 4.02 Procedure for Multicurrency Revolving Credit Borrowing............................................ 37 SECTION 4.03 Spot Exchange Rate Calculations................................................................... 37 SECTION 4.04 Commitment Reallocations........................................................................... 37 SECTION 4.05 Redenomination and Alternative Currencies......................................................... 39 ARTICLE V. GENERAL PROVISIONS APPLICABLE TO THE LOANS............................................................... 39 SECTION 5.01 Interest Rates and Payment Dates.................................................................. 39 SECTION 5.02 Conversion and Continuation Options............................................................... 39 SECTION 5.03 Minimum Amounts of Tranches....................................................................... 40 SECTION 5.04 Optional and Mandatory Prepayments................................................................ 41 SECTION 5.05 Facility Fees; Other Fees......................................................................... 42 SECTION 5.06 Computation of Interest and Fees.................................................................. 43 SECTION 5.07 Inability to Determine Interest Rate.............................................................. 44 SECTION 5.08 Pro Rata Treatment and Payments................................................................... 44 SECTION 5.09 Illegality........................................................................................ 48 SECTION 5.10 Requirements of Law............................................................................... 48 SECTION 5.11 Taxes............................................................................................. 49
-i- SECTION 5.12 Indemnity......................................................................................... 52 SECTION 5.13 Use of Proceeds................................................................................... 53 SECTION 5.14 Change of Lending Office; Replacement of Lenders.................................................. 53 ARTICLE VI. REPRESENTATIONS AND WARRANTIES.......................................................................... 54 SECTION 6.01 Financial Condition............................................................................... 54 SECTION 6.02 No Change......................................................................................... 55 SECTION 6.03 Corporate Existence; Compliance with Law.......................................................... 55 SECTION 6.04 Corporate Power; Authorization; Enforceable Obligations........................................... 55 SECTION 6.05 No Legal Bar...................................................................................... 56 SECTION 6.06 No Material Litigation............................................................................ 56 SECTION 6.07 No Default........................................................................................ 56 SECTION 6.08 Ownership of Property; Liens...................................................................... 56 SECTION 6.09 Intellectual Property............................................................................. 56 SECTION 6.10 No Burdensome Restrictions........................................................................ 56 SECTION 6.11 Taxes............................................................................................. 56 SECTION 6.12 Federal Regulations............................................................................... 57 SECTION 6.13 ERISA............................................................................................. 57 SECTION 6.14 Investment Company Act; Other Regulations......................................................... 57 SECTION 6.15 Subsidiaries...................................................................................... 58 SECTION 6.16 Environmental Matters............................................................................. 58 SECTION 6.17 Accuracy and Completeness of Information.......................................................... 59 SECTION 6.18 Other Unsubordinated Indebtedness................................................................. 59 SECTION 6.19 Foreign Subsidiary Borrowers...................................................................... 59 SECTION 6.20 Security Documents................................................................................ 60 SECTION 6.21 Solvency.......................................................................................... 60 SECTION 6.22 Year 2000 Matters................................................................................. 60 ARTICLE VII. CONDITIONS PRECEDENT................................................................................... 60 SECTION 7.01 Conditions to Initial Extensions of Credit........................................................ 60 SECTION 7.02 Conditions to Each Extension of Credit............................................................ 62 ARTICLE VIII. AFFIRMATIVE COVENANTS................................................................................. 63 SECTION 8.01 Financial Statements.............................................................................. 64 SECTION 8.02 Certificates; Other Information................................................................... 64 SECTION 8.03 Accrual of Liabilities; Payment of Obligations.................................................... 65 SECTION 8.04 Maintenance of Corporate Existence; Maintenance of Properties..................................... 65 SECTION 8.05 Insurance......................................................................................... 65 SECTION 8.06 Notices........................................................................................... 65 SECTION 8.07 Compliance with Contractual Obligations and Laws.................................................. 66 SECTION 8.08 Access to Books and Inspection.................................................................... 66 SECTION 8.09 Use of Proceeds................................................................................... 66 SECTION 8.10 Environmental Laws................................................................................ 66 SECTION 8.11 Additional Collateral and Guaranties.............................................................. 67 SECTION 8.12 Foreign Collateral Matters........................................................................ 68
-ii- ARTICLE IX. NEGATIVE COVENANTS...................................................................................... 69 SECTION 9.01 Cash Flow Coverage................................................................................ 69 SECTION 9.02 Consolidated Leverage Ratio....................................................................... 69 SECTION 9.03 Maintenance of Consolidated Net Worth............................................................. 69 SECTION 9.04 Limitation on Liens............................................................................... 69 SECTION 9.05 Limitation on Indebtedness........................................................................ 71 SECTION 9.06 Limitation on Guaranties.......................................................................... 72 SECTION 9.07 Limitation on Fundamental Changes................................................................. 73 SECTION 9.08 Limitation on Sale of Assets...................................................................... 74 SECTION 9.09 Limitation on Restricted Payments................................................................. 74 SECTION 9.10 Restrictions on Special Purpose Subsidiaries...................................................... 75 SECTION 9.11 Limitation on Investments, Loans and Advances..................................................... 75 SECTION 9.12 Limitation on Optional Payments and Modifications of Debt Instruments, Certain Derivative Transactions, etc.......................................................................................... 77 SECTION 9.13 Limitation on Sales and Leasebacks................................................................ 77 SECTION 9.14 Limitation on Restrictions on Subsidiary Distributions............................................ 77 SECTION 9.15 Multiemployer Plans............................................................................... 78 SECTION 9.16 Limitation on More Restrictive Covenants.......................................................... 78 SECTION 9.17 Affiliates........................................................................................ 78 ARTICLE X. GUARANTEE................................................................................................ 78 SECTION 10.01 Guarantee........................................................................................ 78 SECTION 10.02 Right of Set-off................................................................................. 79 SECTION 10.03 No Subrogation................................................................................... 79 SECTION 10.04 Amendments, etc. with respect to the Obligations; Waiver of Rights............................... 80 SECTION 10.05 Guarantee Absolute and Unconditional............................................................. 80 SECTION 10.06 Reinstatement.................................................................................... 81 SECTION 10.07 Payments......................................................................................... 82 ARTICLE XI. EVENTS OF DEFAULT....................................................................................... 82 ARTICLE XII. THE ADMINISTRATIVE AGENT............................................................................... 84 SECTION 12.01 Appointment...................................................................................... 84 SECTION 12.02 Delegation of Duties............................................................................. 85 SECTION 12.03 Exculpatory Provisions........................................................................... 85 SECTION 12.04 Reliance by Administrative Agent................................................................. 85 SECTION 12.05 Notice of Default................................................................................ 86 SECTION 12.06 Non-Reliance on Agents and Other Lenders......................................................... 86 SECTION 12.07 Indemnification.................................................................................. 86 SECTION 12.08 Administrative Agent in Its Individual Capacity.................................................. 87 SECTION 12.09 Successor Administrative Agent................................................................... 87 SECTION 12.10 Authorization to Release Liens................................................................... 87 ARTICLE XIII. MISCELLANEOUS......................................................................................... 88
-iii- SECTION 13.01 Amendments and Waivers........................................................................ 88 SECTION 13.02 Notices....................................................................................... 90 SECTION 13.03 No Waiver; Cumulative Remedies................................................................ 91 SECTION 13.04 Survival of Representations and Warranties.................................................... 91 SECTION 13.05 Payment of Expenses and Taxes................................................................. 91 SECTION 13.06 Successors and Assigns; Participations and Assignments........................................ 92 SECTION 13.07 Adjustments; Set-Off.......................................................................... 95 SECTION 13.08 Counterparts.................................................................................. 95 SECTION 13.09 Severability.................................................................................. 96 SECTION 13.10 Integration................................................................................... 96 SECTION 13.11 GOVERNING LAW................................................................................. 96 SECTION 13.12 Submission To Jurisdiction; Waivers........................................................... 96 SECTION 13.13 Acknowledgements.............................................................................. 97 SECTION 13.14 WAIVERS OF JURY TRIAL......................................................................... 97 SECTION 13.15 Power of Attorney............................................................................. 97 SECTION 13.16 Release of Collateral......................................................................... 97 SECTION 13.17 Judgment...................................................................................... 98 SECTION 13.18 Confidentiality............................................................................... 98
-iv- Page -v- Page ANNEXES: Annex A Pricing Grid SCHEDULES: I Commitments; Addresses II Subsidiaries; Foreign Subsidiary Borrowers; Insignificant Subsidiaries III Existing Liens IV Existing Indebtedness and Existing Guaranties V Pledge Agreements VI Excluded Foreign Subsidiaries 6.20 Perfection Actions 9.05(c) Indebtedness of Special Purpose Subsidiaries 9.08 Excluded Assets -vi- EXHIBITS: A-1 Form of US$ Revolving Credit Note A-2 Form of Term Note B Form of Domestic Subsidiary Guarantee C Form of Domestic Pledge Agreement D-1 Form of Trust Agreement (First Union) D-2 Form of Trust Agreement (ABN AMRO) E Form of Joinder Agreement F Form of Responsible Officer's Certificate G Form of Assignment and Acceptance H-1 Form of Opinion of David M. Sherbin, Esq., Associate General Counsel of the Company H-2 Form of Opinion of Skadden, Arps, Slate, Meagher & Flom LLP I Matters to be Covered by Foreign Subsidiary Opinion J Form of Reallocation Notice -vii- THIRD AMENDED AND RESTATED CREDIT AGREEMENT, dated as of February 24, 1999, among FEDERAL-MOGUL CORPORATION, a Michigan corporation (the "Company"), ------- each FOREIGN SUBSIDIARY BORROWER (as hereinafter defined) (together with the Company, the "Borrowers"), the several banks and other financial institutions --------- from time to time parties hereto (the "Lenders") and THE CHASE MANHATTAN BANK, a ------- New York banking corporation ("Chase"), as administrative agent for the Lenders ----- hereunder. W I T N E S S E T H: ------------------- WHEREAS, the Company is party to (i) the Second Amended and Restated Credit Agreement, dated as of December 18, 1997 (the "Existing Multicurrency ---------------------- Agreement"), among the Company, the foreign subsidiary borrowers parties - - --------- thereto, the lenders parties thereto and Chase, as administrative agent, (ii) the $1,950,000,000 Loan Agreement, dated as of September 30, 1998 (the "Existing -------- Loan Agreement"), among the Company, the lenders parties thereto and Chase, as - - -------------- administrative agent and (iii) the $200,000,000 364-Day Revolving Credit Agreement, dated as of September 30, 1998 (the "Existing 364-Day Agreement" and -------------------------- collectively with the Existing Multicurrency Agreement and the Existing Loan Agreement, the "Existing Credit Agreements"), among the Company, the lenders -------------------------- parties thereto and Chase, as administrative agent; WHEREAS, in order to restate and refinance the Existing Credit Agreements (the "Refinancing"), to provide for additional working capital ----------- financing for the Company and its Subsidiaries and to pay fees and expenses in connection with the Refinancing, the Company is entering into this Agreement; and WHEREAS, the Company, the Lenders and the Administrative Agent desire to amend and restate the Existing Credit Agreements upon and subject to the terms and conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises and the mutual agreements contained herein, the parties hereto agree that on the Closing Date the Existing Credit Agreements shall be further amended and restated in their entirety as follows: ARTICLE I. DEFINITIONS ----------- SECTION I.1 Defined Terms. As used in this Agreement, the following ------------- terms shall have the following meanings: "Accumulated Funding Deficiency": any accumulated funding deficiency ------------------------------ within the meaning of Section 412 of the Code or Section 302 of ERISA. -1- "Additional US$ Revolving Credit Commitments": as defined in Section ------------------------------------------- 4.04. "Additional US$ Revolving Credit Facility": as defined in the ---------------------------------------- definition of "Facility". "Additional US$ Revolving Credit Loans": any revolving credit loans ------------------------------------- made to the Company under the Additional US$ Revolving Commitments. Each Additional US$ Revolving Credit Loan shall be a Eurodollar Loan or a Base Rate Loan. "Additional US$ Revolving Credit Percentage": as to any Multicurrency ------------------------------------------ Revolving Credit Lender at any time, the percentage which such Lender's Additional US$ Revolving Credit Commitment then constitutes of the aggregate Additional US$ Revolving Credit Commitments (or, at any time after the Additional US$ Revolving Credit Commitments shall have expired or terminated, the percentage which the aggregate principal amount of such Lender's Additional US$ Revolving Credit Loans then outstanding constitutes of the aggregate principal amount of the Additional US$ Revolving Credit Loans then outstanding). "Adjustment Date": as defined in the Pricing Grid. --------------- "Administrative Agent": Chase, together with its affiliates, as -------------------- arranger of the Commitments and as administrative agent for the Lenders under this Agreement or any successor thereto appointed pursuant to Section 12.09. "Affiliate": of any Person, shall mean any Person that, directly or --------- indirectly, controls or is controlled by or is under common control with such Person, or in the case of any Lender which is an investment fund, (i) the investment advisor thereof and (ii) any other investment fund having the same investment advisor. For the purposes of this definition, "control" (including, with correlative meanings, the terms "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise. "Aggregate Multicurrency Revolving Credit Exposure": the aggregate ------------------------------------------------- amount of the Multicurrency Revolving Credit Exposure of all Lenders. "Agreement": this Third Amended and Restated Credit Agreement, as the --------- same may be amended, supplemented or otherwise modified from time to time. "Agreement Currency": as defined in Section 13.17(b). ------------------ "Applicable Margin": for each Type and Class of Loan, the rate per ----------------- annum set forth under the relevant column heading below: -2- Base Eurodollar Loans/ Rate Loans Multicurrency Revolving ---------- ----------------------- Credit Loans ----------------------- Revolving Credit Loans .375% 1.375% Multicurrency Revolving Credit Loans .375% 1.375% Tranche A Term Loans .75% 1.75% Tranche B Term Loans 1.00% 2.00% ; provided, that on and after the first Adjustment Date occurring after the -------- Closing Date, the Applicable Margin with respect to Revolving Credit Loans, Multicurrency Revolving Credit Loans and Tranche A Term Loans will be determined pursuant to the Pricing Grid. "Assigned Dollar Value": in respect of any Multicurrency Revolving --------------------- Credit Borrowing, the amount thereof expressed in Dollars in the initial borrowing request with respect thereto. Thereafter, Assigned Dollar Value shall mean, in respect of any Multicurrency Revolving Credit Borrowing, the Dollar Equivalent of the principal amount of the Loans relating to such Multicurrency Revolving Credit Borrowing as determined on the most recent Reset Date based on the Spot Exchange Rate. "Assignee": as defined in Section 13.06(c). -------- "Available Additional US$ Revolving Credit Commitment": as to any ---------------------------------------------------- Multicurrency Revolving Credit Lender at any time, an amount equal to (a) such Lender's Additional US$ Revolving Credit Commitments minus (b) such ----- Lender's outstanding Additional US$ Revolving Credit Loans. "Available Foreign Currencies": Pounds Sterling, Swiss Francs, ---------------------------- Australian Dollars, Swedish Kroner, euro units and any other available and freely-convertible non-Dollar currency selected by the Company and approved by the Administrative Agent and the Majority Multicurrency Revolving Credit Facility Lenders (including such approval with respect to the Currency Sublimit applicable to such currency). "Available Multicurrency Revolving Credit Commitment": as to any --------------------------------------------------- Multicurrency Revolving Credit Lender at any time, an amount equal to (a) such Lender's Multicurrency Revolving Credit Commitment minus (b) such ----- Lender's Multicurrency Revolving Credit Exposure. "Available US$ Revolving Credit Commitment": as to any US$ Revolving ----------------------------------------- Credit Lender at any time, an amount equal to (a) such Lender's US$ Revolving Credit Commitment minus (b) such Lender's US$ Revolving ----- Extensions of Credit. -3- "Base Rate": for any day, a rate per annum (rounded upwards, if --------- necessary, to the next 1/16 of 1%) equal to the greater of (a) the Prime Rate in effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. If for any reason the Administrative Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Federal Funds Effective Rate for any reason, including the inability or failure of the Administrative Agent to obtain sufficient quotations in accordance with the terms thereof, the Base Rate shall be determined without regard to clause (b) of the first sentence of this definition until the circumstances giving rise to such inability no longer exist. Any change in the Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective on the effective day of such change in the Prime Rate or the Federal Funds Effective Rate, respectively. "Base Rate Loans": Loans the rate of interest applicable to which is --------------- based upon the Base Rate. "Benefitted Lender": as defined in Section 13.07. ----------------- "Board": the Board of Governors of the Federal Reserve System (or any ----- successor thereto). "Bond Offering": the offering by the Company from time to time of its ------------- debt securities. "Borrowers": as defined in the preamble hereto. --------- "Borrowing Date": any Business Day specified in a notice pursuant to -------------- Section 2.03, 2.07, 3.03 or 4.02 as a date on which a Borrower requests the Lenders to make Loans hereunder. "Business": as defined in Section 6.16. -------- "Business Day": (a) when such term is used in respect of any amount ------------ denominated or to be denominated in (i) any Available Foreign Currency or Dollars under the Multicurrency Revolving Credit Commitments, a London Banking Day which is also a day other than a Saturday or Sunday on which banks are open for general banking business in (x) the city which is the principal financial center of the country of issuance of such Available Foreign Currency (or, in the case of Pounds Sterling, Paris), (y) in the case of euro only, Frankfurt am Main, Germany (or such other principal financial center as the Administrative Agent may from time to time nominate for this purpose) and (z) New York City and (ii) Dollars under the US$ Revolving Credit Commitments or the Additional US$ Revolving Credit Commitments, a London Banking Day which is also a day other than a Saturday or Sunday on which banks are open for general banking business in New York City and (b) when such term is used for the -4- purpose of determining the date on which the Eurocurrency Base Rate is determined under this Agreement for any Loan denominated in euro for any Interest Period therefor and for purposes of determining the first and last day of any Interest Period, references in this Agreement to Business Days shall be deemed to be references to Target Operating Days. "Calculation Date": (a) the last Business Day of each March, June, ---------------- September and December and (b) at any time when the Aggregate Multicurrency Revolving Credit Exposure exceeds 85% of the Total Multicurrency Revolving Credit Commitments or at any time when a Default or Event of Default shall have occurred and be continuing, any other date which the Administrative Agent may determine in its discretion to be a Calculation Date. "Capital Expenditures": all expenditures of the Company and its -------------------- Subsidiaries on a consolidated basis for any fixed assets or improvements, or for replacements, substitutions or additions thereto, which have a useful life of more than one year, including, but not limited to, the direct or indirect acquisition of such assets by way of increased product or service charges, offset items or otherwise, including all expenditures under capital leases, all determined in accordance with GAAP. "Capital Stock": any and all shares, interests, participations or ------------- other equivalents (however designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person other than a corporation and any and all warrants or options to purchase any of the foregoing. For all purposes of this Agreement, "Capital Stock" shall include the 11,500,000 7% Trust Convertible Preferred Securities (Liquidation Amount $50 Per Convertible Preferred Security) issued by Federal-Mogul Financing Trust and guaranteed by the Company upon terms described in the Offering Memorandum issued November 24, 1997 and any other substantially equivalent securities hereafter issued by a financing vehicle for the benefit of the Company, and such Trust Convertible Securities and substantially equivalent securities will be treated as preferred stock of the Company and the Company shall not be deemed to have issued any Indebtedness or Guarantee in connection therewith. "Cash Equivalents": (a) securities with maturities of one year or ---------------- less from the date of acquisition issued or fully guaranteed or insured by the United States Government or any agency thereof, (b) certificates of deposit and eurodollar time deposits with maturities of one year or less from the date of acquisition and overnight bank deposits of any Lender or of any commercial bank having capital and surplus in excess of $500,000,000, (c) repurchase obligations of any Lender or of any commercial bank satisfying the requirements of clause (b) of this definition, having a term of not more than 30 days with respect to securities issued or fully guaranteed or insured by the United States Government, (d) commercial paper of a domestic issuer rated at least A-2 by S&P or P-2 by Moody's, (e) securities with maturities of one year or less from the date of acquisition issued or fully guaranteed by any state, commonwealth or territory of the -5- United States, by any political subdivision or taxing authority of any such state, commonwealth or territory or by any foreign government, the securities of which state, commonwealth, territory, political subdivision, taxing authority or foreign government (as the case may be) are rated at least A by S&P or A by Moody's (or an equivalent rating for such foreign securities), (f) securities with maturities of one year or less from the date of acquisition backed by standby letters of credit issued by any Lender or any commercial bank satisfying the requirements of clause (b) of this definition or (g) shares of money market mutual or similar funds which invest exclusively in assets satisfying the requirements of clauses (a) through (f) of this definition, provided that, in the case of any -------- investment by a Foreign Subsidiary, "Cash Equivalents" shall also include: (i) direct obligations of the sovereign nation (or any agency thereof) in which such Foreign Subsidiary is organized and is conducting business or in obligations fully and unconditionally guaranteed by such sovereign nation (or any agency thereof), (ii) investments of the type and maturity described in clauses (a) through (f) above of foreign obligors, which Investments or obligors (or the parents of such obligors) have ratings described in such clauses or equivalent ratings from comparable foreign rating agencies and (iii) shares of money market mutual or similar funds which invest exclusively in assets otherwise satisfying the requirements of this definition (including this proviso). "Cash Flow Coverage": for any period, the ratio of (a) Consolidated ------------------ EBITDA less Capital Expenditures, divided by (b) (i) Interest Expenses plus (ii) dividends paid on any class of the Company's Capital Stock in each case determined for such period. "Change of Control": (a) any "person" or "group" within the meaning ----------------- of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as amended, shall become the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended) of more than 50% of the then outstanding voting stock of the Company other than in a transaction having the approval of the board of directors of the Company at least a majority of which members are Continuing Directors or (b) Continuing Directors shall cease to constitute at least a majority of the directors constituting the board of directors of the Company. "Chase": The Chase Manhattan Bank, a New York banking corporation. ----- "Class": the collective reference to Loans outstanding under a single ----- Facility. "Closing Date": the date, on or before March 31, 1999, on which the ------------ conditions precedent set forth in Section 7.01 are satisfied or waived in accordance with this Agreement. "Code": the Internal Revenue Code of 1986, as amended from time to ---- time. "Collateral": all Property of the Loan Parties, now owned or ---------- hereafter acquired, upon which a Lien is purported to be created by any Security Document. -6- "Collateral Release Date": the date of receipt by the Administrative ----------------------- Agent of a written request by the Company to release the Collateral following either (i) the date on which there is in effect either (A) an S&P Bond Rating of at least BBB- or its equivalent or (B) a Moody's Bond Rating of at least Baa3 or its equivalent or (ii) the date on which the Consolidated Leverage Ratio is less than or equal to 2.0 to 1.0. "Commitment": as to any Lender, the sum of the Tranche A Term Loan ---------- Commitment, the Tranche B Term Loan Commitment, the US$ Revolving Credit Commitment, the Multicurrency Revolving Credit Commitment and, without duplication, the Additional US$ Revolving Credit Commitment of such Lender. "Commonly Controlled Entity": an entity, whether or not incorporated, -------------------------- which is under common control with the Company within the meaning of Section 4001 of ERISA or is part of a group which includes the Company and which is treated as a single employer under Section 414 of the Code. "Company": as defined in the preamble hereto. ------- "Company Guaranty": the guarantee contained in Article X. ---------------- "Consolidated Current Assets": at any date, all amounts (other than --------------------------- cash and Cash Equivalents) which would, in conformity with GAAP, be set forth opposite the caption "total current assets" (or any like caption) on a consolidated balance sheet of the Company and its Subsidiaries at such date. "Consolidated Current Liabilities": at any date, all amounts which -------------------------------- would, in conformity with GAAP, be set forth opposite the caption "total current liabilities" (or any like caption) on a consolidated balance sheet of the Company and its Subsidiaries at such date, but excluding (a) the current portion of any Funded Debt of the Company and its Subsidiaries and (b) without duplication of clause (a) above and to the extent otherwise included therein, all Indebtedness consisting of Revolving Credit Loans and Multicurrency Revolving Credit Loans. "Consolidated EBITDA": for any period, the sum of (a) the ------------------- consolidated net income (or loss) of the Company and its Subsidiaries for such period before deduction of income and franchise taxes and depreciation, determined in conformity with GAAP, but excluding the income of any Person (other than Subsidiaries of the Company) in which the Company or any of its Subsidiaries has an ownership interest, until such income has been received by the Company or a Subsidiary in a cash distribution, plus ---- (b) any Interest Expenses reported during such period, plus (c) ---- amortization of Intangible Assets deducted in determining net income for such period, plus (d) with respect to the calculation of Consolidated ---- EBITDA for any period which includes any fiscal quarter of the 1998 fiscal year of the Company only, any integration, restructuring and research and development -7- charges taken in any such quarter, provided that the aggregate amount of -------- such integration, restructuring and research and development charges added to Consolidated EBITDA pursuant to this clause (d) shall not exceed $84,000,000, plus (e) without duplication of any of the foregoing ---- amounts, with respect to the calculation of Consolidated EBITDA for any period which includes the third or fourth quarters of the 1998 fiscal year of the Company or any fiscal quarter during the 1999 fiscal year of the Company only, any integration and restructuring charges taken in any such quarter relating to the Cooper Automotive Acquisition, provided that the -------- aggregate amount of such integration and restructuring charges added to Consolidated EBITDA pursuant to this clause (e) shall not exceed $126,000,000 plus (f) any non-cash charges deducted in determining net ---- income for such period; provided, that if in any later period such non-cash -------- charges become a cash expenditure, the amount of such cash expenditure shall be deducted in determining Consolidated EBITDA for such later period. "Consolidated Leverage Ratio": as at the last day of any period of --------------------------- four consecutive fiscal quarters, the ratio of (a) Consolidated Total Debt on such day to (b) Consolidated EBITDA for such period; provided, that for -------- purposes of calculating Consolidated EBITDA for any period of four consecutive fiscal quarters, the Consolidated EBITDA of any Person acquired by the Company or its Subsidiaries during such period shall be included on a pro forma basis for such period (assuming the consummation of each such --------- acquisition and the incurrence or assumption of any Indebtedness in connection therewith occurred on the first day of such period) if the consolidated balance sheet of such acquired Person and its consolidated Subsidiaries as at the end of the period preceding the acquisition of such Person and the related consolidated statements of income and stockholders' equity and of cash flows for the period in respect of which Consolidated EBITDA is to be calculated (i) have been provided to the Administrative Agent and the Lenders and (ii) either (A) have been reported on without a qualification arising out of the scope of the audit (other than a "going concern" or like qualification or exception) by independent certified public accountants of nationally recognized standing or (B) have been found acceptable by the Administrative Agent. "Consolidated Net Income": for any period, the consolidated net ----------------------- income (or loss) of the Company and its Subsidiaries for such period, determined in conformity with GAAP, but excluding the income of any Person (other than Subsidiaries of the Company) in which the Company or any of its Subsidiaries has an ownership interest, until such income has been received by the Company or a Subsidiary in a cash distribution. "Consolidated Net Worth": at any date, shareholders equity ---------------------- (including, but not limited to, Capital Stock, additional paid-in capital and retained earnings after deducting treasury stock and unearned compensation) of the Company and its Subsidiaries on a consolidated basis as at such date determined in accordance with GAAP; provided, that -------- Consolidated Net Worth shall not reflect any additions or deductions resulting from foreign currency translation gains or losses. -8- "Consolidated Total Debt": all Indebtedness of the Company and its ----------------------- Subsidiaries, determined on a consolidated basis. "Consolidated Working Capital": at any date, the excess of ---------------------------- Consolidated Current Assets on such date over Consolidated Current Liabilities on such date. "Continuing Directors": the collective reference to (a) all members -------------------- of the board of directors of the Company who have held office continually since September 26, 1997, and (b) all members of the board of directors of the Company who were elected as directors after September 26, 1997 and whose nomination for election by the Company's shareholders was approved by a vote of at least 50% of the Continuing Directors. "Contractual Obligation": as to any Person, any provision of any ---------------------- security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound. "Cooper Automotive Acquisition": the acquisition by the Company of ----------------------------- Cooper Industries' Automotive Division, consisting of the common stock of Champion Spark Plug Company, Cooper Automotive Company, Moog Automotive Company, Champion Aviation and the common stock of the Related Companies and certain assets and liabilities of the Canadian Division, all as described in the Cooper Automotive Acquisition Agreement. "Cooper Automotive Acquisition Agreement": the Purchase and Sale --------------------------------------- Agreement, dated as of August 17, 1998, between Cooper Industries, Inc. and the Company and certain of the Subsidiaries of the Company. "Currency Sublimit": with respect to any Available Foreign Currency, ----------------- the amount from time to time equal to the amount of Dollars set forth under the heading "Currency Sublimit" opposite such Available Foreign Currency on Schedule I or, with respect to any Available Foreign Currency approved after the date hereof, the amount of Dollars approved by the Administrative Agent and the Majority Multicurrency Revolving Credit Facility Lenders as the "Currency Sublimit" applicable to such Available Foreign Currency . "Default": any of the events specified in Article XI whether or not ------- any requirement for the giving of notice, the lapse of time, or both, or any other condition has been satisfied. "Disposition": with respect to any Property, any sale, lease, sale ----------- and leaseback, assignment, conveyance, transfer or other disposition thereof; and the terms "Dispose" and "Disposed of" shall have correlative meanings. -9- "Dollar Equivalent": with respect to an amount of any Available ----------------- Foreign Currency on any date, the amount of Dollars that may be purchased with such amount of Available Foreign Currency at the Spot Exchange Rate on such date. "Dollars": dollars in lawful currency of the United States of ------- America. "$": dollars in lawful currency of the United States of America. - "Domestic Pledge Agreement": the Amended and Restated Domestic Pledge ------------------------- Agreement, substantially in the form of Exhibit C, to be executed by the Company and certain of its Domestic Subsidiaries. "Domestic Reference Lenders": Chase, Bank of America and Bank One. -------------------------- "Domestic Subsidiary": any Subsidiary of the Company organized under ------------------- the laws of any jurisdiction within the United States, other than any Subsidiary which is a Subsidiary of an Excluded Foreign Subsidiary. "Domestic Subsidiary Guarantee": the Amended and Restated Domestic ----------------------------- Subsidiary Guarantee, substantially in the form of Exhibit B, to be executed and delivered by each Domestic Subsidiary, as the same may from time to time be amended, supplemented or otherwise modified. "EMU": Economic and Monetary Union as contemplated in the Treaty on --- European Union. "EMU Legislation": legislative measures of the European Union for the --------------- introduction of, changeover to or operation of the euro in one or more member states. "Environmental Laws": any and all foreign, Federal, state, local or ------------------ municipal, laws, rules, orders, regulations, statutes, ordinances, codes, decrees, requirements of any Governmental Authority or other Requirements of Law (including common law) regulating, relating to or imposing liability or standards of conduct concerning protection of human health or the environment, as now or may at any time hereafter be in effect. "ERISA": the Employee Retirement Income Security Act of 1974, as ----- amended from time to time. "ESOP Guaranty": the Guaranty, dated as of June 30, 1995, as amended, ------------- made by the Company in favor of Bank of America National Trust and Savings Association, as agent under the ESOP Loan Agreement. -10- "ESOP Loan Agreement": the Loan Agreement, dated as of June 30, 1995, ------------------- as amended, among the Federal-Mogul Corporation Salaried Employees' Stock Ownership Trust, as borrower, various financial institutions, as lenders, and Bank of America National Trust and Savings Association, as agent. "euro": the single currency of the European Union as constituted by ---- the Treaty on European Union and as referred to in EMU Legislation. "euro unit": the currency unit of the euro as defined in the EMU --------- Legislation. "Eurocurrency Base Rate": (a) with respect to each Interest Period ---------------------- pertaining to a Multicurrency Revolving Credit Loan denominated in any currency other than Pounds Sterling, the rate per annum determined by the Administrative Agent to be the offered rate for deposits in such currency with a term comparable to such Interest Period that appears on the applicable Dow Jones Markets Page at approximately 11:00 A.M., London time, two Business Days prior to the beginning of such Interest Period; provided, -------- however, that if at any time for any reason such offered rate for any such ------- currency does not appear on a Dow Jones Markets Page, "Eurocurrency Base Rate" shall mean, with respect to each day during each Interest Period pertaining to a Multicurrency Revolving Credit Loan denominated in such currency, the rate per annum equal to the average (rounded upward to the nearest 1/16th of 1%) of the respective rates notified to the Administrative Agent by each of the Multicurrency Reference Lenders as the rate at which such Multicurrency Reference Lender is offered deposits in such currency at or about 11:00 A.M., London time, two Business Days prior to the beginning of such Interest Period in the London interbank market for delivery on the first day of such Interest Period for the number of days comprised therein; and (b) with respect to each day during each Interest Period pertaining to a Multicurrency Revolving Credit Loan denominated in Pounds Sterling, the rate per annum equal to the average (rounded upward to the nearest 1/16th of 1%) of the respective rates notified to the Administrative Agent by each of the Multicurrency Reference Lenders as the rate at which such Multicurrency Reference Lender is offered deposits in Pounds Sterling at or about 11:00 A.M., London time, two Business Days prior to the beginning of such Interest Period in the Paris interbank market for delivery on the first day of such Interest Period for the number of days comprised therein. "Eurocurrency Rate": with respect to each day during each Interest ----------------- Period pertaining to a Multicurrency Revolving Credit Loan, a rate per annum determined for such day in accordance with the following formula (rounded upward to the nearest 1/100th of 1%): Eurocurrency Base Rate ------------------------------------------- 1.00 - Eurocurrency Reserve Requirements -11- "Eurocurrency Reserve Requirements": for any day as applied to a --------------------------------- Eurodollar Loan or a Multicurrency Revolving Credit Loan, the aggregate (without duplication) of the rates (expressed as a decimal fraction) of reserve requirements in effect on such day (including, without limitation, basic, supplemental, marginal and emergency reserves) under any regulations of the Board of Governors of the Federal Reserve System or other Governmental Authority having jurisdiction with respect thereto dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in Regulation D of such Board) maintained by a member bank of such System. "Eurodollar Base Rate": with respect to each day during each Interest -------------------- Period pertaining to a Eurodollar Loan, the rate per annum determined by the Administrative Agent to be the offered rate for Dollar deposits with a term comparable to such Interest Period that appears on the applicable Dow Jones Markets Page at approximately 11:00 A.M., London time, two Business Days prior to the beginning of such Interest Period. "Eurodollar Loans": Loans the rate of interest applicable to which is ---------------- based upon the Eurodollar Rate. "Eurodollar Rate": with respect to each day during each Interest --------------- Period pertaining to a Eurodollar Loan, a rate per annum determined for such day in accordance with the following formula (rounded upward to the nearest 1/100th of 1%): Eurodollar Base Rate ------------------------------------------ 1.00 - Eurocurrency Reserve Requirements "Event of Default": any of the events specified in Article XI, ---------------- provided that all requirements for the giving of notice, the lapse of time, -------- or both, or any other condition, have been satisfied. "Excluded Foreign Subsidiary": collectively, (i) any Foreign --------------------------- Subsidiary which is not a Significant Subsidiary, (ii) any Foreign Subsidiary listed under the heading "Excluded Foreign Subsidiaries on the Closing Date" in Schedule VI, (iii) any Foreign Subsidiary (and any Domestic Subsidiary which is a Subsidiary of an Excluded Foreign Subsidiary) if the pledge of more than 65% of the Capital Stock of such Foreign Subsidiary (or Domestic Subsidiary, as the case may be) or the execution by such Foreign Subsidiary (or Domestic Subsidiary, as the case may be) of a Subsidiary Guarantee would, in the good faith judgment of the Company, result in adverse tax consequences to the Company or would be unlawful for such Foreign Subsidiary (or Domestic Subsidiary, as the case may be) and (iv) any other Foreign Subsidiary, if the Administrative Agent has determined that the value of the security afforded by a pledge of the stock thereof would be disproportionate to the expense or difficulty of obtaining such security interest. -12- "Existing Accounts Receivable Financing Program": the collective ---------------------------------------------- reference to (i) the Receivable Interest Purchase Agreement dated as of November 20, 1998, among the Receivables Subsidiary, as Seller, the Company, as servicer, Falcon Asset Securitization Corporation as a purchaser, the financial institutions from time to time party thereto as investors and The First National Bank of Chicago, as agent, (ii) the Receivables Sale and Contribution Agreement dated as of November 20, 1998, between the Company, Carter Automotive Company, Inc. and Federal-Mogul Canada Limited as the originators and the Receivables Subsidiary as the buyer, and (iii) all other documents entered into in connection with any of the foregoing, as each of the foregoing are amended, restated, supplemented, renewed, refinanced or otherwise modified from time to time. "Existing Credit Agreements": as defined in the recitals hereto. -------------------------- "Existing Plan": any Plan existing on the date of this Agreement ------------- without giving effect to any amendment thereof made after the date of this Agreement. "Facility": each of (a) the Tranche A Term Loan Commitments and the -------- Tranche A Term Loans made thereunder (the "Tranche A Term Loan Facility"), (b) the Tranche B Term Loan Commitments and the Tranche B Term Loans made thereunder (the "Tranche B Term Loan Facility"), (c) the US$ Revolving Credit Commitments and the extensions of credit (including the Swing Line Loans) made thereunder (the "US$ Revolving Credit Facility"), (d) the Multicurrency Revolving Credit Commitments and the Multicurrency Revolving Credit Loans made thereunder (the "Multicurrency Revolving Credit Facility") and (e) the Additional US$ Revolving Credit Commitments and the Additional US$ Revolving Credit Loans made thereunder (the "Additional US$ Revolving Credit Facility"). "Facility Fee Rate": 0.375% per annum; provided, that on and after ----------------- -------- the first Adjustment Date occurring after the Closing Date, the Facility Fee Rate will be determined pursuant to the Pricing Grid. "Federal Funds Effective Rate": for any day, the weighted average of ---------------------------- the rates per annum on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for the day of such transactions received by the Administrative Agent from three federal funds brokers of recognized standing selected by it, in each case rounded up to the nearest 1/100th of 1%. "Fel-Pro Acquisition": the acquisition of Fel-Pro Master General ------------------- Partnership and related entities and assets. -13- "Foreign Subsidiary": any Subsidiary of the Company other than a ------------------ Domestic Subsidiary. "Foreign Subsidiary Borrower": each Foreign Subsidiary listed as a --------------------------- Foreign Subsidiary Borrower in Schedule II as amended from time to time in accordance with Section 13.01(b). "Foreign Subsidiary Opinion": with respect to any Foreign Subsidiary -------------------------- Borrower, a legal opinion of counsel to such Foreign Subsidiary Borrower addressed to the Administrative Agent and the Lenders concluding that such Foreign Subsidiary Borrower and the Loan Documents to which it is a party substantially comply with the matters listed on Exhibit I, with such assumptions, qualifications and deviations therefrom as the Administrative Agent shall approve (such approval not to be unreasonably withheld). "Funded Debt": all Indebtedness of the Company and its Subsidiaries ----------- on a consolidated basis maturing one year or more after incurrence thereof or that matures within one year from the date on which it was created, but is renewable or extendible under terms such that under GAAP such Indebtedness would be treated as long-term indebtedness. "GAAP": generally accepted accounting principles in the United States ---- of America in effect from time to time; provided, that if at any time after -------- the date hereof there shall occur any change in respect of such generally accepted accounting principles from those used in the preparation of the audited financial statements of the Company for the fiscal year ended December 31, 1997 in a manner which would have a material effect on any matter which is material to Article IX, the Company and the Administrative Agent will, within five Business Days of a notice from the Administrative Agent or the Company, as the case may be, to that effect, commence, and continue in good faith, negotiations with a view towards making appropriate amendments to the provisions hereof acceptable to the Required Lenders, to reflect as nearly as possible the effect of the provisions of Article IX as in effect on the date hereof. "Governmental Authority": any nation or government, any state, or ---------------------- other political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guaranty": 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. -14- "Indebtedness": with respect to any Person, (a) all indebtedness for ------------ borrowed money of such Person which in accordance with GAAP would be shown as a liability on the balance sheet of such Person, (b) obligations of such Person under leases which, in accordance with GAAP, are to be recorded as capital leases, (c) all unreimbursed amounts owing by such Person in respect of letters of credit and (d) all indebtedness of such Person evidenced by bonds, debentures, notes or similar instruments; provided, -------- however, that the term "Indebtedness" shall not include short-term ------- obligations payable to suppliers incurred in the ordinary course of business or indebtedness incurred by a special purpose, Wholly Owned Subsidiary of the Company that purchases accounts receivable from the Company and its other Subsidiaries to the extent that such indebtedness is nonrecourse to the Company and each such other Subsidiary and is not required under GAAP to be reflected on the consolidated balance sheet of the Company. "Indentures": (i) the Indenture, dated as of August 12, 1994, between ---------- the Company and First Trust National Association (as successor to Continental Bank), as trustee, (ii) the Indenture, dated as of June 29, 1998, between the Company and The Bank of New York, as trustee and (iii) the Indenture, dated as of January 20, 1999, among the Company, the guarantors and The Bank of New York, as trustee, each as subsequently amended in accordance with the terms hereof and thereof . "Insignificant Subsidiary": any Subsidiary designated as such by ------------------------ written notice from the Company to the Administrative Agent; provided, that -------- (i) no Subsidiary may be designated as an Insignificant Subsidiary unless (A) as at the end of the fiscal quarter most recently ended prior to such designation the aggregate book value of the assets of such Subsidiary (including stock of Subsidiaries of such Subsidiary) constitutes not more than 5% of the book value of the consolidated assets of the Company and its Subsidiaries taken as a whole and (B) during the period of four consecutive fiscal quarters most recently ended prior to the date of such designation the contribution of such Subsidiary to Consolidated EBITDA was not more than 5% and (ii) no Subsidiary may be designated as an Insignificant Subsidiary if, after giving effect thereto, (A) the total book value of all assets of all Insignificant Subsidiaries (including stock of Subsidiaries of such Subsidiary) as of the end of the fiscal quarter most recently ended constituted more than 15% of the book value of the consolidated assets of the Company and its Subsidiaries taken as a whole and (B) the total contribution of all Insignificant Subsidiares to Consolidated EBITDA for the four consecutive fiscal quarters most recently ended was more than 15%. "Insolvency": with respect to any Multiemployer Plan, the condition ---------- that such Plan is insolvent within the meaning of Section 4245 of ERISA. "Insolvent": pertaining to a condition of Insolvency. --------- -15- "Intangible Assets": assets having no physical existence and that, in ----------------- conformity with GAAP, should be classified as intangible assets, including, without limitation, patents, patent rights, trademarks, trade names, copyrights, franchises, licenses, customer lists, organizational expenses and goodwill. "Intellectual Property": as defined in Section 6.09. --------------------- "Interest Expenses": with respect to any period, the aggregate of all ----------------- interest expense reported by the Company and its Subsidiaries in accordance with GAAP during such period. As used in this definition, the term "interest" shall include, without limitation, all interest, fees and costs payable with respect to the obligations under this Agreement (other than fees and costs which may be capitalized as transaction costs in accordance with GAAP), any discount in respect of sales of accounts receivable and/or related contract rights and the interest portion of capitalized lease payments during such period, all as determined in accordance with GAAP. "Interest Payment Date": (a) as to any Base Rate Loan, the last day --------------------- of each March, June, September and December to occur while such Loan is outstanding, (b) as to any Eurodollar Loan or Multicurrency Revolving Credit Loan having an Interest Period of three months or less, the last day of such Interest Period and (c) as to any Eurodollar Loan or Multicurrency Revolving Credit Loan having an Interest Period longer than three months, (i) each day which is three months, or a whole multiple thereof, after the first day of such Interest Period and (ii) the last day of such Interest Period. "Interest Period": with respect to any Eurodollar Loan or --------------- Multicurrency Revolving Credit Loan: (a) initially, the period commencing on the borrowing or conversion date, as the case may be, with respect to such Eurodollar Loan or Multicurrency Revolving Credit Loan and ending one, two, three, or six or (if available) twelve months thereafter, as selected by the relevant Borrower in its notice of borrowing or notice of conversion, as the case may be, given with respect thereto; and (b) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such Eurodollar Loan or Multicurrency Revolving Credit Loan and ending one, two, three, six or (if available) twelve months thereafter, as selected by the relevant Borrower by irrevocable notice to the Administrative Agent not less than three Business Days prior to the last day of the then current Interest Period with respect thereto; provided that, all of the foregoing provisions relating to Interest Periods -------- are subject to the following: -16- (i) if any Interest Period pertaining to a Eurodollar Loan or Multicurrency Revolving Credit Loan would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Business Day; (ii) any Interest Period applicable to a Eurodollar Loan or Multicurrency Revolving Credit Loan that would otherwise extend beyond the Revolving Credit Termination Date shall end on the Revolving Credit Termination Date; (iii) any Interest Period pertaining to a Eurodollar Loan or Multicurrency Revolving Credit Loan that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month; and (iv) each Borrower shall use reasonable efforts to select Interest Periods which permit the required installments to be made on the Term Loans so as not to require a payment or prepayment of any Eurodollar Loan during an Interest Period for such Eurodollar Loan. "Investments": as defined in Section 9.11. ----------- "Joinder Agreement": the Joinder Agreement to be entered into by each ----------------- Foreign Subsidiary Borrower subsequent to the date hereof pursuant to Section 13.01(b)(i), substantially in the form of Exhibit E. "Judgment Currency": as defined in Section 13.17(b). ----------------- "Lenders": as defined in the preamble hereto. ------- "Lien": (i) any judgment lien or execution, attachment, levy, ---- distraint or similar legal process and (ii) any mortgage, pledge, hypothecation, assignment, lien, charge, encumbrance or other security interest of any kind or nature whatsoever (including, without limitation, the interest of the lessor under any capital lease and the interest of the seller under any conditional sale or other title retention agreement), which secures or purports to secure any Indebtedness or other indebtedness or obligations. "Loan Documents": this Agreement, any Notes, the Security Documents, -------------- the Subsidiary Guarantees and the Trust Agreement. "Loan Parties": the Company and each Subsidiary of the Company which ------------ is a party to a Loan Document. -17- "Loans": the collective reference to the US$ Revolving Credit Loans, ----- the Swing Line Loans, the Term Loans, the Multicurrency Revolving Credit Loans and the Additional US$ Revolving Credit Loans. "London Banking Day": any day on which banks in London are open for ------------------ general banking business, including dealings in foreign currency and exchange. "Majority Additional US$ Revolving Credit Facility Lenders": the --------------------------------------------------------- Majority Facility Lenders in respect of the Additional US$ Revolving Credit Facility. "Majority Aggregate Revolving Credit Facility Lenders": the holders ---------------------------------------------------- of more than 50% of the aggregate unpaid principal amount of the total US$ Revolving Extensions of Credit, the Aggregate Multicurrency Revolving Credit Exposure and the Additional US$ Revolving Credit Loans (or, prior to any termination of the US$ Revolving Credit Commitments, the Multicurrency Revolving Credit Commitments or the Additional US$ Revolving Credit Commitments, the holders of more than 50% of the aggregate US$ Revolving Credit Commitments, the Multicurrency Revolving Credit Commitments and the Additional US$ Revolving Credit Commitments). "Majority Facility Lenders": with respect to any Facility, the ------------------------- holders of more than 50% of the aggregate unpaid principal amount of the Term Loans, the total US$ Revolving Extensions of Credit, the Aggregate Multicurrency Revolving Credit Exposure or the Additional US$ Revolving Credit Loans, as the case may be, outstanding under such Facility (or, in the case of (a) the US$ Revolving Credit Facility, prior to any termination of the US$ Revolving Credit Commitments, the holders of more than 50% of the aggregate US$ Revolving Credit Commitments, (b) the Multicurrency Revolving Credit Facility, prior to any termination of the Multicurrency Revolving Credit Commitments, the holders of more than 50% of the aggregate Multicurrency Revolving Credit Commitments or (c) the Additional US$ Revolving Credit Facility, prior to any termination of the Additional US$ Revolving Credit Commitments, the holders of more than 50% of the aggregate Additional US$ Revolving Credit Commitments). "Majority Multicurrency Revolving Credit Facility Lenders": the -------------------------------------------------------- Majority Facility Lenders in respect of the Multicurrency Revolving Credit Facility. "Majority US$ Revolving Credit Facility Lenders": the Majority ---------------------------------------------- Facility Lenders in respect of the US$ Revolving Credit Facility. "Material Adverse Effect": a material adverse effect on (a) the ----------------------- business, operations, property, condition (financial or otherwise) or prospects of the Company and its Subsidiaries taken as a whole, (b) the ability of any Borrower to perform its obligations under this Agreement or any of the Notes or any of the other Loan Documents to which it is a party or (c) the validity or enforceability of this Agreement or any of the -18- Notes or any of the other Loan Documents or the rights or remedies of the Administrative Agent or the Lenders hereunder or thereunder. "Materials of Environmental Concern": any gasoline or petroleum ---------------------------------- (including crude oil or any fraction thereof) or petroleum products or any hazardous or toxic substances, materials or wastes, defined or regulated as such in or under any Environmental Law, including, without limitation, asbestos, polychlorinated biphenyls and urea-formaldehyde insulation. "Minority Interest": the minority interest of Persons other than the ----------------- Company and its Subsidiaries in the Company's Subsidiaries as shown from time to time in the most recent consolidated balance sheet of the Company and its Subsidiaries. "Moody's Bond Rating": for any day, the rating of the Company's ------------------- senior long-term unsecured debt by Moody's Investor Service, Inc. ("Moody's") in effect at 11:00 A.M., New York City time, on such day. "Multicurrency Reference Lenders": Chase, Fleet National Bank N.A. ------------------------------- and Credit Lyonnais Chicago Branch. "Multicurrency Revolving Credit Borrowing": a borrowing comprised of ---------------------------------------- Multicurrency Revolving Credit Loans. "Multicurrency Revolving Credit Commitment": with respect to any ----------------------------------------- Lender at any time, the commitment (if any) of such Lender to make Loans pursuant to Section 4.01. The amount of each Lender's Multicurrency Revolving Credit Commitment is the amount set forth opposite such Lender's name in Schedule I under the caption "Multicurrency Revolving Credit Commitment", as such amount may be changed from time to time pursuant to this Agreement. The Multicurrency Revolving Credit Commitment of each Lender shall always be expressed in Dollars. "Multicurrency Revolving Credit Exposure": with respect to any --------------------------------------- Multicurrency Revolving Credit Lender at any time, the Assigned Dollar Value at such time of all outstanding Multicurrency Revolving Credit Loans of such Lender. "Multicurrency Revolving Credit Facility": as defined in the --------------------------------------- definition of "Facility". "Multicurrency Revolving Credit Lender": a Lender with a ------------------------------------- Multicurrency Revolving Credit Commitment or holding Multicurrency Revolving Credit Loans. "Multicurrency Revolving Credit Loan": any Loan made by a Lender ----------------------------------- pursuant to its Multicurrency Revolving Credit Commitment. -19- "Multicurrency Revolving Credit Percentage": as to any Multicurrency ----------------------------------------- Revolving Credit Lender at any time, the percentage which such Lender's Multicurrency Revolving Credit Commitment then constitutes of the Total Multicurrency Revolving Credit Commitments (or, at any time after the Multicurrency Revolving Credit Commitments shall have expired or terminated, the percentage which the aggregate principal amount of such Lender's Multicurrency Revolving Credit Loans then outstanding constitutes of the aggregate principal amount of the Multicurrency Revolving Credit Loans then outstanding). "Multiemployer Plan": a Plan which is a multiemployer plan as defined ------------------ in Section 4001(a)(3) of ERISA or any successor statute. "National Currency Unit": the unit of currency (other than a euro ---------------------- unit) of a Participating Member State. "Netherlands BV I": Federal-Mogul Holdings B.V., a Netherlands ---------------- corporation. "Netherlands BV II": Federal-Mogul Global B.V., a Netherlands ----------------- corporation. "Netherlands BV III": Federal-Mogul Investments B.V., a Netherlands ------------------ corporation. "Netherlands BV IV": Federal-Mogul Growth B.V., a Netherlands ----------------- corporation. "Non-Excluded Taxes": as defined in Section 5.11(a). ------------------ "Notes": the collective reference to the Revolving Credit Notes and ----- the Term Notes. "Obligations": collectively, the unpaid principal of and interest on ----------- the Loans and all other obligations and liabilities of each Foreign Subsidiary Borrower under this Agreement and the other Loan Documents (including, without limitation, interest accruing at the then applicable rate provided in this Agreement or any other applicable Loan Document after the maturity of the Loans and interest accruing at the then applicable rate provided in this Agreement or any other applicable Loan Document after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Company or any Foreign Subsidiary Borrower, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding), whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, this Agreement, the Notes, the other Loan Documents or any other document made, delivered or given in connection therewith, in each case whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses or otherwise (including, without limitation, all fees and disbursements of counsel to the Administrative -20- Agent or to the Lenders that are required to be paid by any Borrower pursuant to the terms of this Agreement or any other Loan Document). "Other Permitted Obligations": the sum, without duplication of, (i) --------------------------- the aggregate outstanding principal amount of Indebtedness permitted by Section 9.05(h), (ii) the aggregate outstanding principal amount of all obligations guaranteed pursuant to Section 9.06(i), (iii) the aggregate attributable debt (determined in accordance with GAAP) of all sale and leaseback transactions consummated pursuant to clause (ii) of the proviso to Section 9.13 and (iv) the aggregate amount of all Secured Reimbursement Obligations. "Participating Member State": any member state which has the euro as -------------------------- its lawful currency. "Participants": as defined in Section 13.06(b). ------------ "PBGC": the Pension Benefit Guaranty Corporation established pursuant ---- to Subtitle A of Title IV of ERISA or any successor corporation. "Permitted Acquisition": any acquisition by the Company or any of its --------------------- Subsidiaries of all of the Capital Stock or all or substantially all of the assets of any Person or of a business unit of any Person, so long as (i) such Person or business unit is engaged in the same line of business as engaged in by the Company and its Subsidiaries on the Closing Date, or in a directly related line of business; (ii) no Default or Event of Default shall have occurred and be continuing at the time of consummation of such acquisition or, if earlier, at the time of the execution of definitive documentation for such acquisition; (iii) the Company shall be in pro forma compliance with the financial covenants contained in Sections 9.01, 9.02 and 9.03 after giving pro forma effect to such acquisition and the --- ----- incurrence of any Indebtedness in connection therewith as if such transaction has occurred on the first day of the period of four consecutive fiscal quarters most recently ended prior to such acquisition; (iv) the Consolidated Leverage Ratio shall in any event be less than 4.0 to 1.0 after giving pro forma effect to such acquisition and the incurrence of any --- ----- Indebtedness in connection therewith; (v) such acquisition and the incurrence of any Indebtedness in connection therewith shall not result in any violation of Regulations U, T or X of the Board; and (vi) such acquisition shall have been approved by the board of directors or analogous governing body of such Person. "Permitted Acquisition Debt": Indebtedness of the Company which is -------------------------- incurred to finance a Permitted Acquisition and which may be secured by the Collateral and guaranteed pursuant to the Subsidiary Guarantees so long as (i) the terms of such Indebtedness shall be satisfactory to the Administrative Agent and (ii) to the extent any such Indebtedness is secured by any assets of the Company or any of its Subsidiaries (including any Subsidiary acquired in such Permitted Acquisition) or guaranteed by the Company or any of such Subsidiaries, the Loans shall be secured and guaranteed on an equal and ratable basis with any such Indebtedness, except to the extent the -21- Administrative Agent determines that the granting of such security interests and guarantees would be prohibited by applicable law or contractual provisions, would cause material adverse tax consequences to the Company or any of its Subsidiaries or would cause the Company or any of its Subsidiaries to incur costs which are excessive in relation to the value of the security to be afforded thereby. "Permitted Bridge Acquisition Debt": Permitted Acquisition Debt --------------------------------- having an original tenor of eighteen months or less. "Permitted Other Acquisition Debt": all Permitted Acquisition Debt -------------------------------- other than Permitted Bridge Acquisition Debt. "Person": an individual, partnership, corporation, business trust, ------ joint stock company, trust, unincorporated association, joint venture, Governmental Authority or other entity of whatever nature. "Plan": at a particular time, any employee benefit plan which is ---- covered by ERISA and in respect of which the Company or a Commonly Controlled Entity is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "Pledge Agreements": the collective reference to (i) the Domestic ----------------- Pledge Agreement, (ii) the Pledge Agreements described on Schedule V and (iii) other pledge agreements in form and substance reasonably satisfactory to the Administrative Agent pursuant to which shares of Subsidiaries may be pledged from time to time, in each case, as the same may be amended, supplemented or otherwise modified. "Pledged Stock": the Capital Stock pledged pursuant to a Pledge ------------- Agreement. "Pricing Grid": the pricing grid attached hereto as Annex A. ------------ "Prime Rate": the rate of interest per annum publicly announced from ---------- time to time by Chase as its prime rate in effect at its principal office in New York City (each change in the Prime Rate to be effective on the date such change is publicly announced). The Prime Rate is not intended to be the lowest rate of interest charged by Chase in connection with extensions of credit to debtors. "Prohibited Transaction": any "prohibited transaction" as defined in ---------------------- Section 406 of ERISA or Section 4975 of the Code. "Properties": as defined in Section 6.16(a). ---------- "Property": any right or interest in or to property of any kind -------- whatsoever, whether real, personal or mixed and whether tangible or intangible, including without limitation, Capital Stock. -22- "Receivables Subsidiary": Federal-Mogul Funding Corporation, a ---------------------- Michigan corporation. "Reference Lenders": the collective reference to the Domestic ----------------- Reference Lenders and the Multicurrency Reference Lenders. "Register": as defined in Section 13.06(d). -------- "Reorganization": with respect to any Multiemployer Plan, the -------------- condition that such plan is in reorganization within the meaning of Section 4241 of ERISA. "Replacement Lender": a bank or financial institution (other than a ------------------ Subsidiary of the Company) acceptable to the Administrative Agent and the Company. "Reportable Event": any of the events set forth in Section 4043(b) of ---------------- ERISA or the regulations thereunder. "Required Lenders": the holders of more than 50% of the sum of (a) ---------------- the aggregate unpaid principal amount of the Term Loans, Additional US$ Revolving Credit Loans, Multicurrency Revolving Credit Loans and US$ Revolving Extensions of Credit and (b) the unutilized Additional US$ Revolving Credit Commitments, Multicurrency Revolving Credit Commitments and US$ Revolving Credit Commitments. "Requirement of Law": as to any Person, 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 a court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Reset Date": as defined in Section 4.03(b). ---------- "Responsible Officer": (i) as to the Company, the chief executive ------------------- officer, the president, the chief financial officer, the treasurer, any assistant treasurer or the controller of the Company and (ii) as to any other Borrower, those of its officers or representatives whose signatures and incumbency shall have been certified to the Administrative Agent and the Lenders pursuant to Section 7.01(c) or 7.02(e). "Revolving Credit Commitments": the collective reference to the US$ ---------------------------- Revolving Credit Commitments, the Additional US$ Revolving Credit Commitments and the Multicurrency Revolving Credit Commitments. The original aggregate amount of the Revolving Credit Commitments, as of the Closing Date, is $1,000,000,000. -23- "Revolving Credit Commitment Period": the period from and including ---------------------------------- the Closing Date to but not including the Revolving Credit Termination Date, or such earlier date on which the Revolving Credit Loans shall terminate as provided herein. "Revolving Credit Facility": the collective reference to the US$ ------------------------- Revolving Credit Facility, Multicurrency Revolving Credit Facility and Additional US$ Revolving Credit Facility. "Revolving Credit Lender": each Lender which has a Revolving Credit ----------------------- Commitment or which has made Revolving Credit Loans. "Revolving Credit Loan": the collective reference to US$ Revolving --------------------- Credit Loans, Multicurrency Revolving Credit Loans and Additional US$ Revolving Credit Loans. "Revolving Credit Termination Date": the date which is five years --------------------------------- after the Closing Date. "Secured Obligations": as defined in each Security Document, as ------------------- applicable. "Secured Reimbursement Obligations": at any time, the aggregate --------------------------------- undrawn face amount of, plus the aggregate unreimbursed amount of all drawings under, all letters of credit issued by any Lender for the account of any Borrower, other than any such letter of credit in respect of which the issuing Lender shall have delivered a written acknowledgement to the Administrative Agent to the effect that the obligations of the account party in respect of such letter of credit shall not be secured pursuant to the Security Documents or guaranteed pursuant to a Subsidiary Guarantee. "Security Documents": the collective reference to the Pledge ------------------ Agreements, the Trust Agreement, and all other security documents hereafter delivered to the Administrative Agent (or the Trustee, as the case may be) granting a Lien on any Property of any Person to secure the obligations and liabilities of any Loan Party under any Loan Document. "Significant Subsidiary": any Subsidiary other than an Insignificant ---------------------- Subsidiary. "Single Employer Plan": any Plan which is covered by Title IV of -------------------- ERISA, but which is not a Multiemployer Plan. "Solvent": when used with respect to any Person, means that, as of ------- any date of determination, (a) the amount of the "present fair saleable value" of the assets of such Person will, as of such date, exceed the amount of all "liabilities of such Person, contingent or otherwise", as of such date, as such quoted terms are determined in accordance with applicable federal and state laws governing determinations of the -24- insolvency of debtors, (b) the present fair saleable value of the assets of such Person will, as of such date, be greater than the amount that will be required to pay the liability of such Person on its debts as such debts become absolute and matured, (c) such Person will not have, as of such date, an unreasonably small amount of capital with which to conduct its business, and (d) such Person will be able to pay its debts as they mature. For purposes of this definition, (i) "debt" means liability on a "claim", and (ii) "claim" means any (x) right to payment, whether or not such a right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured or (y) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured or unmatured, disputed, undisputed, secured or unsecured. "Special Purpose Subsidiaries": the collective reference to U.S. ---------------------------- Finance Subsidiary I, U.S. Finance Subsidiary II, U.S. Finance Subsidiary III, Netherlands BV I, Netherlands BV II, Netherlands BV III, Netherlands BV IV, U.K. Acquisition I and U.K. Acquisition II. "Spot Exchange Rate": with respect to any Available Foreign Currency, ------------------ at any date of determination thereof, the spot rate of exchange in London that appears on the display page applicable to such Available Foreign Currency on the Reuters System (or such other page as may replace such page on such service for the purpose of displaying the spot rate of exchange in London) for the conversion of such Available Foreign Currency into Dollars; provided that if there shall at any time no longer exist such a page on -------- such service, the spot rate of exchange shall be determined by reference to another similar rate publishing service selected by the Administrative Agent and if no such similar rate publishing service is available, by reference to the published rate of the Administrative Agent in effect at such date for similar commercial transactions. "S&P Bond Rating": for any day, the rating of the Company's senior --------------- long-term unsecured debt by Standard & Poor's Ratings Service ("S&P") in effect at 11:00 A.M., New York City time, on such day. "Subordinated Debt": unsecured Indebtedness of the Company having a ----------------- final maturity date at least 91 days after the final maturity date of the Tranche B Term Loans and a weighted average life at least as long as the weighted average life of the Tranche B Term Loans, and having subordination terms acceptable to the Administrative Agent, acting reasonably. "Subsequent Participant": any member state that adopts the euro as ---------------------- its lawful currency after January 1, 1999. "Subsidiary": at any particular time, any Person which could be ---------- included as a consolidated subsidiary of the Company in the financial statements prepared and filed -25- with the Company's annual reports on Form 10-K under the Securities Exchange Act of 1934, as amended, if such financial statements were prepared at, and as of, such time. Unless otherwise qualified, all references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of the Company. "Subsidiary Guarantees": the collective reference to the Amended and --------------------- Restated Domestic Subsidiary Guarantee and the U.K. Acquisition I Guarantee, and any other guarantee by a Subsidiary of the Indebtedness and obligations of the Borrowers hereunder that may be executed and delivered to the Administrative Agent hereunder. "Swing Line Commitment": as to the Swing Line Lender, in its capacity --------------------- as a Swing Line Lender, its obligation to make Swing Line Loans to the Company in an aggregate principal amount not to exceed, at any one time outstanding $50,000,000. "Swing Line Lender": Chase, in its capacity as provider of the Swing ----------------- Line Loans. "Swing Line Loan": as defined in Section 2.05. --------------- "Swing Line Loans": as defined in Section 2.05. ---------------- "Target Operating Day": any day that is not (a) a Saturday or Sunday, -------------------- (b) Christmas Day or New Year's Day or (c) any other day on which the Trans-European Real-time Gross Settlement Operating System (or any successor settlement system) is not operating (as determined by the Administrative Agent). "T & N Acquisition": the acquisition by the Company, through an ----------------- indirect Wholly Owned Subsidiary, of T & N plc. "T & N Industries": T & N Industries, Inc., a Delaware corporation. ---------------- "T & N plc": T & N plc, a company organized under the laws of --------- England. "Term Loan Commitments": the collective reference to the Tranche A --------------------- Term Loan Commitments and the Tranche B Term Loan Commitments. "Term Loan Lenders": the collective reference to the Tranche A Term ----------------- Loan Lenders and the Tranche B Term Loan Lenders. "Term Loans": the collective reference to the Tranche A Term Loans ---------- and the Tranche B Term Loans. "Total Multicurrency Revolving Credit Commitments": at any time, the ------------------------------------------------ aggregate amount of the Multicurrency Revolving Credit Commitments, as in effect at such time. The Total Multicurrency Revolving Credit Commitments on the Closing Date is $125,000,000. -26- "Total US$ Revolving Credit Commitments": at any time, the aggregate -------------------------------------- amount of the US$ Revolving Credit Commitments, as in effect at such time. The Total US$ Revolving Credit Commitments on the Closing Date is $875,000,000. "Tranche": the collective reference to Eurodollar Loans or ------- Multicurrency Revolving Credit Loans of any Class the then current Interest Periods with respect to all of which begin on the same date and end on the same later date (whether or not such Loans shall originally have been made on the same day). "Tranche A Term Loans": as defined in Section 3.01. -------------------- "Tranche A Term Loan Commitment": as to any Lender, the obligation of ------------------------------ such Lender, if any, to make a Tranche A Term Loan to the Company hereunder in a principal amount not to exceed the amount set forth under the heading "Tranche A Term Loan Commitment" opposite such Lender's name on Schedule I. "Tranche A Term Loan Exposure": as to any Tranche A Term Loan Lender ---------------------------- at any time, the aggregate outstanding principal amount of the Tranche A Term Loans of such Tranche A Term Loan Lender at such time. "Tranche A Term Loan Lender": each Lender which has a Tranche A Term -------------------------- Loan Commitment or which has made a Tranche A Term Loan. "Tranche A Term Loan Percentage": as to any Tranche A Term Loan ------------------------------ Lender at any time, the percentage which such Lender's Tranche A Term Loan Exposure then constitutes of the aggregate Tranche A Term Loan Exposures. "Tranche B Term Loans": as defined in Section 3.01. -------------------- "Tranche B Term Loan Commitment": as to Tranche B Term Loan Lender, ------------------------------ the obligation of such Lender, if any, to make a Tranche B Term Loan to the Company hereunder in a principal amount not to exceed the amount set forth under the heading "Tranche B Term Loan Commitment" opposite such Lender's name on Schedule I. "Tranche B Term Loan Exposure": as to any Tranche B Term Loan Lender ---------------------------- at any time, the aggregate outstanding principal amount of the Tranche B Term Loans of such Tranche B Term Loan Lender at such time. "Tranche B Term Loan Lender": each Lender which has a Tranche B Term -------------------------- Loan Commitment or which has made a Tranche B Term Loan. -27- "Tranche B Term Loan Percentage": as to any Tranche B Term Loan ------------------------------ Lender at any time, the percentage which such Lender's Tranche B Term Loan Exposure then constitutes of the aggregate Tranche B Term Loan Exposures. "Transferee": as defined in Section 13.06(f). ---------- "Treaty on European Union": the Treaty of Rome of March 25, 1957, as ------------------------ amended by the Single European Act 1986 and the Maastricht Treaty (which was signed at Maastricht on February 7, 1992, and came into force on November 1, 1993), as amended from time to time. "Trust Agreement": each of (or, where the context requires, both of) --------------- (i) the Amended and Restated Trust Agreement, dated as of February 24,1999, among the Company, certain Subsidiaries of the Company and First Union National Bank, substantially in the form of Exhibit D-2 and (ii) the Amended and Restated Trust Agreement, dated as of February 24, 1999, among the Company, certain Subsidiaries of the Company, and ABN AMRO Trust Company (Jersey) Limited, substantially in the form of Exhibit D-1, in each case as amended, amended and restated, supplemented or otherwise modified from time to time. "Trustee": each of (or, where the context requires, both of) (i) ABN ------- AMRO Trust Company (Jersey) Limited and (ii) First Union National Bank, in its respective capacity as Trustee under a Trust Agreement. "Type": as to any Revolving Credit Loan or Term Loan, its nature as a ---- Base Rate Loan or a Eurodollar Loan. "U.K. Acquisition I": F-M UK Holding Limited, a company organized ------------------ under the laws of England. "U.K. Acquisition I Guarantee": the Guarantee to be made on or prior ---------------------------- to the date which is 120 days following the Closing Date by U.K. Acquisition I in favor of Chase, as amended, amended and restated, supplemented or otherwise modified from time to time. "U.K. Acquisition II": Federal-Mogul Global Growth Limited, a company ------------------- organized under the laws of England. "US$ Revolving Credit Borrowing": a borrowing comprised of US$ ------------------------------ Revolving Credit Loans. "US$ Revolving Credit Commitment": with respect to any Lender, the ------------------------------- commitment (if any) of such Lender to make US$ Revolving Credit Loans pursuant to Section 2.01, and to acquire participations in Swing Line Loans pursuant to Section 2.09. The amount of each Lender's US$ Revolving Credit Commitment is the amount set forth -28- opposite such Lender's name in Schedule I under the caption "US$ Revolving Credit Commitment", as such amount may be changed from time to time pursuant to this Agreement. "US$ Revolving Credit Facility": as defined in the definition of ----------------------------- "Facility". "US$ Revolving Credit Lender": a Lender with a US$ Revolving Credit --------------------------- Commitment or holding US$ Revolving Credit Loans or participating interests in Swing Line Loans. "US$ Revolving Credit Loan": as defined in Section 2.01(a). ------------------------- "US$ Revolving Credit Note": as defined in Section 2.02(e). ------------------------- "US$ Revolving Credit Percentage": as to any US$ Revolving Credit ------------------------------- Lender at any time, the percentage which such Lender's US$ Revolving Credit Commitment then constitutes of the Total US$ Revolving Credit Commitments (or, at any time after the US$ Revolving Credit Commitments shall have expired or terminated, the percentage which the aggregate principal amount of such Lender's US$ Revolving Credit Loans then outstanding constitutes of the aggregate principal amount of the US$ Revolving Credit Loans then outstanding). "US$ Revolving Extensions of Credit": as to any US$ Revolving Credit ---------------------------------- Lender at any time, an amount equal to the sum of (a) the aggregate principal amount of all US$ Revolving Credit Loans made by such Lender then outstanding and (c) such Lender's US$ Revolving Credit Percentage of the aggregate principal amount of Swing Line Loans then outstanding. "U.S. Finance Subsidiary I": Federal-Mogul Dutch Holdings Inc., a ------------------------- Delaware corporation. "U.S. Finance Subsidiary II": Federal-Mogul Global Inc., a Delaware -------------------------- corporation. "U.S. Finance Subsidiary III": Federal-Mogul U.K. Holdings Inc., a --------------------------- Delaware corporation. "Wholly Owned Subsidiary": as to any Person, any other Person all of ----------------------- the Capital Stock of which (other than directors' qualifying shares required by law) is owned by such Person directly and/or through other Wholly Owned Subsidiaries. SECTION I.2 Other Definitional Provisions. (a) Unless otherwise ----------------------------- specified therein, all terms defined in this Agreement shall have the defined meanings when used in the -29- Notes, the other Loan Documents or any certificate or other document made or delivered pursuant hereto. (b As used herein and in the Notes and any other Loan Document, and any certificate or other document made or delivered pursuant hereto or thereto, accounting terms relating to the Company and its Subsidiaries not defined in Section 1.01 and accounting terms partly defined in Section 1.01, to the extent not defined, shall have the respective meanings given to them under GAAP. (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 The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. ARTICLE II. AMOUNT AND TERMS OF REVOLVING CREDIT COMMITMENTS AND SWING LINE --------------------------------------------------------------- COMMITMENT ---------- SECTION II.1 US$ Revolving Credit Commitments. (a) Subject to the -------------------------------- terms and conditions hereof, each US$ Revolving Credit Lender severally agrees to make revolving credit loans in Dollars ("US$ Revolving Credit Loans") to the -------------------------- Company from time to time during the Revolving Credit Commitment Period in an aggregate principal amount at any one time outstanding which, when added to such Lender's US$ Revolving Credit Percentage of the aggregate principal amount of the Swing Line Loans then outstanding (after giving effect to the use of proceeds of such US$ Revolving Credit Loans), does not exceed the amount of such Lender's US$ Revolving Credit Commitment. During the Revolving Credit Commitment Period the Company may use the US$ Revolving Credit Commitments by borrowing, prepaying the US$ Revolving Credit Loans in whole or in part, and reborrowing, all in accordance with the terms and conditions hereof. (b The US$ Revolving Credit Loans may from time to time be (i) Eurodollar Loans, (ii) Base Rate Loans or (iii) a combination thereof, as determined by the Company and notified to the Administrative Agent in accordance with Sections 2.03 and 5.02, provided that no US$ Revolving Credit Loan shall be -------- made as a Eurodollar Loan after the day that is one month prior to the Revolving Credit Termination Date. SECTION II.2 Repayment of US$ Revolving Credit Loans; Evidence of ---------------------------------------------------- Debt. (a) The Company hereby unconditionally promises to pay to the - - ---- Administrative Agent for the account of each US$ Revolving Credit Lender the then unpaid principal amount of each US$ Revolving Credit Loan of such US$ Revolving Credit Lender on the Revolving Credit Termination Date and on such other dates and in such other amounts as may be required from -30- time to time pursuant to this Agreement. The Company hereby further agrees to pay interest on the unpaid principal amount of the US$ Revolving Credit Loans from time to time outstanding until payment thereof in full at the rates per annum, and on the dates, set forth in Section 5.01. (b) Each US$ Revolving Credit Lender shall maintain in accordance with its usual practice an account or accounts evidencing indebtedness of the Company to such US$ Revolving Credit Lender resulting from each US$ Revolving Credit Loan of such US$ Revolving Credit Lender from time to time, including the amounts of principal and interest payable thereon and paid to such US$ Revolving Credit Lender from time to time under this Agreement. (c) The Administrative Agent shall maintain the Register pursuant to Section 13.06(d), and a subaccount therein for each US$ Revolving Credit Lender, in which Register and subaccounts shall be recorded (i) the amount of each US$ Revolving Credit Loan made hereunder, the Type thereof and each Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Company to each US$ Revolving Credit Lender hereunder in respect of the US$ Revolving Credit Loans and (iii) both the amount of any sum received by the Administrative Agent hereunder from the Company in respect of the US$ Revolving Credit Loans and each US$ Revolving Credit Lender's share thereof. (d) The entries made in the Register and the accounts of each US$ Revolving Credit Lender maintained pursuant to Section 2.02(b) shall, to the extent permitted by applicable law, be prima facie evidence of the existence and ----- ----- amounts of the obligations of the Company therein recorded; provided, however, -------- ------- that the failure of any US$ Revolving Credit Lender or the Administrative Agent to maintain the Register or any such account, or any error therein, shall not in any manner affect the obligation of the Company to repay (with applicable interest) the US$ Revolving Credit Loans made to the Company by such US$ Revolving Credit Lender in accordance with the terms of this Agreement. (e) The Company agrees that, upon the request to the Administrative Agent by any US$ Revolving Credit Lender, the Company will execute and deliver to such US$ Revolving Credit Lender a promissory note of the Company evidencing the US$ Revolving Credit Loans of such US$ Revolving Credit Lender, substantially in the form of Exhibit A-1 with appropriate insertions as to date and principal amount (each, a "US$ Revolving Credit Note"); provided, that the -------- delivery of such US$ Revolving Credit Notes shall not be a condition precedent to the Closing Date. SECTION II.3 Procedure for US$ Revolving Credit Borrowing. The -------------------------------------------- Company may borrow under the US$ Revolving Credit Commitments during the Revolving Credit Commitment Period on any Business Day, provided that the -------- Company shall give the Administrative Agent irrevocable notice (which notice must be received by the Administrative Agent prior to 10:00 A.M., New York City time and must be promptly confirmed in writing by the Company, (a) three Business Days prior to the requested Borrowing Date, if all or any part of -31- the requested US$ Revolving Credit Loans are to be initially Eurodollar Loans, or (b) on the requested Borrowing Date, otherwise), specifying in each case (i) the amount to be borrowed, (ii) the requested Borrowing Date, (iii) whether the borrowing is to be of Eurodollar Loans, Base Rate Loans or a combination thereof and (iv) if the borrowing is to be entirely or partly of Eurodollar Loans, the amount of such Type of Loan and the length of the initial Interest Periods therefor. Each borrowing under the US$ Revolving Credit Commitments shall be in an amount equal to (A) in the case of Base Rate Loans, $1,000,000 or a whole multiple of $1,000,000 in excess thereof (or, if the then aggregate Available US$ Revolving Credit Commitments are less than $1,000,000, such lesser amount) and (B) in the case of Eurodollar Loans, $10,000,000 or a whole multiple of $1,000,000 in excess thereof. Upon receipt of any such notice from the Company, the Administrative Agent shall promptly notify each US$ Revolving Credit Lender thereof. Not later than 11:00 A.M., New York City time, on each requested Borrowing Date each US$ Revolving Credit Lender shall make an amount equal to its US$ Revolving Credit Percentage of the principal amount of the US$ Revolving Credit Loans requested to be made on such Borrowing Date available to the Administrative Agent at its New York office specified in Section 13.02 in Dollars and in immediately available funds. The Administrative Agent shall on such date credit the account of the Company on the books of such office with the aggregate of the amounts made available to the Administrative Agent by the US$ Revolving Credit Lenders and in like funds as received by the Administrative Agent. SECTION II.4 Termination or Reduction of US$ Revolving Credit ------------------------------------------------ Commitments. The relevant Borrower shall have the right, upon not less than - - ----------- three Business Days' notice to the Administrative Agent, to terminate the US$ Revolving Credit Commitments or, from time to time, to reduce the amount of the US$ Revolving Credit Commitments or the Multicurrency Revolving Credit Commitments; provided that no such termination or reduction of such Revolving -------- Credit Commitments shall be permitted if, after giving effect thereto and to any prepayments of the Loans made on the effective date thereof, (i) the aggregate US$ Revolving Extensions of Credit would exceed the Total US$ Revolving Credit Commitments then in effect or (ii) the Aggregate Multicurrency Revolving Credit Exposure would exceed the Total Multicurrency Revolving Credit Commitments then in effect. Any such reduction shall be in an amount equal to $10,000,000 or a whole multiple of $1,000,000 in excess thereof and shall reduce permanently the relevant Revolving Credit Commitments then in effect. SECTION II.5 Swing Line Commitments. Subject to the terms and ---------------------- conditions hereof, the Swing Line Lender agrees to make swing line loans (individually, a "Swing Line Loan"; collectively, the "Swing Line Loans") in Dollars to the Company under the US$ Revolving Credit Commitments from time to time during the Revolving Credit Commitment Period in an aggregate principal amount at any one time outstanding not to exceed the amount of the Swing Line Commitment, so long as after giving effect thereto the aggregate amount of the Available US$ Revolving Credit Commitments is greater than or equal to zero. Amounts borrowed by the Company under this Section 2.05 may be repaid and, during the Revolving Credit Commitment Period, reborrowed. -32- SECTION II.6 Procedure for Swing Line Borrowings; Interest Rate. (a) -------------------------------------------------- The Company shall give the Swing Line Lender irrevocable notice (which notice must be received by the Swing Line Lender prior to 10:00 A.M., New York City time on the requested Borrowing Date and must be promptly confirmed in writing by the Company) specifying the amount of the requested Swing Line Loan, which shall be in an aggregate principal amount of not less than $5,000,000 or a whole multiple of $100,000 in excess thereof. The proceeds of the requested Swing Line Loan will be made available by the Swing Line Lender to the Company at the office of the Swing Line Lender by crediting the account of the Company at such office with such proceeds in Dollars. (b All Swing Line Loans shall be either (i) Base Rate Loans bearing interest at the same rate as Revolving Credit Loans which are Base Rate Loans or (ii) bear interest at such rate as shall be agreed from time to time by the Company and the Swing Line Lender. No Swing Line Loan may be converted into a Eurodollar Loan. SECTION II.7 Repayment of Swing Line Loans; Evidence of Debt. (a) ------------------------------------------------ The Company hereby unconditionally promises to pay to the Swing Line Lender the then unpaid principal amount of the Swing Line Loans on the Revolving Credit Termination Date and on such other dates and in such other amounts as may be required from time to time pursuant to this Agreement. The Company hereby further agrees to pay interest on the unpaid principal amount of the Swing Line Loans from time to time outstanding until payment thereof in full at the rates per annum, and on the dates, set forth in Section 5.01. (b The Swing Line Lender shall maintain in accordance with its usual practice an account or accounts evidencing indebtedness of the Company resulting from each Swing Line Loan made by it from time to time, including the amounts of principal and interest payable thereon and paid from time to time under this Agreement. (c The Administrative Agent shall maintain the Register pursuant to Section 13.06(d), and a subaccount therein for the Swing Line Lender, in which shall be recorded (i) the date and amount of each Swing Line Loan made hereunder, (ii) the amount of each US$ Revolving Credit Lender's participating interest in such Swing Line Loans, (iii) the date and amount of any principal or interest due and payable or to become due and payable from the Company hereunder in respect of the Swing Line Loans and (iv) both the date and amount of any sum received by the Administrative Agent hereunder from the Company in respect of the Swing Line Loans, each US$ Revolving Credit Lender's participating interest therein (if any) and the amount thereof payable to the Swing Line Lender. (d The entries made in the Register and the accounts of the Swing Line Lender maintained pursuant to this Section 2.07 shall, to the extent permitted by applicable law, be prima facie evidence of the existence and ----- ----- amounts of the obligations of the Company therein recorded; provided, however, -------- ------- that the failure of the Swing Line Lender or the Administrative Agent to maintain the Register or any such account, or any error therein, shall not in any manner -33- affect the obligation of the Company to repay (with applicable interest) the Swing Line Loans made to the Company by the Swing Line Lender in accordance with the terms of this Agreement. SECTION II.8 Refunding of Swing Line Borrowings. (a) The Swing Line ---------------------------------- Lender, at any time in its sole and absolute discretion may, on behalf of the Company (which hereby irrevocably directs and authorizes the Swing Line Lender to act on its behalf), request each US$ Revolving Credit Lender, including Chase, to make a US$ Revolving Credit Loan (which shall be a Base Rate Loan) in an amount equal to such US$ Revolving Credit Lender's US$ Revolving Credit Percentage of the principal amount of the Swing Line Loans (the "Refunded Swing Line Loans") outstanding on the date such notice is given; provided that the -------- provisions of this Section shall not affect the Company's obligations to repay Swing Line Loans in accordance with the provisions of Sections 2.07 and 5.04(c) and (h). Unless the US$ Revolving Credit Commitments shall have expired or terminated (in which event the procedures of Section 2.09 shall apply), each US$ Revolving Credit Lender will make the proceeds of the US$ Revolving Credit Loan made by it pursuant to the immediately preceding sentence available to the Administrative Agent at the office of the Administrative Agent specified in Section 13.02 prior to 10:00 A.M., New York City time, in funds immediately available on the Business Day next succeeding the date such notice is given. The proceeds of such US$ Revolving Credit Loans shall be immediately made available by the Administrative Agent to the Swing Line Lender for application to the payment in full of the Refunded Swing Line Loans. Upon any request by the Swing Line Lender to the US$ Revolving Credit Lenders pursuant to this Section 2.08, the Administrative Agent shall promptly give notice to the Company of such request. SECTION II.9 Participating Interests. (a) If the US$ Revolving ----------------------- Credit Commitments shall expire or terminate at any time while Swing Line Loans are outstanding, at the request of the Swing Line Lender in its sole discretion, either (i) each US$ Revolving Credit Lender (including Chase) shall, notwithstanding the expiration or termination of the US$ Revolving Credit Commitments, make a US$ Revolving Credit Loan (which shall be a Base Rate Loan) or (ii) each US$ Revolving Credit Lender (other than Chase) shall purchase an undivided participating interest in the Swing Line Loans of the Swing Line Lender, in either case in an amount equal to such US$ Revolving Credit Lender's US$ Revolving Credit Percentage (determined on the date of, and immediately prior to, expiration or termination of the US$ Revolving Credit Commitments) of the aggregate principal amount of such Swing Line Loans. Each US$ Revolving Credit Lender will make the proceeds of any US$ Revolving Credit Loan made by it pursuant to the immediately preceding sentence available to the Administrative Agent for the account of the Swing Line Lender at the office of the Administrative Agent specified in Section 13.02 prior to 10:00 A.M., New York City time, in funds immediately available on the Business Day next succeeding the date of the request by the Swing Line Lender. The proceeds of such US$ Revolving Credit Loans shall be immediately applied to repay the Swing Line Loans outstanding on the date of termination or expiration of the US$ Revolving Credit Commitments. In the event that any of the US$ Revolving Credit Lenders purchase undivided participating interests pursuant to the first sentence of this Section 2.09(a), each Revolving Credit Lender shall immediately transfer to the Swing Line Lender, in immediately available funds, the amount of its participation in the Swing Line Loans of the Swing Line Lender and upon receipt -34- thereof the Swing Line Lender will deliver to any such US$ Revolving Credit Lender that so requests a confirmation of such US$ Revolving Credit Lender's undivided participating interest in the Swing Line Loans of the Swing Line Lender dated the date of receipt of such funds and in such amount. (b Whenever, at any time after the Swing Line Lender has received payment from any US$ Revolving Credit Lender in respect of such US$ Revolving Credit Lender's participating interest in a Swing Line Loan of the Swing Line Lender, the Swing Line Lender receives any payment on account thereof, the Swing Line Lender will distribute to such US$ Revolving Credit Lender its participating interest in such amount (appropriately adjusted, in the case of interest payments, to reflect the period of time during which such US$ Revolving Credit Lender's participating interest was outstanding and funded); provided, -------- however, that in the event that any such payment received by the Swing Line - - ------- Lender is required to be returned, such US$ Revolving Credit Lender will return to the Swing Line Lender any portion thereof previously distributed by the Swing Line Lender to it. ARTICLE III. AMOUNT AND TERMS OF TERM LOAN COMMITMENTS ----------------------------------------- SECTION III.1 Term Loan Commitments. Subject to the terms and --------------------- conditions hereof, (a) each Tranche A Term Loan Lender severally agrees to make term loans ("Tranche A Term Loans") to the Company in an aggregate principal amount not to exceed the amount of the Tranche A Term Loan Commitment of such Lender and (b) each Tranche B Term Loan Lender severally agrees to make term loans ("Tranche B Term Loans") to the Company in an aggregate principal amount not to exceed the amount of the Tranche B Term Loan Commitment of such Lender. The Term Loans shall be made in a single drawing on the Closing Date. The Term Loans may from time to time be Eurodollar Loans or Base Rate Loans, as determined by the Company and notified to the Administrative Agent in accordance with Sections 3.03 and 5.02. SECTION III.2 Repayment of Term Loans; Evidence of Debt. (a) The ----------------------------------------- Tranche A Term Loan of each Tranche A Lender shall mature in 17 consecutive quarterly installments, commencing on February 24, 2000, each of which shall be in an amount equal to such Lender's Tranche A Term Loan Percentage multiplied by the amount set forth below opposite such installment: Installment Principal Amount ----------- ---------------- February 24, 2000 $10,000,000 May 24, 2000 $10,000,000 August 24, 2000 $10,000,000 November 24, 2000 $10,000,000 February 24, 2001 $10,000,000 May 24, 2001 $25,000,000 August 24, 2001 $25,000,000 November 24, 2001 $25,000,000 -35- February 24, 2002 $25,000,000 May 24, 2002 $25,000,000 August 24, 2002 $25,000,000 November 24, 2002 $25,000,000 February 24, 2003 $25,000,000 May 24, 2003 $35,000,000 August 24, 2003 $35,000,000 November 24, 2003 $35,000,000 February 24, 2004 $45,000,000 (b The Tranche B Term Loan of each Tranche B Lender shall mature in 21 consecutive quarterly installments, commencing on February 24, 2000, each of which shall be in an amount equal to such Lender's Tranche B Term Loan Percentage multiplied by the amount set forth below opposite such installment: Installment Principal Amount ----------- ---------------- February 24, 2000 $ 1,000,000 May 24, 2000 $ 1,000,000 August 24, 2000 $ 1,000,000 November 24, 2000 $ 1,000,000 February 24, 2001 $ 1,000,000 May 24, 2001 $ 1,000,000 August 24, 2001 $ 1,000,000 November 24, 2001 $ 1,000,000 February 24, 2002 $ 1,000,000 May 24, 2002 $ 1,000,000 August 24, 2002 0 November 24, 2002 $ 1,000,000 February 24, 2003 $ 1,000,000 May 24, 2003 $ 1,000,000 August 24, 2003 $ 1,000,000 November 24, 2003 $ 1,000,000 February 24, 2004 $ 1,000,000 May 24, 2004 $ 50,000,000 August 24, 2004 $ 50,000,000 November 24, 2004 $ 50,000,000 February 24, 2005 $183,000,000 (c The Company hereby unconditionally promises to pay to the Administrative Agent for the account of the appropriate Term Loan Lender the principal amount of each Term -36- Loan of such Term Loan Lender in installments according to the amortization schedule set forth in paragraphs (a) or (b) above, as applicable (or on such earlier date on which the Loans become due and payable pursuant to Article XI). The Company hereby further agrees to pay interest on the unpaid principal amount of the Term Loans from time to time outstanding from the date hereof until payment in full thereof at the rates per annum, and on the dates, set forth in Section 5.01. (d Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing indebtedness of the Company to such Lender resulting from each Term Loan of such Lender from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time in respect of such Term Loans under this Agreement. (e The Administrative Agent, on behalf of the Company, shall maintain the Register pursuant to Section 13.06(d), and a subaccount therein for each Lender, in which shall be recorded (i) the amount of each Term Loan made hereunder and any Note evidencing such Term Loan, the Type thereof and each Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Company to each Lender hereunder and (iii) both the amount of any sum received by the Administrative Agent hereunder from the Company and each Lender's share thereof. (f The entries made in the Register and the accounts of each Lender maintained pursuant to Section 3.02(d) shall, to the extent permitted by applicable law, be prima facie evidence of the existence and amounts of the ----- ----- obligations of the Company therein recorded; provided, however, that the failure -------- ------- of any Lender or the Administrative Agent to maintain the Register or any such account, or any error therein, shall not in any manner affect the obligation of the Company to repay (with applicable interest) the Term Loans by such Lender in accordance with the terms of this Agreement. (g The Company agrees that, upon the request to the Administrative Agent by any Lender, the Company will execute and deliver to such Lender a promissory note of the Company evidencing any Term Loans of such Lender, substantially in the form of Exhibit A-2, with appropriate insertions as to date and principal amount. SECTION III.3 Procedure for Term Loan Borrowing. The Company may --------------------------------- borrow the Term Loans on the Closing Date, provided that the Company shall give -------- the Administrative Agent irrevocable notice (which notice must be received by the Administrative Agent prior to 10:00 A.M., New York City time, (a) three Business Days prior to the Closing Date, if all or any part of the requested Term Loans are to be initially Eurodollar Loans, or (b) one Business Day prior to the requested Closing Date, otherwise), specifying in each case (i) the amount to be borrowed, (ii) the requested Closing Date, (iii) whether the borrowing is to be of Eurodollar Loans, Base Rate Loans or a combination thereof and (iv) if the borrowing is to be entirely or partly of Eurodollar Loans, the amount of such Type of Loan and the length of the initial Interest Periods therefor. Upon receipt of any such notice from the Company, the Administrative Agent shall promptly notify each Term Loan Lender thereof. Not later than 11:00 A.M., New York -37- City time, on the Closing Date each Term Loan Lender shall make the amount of the Term Loans to be made by it on such Borrowing Date available to the Administrative Agent at its New York office specified in Section 13.02 in Dollars and in immediately available funds. The Administrative Agent shall on such date credit the account of the Company on the books of such office with the aggregate of the amounts made available to the Administrative Agent by the Term Loan Lenders and in like funds as received by the Administrative Agent. ARTICLE IV. AMOUNT AND TERMS OF MULTICURRENCY REVOLVING CREDIT COMMITMENTS -------------------------------------------------------------- SECTION IV.1 Multicurrency Revolving Credit Commitments. (a) Subject ------------------------------------------ to the terms and conditions hereof, each Multicurrency Revolving Credit Lender severally agrees to make Multicurrency Revolving Credit Loans to any Borrower, at any time and from time to time on and after the date hereof and until the earlier of the Revolving Credit Termination Date and the termination of the Multicurrency Revolving Credit Commitment of such Lender in accordance with the terms hereof, in Dollars and any Available Foreign Currency in an aggregate principal amount at any time outstanding that will not result in (i) such Lender's Multicurrency Revolving Credit Exposure at such time exceeding its Multicurrency Revolving Credit Commitment or (ii) the amount of Multicurrency Revolving Credit Loans denominated in any such Available Foreign Currency exceeding the Currency Sublimit applicable to such Available Foreign Currency. (b Each Multicurrency Revolving Credit Lender shall make each Multicurrency Revolving Credit Loan to be made by it hereunder on the proposed date thereof by wire transfer to such account as the Administrative Agent may designate in immediately available funds not later than 11:00 a.m., London time, and the Administrative Agent shall credit the amounts so received to an account designated by the relevant Borrower in the applicable borrowing request. (c The Administrative Agent shall notify the Company and the Multicurrency Revolving Credit Lenders of the amount of the Aggregate Multicurrency Revolving Credit Exposure, promptly following each Calculation Date. (d Each Borrower which has borrowed Multicurrency Revolving Credit Loans shall repay all such Loans made to it in the currency in which such Loans were made on the Revolving Credit Termination Date. SECTION IV.2 Procedure for Multicurrency Revolving Credit Borrowing. ------------------------------------------------------ (a) In order to request a Multicurrency Revolving Credit Loan, the relevant Borrower shall hand deliver or telecopy to the Administrative Agent a duly completed borrowing request, not later than 12:00 (noon), London time, three Business Days (or, in the case of a borrowing denominated in Australian Dollars, four Business Days) before such proposed borrowing. Each borrowing request shall be irrevocable. The Administrative Agent shall promptly advise the applicable Lenders of any notice given pursuant to this Section 4.02 and of each Lender's portion of the requested borrowing and the Spot Exchange Rate utilized. Each borrowing under the -38- Multicurrency Revolving Credit Commitments shall be in a minimum amount in Dollars equal to, or an amount in an Available Foreign Currency of which the Dollar Equivalent is $10,000,000 or a whole multiple of $1,000,000 in excess thereof (or, if the Dollar Equivalent of the then aggregate Available Multicurrency Revolving Credit Commitments is less than $10,000,000, such lesser amount) as rounded upwards to the nearest 100,000 units in the relevant Available Foreign Currency. SECTION IV.3 Spot Exchange Rate Calculations. (a) Not later than ------------------------------- 2:00 p.m., London time, on each Calculation Date, the Administrative Agent shall (A) determine the Spot Exchange Rate as of such Calculation Date with respect to each of the Available Foreign Currencies in which Multicurrency Revolving Credit Loans are then outstanding and (B) give notice thereof to the Company and the Multicurrency Revolving Credit Lenders. (b The Spot Exchange Rates determined pursuant to Section 4.03(a) shall become effective on the second Business Day immediately following the relevant Calculation Date (a "Reset Date") and shall remain effective until the next succeeding Reset Date. (c Not later than 2:00 p.m., London time, on the Business Day immediately following the delivery of any notice in connection with the repayment of Multicurrency Revolving Credit Loans, the Administrative Agent shall (A) determine as of such date the Assigned Dollar Value, based on the Spot Exchange Rate then in effect, of each Multicurrency Revolving Credit Loan then outstanding (after giving effect to any Multicurrency Revolving Credit Loan repaid in connection therewith) and (B) notify the Company and the Multicurrency Revolving Credit Lenders of the results of such determination. SECTION IV.4 Commitment Reallocations. (a) The Borrowers may, from ------------------------ time to time, but not more than once per calendar quarter (unless otherwise agreed by each Multicurrency Revolving Credit Lender), from and after the Closing Date until the earlier of the Revolving Credit Termination Date and the termination of the Multicurrency Revolving Credit Commitments, upon giving an irrevocable joint written notice substantially in the form of Exhibit J (each, a "Reallocation Notice") to the Administrative Agent at least ten Business Days ------------------- prior to the beginning of the next following calendar quarter, temporarily reduce, in whole or in part, or increase, the Multicurrency Revolving Credit Commitments. Any reductions or increases in the Multicurrency Revolving Credit Commitments or the Additional US$ Revolving Credit Commitments (as defined below) shall take effect on the first day of the next following calendar quarter. Each reduction or increase in the Multicurrency Revolving Credit Commitments shall result in an automatic corresponding increase or reduction in the Additional US$ Revolving Credit Commitments; provided that the Total -------- Multicurrency Revolving Credit Commitments shall not, at any time, (i) be reduced to an amount that is less than the Dollar Equivalent of the aggregate Multicurrency Revolving Credit Loans outstanding at such time or (ii) exceed $125,000,000. The Revolving Credit Commitments from time to time resulting from a reallocation of Multicurrency Revolving Credit Commitments pursuant to this Section 4.04 at any time are the "Additional US$ Revolving Credit Commitments". Any amount of the Multicurrency Revolving Credit Commitments reallocated under this Section 4.04 as Additional -39- US$ Revolving Credit Commitments will only be available to the Company until and only if such amounts are reallocated back to the Multicurrency Revolving Credit Commitments in accordance with the terms and conditions of this Section 4.04. The ability of the Borrowers to reallocate the relevant Revolving Credit Commitments in accordance with this Section 4.04 shall be subject to the conditions that (A) the representations and warranties set forth in each Loan Document shall be true and correct in all material respects on and as of the date of such reallocation with the same effect as though made on and as of such date, except to the extent that such representations and warranties expressly relate to an earlier date and (B) at the time of and immediately following such reallocation, no Event of Default or Default shall have occurred and be continuing. Each Reallocation Notice shall specify the amount (expressed in Dollars) of any reduction or increase in the Multicurrency Revolving Credit Commitments and the corresponding increase or reduction in the Additional US$ Revolving Credit Commitments. Each reallocation requested under this Section 4.04 shall be in a minimum aggregate principal amount of $50,000,000 (or, if less, the remaining amount of the relevant Revolving Credit Commitments) and in integral multiples of $5,000,000 in excess thereof. Each reduction or increase in the Multicurrency Revolving Credit Commitments under this Section 4.04 shall be made ratably among the Multicurrency Revolving Credit Lenders based on their respective Multicurrency Revolving Credit Commitments. Each reduction or increase in the Additional US$ Revolving Credit Commitments under this Section 4.04 shall be made ratably among the Multicurrency Revolving Credit Lenders based on their respective Multicurrency Revolving Credit Commitments. The Administrative Agent shall promptly after receiving a Reallocation Notice notify each Multicurrency Revolving Credit Lender of the amount of its Multicurrency Revolving Credit Commitment or Additional US$ Revolving Credit Commitment, as the case may be, to be reallocated and the date of such reallocation. (b) The Additional US$ Revolving Credit Commitments shall be available to the Company on the same terms (except as provided in this paragraph (b)), mutatis mutandis, as the US$ Revolving Credit Commitments. Without ------- -------- limiting the generality of the foregoing, (i) the Company may borrow for its account under the Additional US$ Revolving Credit Commitments to the same extent as it may utilize the US$ Revolving Credit Commitments (subject to the same interest rate options, minimum borrowing and repayment amounts and maturities), provided that the aggregate principal amount of Additional US$ Revolving Credit - - -------- Loans shall not exceed the aggregate Additional US$ Revolving Credit Commitments, (ii) Swing Line Loans are not available under the Additional US$ Revolving Credit Commitments, and (iii) the Multicurrency Revolving Credit Lenders shall be entitled to the same rights (including acceleration rights) and subject to the same obligations with respect to the Additional US$ Revolving Credit Commitments as are the US$ Revolving Credit Lenders with respect to the US$ Revolving Credit Commitments. SECTION 4.05 Redenomination and Alternative Currencies. Each ----------------------------------------- obligation under this Agreement of a party to this Agreement which has been denominated in the national currency unit of a Subsequent Participant state shall be redenominated into the euro unit in -40- accordance with EMU legislation immediately upon such Subsequent Participant becoming a Participating Member State (but otherwise in accordance with EMU Legislation). ARTICLE V. GENERAL PROVISIONS APPLICABLE TO THE LOANS ------------------------------------------ SECTION V.1 Interest Rates and Payment Dates. (a) Each Eurodollar -------------------------------- Loan of each Class shall bear interest for each day during each Interest Period with respect thereto at a rate per annum equal to the Eurodollar Rate determined for such Interest Period plus the Applicable Margin for such Class of Loans in effect for such day. (b) Each Base Rate Loan of each Class shall bear interest for each day that it is outstanding at a rate per annum equal to the Base Rate for such day plus the Applicable Margin for such Class of Loans in effect for such day. (c) Each Multicurrency Revolving Credit Loan shall bear interest for each day during each Interest Period with respect thereto at a rate per annum equal to the applicable Eurocurrency Rate determined for such Interest Period plus the Applicable Margin for such Class of Loans in effect for such day. (d) If all or a portion of (i) the principal amount of any Loan, (ii) any interest payable thereon or (iii) any fee or other amount payable hereunder shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such overdue amount shall bear interest at a rate per annum equal to the rate that would otherwise be applicable thereto pursuant to the foregoing provisions of this Section plus 2% or, if higher, in the case of amounts required to be paid in Dollars, the rate described in paragraph (b) of this Section plus 2%. (e) Interest shall be payable in arrears on each Interest Payment Date, provided that interest accruing pursuant to paragraph (d) of this Section -------- shall be payable from time to time on demand. SECTION V.2 Conversion and Continuation Options. (a) The Company ----------------------------------- may elect from time to time to convert outstanding Eurodollar Loans of any Class (in whole or in part) to Base Rate Loans of the same Class by giving the Administrative Agent at least two Business Days' prior irrevocable notice of such election, provided that any such conversion of Eurodollar Loans may only be -------- made on the last day of an Interest Period with respect thereto. The Company may elect from time to time to convert outstanding Base Rate Loans (other than Swing Line Loans) of any Class (in whole or in part) to Eurodollar Loans of the same Class by giving the Administrative Agent at least three Business Days' prior irrevocable notice of such election. Any such notice of conversion to Eurodollar Loans shall specify the length of the initial Interest Period or Interest Periods therefor. Upon receipt of any such notice the Administrative Agent shall promptly notify each Lender thereof. All or any part of outstanding Eurodollar Loans and Base Rate Loans under a particular Facility may be converted as provided herein, provided that (i) no Base Rate Loan may be -------- converted into a Eurodollar Loan when any Default -41- or Event of Default has occurred and is continuing and the Administrative Agent or the Majority Facility Lenders in respect of such Facility have determined that such conversion is not appropriate, (ii) any such conversion may only be made if, after giving effect thereto, Section 5.03 shall not have been violated, (iii) no Base Rate Loan of any Class may be converted into a Eurodollar Loan after the date that is one month prior to the Revolving Credit Termination Date (in the case of Revolving Credit Loans) or the date of final maturity of the Loans of such Class (in the case of Term Loans) and (iv) Swing Line Loans may not be converted to Eurodollar Loans. (b) Any Eurodollar Loans may be continued as such upon the expiration of the then current Interest Period with respect thereto by the Company giving notice to the Administrative Agent of the length of the next Interest Period to be applicable to such Loans in accordance with the applicable provisions of the term "Interest Period" set forth in Section 1.01, provided that no Eurodollar -------- Loan under a particular Facility may be continued as such (i) when any Default or Event of Default has occurred and is continuing and the Administrative Agent or the Majority Facility Lenders in respect of such Facility have determined that such continuation is not appropriate, (ii) if, after giving effect thereto, Section 5.03 would be contravened or (iii) after the date that is one month prior to the Revolving Credit Termination Date, and provided, further, that if -------- ------- the Company shall fail to give such notice or if such continuation is not permitted pursuant to the preceding proviso such Eurodollar Loans shall be automatically converted to Base Rate Loans on the last day of such then expiring Interest Period. (c) Any Multicurrency Revolving Credit Loans may be continued as such upon the expiration of the then current Interest Period with respect thereto by the relevant Borrower giving the Administrative Agent at least three Business Days' prior irrevocable notice of such election, provided, that if the relevant -------- Borrower shall fail to give such notice or if any Default or Event of Default has occurred and is continuing and the Administrative Agent or the Required Lenders have determined that such continuation would not be appropriate, such Multicurrency Revolving Credit Loans shall automatically be continued for an Interest Period of one month. (d) Any such notice required in paragraphs (a) through (c) above shall be made no later than 10:00 A.M., New York City time, in the case of Term Loans, US$ Revolving Credit Loans and Additional US$ Revolving Credit Loans, and no later than 11:00 A.M., London time, in the case of Multicurrency Revolving Credit Loans, in each such case, on the day prescribed for such notice by such paragraph. SECTION V.3 Minimum Amounts of Tranches. All borrowings, conversions --------------------------- and continuations of Loans hereunder and all selections of Interest Periods hereunder shall be in such amounts and be made pursuant to such elections so that, immediately after giving effect thereto, (a) the aggregate principal amount of the Eurodollar Loans comprising each Tranche shall be equal to $10,000,000 or a whole multiple of $1,000,000 in excess thereof, (b) the aggregate principal amount of the Multicurrency Revolving Credit Loans comprising each Tranche shall be in an amount which is, or of which the Dollar Equivalent is, at least $10,000,000 and (c) there shall not be more than 25 Tranches at any one time outstanding. -42- SECTION V.4 Optional and Mandatory Prepayments. (a) The Company may ---------------------------------- at any time and from time to time prepay US$ Revolving Credit Loans, Swing Line Loans and/or Term Loans, in whole or in part, upon at least three Business Days' irrevocable notice to the Administrative Agent (in the case of Eurodollar Loans) and at least one Business Day's irrevocable notice to the Administrative Agent (in the case of Base Rate Loans), specifying the date and amount of prepayment, which Class of Loans will be prepaid, and whether the prepayment is of Eurodollar Loans, Base Rate Loans or a combination thereof, and, if a combination thereof, the amount allocable to each; provided, the Swing Line -------- Loans may be prepaid without prior notice. Upon the receipt of any such notice the Administrative Agent shall promptly notify each Lender thereof. If any such notice is given, the amount specified in such notice shall be due and payable on the date specified therein, together with any amounts payable pursuant to Section 5.12. Partial prepayments of US$ Revolving Credit Loans or Term Loans of any Class shall be in an aggregate principal amount of $10,000,000 or a whole multiple of $1,000,000 in excess thereof. Partial prepayments of the Swing Line Loans shall be in aggregate principal amount of $1,000,000 or a whole multiple of $100,000 in excess thereof. (b) The Borrowers may at any time and from time to time prepay, without premium or penalty, the Multicurrency Revolving Credit Loans, in whole or in part, upon at least three Business Days' (or, in the case of a prepayment with respect to Multicurrency Revolving Credit Loans denominated in Australian Dollars, four Business Days) irrevocable notice to the Administrative Agent specifying the date and amount of prepayment. Upon the receipt of any such notice, the Administrative Agent shall promptly notify each Multicurrency Revolving Credit Lender thereof. If any such notice is given, the amount specified in such notice shall be due and payable on the date specified therein. Partial prepayments of Multicurrency Revolving Credit Loans shall be in an aggregate principal amount in Dollars equal to, or an amount in an Available Foreign Currency of which the Dollar Equivalent is at least $5,000,000, as rounded upwards to the nearest 100,000 units in the relevant Available Foreign Currency. (c) If, on any Reset Date, the Aggregate Multicurrency Revolving Credit Exposure (expressed in Dollars) exceeds an amount equal to 105% of the Total Multicurrency Revolving Credit Commitment, then (i) the Administrative Agent shall give notice thereof to each Multicurrency Revolving Credit Lender and the Company and (ii) the Company shall, or shall cause the relevant Borrower to, on the next succeeding Business Day, prepay outstanding Multicurrency Revolving Credit Loans in an amount so that after giving effect to any such prepayments, the Aggregate Multicurrency Revolving Credit Exposure (expressed in Dollars) does not exceed the Total Multicurrency Revolving Credit Commitment. If, on any Reset Date, the Aggregate Multicurrency Revolving Credit Exposure with respect to a particular Available Foreign Currency (expressed in Dollars) exceeds an amount equal to 105% of the Currency Sublimit applicable to such Available Foreign Currency, then (i) the Administrative Agent shall give notice thereof to each Multicurrency Revolving Credit Lender and the Company and (ii) the Company shall, or shall cause the relevant Borrower to, on the next succeeding Business Day, prepay outstanding Multicurrency Revolving Credit Loans in such Available Foreign Currency in an amount so that after giving effect to any such prepayments, the Aggregate Multicurrency -43- Revolving Credit Exposure with respect to such Available Foreign Currency (expressed in Dollars) does not exceed the Currency Sublimit with respect to such Available Foreign Currency. (d) If at any time any mandatory prepayment (other than the type referred to in paragraph (c) above) is required to be made in respect of any Permitted Other Acquisition Debt, such mandatory prepayment shall be applied toward the prepayment of the Term Loans and such Permitted Other Acquisition Debt ratably based on the outstanding principal amounts thereof. (e) Each prepayment of Loans pursuant to this Section 5.04 shall be accompanied by accrued and unpaid interest on the amount prepaid to the date of prepayment and any amounts payable under Section 5.12 in connection with such prepayment. (f) Prepayments of any Class of Loans pursuant to this Section 5.04 shall be applied as follows: (i) in the case of prepayments made by the Company, first, to prepay Base Rate Loans of such Class then outstanding and ----- second, to prepay Eurodollar Loans of such Class then outstanding and (ii) in - - ------ case of prepayments of Multicurrency Revolving Credit Loans made by a Borrower, to prepay Multicurrency Revolving Credit Loans borrowed by such Borrower. Optional prepayments of the Tranche A Term Loans or the Tranche B Term Loans shall be applied ratably and to the installments thereof in the direct order of scheduled maturity or in the inverse order of scheduled maturity at the option of the Company. Mandatory prepayments of the Tranche A Term Loans or the Tranche B Term Loans shall be applied ratably and to the installments thereof ratably in accordance with the then outstanding amounts thereof or in the inverse order of scheduled maturity at the option of the Company. (g) The Company shall, unless otherwise agreed to by the Swing Line Lender, prepay all Swing Line Loans then outstanding simultaneously with each borrowing of US$ Revolving Credit Loans. SECTION V.5 Facility Fees; Other Fees. (a) The Company agrees to ------------------------- pay to the Administrative Agent for the account of each Revolving Credit Lender, a facility fee for the period from and including the Closing Date to but excluding the Revolving Credit Termination Date (or such earlier date on which the Revolving Credit Commitments shall terminate as provided herein), computed at the Facility Fee Rate on the daily average amount of such Lender's aggregate Revolving Credit Commitment (drawn and undrawn). Such facility fees shall be payable quarterly in arrears on the last day of each March, June, September and December and on the Revolving Credit Termination Date or such earlier date on which the Revolving Credit Commitments shall terminate as provided herein, commencing on the first of such dates to occur after the date hereof. (b) The Company shall pay (without duplication of any other fee payable under this Section 5.05) to Chase, for its own account, fees in the amounts and on the dates separately agreed to by the Company and Chase. -44- (c) The Company shall (without duplication of any other fee payable under this Section 5.05) pay to the Administrative Agent, for its own amount, fees in the amounts and on the dates separately agreed to by the Company and the Administrative Agent. SECTION V.6 Computation of Interest and Fees. (a) Interest based on -------------------------------- the Eurodollar Rate, the Eurocurrency Rate (other than with respect to amounts denominated in Pounds Sterling) or (when it is based on the Federal Funds Effective Rate) the Base Rate shall be calculated on the basis of a 360-day year for the actual days elapsed; and facility fees and interest (other than as specified above) shall be calculated on the basis of a 365- (or 366-, as the case may be) day year for the actual days elapsed. The Administrative Agent shall as soon as practicable notify the Company and the Lenders of each determination of a Eurodollar Rate or a Eurocurrency Rate. Any change in the interest rate on a Loan resulting from a change in the Base Rate or a change in the Prime Rate shall become effective as of the opening of business on the day on which such change becomes effective provided that such change becomes effective prior to 5:00 p.m., New York City time, on such day. The Administrative Agent shall as soon as practicable notify the Company and the Lenders of the Closing Date and the amount of each such change in the Base Rate. (b) Each determination of an interest rate by the Administrative Agent pursuant to any provision of this Agreement shall be conclusive and binding on the Borrowers and the Lenders in the absence of manifest error. The Administrative Agent shall, at the request of a Borrower or any Lender, deliver to such Borrower or such Lender a statement showing in reasonable detail the quotations and calculations used by the Administrative Agent in determining any interest rate pursuant to Section 5.01(a) or (c). (c) (i) If any Domestic Reference Lender shall for any reason no longer have a US$ Revolving Credit Commitment or an Additional US$ Revolving Credit Commitment or any US$ Revolving Credit Loans or any Additional US$ Revolving Credit Loans, such Domestic Reference Lender shall thereupon cease to be a Domestic Reference Lender, and if, as a result, there shall only be one Domestic Reference Lender remaining, the Administrative Agent (after consultation with the Company and the Lenders) shall, by notice to the Company and the Lenders, designate another Lender as a Domestic Reference Lender so that there shall at all times be at least two Domestic Reference Lenders. (ii) If any Multicurrency Reference Lender shall for any reason no longer have a Multicurrency Revolving Credit Commitment or any Multicurrency Revolving Credit Loans, such Multicurrency Reference Lender shall thereupon cease to be a Multicurrency Reference Lender, and if, as a result, there shall only be one Multicurrency Reference Lender remaining, the Administrative Agent (after consultation with the Company and the Lenders) shall, by notice to the Company and the Lenders, designate another Multicurrency Revolving Credit Lender as a Multicurrency Reference Lender so that there shall at all times be at least two Multicurrency Reference Lenders. -45- (d) Each Reference Lender shall use its best efforts to furnish quotations of rates to the Administrative Agent as contemplated hereby. If any of the Reference Lenders shall be unable or shall otherwise fail to supply such rates to the Administrative Agent upon its request, the rate of interest shall, subject to the provisions of Section 5.07, be determined on the basis of the quotations of the remaining applicable Reference Lenders or Reference Lender, as applicable. SECTION V.7 Inability to Determine Interest Rate. If prior to the ------------------------------------ first day of any Interest Period: (a) the Administrative Agent shall have determined (which determination shall be conclusive and binding upon the Borrowers) that, by reason of circumstances affecting the relevant market generally, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate or the Eurocurrency Rate with respect to the currency in which a Loan or a requested Loan is denominated (the "Affected Currency"), as the case may be, for such Interest Period, or (b) the Administrative Agent has received notice from the Majority Facility Lenders in respect of the relevant Facility that the Eurodollar Rate or Eurocurrency Rate, as the case may be, determined or to be determined with respect to the Affected Currency for such Interest Period will not adequately and fairly reflect the cost to such Lenders (as certified by such Lenders) of making or maintaining their Eurodollar Loans or Multicurrency Revolving Credit Loans, as the case may be, during such Interest Period, the Administrative Agent shall give telecopy or telephonic notice thereof to the Company and the Lenders as soon as practicable thereafter. If such notice is given (i) any Eurodollar Loans or Multicurrency Revolving Credit Loans, as the case may be, requested to be made on the first day of such Interest Period shall be made as Base Rate Loans in Dollars, (ii) any US$ Revolving Credit Loans, Additional US$ Revolving Credit Loans or Multicurrency Revolving Credit Loans denominated in Dollars that were to have been converted on the first day of such Interest Period to or continued as Eurodollar Loans shall be converted to or continued as Base Rate Loans, (iii) any outstanding Eurodollar Loans shall be converted on the first day of such Interest Period to Base Rate Loans and (iv) any Multicurrency Revolving Credit Loans denominated in any Available Foreign Currency to which such Interest Period relates shall be repaid on the first day of such Interest Period. Until such notice has been withdrawn by the Administrative Agent, no further Eurodollar Loans or Multicurrency Revolving Credit Loans shall be made or continued as such, nor shall the Company have the right to convert Base Rate Loans to Eurodollar Loans, as the case may be, provided that Loans may continue to be made, converted or continued, as the case - - -------- may be, in Dollars or Available Foreign Currencies other than the Affected Currency. SECTION V.8 Pro Rata Treatment and Payments. (a) (i) Each borrowing ------------------------------- of US$ Revolving Credit Loans, the Additional US$ Revolving Credit Loans or the Multicurrency Revolving Credit Loans shall be made pro rata according to the --- ---- respective US$ Revolving Credit Percentages, Additional US$ Revolving Credit Percentages or Multicurrency Revolving Credit -46- Percentages, as the case may be, of the relevant Lenders in effect on the date of such borrowing. Each payment by the Company on account of any facility fee hereunder shall be allocated by the Administrative Agent among the Lenders in accordance with the respective amounts which such Lenders are entitled to receive pursuant to Section 5.05(a). Any reduction of the US$ Revolving Credit Commitments, Additional US$ Revolving Credit Commitments or Multicurrency Revolving Credit Commitments shall be allocated by the Administrative Agent among the Lenders pro rata according to the US$ Revolving Credit Percentages, --- ---- the Additional US$ Revolving Credit Percentages or the Multicurrency Revolving Credit Percentages, as the case may be, of the relevant Lenders. Each payment (including each prepayment) on account of principal of and interest on the US$ Revolving Credit Loans shall be made pro rata according to the respective --- ---- outstanding principal amounts of the US$ Revolving Credit Loans then held by the US$ Revolving Credit Lenders. Each payment (including each prepayment) by a Borrower on account of principal of and interest on Additional US$ Revolving Credit Loans shall be allocated by the Administrative Agent pro rata according --- ---- to the respective principal amounts of the Additional US$ Revolving Credit Loans then due and owing by such Borrower to each Additional US$ Revolving Credit Lender. Each payment (including each prepayment) by a Borrower on account of principal of and interest on Multicurrency Revolving Credit Loans shall be allocated by the Administrative Agent pro rata according to the respective --- ---- principal amounts of the Multicurrency Revolving Credit Loans then due and owing by such Borrower to each Multicurrency Revolving Credit Lender. (ii) Each borrowing by the Company of Term Loans hereunder shall be made pro rata according to the respective Tranche A Term Loan Percentages or --- ---- Tranche B Term Loan Percentages, as the case may be, of the relevant Lenders. Each payment (including each prepayment) by the Company on account of principal of and interest on the Term Loans shall be made pro rata according to the --- ---- respective outstanding principal amounts of the Term Loans then held by the Term Loan Lenders. The amount of each principal prepayment (other than optional prepayments) of the Tranche A Term Loans and the Tranche B Term Loans shall be applied to reduce the installments thereof pro rata based upon the then --- ---- remaining principal amount thereof. Amounts prepaid on account of the Term Loans may not be reborrowed. (iii) All payments (including prepayments) to be made by the Company hereunder in respect of amounts denominated in Dollars, whether on account of principal, interest, fees or otherwise, shall be made without set-off or counterclaim and shall be made prior to 12:00 Noon, New York City time, in the case of US$ Revolving Credit Loans or Additional US$ Revolving Credit Loans, and 11:00 A.M., London time, in the case of Multicurrency Revolving Credit Loans, on the due date thereof to the Administrative Agent, for the account of the Lenders, at the Administrative Agent's office specified in Section 13.02, in Dollars and in immediately available funds. The Administrative Agent shall distribute such payments to the Lenders entitled to receive the same promptly upon receipt in like funds as received. (iv) All payments (including prepayments) to be made by a Borrower on account of Multicurrency Revolving Credit Loans denominated in any Available Foreign Currency, whether on account of principal, interest, fees or otherwise, shall be made without set-off or -47- counterclaim and shall be made prior to 12:00 Noon, London time (or, in the case of payments in euro units, prior to 12:00 Noon, Frankfurt time), on the due date thereof to the Administrative Agent, for the account of the Multicurrency Revolving Credit Lenders, at the payment office for the currency of such Multicurrency Revolving Credit Loans specified from time to time by the Administrative Agent by notice to the Borrowers, in the currency of such Multicurrency Revolving Credit Loans and in immediately available funds. The Administrative Agent shall distribute such payments to the Multicurrency Revolving Credit Lenders entitled to receive the same promptly upon receipt. In relation to the payment of any amount of euro, such amount shall be made available to the Administrative Agent in immediately available, freely transferable, cleared funds to such account with such bank in Frankfurt am Main, Germany (or such other principal financial center in such Participating Member State as the Administrative Agent may from time to time nominate for this purpose) as the Administrative Agent shall from time to time nominate for this purpose. (v) If any payment hereunder (other than payments on the Eurodollar Loans or the Multicurrency Revolving Credit Loans) becomes due and payable on a day other than a Business Day, the maturity of such payment shall be extended to the next succeeding Business Day, and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension. If any payment on a Eurodollar Loan or a Multicurrency Revolving Credit Loan becomes due and payable on a day other than a Business Day, the maturity of such payment shall be extended to the next succeeding Business Day (and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension) unless the result of such extension would be to extend such payment into another calendar month, in which event such payment shall be made on the immediately preceding Business Day. (b) A payment shall be deemed to have been made by the Administrative Agent on the date on which it is required to be made under this Agreement if the Administrative Agent has, on or before that date, taken all relevant steps to make that payment. With respect to the payment of any amount denominated in euro, the Administrative Agent shall not be liable to any Borrower or any of the Lenders in any way whatsoever for any delay, or the consequences of any delay, in the crediting to any account of any amount required by this Agreement to be paid by the Administrative Agent if the Administrative Agent shall have taken all relevant steps to achieve, on the date required by this Agreement, the payment of such amount in immediately available, freely transferable, cleared funds in the euro unit to the account with the bank in the principal financial center in the Participating Member State which the relevant Borrower or, as the case may be, any Lender shall have specified for such purpose. In this paragraph (b), "all relevant steps" means all such steps as may be prescribed from time to time by the regulations or operating procedures of such clearing or settlement system as the Administrative Agent may from time to time determine for the purpose of clearing or settling payments of euro. (c) Unless the Administrative Agent shall have been notified in writing by any Lender prior to a Borrowing Date that such Lender will not make the amount that would constitute its share of such borrowing available to the Administrative Agent, the Administrative -48- Agent may assume that such Lender is making such amount available to the Administrative Agent, and the Administrative Agent may, in reliance upon such assumption, make available to the applicable Borrower a corresponding amount. If such amount is not made available to the Administrative Agent by the required time on the Borrowing Date therefor, such Lender shall pay to the Administrative Agent, on demand, such amount with interest thereon at a rate per annum equal to (i) the daily average Federal Funds Effective Rate (in the case of a borrowing of US$ Revolving Credit Loans, Additional US$ Revolving Credit Loans or Term Loans) and (ii) the Administrative Agent's reasonable estimate of its average daily cost of funds (in the case of a borrowing of Multicurrency Revolving Credit Loans), in each case for the period until such Lender makes such amount immediately available to the Administrative Agent. A certificate of the Administrative Agent submitted to any Lender with respect to any amounts owing under this Section shall be conclusive in the absence of manifest error. If such Lender's share of such borrowing is not made available to the Administrative Agent by such Lender within three Business Days of such Borrowing Date, the applicable Borrower shall repay such Lender's share of such borrowing (together with interest thereon from the date such amount was made available to such Borrower (i) at the rate per annum applicable to Base Rate Loans hereunder (in the case of a borrowing of US$ Revolving Credit Loans or Additional US$ Revolving Credit Loans or Term Loans) or (ii) the Administrative Agent's reasonable estimate of its average daily cost of funds plus the Applicable ---- Margin applicable to Multicurrency Revolving Credit Loans (in the case of a borrowing of Multicurrency Revolving Credit Loans)) to the Administrative Agent not later than three Business Days after receipt of written notice from the Administrative Agent specifying such Lender's share of such borrowing that was not made available to the Administrative Agent. (d) Any amount payable by the Administrative Agent to the Lenders under this Agreement in the currency of a Participating Member State shall be paid in the euro unit. (e) If, in relation to the currency of any Subsequent Participant, the basis of accrual of interest or fees expressed in this Agreement with respect to such currency shall be inconsistent with any convention or practice in the London Interbank Market or, as the case may be, the Paris Interbank Market for the basis of accrual of interest or fees in respect of the euro, such convention or practice shall replace such expressed basis effective as of and from the date on which such Subsequent Participant becomes a Participating Member State; provided, that if any Loan in the currency of such Subsequent -------- Participant is outstanding immediately prior to such date, such replacement shall take effect, with respect to such Loan, at the end of the then current Interest Period. (f) Rounding and Other Consequential Changes. Without prejudice and ---------------------------------------- in addition to any method of conversion or rounding prescribed by any EMU legislation and (i) without prejudice to the respective liabilities for indebtedness of the Borrowers to the Lenders and the Lenders to the Borrowers under or pursuant to this Agreement and (ii) without increasing the Available Multicurrency Revolving Credit Commitment of any Lender: -49- (i) the Multicurrency Revolving Credit Facility and each reference in this Agreement to a minimum amount (or an integral multiple thereof) in a national currency denomination of a Subsequent Participant to be paid to or by the Administrative Agent shall, immediately upon such Subsequent Participant becoming a Participating Member State, be replaced by a reference to such reasonably comparable and convenient amount (or an integral multiple thereof) in the euro unit as the Administrative Agent may from time to time specify; and (ii) except as expressly provided in this Section 5.08, each provision of this Agreement shall be subject to such reasonable changes of construction as the Administrative Agent may from time to time specify to be necessary or appropriate to reflect the adoption of the euro in any Participating Member State and any relevant market conventions or practices relating to the euro. SECTION V.9 Illegality. Notwithstanding any other provision herein, ---------- if the adoption of or any change in any Requirement of Law or in the interpretation or application thereof shall make it unlawful for any Lender to make or maintain Eurodollar Loans or Multicurrency Revolving Credit Loans, as the case may be, as contemplated by this Agreement, (a) such Lender shall immediately notify the Company and the Administrative Agent, (b) the commitment of such Lender hereunder to make Eurodollar Loans or Multicurrency Revolving Credit Loans, as the case may be, continue Eurodollar Loans or Multicurrency Revolving Credit Loans, as the case may be, as such and convert Base Rate Loans to Eurodollar Loans shall forthwith be suspended until such time as it shall no longer be unlawful for such Lender to make or maintain the affected Loans, (c) as applicable, such Lender's Loans then outstanding as Eurodollar Loans, if any, shall be converted automatically to Base Rate Loans on the respective last days of the then current Interest Periods with respect to such Eurodollar Loans or within such earlier period as may be required by law and (d) as applicable, such Lender's Multicurrency Revolving Credit Loans shall be prepaid on the last day of the then current Interest Period with respect thereto. If any such conversion of a Eurodollar Loan or a Multicurrency Revolving Credit Loan, as the case may be, occurs on a day which is not the last day of the then current Interest Period with respect thereto, the Company shall pay to such Lender such amounts, if any, as may be required pursuant to Section 5.12. SECTION V.10 Requirements of Law. (a) If the adoption of or any ------------------- change in any Requirement of Law or in the interpretation or application thereof or compliance by any Lender with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority, made subsequent to the date hereof: (i) shall subject such Lender to any tax of any kind whatsoever with respect to this Agreement, any Note, any Eurodollar Loan made by it or any Multicurrency Revolving Credit Loan made by it or its obligation to make any Eurodollar Loan or Multicurrency Revolving Credit Loan or change the basis of taxation of payments to such Lender in respect thereof (except for taxes covered by Section 5.11 and changes in rate of tax on the overall net income of such Lender); -50- (ii) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, any office of such Lender which is not otherwise included in the determination of the Eurodollar Rate or the Eurocurrency Rate hereunder, including, without limitation, the imposition of any reserves with respect to Eurocurrency Liabilities under Regulation D of the Board; or (iii) shall impose on such Lender any other condition; and the result of any of the foregoing is to increase the cost to such Lender, by an amount which such Lender deems to be material, of making, converting into, continuing or maintaining Eurodollar Loans or Multicurrency Revolving Credit Loans or to reduce any amount receivable hereunder in respect thereof, then, in any such case, the applicable Borrower shall promptly pay such Lender, upon its demand, any additional amount or amounts as will compensate such Lender for such increased cost or reduced amount receivable. If any Lender becomes entitled to claim any additional amounts pursuant to this Section, it shall promptly notify the Company (with a copy to the Administrative Agent) of the event by reason of which it becomes so entitled. A certificate as to any additional amounts payable pursuant to this Section submitted by such Lender to the Company (with a copy to the Administrative Agent) shall be conclusive in the absence of manifest error. This covenant shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. (b) If any Lender shall have determined that the adoption of or any change in any Requirement of Law regarding capital adequacy or in the interpretation or application thereof or compliance by such Lender or any corporation controlling such Lender with any request or directive regarding capital adequacy (whether or not having the force of law) from any Governmental Authority made subsequent to the date hereof shall have the effect of reducing the rate of return on such Lender's or such corporation's capital as a consequence of its obligations hereunder to a level below that which such Lender or such corporation could have achieved but for such adoption, change or compliance (taking into consideration such Lender's or such corporation's policies with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time, after submission by such Lender to the Company (with a copy to the Administrative Agent) of a prompt written request therefor, the Company shall promptly pay to such Lender such additional amount or amounts as will compensate such Lender for such reduction. (c) No Lender shall be entitled to compensation under this Section 5.10 for any costs incurred or reductions suffered with respect to any date that it has such costs unless it shall have notified the Company that it will demand compensation for such costs or reductions under paragraph (a) or (b) above, not more than 120 days after the later of (i) such date and (ii) the date on which it shall have become aware of such costs or reductions; provided that the foregoing shall in no way operate in derogation of the undertaking contained in the penultimate sentence of -51- this paragraph (c). Notwithstanding any other provision of this Section 5.10, no Lender shall demand compensation for any increased cost or reduction referred to above if it shall not at the time be the general policy or practice of such Lender to demand such compensation in similar circumstances under comparable provisions of other credit agreements. In the event that any Lender determines that any event or circumstances that will lead to a claim under this Section 5.10 has occurred or will occur, such Lender will use its best efforts to so notify the Company; provided, that any failure to provide such notice shall in -------- no way impair the rights of any Lender to demand and receive compensation under this Section 5.10, but without prejudice to any claims of the Company for compensation for actual damages sustained as a result of any failure to observe this undertaking. The agreements of this Section shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. SECTION V.11 Taxes. (a) All payments of principal and interest made ----- by the Borrowers under this Agreement and any Note shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority, excluding income taxes and franchise taxes (imposed in lieu of income taxes) imposed on the Administrative Agent or any Lender as a result of a present or former connection between the Administrative Agent or such Lender and the jurisdiction of the Governmental Authority imposing such tax or any political subdivision or taxing authority thereof or therein (other than any such connection arising solely from the Administrative Agent or such Lender having executed, delivered or performed its obligations or received a payment under, or enforced, this Agreement, any Note or any other Loan Document). If any such non-excluded taxes, levies, imposts, duties, charges, fees, deductions or withholdings ("Non-Excluded Taxes") are required to be withheld from any amounts payable to the Administrative Agent or any Lender hereunder or under any Note, the amounts so payable to the Administrative Agent or such Lender shall be increased to the extent necessary to yield to the Administrative Agent or such Lender (after payment of all Non- Excluded Taxes) interest or any such other amounts payable hereunder at the rates and in the amounts specified in this Agreement, provided, however, that -------- ------- (i) the Company shall not be required to increase any such amounts payable to any Lender that is not organized under the laws of the United States of America or a state thereof if such Lender fails to comply with the requirements of paragraph (b) of this Section, and (ii) a Foreign Subsidiary Borrower shall not be required to increase any such amounts payable to any Lender if such Lender fails to comply with the requirements of paragraph (c) of this Section. Whenever any Non-Excluded Taxes are payable by a Borrower, as promptly as possible thereafter such Borrower shall send to the Administrative Agent for its own account or for the account of such Lender, as the case may be, a certified copy of an original official receipt received by such Borrower showing payment thereof. If a Borrower fails to pay any Non-Excluded Taxes when due to the appropriate taxing authority or fails to remit to the Administrative Agent the required receipts or other required documentary evidence, such Borrower shall indemnify the Administrative Agent and the Lenders for any incremental taxes, interest or penalties that may become payable by the Administrative Agent or any Lender as a result of any such failure. The agreements in this Section shall survive -52- the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. (b) Each Lender that is not incorporated or organized under the laws of the United States of America or a state thereof shall: (i) in the case of a Lender other than a Lender described in Section 5.11(b)(ii); (A) at least five Business Days before the date of the initial payment to be made by the Company under this Agreement to such Lender, deliver to the Company and the Administrative Agent two duly completed copies of United States Internal Revenue Service Form 1001 or 4224, or successor applicable form, as the case may be, certifying that it is entitled to receive payments under this Agreement without deduction or withholding of any United States federal income taxes; and (B) deliver to the Company and the Administrative Agent two further copies of any such form or certification at least five Business Days before the date that any such form or certification expires or becomes obsolete and after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Administrative Agent and the Company; and (C) obtain such extensions of time for filing and complete such forms or certifications as may reasonably be requested by the Company or the Administrative Agent; and (D) file amendments to such forms as and when required; and (ii) in the case of a Lender that is not a "bank" under Section 881(c)(3)(A) of the Code and that is legally unable to comply with the requirements of Section 5.11(b)(i); (A) at least five Business Days before the date of the initial payment to be made by the Company under this Agreement to such Lender, deliver to the Company and the Administrative Agent (I) a statement that such Lender (x) is not a "bank" under Section 881(c)(3)(A) of the Code, is not subject to regulatory or other legal requirements as a bank in any jurisdiction, and has not been treated as a bank for purposes of any tax, securities law or other filing or submission made to any Governmental Authority, any application made to a rating agency or qualification for any exemption from tax, securities law or other legal requirements, (y) is not a 10-percent shareholder within the meaning of Section 881(c)(3)(B) of the Code and (z) is not a controlled foreign corporation receiving interest from a related person within the meaning of Section 881(c)(3)(C) of the Code and (II) a properly completed and duly executed Internal Revenue Service Form W-8 or applicable successor form; and -53- (B) deliver to the Company and the Administrative Agent two further properly completed and duly executed copies of said Form W-8, or any successor applicable form at least five Business Days on or before the date that any such Form W-8 expires or becomes obsolete or after the occurrence of any event requiring a change in the most recent form previously delivered by it to the Company or upon the request of the Company or the Administrative Agent; and (C) obtain such extensions of time for filing and completing such forms or certifications as may be reasonably requested by the Company and the Administrative Agent; and (D) file amendments to such forms as and when required; unless an event (including, without limitation, any change in treaty, law or regulation) has occurred after the date such Person becomes a Lender hereunder which renders all such forms inapplicable or which would prevent such Lender from duly completing and delivering any such form with respect to it and such Lender so advises the Company and the Administrative Agent; provided, however, -------- that the Company may rely upon such forms provided to the Company for all periods prior to the occurrence of such event. Each Person that shall become a Lender or a Participant pursuant to Section 13.06 shall, upon the effectiveness of the related transfer, be required to provide all of the forms, certifications and statements required pursuant to this Section, provided that in the case of -------- such Participant, the obligations of such Participant pursuant to this Section 5.11(b) shall be determined as if such Participant were a Lender, except that such Participant shall furnish all such required forms, certifications and statements to the Lender from which the related participation shall have been purchased. (c) Each Lender that is not incorporated or organized under the laws of the jurisdiction under which a Foreign Subsidiary Borrower is incorporated or organized shall, upon request by such Foreign Subsidiary Borrower, within a reasonable period of time after such request, deliver to such Foreign Subsidiary Borrower or the applicable governmental or taxing authority, as the case may be, any form or certificate required in order that any payment by such Foreign Subsidiary Borrower under this Agreement or any Notes to such Lender may be made free and clear of, and without deduction or withholding for or on account of any Non-Excluded Tax (or to allow any such deduction or withholding to be at a reduced rate) imposed on such payment under the laws of the jurisdiction under which such Foreign Subsidiary Borrower is incorporated or organized, provided -------- that such Lender is legally entitled to complete, execute and deliver such form or certificate and such completion, execution or submission would not materially prejudice the legal position of such Lender. -54- (d) No Lender shall be entitled to payment under this Section 5.11 unless it shall have notified the applicable Borrower that it will demand such payment not more than 120 days after the date on which it shall become aware that it was entitled to such payment, provided that such notice requirement -------- shall in no way operate in derogation of the undertaking contained in the second following sentence of this Section 5.11(d). Notwithstanding any other provision of this Section 5.11, no Lender shall demand any payment under this Section 5.11 if it shall not at the time be the general policy or practice of such Lender to demand such compensation in similar circumstances under comparable provisions of other credit agreements. In the event that any Lender determines that any event or circumstance that will lead to a claim by it under this Section 5.11 has occurred or will occur, such Lender will use its best efforts to so notify the Company provided that any failure to provide such notice shall in no way impair -------- the rights of any Lender to demand and receive compensation under this Section 5.11, but without prejudice to any claims of the Company for failure to observe this undertaking. SECTION V.12 Indemnity. Each Borrower agrees to indemnify each --------- Lender and to hold each Lender harmless from any loss or expense which such Lender may sustain or incur as a consequence of (a) default by such Borrower in payment when due of the principal amount of or interest on any Eurodollar Loan or Multicurrency Revolving Credit Loan, (b) default by such Borrower in making a borrowing of, conversion into or continuation of Eurodollar Loans or Multicurrency Revolving Credit Loans after such Borrower has given a notice requesting the same in accordance with the provisions of this Agreement, (c) default by such Borrower in making any prepayment after such Borrower has given a notice thereof in accordance with the provisions of this Agreement or (d) the making by such Borrower of a prepayment of Eurodollar Loans or Multicurrency Revolving Credit Loans on a day which is not the last day of an Interest Period with respect thereto, including, without limitation, in each case, any such loss or expense arising from the reemployment of funds obtained by it or from fees payable to terminate the deposits from which such funds were obtained. Such indemnification may include an amount equal to the excess, if any, of (i) the amount of interest which would have accrued on the amount so prepaid, or not so borrowed, converted or continued, for the period from the date of such prepayment or of such failure to borrow, convert or continue to the last day of such Interest Period (or, in the case of a failure to borrow, convert or continue, the Interest Period that would have commenced on the date of such failure) in each case at the applicable rate of interest for such Loans provided for herein (excluding, however, the Applicable Margin included therein, if any) over (ii) the amount of interest (as reasonably determined by such Lender) which would have accrued to such Lender on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank eurodollar market. All payments required to be made by any Borrower to any Lender under this Section 5.12 shall be made no later than 30 days after receipt by such Borrower of a written notice from such Lender setting forth in reasonable detail the basis upon which such Lender is entitled to receive such payments. This covenant shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. SECTION V.13 Use of Proceeds. The proceeds of the Revolving Credit --------------- Loans and Multicurrency Revolving Credit Loans shall be used (a) to refinance the Existing Credit -55- Agreements, (b) to pay fees and expenses incurred by the Borrowers in connection therewith and (c) for working capital and other general corporate purposes of the Borrowers and their Subsidiaries, including investments and acquisitions. The proceeds of the Term Loans shall be used (a) to refinance the Existing Credit Agreements and (b) to pay fees and expenses incurred in connection therewith. SECTION V.14 Change of Lending Office; Replacement of Lenders. (a) ------------------------------------------------ Each Lender agrees that if it makes any demand for payment under Section 5.10 or 5.11, or if any adoption or change of the type described in Section 5.09 shall occur with respect to it, it shall use reasonable efforts (consistent with its internal policy and legal and regulatory restrictions and so long as such efforts would not be disadvantageous to it, as determined in its sole discretion) to designate a different lending office if the making of such a designation would reduce or obviate the need for the Borrowers to make payments under Section 5.10 or 5.11, or would eliminate or reduce the effect of any adoption or change described in Section 5.09. (b) If at any time any Lender makes any demand for payment under Section 5.10 or 5.11 as a result of any condition described in any such Section, then the Borrowers may, if such condition continues to exist after such Lender shall have used or failed to use reasonable efforts pursuant to paragraph (a) of this Section 5.14 and on 10 Business Days' prior written notice to the Administrative Agent and such Lender, replace such Lender by causing such Lender to (and such Lender shall) assign pursuant to Section 13.06(c) all of its rights and obligations under this Agreement to another Lender or other bank or financial institution selected by the Company and acceptable to the Administrative Agent for a purchase price equal to the outstanding principal amount of all Loans, accrued interest, fees and other amounts owing to such Lender; provided that (i) the Borrowers shall have no right to replace the -------- Administrative Agent, (ii) neither the Administrative Agent nor any Lender shall have any obligation to the Borrowers to find a replacement Lender or other bank or financial institution, (iii) such replacement must take place no later than 180 days after such Lender shall have made any such demand for payment, (iv) in no event shall any Lender hereby replaced be required to pay or surrender to such replacement Lender or other bank or financial institution any of the fees received by such Lender pursuant to this Agreement, (v) the Borrowers shall pay such amounts demanded under Section 5.10 or 5.11 to such Lender, together with any amounts as may be required pursuant to Section 5.12, prior to such Lender being replaced and the payment of such amounts shall be a condition to the replacement of such Lender and (vi) such Lender shall not be required to pay any fees required by Section 13.06(e) in connection with such replacement, which fees shall be paid by the Company. ARTICLE VI. REPRESENTATIONS AND WARRANTIES ------------------------------ Each of the Company and the Foreign Subsidiary Borrowers (insofar as the representations and warranties set forth below relate respectively to such Foreign Subsidiary Borrower) represents and warrants to the Administrative Agent and each Lender that: -56- SECTION VI.1 Financial Condition. The consolidated balance sheets of ------------------- the Company and its consolidated Subsidiaries as at December 31, 1996 and December 31, 1997, respectively, and the related consolidated statements of earnings, cash flows and shareholders' equity for the fiscal years ended on such dates, reported on by Ernst & Young LLP, copies of which have heretofore been furnished to each Lender, are complete and correct in all material respects and present fairly the consolidated financial condition of the Company and its consolidated Subsidiaries as at such dates, and the consolidated results of their operations and their consolidated cash flows for the fiscal years then ended. The unaudited consolidated balance sheet of the Company and its consolidated Subsidiaries as at September 30, 1998 and the related unaudited consolidated statements of earnings and of cash flows for the nine-month period ended on such date, certified by a Responsible Officer, copies of which have heretofore been furnished to each Lender, are complete and correct and present fairly the consolidated financial condition of the Company and its consolidated Subsidiaries as at such date, and the consolidated results of their operations and their consolidated cash flows for the nine-month period then ended (subject to normal year-end audit adjustments). All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP applied consistently throughout the periods involved (except as approved by such accountants or Responsible Officer, as the case may be, and as disclosed therein). Neither the Company nor any of its consolidated Subsidiaries (taken as a whole) had, at the date of the most recent balance sheet referred to above, any material Guaranty, contingent liability or liability for taxes, or any long- term lease or unusual forward or long-term commitment, including, without limitation, any interest rate or foreign currency swap or exchange transaction, which is not reflected in the foregoing statements or in the notes thereto. Except as disclosed in filings with the Securities and Exchange Commission made by the Company on or prior to February 24, 1999, during the period from December 31, 1997 to and including the date hereof there has been no sale, transfer or other disposition by the Company or any of its consolidated Subsidiaries of any material part of its business or property and no purchase or other acquisition of any business or property (including any capital stock of any other Person) material in relation to the consolidated financial condition of the Company and its consolidated Subsidiaries at December 31, 1997, other than any such sale, transfer or other disposition or purchase or acquisition that would have been permitted by this Agreement if this Agreement had been in effect at all times during such period. SECTION VI.2 No Change. Since December 31, 1997, there has been no --------- development or event which has had or could reasonably be expected to have a Material Adverse Effect. SECTION VI.3 Corporate Existence; Compliance with Law. Each of the ---------------------------------------- Company and its Subsidiaries (a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization except to the extent that, with respect to those Subsidiaries that are not Borrowers hereunder, the lack of such organization, existence or good standing could not, in the aggregate, reasonably be expected to have a Material Adverse Effect, (b) has the corporate or other power and authority, and the legal right, to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged except to the extent that, with respect to those Subsidiaries that are not -57- Borrowers hereunder, the lack of such power, authority or legal right could not, in the aggregate, reasonably be expected to have a Material Adverse Effect, (c) is duly qualified as a foreign corporation or other entity and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification except to the extent that the failure to qualify or be in good standing could not, in the aggregate, reasonably be expected to have a Material Adverse Effect and (d) is in compliance with all Requirements of Law except to the extent that the failure to comply therewith could not, in the aggregate, reasonably be expected to have a Material Adverse Effect. SECTION VI.4 Corporate Power; Authorization; Enforceable Obligations. ------------------------------------------------------- Each Loan Party has the corporate or other power and authority, and the legal right, to execute, deliver and perform the Loan Documents to which it is a party and, in the case of each Borrower, to borrow hereunder and has taken all necessary corporate or other action to authorize the borrowings on the terms and conditions of this Agreement and the Notes to which it is a party and to authorize the execution, delivery and performance of the Loan Documents to which it is a party. No consent or authorization of, filing with, notice to or other act by or in respect of, any Governmental Authority or any other Person is required with respect to the Company or any of its Subsidiaries in connection with the borrowings hereunder of the consummation of the Refinancing or, with the execution, delivery, performance, validity or enforceability of the Loan Documents to which it is a party, except for consents, filings, authorizations or approvals which have been obtained and are in full force and effect, and except for approvals the failure to obtain which could not reasonably be expected to have a Material Adverse Effect. This Agreement has been, and each other Loan Document has been or when executed pursuant hereto will be, duly executed and delivered on behalf of each of the applicable Loan Parties. This Agreement and each other Loan Document to which a Loan Party is a party constitutes a legal, valid and binding obligation of such Person enforceable against such Person in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general equitable principles (whether enforcement is sought by proceedings in equity or at law) and by an implied covenant of good faith and fair dealing. SECTION VI.5 No Legal Bar. The execution, delivery and performance ------------ of the Loan Documents, the borrowings hereunder, the use of the proceeds thereof and the consummation of the Refinancing will not violate any Requirement of Law or Contractual Obligation of the Company or of any of its Subsidiaries, other than any such violation which could not reasonably be expected to have a Material Adverse Effect, and will not result in, or require, the creation or imposition of any Lien on any of its or their respective properties or revenues pursuant to any such Requirement of Law or Contractual Obligation, except Liens created pursuant to the Loan Documents and any Lien which could not reasonably be expected to have a Material Adverse Effect. -58- SECTION VI.6 No Material Litigation. No litigation, investigation or ---------------------- proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of the Company, threatened by or against the Company or any of its Subsidiaries or against any of its or their respective properties or revenues (a) with respect to any of the Loan Documents, the Refinancing or any of the transactions contemplated hereby, or (b) which could reasonably be expected to have a Material Adverse Effect. SECTION VI.7 No Default. Neither the Company nor any of its ---------- Subsidiaries is in default under or with respect to any of its Contractual Obligations in any respect which could reasonably be expected to have a Material Adverse Effect. No Default or Event of Default has occurred and is continuing. SECTION VI.8 Ownership of Property; Liens. Each of the Company and ---------------------------- its Significant Subsidiaries has good record and marketable title in fee simple to, or a valid leasehold interest in, all its material real property, and good title to, or a valid leasehold interest in, all its other material property, and none of such property is subject to any Lien except as permitted by Section 9.04. SECTION VI.9 Intellectual Property. Each of the Company and its --------------------- Significant Subsidiaries owns, or is licensed to use, all trademarks, tradenames, copyrights, technology, know-how and processes necessary for the conduct of its business as currently conducted except for those the failure to own or license which could not reasonably be expected to have a Material Adverse Effect (the "Intellectual Property"). No claim has been asserted and is pending by any Person challenging or questioning the use of any such Intellectual Property or the validity or effectiveness of any such Intellectual Property, nor does the Company know of any valid basis for any such claim which, in the aggregate, could reasonably be expected to have a Material Adverse Effect. The use of such Intellectual Property by the Company and its Subsidiaries does not infringe on the rights of any Person, except for such claims and infringements that, in the aggregate, could not reasonably be expected to have a Material Adverse Effect. SECTION VI.10 No Burdensome Restrictions. No Requirement of Law or -------------------------- Contractual Obligation of the Company or any of its Subsidiaries could reasonably be expected to have a Material Adverse Effect. SECTION VI.11 Taxes. Each of the Company and its Subsidiaries has ----- filed or caused to be filed all U.S. tax returns and all other material tax returns which, to the knowledge of the Borrowers, are required to be filed and has paid all taxes shown to be due and payable on said returns or on any assessments made against it or any of its property and all other taxes, fees or other charges imposed on it or any of its property by any Governmental Authority (other than any (i) with respect to which the failure to pay, in the aggregate, would not reasonably be expected to have a Material Adverse Effect or (ii) the amount or validity of which is currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided on the books of the Company or its Subsidiaries, as -59- the case may be); no tax Lien has been filed, and, to the knowledge of the Company, no claim is being asserted, with respect to any such tax, fee or other charge. SECTION VI.12 Federal Regulations. No part of the proceeds of any ------------------- Loans 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 that would cause the Loans to be in violation of 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. If any Borrower is requested by any Lender or the Administrative Agent, such Borrower will furnish to the Administrative Agent and each Lender a statement to the foregoing effect in conformity with the requirements of Form FR U-1 or FR G-3 referred to in said Regulation U. SECTION VI.13 ERISA. Neither a Reportable Event nor an Accumulated ----- Funding Deficiency has occurred during the five-year period prior to the date on which this representation is made or deemed made with respect to any Plan, and each Plan has complied in all material respects with the applicable provisions of ERISA and the Code. No termination of a Single Employer Plan has occurred, and no Lien in favor of PBGC or a Plan has arisen, during such five-year period. The present value of all accrued benefits under each Single Employer Plan (based on those assumptions used to fund such Plans) did not, as of the last annual valuation date prior to the date on which this representation is made or deemed made, exceed the value of the assets of such Plan allocable to such accrued benefits by an amount which could reasonably be expected to have a Material Adverse Effect, either individually or in the aggregate with all other Single Employer Plans under which such accrued benefits exceed such assets. Neither the Company nor any Commonly Controlled Entity has had a complete or partial withdrawal from any Multiemployer Plan during the five-year period prior to the date on which this representation is made or deemed made which could, in the aggregate with other such withdrawals during such period, reasonably be expected to have a Material Adverse Effect, and neither the Company nor any Commonly Controlled Entity would become subject to any liability under ERISA if the Company or any such Commonly Controlled Entity were to withdraw completely from all Multiemployer Plans as of the valuation date most closely preceding the date on which this representation is made or deemed made. No such Multiemployer Plan is in Reorganization or is Insolvent. SECTION VI.14 Investment Company Act; Other Regulations. No Borrower ----------------------------------------- is an "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. No Borrower is subject to any law or regulation which limits its ability to incur the Indebtedness to be incurred by it under the Loan Documents. SECTION VI.15 Subsidiaries. As of the date hereof, the Company has ------------ no Subsidiaries except those Subsidiaries identified on Schedule II to this Agreement. Schedule II also specifies which Subsidiaries are Insignificant Subsidiaries on the date of this Agreement. -60- Schedule VI lists, under the heading "Foreign Subsidiaries of which 65% of the Capital Stock is to be Pledged", all Excluded Foreign Subsidiaries on the Closing Date other than Excluded Foreign Subsidiaries of the type described in clauses (i) and (iv) of the definition of Excluded Foreign Subsidiary in Section 1.01. Schedule VI lists, under the heading "Foreign Subsidiaries of which 100% of the Capital Stock is to be Pledged", all Foreign Subsidiaries on the Closing Date other than Excluded Foreign Subsidiaries. SECTION VI.16 Environmental Matters. (a) The facilities and --------------------- properties owned, leased or operated by the Company and/or any of its Subsidiaries (the "Properties") do not contain, and have not previously contained, any Materials of Environmental Concern in amounts or concentrations which (i) constitute or constituted a violation of, or (ii) could reasonably be expected to give rise to liability under, any Environmental Law except in either case insofar as such violation or liability, or any aggregation thereof, is not reasonably likely to result in a Material Adverse Effect. (b) The Properties and all operations at the Properties are in compliance, and have in the last five years been in compliance, in all material respects with all applicable Environmental Laws, and there is no contamination at, under or about the Properties or violation of any Environmental Law with respect to the Properties or the business operated by the Company or any of its Subsidiaries (the "Business") which could materially interfere with the continued operation of the Properties or materially impair the aggregate fair saleable value of the Properties. (c) Neither the Company nor any of its Subsidiaries has received any notice of violation, alleged violation, non-compliance, liability or potential liability regarding environmental matters or compliance with Environmental Laws with regard to any of the Properties or the Business, nor does the Company or any of its Subsidiaries have knowledge or reason to believe that any such notice will be received or is being threatened except insofar as such notice or threatened notice, or any aggregation thereof, does not involve a matter or matters that is or are reasonably likely to result in a Material Adverse Effect. (d) Materials of Environmental Concern have not been transported or disposed of from the Properties in violation of, or in a manner or to a location which could reasonably be expected to give rise to liability under, any Environmental Law, nor have any Materials of Environmental Concern been generated, treated, stored or disposed of at, on or under any of the Properties in violation of, or in a manner that could reasonably be expected to give rise to liability on the part of the Company or any Subsidiary under, any applicable Environmental Law except insofar as any such violation or liability referred to in this paragraph, or any aggregation thereof, is not reasonably likely to result in a Material Adverse Effect. (e) No judicial proceeding or governmental or administrative action is pending or, to the knowledge of the Company, threatened, under any Environmental Law to which the Company or any Subsidiary is or will be named as a party with respect to the Properties or the Business, nor are there any consent decrees or other decrees, consent orders, administrative -61- orders or other orders, or other administrative or judicial requirements outstanding under any Environmental Law with respect to the Properties or the Business except insofar as such proceeding, action, decree, order or other requirement, or any aggregation thereof, is not reasonably likely to result in a Material Adverse Effect. (f) There has been no release or threat of release of Materials of Environmental Concern at or from the Properties, or arising from or related to the operations of the Company or any Subsidiary in connection with the Properties or otherwise in connection with the Business, in violation of or in amounts or in a manner that could reasonably give rise to liability under Environmental Laws except insofar as any such violation or liability referred to in this paragraph, or any aggregation thereof, is not reasonably likely to result in a Material Adverse Effect. SECTION VI.17 Accuracy and Completeness of Information. All written ---------------------------------------- information heretofore furnished by each Loan Party to the Lenders for purposes of or in connection with this Agreement, taken as a whole, does not, and all such information hereafter furnished by such Loan Party to any Lender for purposes of this Agreement will not, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made or to be made, in the light of the circumstances under which they were or will be made, not misleading. Prior to the date hereof, the Company has disclosed to the Lenders in writing any and all facts which materially and adversely affect (to the extent the Company can as of the date hereof reasonably foresee), the business, operations or financial condition of the Company and its Subsidiaries, taken as a whole, or the ability of any Loan Party to perform its obligations under the Loan Documents. It is understood that no representation or warranty is made concerning the forecasts, estimates, pro forma information, projections and statements as to anticipated future performance or conditions, and the assumptions on which they were based, contained in any such information, reports, financial statements, exhibits or schedules, except that as of the date such forecasts, estimates, pro forma information, projections and statements were generated, (a) such forecasts, estimates, pro forma information, projections and statements were based on the good faith assumptions of the management of the Company and (b) such assumptions were believed by such management to be reasonable. SECTION VI.18 Other Unsubordinated Indebtedness. The obligations of --------------------------------- each of the Borrowers under this Agreement and the Notes and the other Loan Documents rank at least pari passu in right of payment with all other unsubordinated Indebtedness of such Borrowers. SECTION VI.19 Foreign Subsidiary Borrowers. (a) Each Foreign ---------------------------- Subsidiary Borrower will be a direct or indirect, Wholly Owned Subsidiary of the Company (or, with the consent of the Majority Multicurrency Revolving Credit Facility Lenders, which consent shall not be unreasonably withheld, a direct or indirect, majority-owned Subsidiary of the Company). (b) Each Foreign Subsidiary Borrower will have, upon becoming a party hereto, full right and authority to enter into this Agreement and each other Loan Document to which it is a party, and to perform all of its obligations under this and each other Loan Document to which it is a party; all of the foregoing actions will have been, prior to any request for Loans by such -62- Borrower, duly authorized by all necessary action on the part of such Borrower; and when such Foreign Subsidiary Borrower becomes a party hereto, this Agreement and each other Loan Document to which it is a party will constitute valid and binding obligations of such Borrower enforceable in accordance with their respective terms except as such terms may be limited by the application of bankruptcy, moratorium, insolvency and similar laws affecting the rights of creditors generally and by equitable principles affecting the availability of specific performance and other remedies. SECTION VI.20 Security Documents. Each Security Document, when ------------------ executed and delivered by the Loan Party which is a party thereto, will be effective to create in favor of the Administrative Agent (or the Trustee, as the case may be), for the benefit of the Lenders (and, as the case may be, the other creditors which are secured thereby), a legal, valid and enforceable security interest in the Collateral described therein and proceeds thereof. When the actions described in Schedule 6.20 in respect of each Security Document have been taken, the Security Documents shall constitute fully perfected Liens on, and security interests in, all right, title and interest of the Loan Parties in such Collateral and the proceeds thereof, as security for the Secured Obligations, in each case prior and superior in right to any other Person. SECTION VI.21 Solvency. Each Loan Party is, and after giving effect -------- to the incurrence of all Indebtedness and obligations being incurred in connection herewith and therewith will be and will continue to be, Solvent. SECTION VI.22 Year 2000 Matters. Any reprogramming required to ----------------- permit the proper functioning, in and following the year 2000, of (i) the Company's computer systems and (ii) equipment containing embedded microchips (including systems and equipment supplied by others or with which Company's systems interface) and the testing of all such systems and equipment, as so reprogrammed, will be completed within such period of time as is required to avoid the occurrence of a Material Adverse Effect as a result of the failure to complete such reprogramming. The cost to the Company of such reprogramming and testing and of the reasonably foreseeable consequences of year 2000 to the Company (including, without limitation, reprogramming errors and the failure of others' systems or equipment) will not result in a Material Adverse Effect. ARTICLE VII. CONDITIONS PRECEDENT -------------------- SECTION VII.1 Conditions to Initial Extensions of Credit. The ------------------------------------------ obligation of each Lender to make its initial extension of credit is subject to the satisfaction of the following conditions precedent on or before the Closing Date. The Agreement shall become effective on the date of the satisfaction of the conditions precedent set forth in this Section 7.01: -63- (a) Credit Agreement. The Administrative Agent shall have received ---------------- this Agreement, executed and delivered by a duly authorized officer (or a duly authorized representative) of the Company and each Foreign Subsidiary Borrower that is a party hereto on the Closing Date. (b) Corporate Proceedings. The Administrative Agent shall have --------------------- received a copy of the resolutions, in form and substance satisfactory to the Administrative Agent, of the Board of Directors of the Company and each other Borrower that is a party hereto on the Closing Date, authorizing (i) the execution, delivery and performance by it of this Agreement and the Loan Documents to which it is a party and (ii) the borrowings by it contemplated hereunder, certified by the Secretary or an Assistant Secretary of the Company or such other Borrower, as the case may be, as of the Closing Date, which certificate shall be in form and substance satisfactory to the Administrative Agent and shall state that the resolutions thereby certified have not been amended, modified, revoked or rescinded. (c) Incumbency Certificate. The Administrative Agent shall have ---------------------- received a certificate of the Company, dated the Closing Date, as to the incumbency and signature of the officers or representatives of each Borrower executing any Loan Document on the Closing Date, satisfactory in form and substance to the Administrative Agent, executed by any of the Chief Executive Officer, the President, the Chief Financial Officer, the Treasurer or the Controller of the Company and the Secretary or any Assistant Secretary (or a duly authorized representative, if such representative is also a duly authorized officer of the Company or otherwise authorized by the Company) of the Company. (d) Corporate Documents. The Administrative Agent shall have ------------------- received true and complete copies of the certificate of incorporation and by-laws of the Company and each other Borrower that is a party hereto on the Closing Date, certified as of the Closing Date as complete and correct copies thereof by the Secretary or an Assistant Secretary or a duly authorized representative of the Company or such other Borrower, as the case may be. (e) Approvals. All governmental and third party approvals necessary --------- in connection with the transactions contemplated hereby shall have been obtained and be in full force and effect (other than approvals the failure to obtain which could not reasonably be expected to have a Material Adverse Effect). The Administrative Agent shall have received a certificate of a Responsible Officer of the Company to the foregoing effect, to which shall be attached copies of any such approvals theretofore obtained. (f) Fees. The Administrative Agent shall have received all fees to ----- be received by the Administrative Agent or Chase on or prior to the Closing Date in connection with this Agreement. -64- (g) Legal Opinions. The Administrative Agent shall have received the -------------- executed legal opinions of (i) David M. Sherbin, Esq., Associate General Counsel of the Company and (ii) Skadden, Arps, Slate, Meagher & Flom LLP, special counsel to the Company, each given upon the express instructions of the Company, substantially in the forms of Exhibits H-1 and H-2, respectively. Subject to Section 8.12, the Administrative Agent shall also have received such legal opinions from Netherlands, English, Canadian and German counsel as it shall reasonably request in respect of Security Documents or Guarantees governed by the laws of such jurisdictions. (h) Perfection Actions; Other Actions. Subject to Section 8.12, all --------------------------------- actions required to cause the effectiveness of the Security Documents and the Trust Agreements and to perfect the security interests created by each of the Security Documents shall have been completed. (i) Security Documents and Subsidiary Guarantees; Trust Agreements. -------------------------------------------------------------- Subject to Section 8.12, the Administrative Agent shall have received (i) the Domestic Subsidiary Guarantee and the U.K. Acquisition I Guarantee, executed and delivered by a duly authorized officer of each guarantor party thereto, (ii) each of the Security Documents, executed and delivered by a duly authorized officer of each party thereto and (iii) each of the Trust Agreements, executed and delivered by a duly authorized officer of each party thereto. (j) Existing Credit Agreements. All loans, accrued interest, fees -------------------------- and any other amounts owing to the respective lenders and agents under the Existing Credit Agreements shall have been paid in full contemporaneous with the Loans made on the Closing Date, and the commitments to make loans thereunder shall have been replaced and restated pursuant to this Agreement. SECTION VII.2 Conditions to Each Extension of Credit. The agreement -------------------------------------- of each Lender to make any extension of credit requested to be made by it on any date (including, without limitation, its extensions of credit on the Closing Date) is subject to the satisfaction of the following conditions precedent: (a) Representations and Warranties. Each of the representations and ------------------------------ warranties made by any Loan Party in or pursuant to the Loan Documents shall be true and correct in all material respects on and as of such date as if made on and as of such date, except if such representation or warranty relates to an earlier date or refers to Schedules, in which case such representation and warranty shall be true and correct in all material respects on such earlier date and after giving effect to any amendments of such Schedules. (b) No Default. No Default or Event of Default shall have occurred ---------- and be continuing on such date or after giving effect to the extension of credit requested to be made on such date. -65- (c) Foreign Subsidiary Opinion. If such Loan is the initial Loan to -------------------------- a Foreign Subsidiary Borrower, the Administrative Agent shall have received a Foreign Subsidiary Opinion in respect of such Foreign Subsidiary Borrower. (d) Corporate Proceedings. If such Loan is the initial Loan to a --------------------- Foreign Subsidiary Borrower, the Administrative Agent shall have received a copy of the resolutions, in form and substance satisfactory to the Administrative Agent, of the Board of Directors of such Borrower, authorizing (i) the execution, delivery and performance by it of this Agreement and the Loan Documents to which it is a party and (ii) the borrowings by it contemplated hereunder, certified by the Secretary or an Assistant Secretary of such Borrower as of the date on which such Loan is requested to be made, which certificate shall be in form and substance satisfactory to the Administrative Agent and shall state that the resolutions thereby certified have not been amended, modified, revoked or rescinded. (e) Incumbency Certificate. If such Loan is the initial Loan to a ---------------------- Foreign Subsidiary Borrower, the Administrative Agent shall have received a certificate of such Borrower dated the date on which such Loan is requested to be made, as to the incumbency and signature of the officers or representatives of such Borrower executing any Loan Document, satisfactory in form and substance to the Administrative Agent, executed by any Responsible Officer of such Borrower and the Secretary or any Assistant Secretary (or a duly authorized representative, if such representative is also a duly authorized officer of such Borrower or otherwise authorized by such Borrower). (f) Corporate Documents. If such Loan is the initial Loan to a ------------------- Foreign Subsidiary Borrower, the Administrative Agent shall have received true and complete copies of the organic documents of such Borrower, certified as of the date on which such Loan is required to be made as complete and correct copies thereof by the Secretary or an Assistant Secretary or a duly authorized representative of such Borrower. (g) Additional Matters. All corporate and other proceedings, and all ------------------ documents, instruments and other legal matters in connection with the transactions contemplated by this Agreement and the other Loan Documents shall be satisfactory in form and substance to the Administrative Agent, and the Administrative Agent shall have received such other documents and legal opinions in respect of any aspect or consequence of the transactions contemplated hereby or thereby as it shall reasonably request. Each borrowing of Loans by a Borrower hereunder shall constitute a representation and warranty by the Company and such Borrower as of the date of such Loan that the conditions contained in this Section 7.02 have been satisfied. -66- ARTICLE VIII. AFFIRMATIVE COVENANTS --------------------- From and after the Closing Date, each of the Company and, to the extent the covenants set forth below relate thereto, each Foreign Subsidiary Borrower, hereby covenants and agrees that so long as any of the Commitments remain in effect, any Loan remains outstanding and unpaid or any other amount is owing to any Lender or the Administrative Agent hereunder, the Company or such Foreign Subsidiary Borrower, as applicable, will comply with the covenants set forth below in this Article VIII: SECTION VIII.1 Financial Statements. The Company will furnish to -------------------- each Lender: (a) as soon as available, but in any event within 120 days after the end of each fiscal year of the Company, a copy of the consolidated balance sheet of the Company and its Subsidiaries as at the end of such year and the related consolidated statements of income and cash flows for such year, setting forth in each case in comparative form the figures for the previous year, certified without qualification or exception by independent public accountants of nationally recognized standing selected by the Company, it being understood and agreed that the delivery of the Company's Annual Report on Form 10-K for such fiscal year signed by a Responsible Officer will satisfy the requirement set forth in this clause; and (b) as soon as available, but in any event within 60 days after the end of each of the first three quarterly periods of each fiscal year of the Company, a copy of the unaudited consolidated condensed balance sheet of the Company and its Subsidiaries as at the end of each such quarter and the related unaudited consolidated condensed statements of income and cash flows of the Company and its Subsidiaries for the portion of the fiscal year through such date, setting forth in each case in comparative form such figures for the previous year, certified by a Responsible Officer, it being understood and agreed that the delivery of the Company's Quarterly Report on Form 10-Q for the relevant fiscal quarter signed by a Responsible Officer will satisfy the requirement set forth in this clause; all such financial statements to be complete and correct in all material respects and prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein (except for such changes in accounting principles as may be approved by such Responsible Officer and concurred in by the Company's independent public accountants and disclosed therein). SECTION VIII.2 Certificates; Other Information. The Company will ------------------------------- furnish to each Lender: (a) concurrently with each delivery of the financial statements referred to in Sections 8.01(a) and (b), a certificate of a Responsible Officer in the form of Exhibit F (i) stating that such officer has no knowledge of any Default or Event of Default except as specified in such certificate and (ii) showing in reasonable detail the calculations supporting such statement in respect of Sections 9.01, 9.02 and 9.03; -67- (b) on or prior to February 28 of each year, a copy of the projections by the Company of the operating budget and cash flow budget of the Company and its Subsidiaries for the succeeding fiscal year, such projections to be accompanied by a certificate of a Responsible Officer to the effect that such projections have been prepared on a reasonable basis and in good faith, it being understood that no representation or warranty shall be deemed to be made concerning the projections and budgets and the assumptions on which they were based, except that as of the date on which such projections and budgets were generated, (a) they were based on the good faith assumptions of the management of the Company and (b) such assumptions were believed by such management to be reasonable (it being understood that the requirements of this paragraph (b) have been satisfied for fiscal year 1999); (c) if requested by the Administrative Agent or by any Lender through the Administrative Agent, promptly after the same is furnished to PBGC, copies of all information furnished by the Company, any Subsidiary or any Commonly Controlled Entity to PBGC, except, in each case, information furnished as to ordinary operational aspects of the business of the Company or any Subsidiary and not relating to any deviation by the Company or any Subsidiary from rules and regulations of PBGC; and (d) promptly, such additional financial and other information as any Lender may from time to time reasonably request. SECTION VIII.3 Accrual of Liabilities; Payment of Obligations. The ---------------------------------------------- Company will maintain, and cause each of its Subsidiaries to maintain, in accordance with GAAP, appropriate reserves for the accrual of taxes and all other obligations, liabilities and claims and pay, discharge or otherwise satisfy, and cause each of its Subsidiaries to pay, discharge or otherwise satisfy, at or before their maturity or before they become delinquent, as the case may be, all obligations except (a) where the same are being contested in good faith by appropriate proceedings diligently pursued or (b) where the failure so to pay, discharge or otherwise satisfy obligations would not, in the aggregate, reasonably be expected to have a Material Adverse Effect. SECTION VIII.4 Maintenance of Corporate Existence; Maintenance of -------------------------------------------------- Properties. The Company will (a) maintain its corporate existence, rights and - - ---------- franchises necessary to continue its business and the corporate existence, rights and franchises necessary to continue the business of each of its Significant Subsidiaries, provided that the foregoing shall not be a limitation -------- (i) on the right of the Company to discontinue any operations if in the opinion of the Company such discontinuance is in the best interest of the Company and would not materially affect the ability of the Company to pay its debts as they become due, (ii) on asset sales permitted under Section 9.08 and (iii) on the right of any Significant Subsidiary of the Company to merge with or be liquidated into the Company or another Significant Subsidiary of the Company if a Default does not then exist and would not result therefrom; and (b) maintain, and cause each Significant Subsidiary to maintain, the properties which are used or useful in its respective operations in good working order and condition. -68- SECTION VIII.5 Insurance. The Company will maintain, and cause each --------- of its Significant Subsidiaries to maintain, insurance with financially sound and reputable companies in such form and upon such terms and in such amounts and against such risks (including liability for bodily injury and property damage) and subject to such deductibles or retentions as in the reasonable opinion of the Company is available on commercially reasonable terms and will provide sound and reasonable protection for the Company's or such Significant Subsidiary's assets and operations. At the Administrative Agent's request, the Company will furnish to the Administrative Agent (with copies for each Lender) certificates of insurance or other evidence that such insurance is being maintained. SECTION VIII.6 Notices. The Company will (a) promptly give notice in ------- writing to the Administrative Agent (which shall promptly notify each Lender) of the occurrence of any Default or Event of Default under this Agreement, or of the commencement of (i) any material litigation or proceedings affecting the Company or any Subsidiary or (ii) any dispute between the Company or any Subsidiary and any Governmental Authority or any other party if such litigation, proceedings or dispute could reasonably be expected to result in a Material Adverse Effect; and (b) as soon as possible and in any event within 45 days after the Company knows or has reason to know that any Reportable Event (other than a Reportable Event not subject to the provision for 30-day notice to PBGC pursuant to the regulations issued under ERISA) has occurred with respect to any Single Employer Plan or that PBGC or any Borrower or any Commonly Controlled Entity has instituted or will institute proceedings under Title IV of ERISA to terminate any Single Employer Plan, deliver to the Administrative Agent (which shall promptly notify each Lender) a certificate of a Responsible Officer of the Company setting forth details as to such Reportable Event and the action that the Company proposes to take with respect thereto, together with a copy of any notice of such Reportable Event that may be required to be filed with PBGC, or any notice delivered by PBGC evidencing its intent to institute such proceedings or any notice to PBGC that such Plan is to be terminated, as the case may be. For all purposes of clause (b) of this Section 8.06, the Company shall be deemed to have all knowledge or knowledge of all facts attributable to the administrator of a Single Employer Plan. SECTION VIII.7 Compliance with Contractual Obligations and Laws. The ------------------------------------------------ Company will, and will cause each of its Subsidiaries to, comply with all provisions of any Contractual Obligation, applicable law, rule, regulation, order, writ, judgment, injunction, decree, award or ordinance to which it is subject, except to the extent that the failure to comply therewith could not, in the aggregate, reasonably be expected to have a Material Adverse Effect. SECTION VIII.8 Access to Books and Inspection. The Company shall ------------------------------ keep proper books of record and account in which full, true and correct entries in conformity with GAAP and all Requirements of Law shall be made of all dealings and transactions in relation to its business and activities; and give the Administrative Agent and any reasonable number of representatives of the Lenders access, at the Company's principal office, upon reasonable notice during normal business hours to, and permit any such representatives to examine, copy or make excerpts from, any and all books, records and documents in the possession of the Company relating to its affairs and the affairs of the Subsidiaries, and to inspect any of the properties of the -69- Company or the Subsidiaries. Notwithstanding any provision in this Section, the Company (i) shall be given a reasonable opportunity upon reasonable notice to have an officer or officers of the Company accompany any such representative during any such visit, and (ii) shall not be responsible for any expenses incurred by any such representative. SECTION VIII.9 Use of Proceeds. The Borrowers shall use the proceeds --------------- of the Loans for the purposes specified in Section 5.13. SECTION VIII.10 Environmental Laws. The Company will, and will cause ------------------ each Subsidiary to, (a) comply with, and ensure compliance by all tenants and subtenants, if any, with, all applicable Environmental Laws and obtain and comply in all material respects with and maintain, and ensure that all tenants and subtenants obtain and comply in all material respects with and maintain, any and all licenses, approvals, notifications, registrations or permits required by applicable Environmental Laws except to the extent that the failure to do so, or any aggregation thereof, is not reasonably likely to result in a Material Adverse Effect, (b) conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required under Environmental Laws and promptly comply in all material respects with all lawful orders and directives of all Governmental Authorities regarding Environmental Laws except to the extent that the same are being contested in good faith by appropriate proceedings and the pendency of such proceedings is not reasonably likely to result in a Material Adverse Effect and (c) defend, indemnify and hold harmless the Administrative Agent and the Lenders, and their respective employees, agents, officers and directors, from and against any and all claims, demands, penalties, fines, liabilities, settlements, damages, costs and expenses of whatever kind or nature known or unknown, contingent or otherwise, arising out of, or in any way relating to the violation of, noncompliance with or liability under, any Environmental Law applicable to the operations of the Company, any of its Subsidiaries or the Properties, or any orders, requirements or demands of Governmental Authorities related thereto, including, without limitation, investigation and laboratory fees, response costs, court costs, litigation expenses and reasonable attorneys' and consultants' fees, except to the extent that any of the foregoing arise out of the gross negligence or willful misconduct of the party seeking indemnification therefor. The agreements in clause (c) of this Section shall survive repayment of the Notes and all other amounts payable hereunder. SECTION VIII.11 Additional Collateral and Guaranties. ------------------------------------ (a) With respect to any new Subsidiary (other than an Excluded Foreign Subsidiary) created or acquired after the Closing Date by the Company or any Domestic Subsidiary (which new Subsidiary, for the purposes of this paragraph (a), shall include any existing Significant Subsidiary that ceases to be an Excluded Foreign Subsidiary and, at the request of the Administrative Agent, shall also include any Foreign Subsidiary (other than any Excluded Foreign Subsidiary) of the Company or any Domestic Subsidiary which is in existence on the Closing Date but does not execute a Subsidiary Guarantee on the Closing Date), the Company or its Subsidiaries, as applicable, shall promptly (i) execute and deliver to the Trustee such amendments to the applicable Pledge Agreement, or such additional Pledge Agreement, as -70- the Administrative Agent deems necessary or advisable in order to grant to the Trustee, as security for the Secured Obligations secured under such Pledge Agreement, a perfected first priority security interest in the Capital Stock of such new Subsidiary which is owned by the Company or any of its Subsidiaries (other than an Excluded Foreign Subsidiary), (ii) deliver to the Trustee the certificates representing such Capital Stock, together with undated stock powers, in blank, executed and delivered by a duly authorized officer of the Company or such pledgor Subsidiary, as the case may be, or take such other perfection actions in respect of such Capital Stock as shall be reasonably requested by the Administrative Agent to perfect its security interest therein, (iii) cause such new Subsidiary to become a party to a Subsidiary Guarantee and (iv) if reasonably requested by the Administrative Agent, deliver to the Administrative Agent legal opinions relating to the matters described above, which opinions shall be in form and substance, and from counsel, reasonably satisfactory to the Administrative Agent. (b) With respect to any new Excluded Foreign Subsidiary (other than any such Subsidiary which is of the type described in clause (i) or (iv) of the definition of Excluded Foreign Subsidiary in Section 1.01) created or acquired after the Closing Date by the Company or any of its Domestic Subsidiaries, the Company or such Domestic Subsidiary, as applicable, shall promptly (i) execute and deliver to the Administrative Agent such amendments or supplements to the Pledge Agreement, or such other security documents, as the Administrative Agent deems necessary or advisable in order to grant to the Trustee, as security for the Secured Obligations secured under the Pledge Agreement, a perfected first priority security interest in the Capital Stock of such new Subsidiary which is owned by the Company or any of its Domestic Subsidiaries (provided that in no event shall more than 65% of the total outstanding Capital Stock of any such new Excluded Foreign Subsidiary be required to be so pledged), (ii) deliver to the Trustee the certificates representing such Capital Stock, together with undated stock powers, in blank, executed and delivered by a duly authorized officer of the Company or such Subsidiary, as the case may be and (iii) if requested by the Administrative Agent, deliver to the Administrative Agent legal opinions relating to the matters described above, which opinions shall be in form and substance, and from counsel, reasonably satisfactory to the Administrative Agent. (c) Notwithstanding anything in this Section 8.11 to the contrary, (i) shares of the Capital Stock of Netherlands BV II and Netherlands BV IV shall not be required to be pledged hereunder, and shares of Capital Stock of any other Foreign Subsidiary shall not be required to be pledged hereunder to the extent that, in the good faith judgment of the Company, the pledging of such Capital Stock would result in adverse tax consequences to the Company or would be unlawful and (ii) so long as the Existing Accounts Receivable Financing Program or any similar program is in effect, the Receivables Subsidiary or any Subsidiary created under a subsequent receivables financing program shall not be required to become a party to a Subsidiary Guarantee or to create a security interest in any of its assets. SECTION VIII.12 Foreign Collateral Matters. Notwithstanding the -------------------------- provisions of Section 7.01 (g), (h) and (i) and Section 8.11 (but subject to Section 8.11(c)): -71- (a) with respect to any Foreign Subsidiary listed under the heading "Foreign Subsidiaries of which 65% of the Capital Stock is to be Pledged" in Schedule VI, the Company shall take the actions required by Section 7.01 (h) and (i) to pledge 65% of the Capital Stock of each such Foreign Subsidiary, and shall cause the applicable legal opinions required by Section 7.01 (g) to be delivered, as promptly as practicable, and in any event within 120 days after the Closing Date; and with respect to any Foreign Subsidiary listed under the heading "Foreign Subsidiaries of which 100% of the Capital Stock is to be Pledged" in Schedule VI, the Company shall take the actions required by Section 7.01(h) and (i) to pledge 100% of the Capital Stock of each such Foreign Subsidiary, and shall cause the applicable legal opinions required by Section 7.01(g) to be delivered, as promptly as practicable, and in any event within 120 days after the Closing Date; (b) the Company may satisfy the requirements of Sections 7.01 (g), (h) and (i) and Section 8.11 with respect to any Excluded Foreign Subsidiary by transferring all of the Capital Stock of such Excluded Foreign Subsidiary to F-M International Group Inc.; and (c) the Company shall cause to be delivered, as promptly as practicable, and in any event within 120 days after the Closing Date, the UK Acquisition I Guarantee, the legal opinion of U.K. counsel in connection therewith and all other documents delivered in connection with the guarantee of U.K. Acquisition I under the Existing Multicurrency Agreement. ARTICLE IX. NEGATIVE COVENANTS ------------------ From and after the Closing Date, the Company hereby covenants and agrees that so long as any of the Commitments remain in effect, any Loan remains outstanding and unpaid or any other amount is owing to any Lender or the Administrative Agent hereunder, the Company will comply with the covenants set forth below in this Article IX: SECTION IX.1 Cash Flow Coverage. The Company will not permit the ------------------ Cash Flow Coverage for any period of four consecutive fiscal quarters to be less than 1.50 to 1.0. SECTION IX.2 Consolidated Leverage Ratio. The Company will not --------------------------- permit the Consolidated Leverage Ratio at the last day of any fiscal quarter ending during any period set forth below to be greater than the ratio set forth below for such period: Period Consolidated Leverage Ratio ------ --------------------------- Closing Date - December 30, 1999 4.50 to 1.0 December 31, 1999 - 4.00 to 1.0 December 30, 2000 -72- December 31, 2000 and 3.50 to 1.0 thereafter SECTION IX.3 Maintenance of Consolidated Net Worth. The Company will ------------------------------------- not permit Consolidated Net Worth at any time to be less than $2,000,000,000. SECTION IX.4 Limitation on Liens. The Company will not, nor will it ------------------- permit any of its Subsidiaries to, create, assume or incur or suffer to be created, assumed or incurred or to exist any Lien on any of its properties or assets, whether now owned or hereafter acquired, provided, however, that the -------- ------- foregoing restriction shall not apply to the following: (a) Liens existing on the date of this Agreement and described on Schedule III; (b) [Reserved]; (c) Liens in favor of the Company or any Wholly Owned Subsidiary; (d) Liens in favor of any Governmental Authority to secure progress, advance or other payments pursuant to any contract or provision of any statute; (e) any extension, renewal or replacement (or successive extensions, renewals or replacements), as a whole or in part, of any Lien referred to in the clauses (a) through (d), and (m) and (n), inclusive of this Section 9.04; provided that (i) no such extension, renewal or replacement shall -------- result in an increase in the liabilities secured thereby and (ii) such extension, renewal or replacement Lien shall be limited to all or a part of the same property that secured the Lien so extended, renewed or replaced (plus additions, accessions, replacements and improvements to such property); (f) Liens for taxes not yet due or which are being contested in good faith and by appropriate proceedings diligently pursued if adequate reserves with respect thereto are maintained on the books of the Company or such Subsidiary, as the case may be, in accordance with GAAP or in the case of a Subsidiary located outside the United States, general accounting principles in effect from time to time in their respective jurisdictions of incorporation; (g) carriers', warehousemen's, mechanics', landlords', materialmen's, repairmen's or other like Liens arising in the ordinary course of business (A) which are not overdue for a period of more than 60 days or (B) which are being contested in good faith and by appropriate proceedings diligently pursued if adequate reserves with respect thereto are maintained on the books of the Company or such Subsidiary, as the case may be, in accordance with GAAP; (h) easements, rights-of-way, zoning and similar restrictions and other similar encumbrances or title defects incurred in the ordinary course of business which, in the -73- aggregate, are not greater than $15,000,000 (to the extent the dollar values of such encumbrances are calculable) and which do not in any case materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the business of the Company or its Subsidiaries; (i) any attachment or judgment lien, unless the judgment it secures shall not, within 30 days after the entry thereof, have been discharged or execution thereof stayed pending appeal, or shall not have been discharged within 30 days after the expiration of any such stay; (j) pledges or deposits in connection with workers' compensation, unemployment insurance and other social legislation and deposits securing liability to insurance carriers under insurance or self-insurance arrangements; (k) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business; (l) Liens created pursuant to the Security Documents; (m) other Liens incidental to the conduct of the Company's or any Subsidiary's business or the ownership of its property and assets, including, without limitation, (i) Liens that were incurred in connection with the borrowing of money or the obtaining of advances or credit or capital leases and (ii) Liens on property or assets existing at the time of the acquisition thereof (including acquisition through merger or consolidation) or to secure the payment of all or any part of the purchase price or construction cost thereof or to secure any Indebtedness incurred prior to, at the time of, or within six months after, the acquisition or completion of such property or assets for the purpose of financing all or any part of the purchase price or construction cost thereof; provided, -------- however, that the Indebtedness secured by all of the foregoing Liens ------- referred to in clauses (i) and (ii) above, plus the aggregate amount of all Other Permitted Obligations, does not at any time exceed in the aggregate for the Company and all Subsidiaries of the Company an amount equal to the sum of (A) $250,000,000; plus (B) an amount equal to forty percent (40%) of Consolidated Net Worth (determined as of the most recent fiscal quarter of the Company); (n) Liens granted by a special-purpose, Wholly Owned Subsidiary of the Company that purchases accounts receivable from the Company and its Subsidiaries to the extent such Liens are granted on such accounts receivable and (related assets customarily pledged in connection with similar transactions, such as promissory notes evidencing such receivables and software and records relating to such receivables) to secure the payment of indebtedness of such Wholly Owned Subsidiary; and (o) Liens granted to secure any Permitted Acquisition Debt. -74- SECTION IX.5 Limitation on Indebtedness. The Company will not, and -------------------------- will not permit any of its Subsidiaries to, create, incur, assume or suffer to exist any Indebtedness, except: (a) Indebtedness of any Loan Party pursuant to any Loan Document; (b) Indebtedness of the Company to any Subsidiary and of any Subsidiary which is a party to a Subsidiary Guarantee to the Company or any other Subsidiary; (c) (i) Indebtedness of the Special Purpose Subsidiaries described in Schedule 9.05(c), (ii) Indebtedness of any Subsidiary which is not a party to a Subsidiary Guarantee owing to any other Subsidiary which is not a party to a Subsidiary Guarantee and (iii) Indebtedness in the form of any investment permitted by Section 9.11; (d) Indebtedness of the Company (i) having a final maturity after the Revolving Credit Termination Date, and (ii) the proceeds of which are used to prepay the Term Loans and any Permitted Acquisition Debt in accordance with its terms; (e) Subordinated Debt; (f) Indebtedness outstanding on the date hereof and listed on Schedule IV and any refinancings, refundings, renewals or extensions thereof (without any increase in the principal amount thereof); (g) Permitted Acquisition Debt; and (h) additional Indebtedness of the Company and its Subsidiaries (including, without limitation, (i) Indebtedness of Foreign Subsidiaries to the Company, any other Subsidiary or any other Person, (ii) capital lease obligations and (iii) Indebtedness of any Person which becomes a Subsidiary or is merged with or into the Company after the date of this Agreement, provided that in the case of Indebtedness described by the foregoing clause -------- (iii), (A) such Indebtedness was in existence on the date such Person became a Subsidiary or merged with or into the Company, (B) such Indebtedness was not created in contemplation of such Person becoming a Subsidiary or merging with or into the Company and (C) immediately after giving effect to the acquisition of such Person by the Company no Default or Event of Default shall have occurred and be continuing), provided, that -------- the aggregate amount of Other Permitted Obligations, plus the aggregate amount of all obligations secured by Liens permitted pursuant to Section 9.04(m), shall not at any time exceed in the aggregate for the Company and its Subsidiaries the sum of (x) $250,000,000 plus (y) an amount equal to forty percent (40%) of Consolidated Net Worth (determined as of the most recent fiscal quarter of the Company). SECTION IX.6 Limitation on Guaranties. The Company will not, and ------------------------ will not permit any of its Subsidiaries to, create, incur, assume or suffer to exist any Guaranty except: -75- (a) Guaranties in existence on the date hereof and listed on Schedule IV and Guaranties of any refinancings, refundings, renewals or extensions of the Indebtedness or obligations guaranteed thereby, provided that the -------- amount of such Indebtedness or obligations are not increased; (b) the Subsidiary Guarantees; (c) Guaranties of Indebtedness permitted under clauses (a) through (d) and clauses (g) and (h) of Section 9.05; (d) additional Guaranties in respect of Indebtedness and other obligations not exceeding $50,000,000 at any time outstanding; (e) [reserved]; (f) Guaranties of the Loan Parties in respect of Subordinated Debt, which Guaranties shall have subordination terms acceptable to the Administrative Agent, acting reasonably; (g) Guaranties by any Subsidiary which is a party to a Subsidiary Guarantee in respect of the obligations of the Company under the ESOP Guaranty or the obligations of Federal-Mogul Corporation Salaried Employees' Stock Ownership Trust under the ESOP Loan Agreement, provided -------- that each such Guaranty shall provide that when any Subsidiary Guarantor party to such Guaranty is released from its obligations under the Subsidiary Guarantee to which it is a party, such Subsidiary Guarantor shall be released from its obligations under such Guaranty; (h) Guaranties by any Subsidiary which is a party to a Subsidiary Guarantee of Indebtedness incurred by the Company in connection with a Bond Offering or under the Indentures; provided, that if any such Guaranty is in -------- connection with a Bond Offering in respect of Subordinated Debt, the Guaranties in respect thereof shall have subordination terms acceptable to the Administrative Agent, acting reasonably; and (i) Guaranties of any Person which becomes a Subsidiary of the Company or is merged with or into the Company after the date of this Agreement; provided that (i) such Guaranty was in existence on the date -------- such Person became a Subsidiary or was merged with or into the Company, (ii) such Guaranty was not created in contemplation of such Person becoming a Subsidiary or merging with or into the Company, (iii) immediately after giving effect to the acquisition of such Person by the Company, no Default or Event of Default shall have occurred and be continuing and (iv) the aggregate amount of Other Permitted Obligations, plus the aggregate amount of all obligations secured by Liens permitted pursuant to Section 9.04(m), shall not at any time exceed in the aggregate for the Company and its Subsidiaries the sum of (A) $250,000,000 plus (B) an amount equal -76- to forty percent (40%) of Consolidated Net Worth (determined as of the most recent fiscal quarter of the Company). SECTION IX.7 Limitation on Fundamental Changes. The Company will --------------------------------- not, and will not permit any of its Subsidiaries to, enter into any merger, consolidation or amalgamation, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or Dispose of all or substantially all of its Property or business, or make any material change in its present method of conducting business, except: (a) any Subsidiary of the Company may be merged or consolidated with or into the Company (provided that the Company shall be the continuing or -------- surviving corporation) or with or into any Subsidiary which is a party to a Subsidiary Guarantee (provided that such Subsidiary which is a party to a -------- Subsidiary Guarantee shall be the continuing or surviving corporation) or with or into any Person (provided that the surviving corporation of such merger or consolidation continues to be a Subsidiary and such merger or consolidation is permitted by Section 9.11) and any Subsidiary of the Company which is not a party to a Subsidiary Guarantee may be merged or consolidated with or into any other Subsidiary which is not a party to a Subsidiary Guarantee; (b) any Subsidiary of the Company may Dispose of any or all of its assets (upon voluntary liquidation or otherwise) to the Company or any Subsidiary which is a party to a Subsidiary Guarantee, and any Subsidiary of the Company which is not a party to a Subsidiary Guarantee may Dispose of assets to any other Subsidiary which is not a party to a Subsidiary Guarantee; and (c) Dispositions permitted by Sections 9.08(a), (d), (e), (f), (g), (i) and (j). SECTION IX.8 Limitation on Sale of Assets. The Company will not, and ---------------------------- will not permit any of its Significant Subsidiaries to, Dispose of any of its Property or business (including, without limitation, receivables and leasehold interests), whether now owned or hereafter acquired, or, in the case of any Subsidiary, issue or sell any shares of such Subsidiary's Capital Stock to any Person, except: (a) the Disposition of obsolete or worn out property in the ordinary course of business; (b) the sale of inventory in the ordinary course of business; (c) Dispositions permitted by Sections 9.07(a) and (b) or Section 9.11; (d) the sale or issuance of the Capital Stock of any Subsidiary which is a party to a Subsidiary Guarantee to the Company or any Subsidiary, or the sale or issuance of Capital Stock of any Foreign Subsidiary to any other Foreign Subsidiary; -77- (e) sales of receivables under the Company's Existing Accounts Receivable Financing Program (as amended from time to time) or any replacement program; provided that the principal amount of the Company's -------- existing accounts receivable financing program may not be increased to an aggregate principal amount greater than $500,000,000; (f) Dispositions of assets required to comply with anti-trust laws; (g) Dispositions of assets listed in Schedule 9.08; (h) Dispositions pursuant to sale and leaseback transactions permitted pursuant to Section 9.13; (i) the transactions described in Section 9.10 may be consummated; and (j) any other sales of assets (including Capital Stock of Subsidiaries), other than the assets set forth on Schedule 9.08, having a book value which, when added to the book value of all other assets sold pursuant to this clause (j) during such fiscal year, does not exceed 5% of the gross book value of the assets of the Company and its consolidated Subsidiaries, determined in accordance with GAAP, as of the last day of the fiscal quarter ended immediately prior to the date of such sale. SECTION IX.9 Limitation on Restricted Payments. The Company will --------------------------------- not, and will not permit any of its Subsidiaries to, declare or pay any dividend (other than dividends payable solely in common stock of the Person making such dividend) on, or make any payment on account of, or set apart assets for a sinking or other analogous fund for, the purchase, redemption, defeasance, retirement or other acquisition of, any shares of any class of Capital Stock of the Company or any Subsidiary or any warrants or options to purchase any such Capital Stock, whether now or hereafter outstanding, or make any other distribution in respect thereof (other than payments solely in common stock of the Company, or, in the case of such payments made by a Subsidiary to the Company or another Wholly Owned Subsidiary, stock of the Person making such payments), either directly or indirectly, whether in cash or property or in obligations of the Company or any Subsidiary (collectively, "Restricted Payments"), except that: (a) any Subsidiary may make Restricted Payments to the Company or any Subsidiary which is a party to a Subsidiary Guarantee, and any Foreign Subsidiary may make Restricted Payments to any Foreign Subsidiary; (b) so long as no Default or Event of Default shall have occurred and be continuing, the Company may pay dividends in respect of its preferred stock at the stated rate, and dividends in respect of its common stock at a rate not exceeding $.48 per share per year, as adjusted for stock splits and similar events; -78- (c) the Company may issue common stock upon conversion of any of its convertible preferred stock, or the preferred stock of an Affiliate described in the second sentence of the definition of "Capital Stock"; and (d) payments by Federal-Mogul Financing Trust in respect of the 7% Trust Convertible Preferred Securities of Federal-Mogul Financing Trust. SECTION IX.10 Restrictions on Special Purpose Subsidiaries. The -------------------------------------------- Company will not permit any Special Purpose Subsidiary to (a) create, assume, incur or suffer to exist any Lien, any Indebtedness (other than Indebtedness owing to other Special Purpose Subsidiaries or Subsidiaries that are guarantors under a Subsidiary Guarantee), any Guaranty or any other liabilities, direct or contingent or (b) conduct, transact or otherwise engage in any business or other operations other than owning the stock of its Subsidiaries and activities directly related thereto, except that, notwithstanding the foregoing : (i) the Special Purpose Subsidiaries may execute and deliver the Loan Documents to which they are parties, incur and perform their obligations thereunder and create and suffer to exist the Liens created thereby and may execute and deliver the Guaranties permitted by Section 9.06 and perform their obligations thereunder; and (ii) the Special Purpose Subsidiaries may perform obligations under the Investments permitted above and under their respective organic documents and other Requirements of Law, may incur obligations to Governmental Authorities in the ordinary course of business, such as income and franchise tax liabilities and other incidental liabilities, and may incur other immaterial liabilities directly related and incidental to the permitted activities enumerated above. SECTION IX.11 Limitation on Investments, Loans and Advances. The --------------------------------------------- Company will not, and will not permit any of its Subsidiaries to, make any advance, loan, extension of credit (by way of guaranty of obligations of such Person or otherwise) or capital contribution to, or purchase any stock, bonds, notes, debentures or other securities of or any assets constituting all or a material part of a business unit of, or make any other investment in, any Person ("Investments"), except: (a) extensions of trade credit in the ordinary course of business; (b) Investments in Cash Equivalents; (c) Guaranties permitted by Section 9.06; (d) loans and advances to employees of the Company or its Subsidiaries in the ordinary course of business (including, without limitation, for travel, entertainment and relocation expenses); -79- (e) Permitted Acquisitions; (f) Investments (x) by any Subsidiary in the Company or (y) by the Company or any of its Subsidiaries in any Person that, prior to such investment, is a Subsidiary and which, prior to or simultaneously with such investment, is or becomes a party to a Subsidiary Guarantee or (z) by the Company or any of its Subsidiaries in the Receivables Subsidiary or any other Subsidiary created pursuant to a receivables financing program permitted hereunder; (g) the Investments described in Section 9.10; (h) Investments (x) by the Company or any of its Subsidiaries in any entity which at the time of such Investment is an Excluded Foreign Subsidiary and which was not acquired or created in anticipation of the making of such Investment in an aggregate amount outstanding not exceeding $200,000,000 for all Excluded Foreign Subsidiaries, and (y) investments by a Subsidiary which is not a party to a Subsidiary Guarantee in any other Subsidiary which is not a party to a Subsidiary Guarantee; (i) Investments to the extent that the consideration paid by the Company and its Subsidiaries is Capital Stock of the Company (provided that -------- if such Investment is the acquisition of, in a single transaction or in a series of related transactions, all or substantially all of the equity interests of any Person, such acquisition is approved by the board of directors or analogous governing body of such Person); (j) in addition to Investments otherwise expressly permitted by this Section 9.11, Investments by the Company or any of its Subsidiaries in an aggregate amount (valued at cost) not to exceed at any time outstanding $300,000,000 while this Agreement is outstanding (provided that if such -------- Investment is the acquisition of, in a single transaction or in a series of related transactions, all or substantially all of the equity interests of any Person, such acquisition is approved by the board of directors or analogous governing body of such Person); and (k) Investments permitted by Sections 9.07(a) and (b). SECTION IX.12 Limitation on Optional Payments and Modifications of ---------------------------------------------------- Debt Instruments, Certain Derivative Transactions, etc. The Company will not, - - ------------------------------------------------------- and will not permit any of its Subsidiaries to, (a) make or offer to make any payment, prepayment, repurchase or redemption of or otherwise defease or segregate funds with respect to the Subordinated Debt (other than scheduled interest payments required to be made in cash and in connection with a refinancing otherwise permitted hereunder), (b) enter into any derivative transaction or similar transaction obligating the Company or any of its Subsidiaries to make payments to any other Person as a result of a change in market value of Subordinated Debt or Capital Stock of the Company or (c) amend, modify, waive or otherwise change, or consent or agree to any amendment, modification, waiver or other change to, any of the terms of the Subordinated Debt (other than any such amendment, modification, waiver or other change which would extend the -80- maturity or reduce the amount of any payment of principal thereof or which would reduce the rate or extend the date for payment of interest thereon or which would otherwise not materially impair the interests of the Lenders). SECTION IX.13 Limitation on Sales and Leasebacks. Enter into any ---------------------------------- arrangement with any Person providing for the leasing by the Company or any Subsidiary of real or personal property which has been or is to be sold or transferred by the Company or such Subsidiary to such Person or to any other Person to whom funds have been or are to be advanced by such Person on the security of such property or rental obligations of the Company or such Subsidiary; provided, that (i) the Company and its Subsidiaries may consummate -------- sale and leaseback transactions in which the transferee is the Company or a Subsidiary which is a party to a Subsidiary Guarantee and any Subsidiary which is not a party to a Subsidiary Guarantee may consummate sale and leaseback transactions in which the transferor is another Subsidiary which is not a party to a Subsidiary Guarantee and (ii) the Company may consummate other sale and leaseback transactions so long as after giving effect thereto the amount of Other Permitted Obligations, plus the aggregate amount of obligations secured by Liens permitted by Section 9.04(m), does not at any time exceed in the aggregate for the Company and its Subsidiaries the sum of (A) $250,000,000 plus (B) an amount equal to forty percent (40%) of Consolidated Net Worth (determined as of the most recent fiscal quarter of the Company). SECTION IX.14 Limitation on Restrictions on Subsidiary Distributions. ------------------------------------------------------ The Company will not, and will not permit any Significant Subsidiary to, enter into or suffer to exist or become effective any consensual encumbrance or restriction on the ability of any Significant Subsidiary of the Company to (a) pay dividends or make any other distributions in respect of any Capital Stock of such Significant Subsidiary held by, or pay any Indebtedness owed to, the Company or any other Subsidiary of the Company, (b) make loans or advances to the Company or any other Subsidiary of the Company or (c) transfer any of its assets to the Company or any other Subsidiary of the Company, except for such encumbrances or restrictions existing under or by reason of (i) any restrictions existing under the Loan Documents, (ii) any restrictions with respect to a Subsidiary imposed pursuant to an agreement which has been entered into in connection with the Disposition of all or substantially all of the Capital Stock or assets of such Subsidiary, (iii) any restrictions with respect to assets encumbered by a Lien permitted by Section 9.04 so long as such restriction applies only to the asset encumbered by such permitted Lien, (iv) any restrictions with respect to T & N plc and its Subsidiaries, or any of the entities acquired in the Cooper Automotive Acquisition, existing on the date of consummation of the Company's acquisition thereof, (v) any restrictions in respect of Subsidiaries which must be disposed of after the Company's acquisition of T & N plc agreed to between the Company and a Governmental Authority having jurisdiction over antitrust or competition issues as a condition to such Governmental Authority's approval of such acquisition, (vi) any restrictions contained in any Permitted Acquisition Debt and (vii) any restrictions contained in Indebtedness permitted to be incurred under Section 9.05(h). -81- SECTION IX.15 Multiemployer Plans. The Company will not, as of any ------------------- date, permit any liability to occur to which the Company or any Commonly Controlled Entity would become subject under ERISA if the Company or any such Commonly Controlled Entity were to withdraw completely from all Multiemployer Plans as of the valuation date most closely preceding such date. SECTION IX.16 Limitation on More Restrictive Covenants. The Company ---------------------------------------- shall not enter into any new debt agreement that would contain, nor enter into any amendment, supplement or other modification to any indenture, instrument or other agreement concerning the Funded Debt or any refinancing thereof, if such indenture, instrument or other agreement at the time entered into or after giving effect to any such amendment, supplement or other modification thereto, would contain (a) any covenant or event of default that is more restrictive on any Borrower than those set forth in this Agreement, (b) with respect to the Company, any covenant with respect to financial performance the scope of which is materially different from the covenants respecting such matters set forth in Sections 9.01, 9.02 or 9.03, (c) any covenant which would prohibit the granting of liens on its assets by any Borrower or its Subsidiaries in favor of the Lenders, other than, in the case of this clause (c), Indebtedness incurred pursuant to Section 9.05(g), and in the case of clauses (a) and (c), Indebtedness incurred pursuant to Section 9.05(h) constituting a refinancing, refunding, extension or renewal of existing Indebtedness and having terms no more restrictive than the Indebtedness refinanced, refunded, extended or renewed thereby. SECTION IX.17 Affiliates. The Company, will not, nor will it permit ---------- any of its Significant Subsidiaries to, enter into any transaction (including, without limitation, the purchase or sale of any property or service) with, or make any payment or transfer to, any Affiliate (other than the Company or any of its Significant Subsidiaries) except in the ordinary course of business and pursuant to the reasonable requirements of the Company's or such Subsidiary's business and upon fair and reasonable terms no less favorable to the Company or such Subsidiary than the Company or such Subsidiary would obtain in a comparable arms-length transaction. ARTICLE X. GUARANTEE --------- SECTION X.1 Guarantee. (a) The Company hereby unconditionally and --------- irrevocably guarantees to the Administrative Agent, for the ratable benefit of the Administrative Agent and the Lenders and their respective successors, indorsees, transferees and assigns, the prompt and complete payment and performance by the Foreign Subsidiary Borrowers (whether at the stated maturity, by acceleration or otherwise) of the Obligations. (b) The Company further agrees to pay any and all expenses (including, without limitation, all reasonable fees and disbursements of counsel) which may be paid or incurred by the Administrative Agent, or any Lender in enforcing, or obtaining advice of counsel in respect of, any rights with respect to, or collecting, any or all of the Obligations and/or enforcing any rights with respect to, or collecting against, the -82- Company under this Section. This Section shall remain in full force and effect until the Obligations are paid in full and the Commitments are terminated, notwithstanding that from time to time prior thereto the Borrowers may be free from any Obligations. (c) No payment or payments made by any Borrower or any other Person or received or collected by the Administrative Agent or any Lender from any Borrower or any other Person by virtue of any action or proceeding or any set-off or appropriation or application, at any time or from time to time, in reduction of or in payment of the Obligations shall be deemed to modify, reduce, release or otherwise affect the liability of the Company hereunder which shall, notwithstanding any such payment or payments, remain liable hereunder for the Obligations until the Obligations are paid in full and the Commitments are terminated. (d) The Company agrees that whenever, at any time, or from time to time, it shall make any payment to the Administrative Agent or any Lender on account of its liability under this Section, it will notify the Administrative Agent and such Lender in writing that such payment is made under this Section for such purpose. SECTION X.2 Right of Set-off. The Administrative Agent and each ---------------- Lender is hereby irrevocably authorized at any time and from time to time without notice to the Company, any such notice being expressly waived by the Company, to set off and appropriate and apply any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by the Administrative Agent or such Lender (or any Affiliate of such Lender) to or for the credit or the account of the Company, or any part thereof in such amounts as the Administrative Agent or such Lender may elect, against or on account of the obligations and liabilities of the Company to the Administrative Agent or such Lender hereunder which are then due and payable and claims of every nature and description of the Administrative Agent or such Lender against the Company, in any currency, whether arising hereunder, under any other Loan Document or otherwise in connection therewith, as the Administrative Agent or such Lender may elect, whether or not the Administrative Agent or such Lender has made any demand for payment. The Administrative Agent and each Lender shall notify the Company promptly of any such set-off and the application made by the Administrative Agent or such Lender, as the case may be, of the proceeds thereof; provided that the failure to give such notice shall not -------- affect the validity of such set-off and application. The rights of the Administrative Agent and each Lender under this Section are in addition to other rights and remedies (including, without limitation, other rights of set-off) which the Administrative Agent or such Lender may have. SECTION X.3 No Subrogation. Notwithstanding any payment or payments -------------- made by the Company hereunder, or any set-off or application of funds of the Company by the Administrative Agent or any Lender, the Company shall not be entitled to be subrogated to any of the rights of the Administrative Agent or any Lender against the Foreign Subsidiary Borrowers or against any collateral security or guarantee or right of offset held by the -83- Administrative Agent or any Lender for the payment of the Obligations, nor shall the Company seek or be entitled to seek any contribution or reimbursement from such Borrowers in respect of payments made by the Company hereunder, until all amounts owing to the Administrative Agent and the Lenders by such Borrowers on account of the Obligations are paid in full and the Commitments are terminated. If any amount shall be paid to the Company on account of such subrogation rights at any time when all of the Obligations shall not have been paid in full, such amount shall be held by the Company in trust for the Administrative Agent and the Lenders, segregated from other funds of the Company, and shall, forthwith upon receipt by the Company, be turned over to the Administrative Agent in the exact form received by the Company (duly indorsed by the Company to the Administrative Agent, if required), to be applied against the Obligations, whether matured or unmatured, in such order as Administrative Agent may determine. The provisions of this Section shall survive the termination of this Agreement and the payment in full of the Obligations and the termination of the Commitments. SECTION X.4 Amendments, etc. with respect to the Obligations; Waiver -------------------------------------------------------- of Rights. The Company shall remain obligated hereunder notwithstanding that, - - --------- without any reservation of rights against the Company, and without notice to or further assent by the Company, any demand for payment of any of the Obligations made by the Administrative Agent or any Lender may be rescinded by the Administrative Agent or such Lender, and any of the Obligations continued, and the Obligations, or the liability of any other party upon or for any part thereof, or any collateral security or guarantee therefor or right of offset with respect thereto, may, from time to time, in whole or in part, be renewed, extended, amended, modified, accelerated, compromised, waived, surrendered or released by the Administrative Agent or any Lender, and any Loan Documents and any other documents executed and delivered in connection therewith may be amended, modified, supplemented or terminated, in whole or in part, in accordance with the provisions thereof as the Administrative Agent (or the requisite Lenders, as the case may be) may deem advisable from time to time, and any collateral security, guarantee or right of offset at any time held by the Administrative Agent or any Lender for the payment of the Obligations may be sold, exchanged, waived, surrendered or released. None of the Administrative Agent or any Lender shall have any obligation to protect, secure, perfect or insure any Lien at any time held by it as security for the Obligations or for this Agreement or any property subject thereto. When making any demand hereunder against the Company, the Administrative Agent or any Lender may, but shall be under no obligation to, make a similar demand on any Borrower or any other guarantor, and any failure by the Administrative Agent or any Lender to make any such demand or to collect any payments from any Foreign Subsidiary Borrower or any such other guarantor or any release of any Foreign Subsidiary Borrower or such other guarantor shall not relieve the Company of its obligations or liabilities hereunder, and shall not impair or affect the rights and remedies, express or implied, or as a matter of law, of the Administrative Agent or any Lender against the Company. For the purposes hereof "demand" shall include the commencement and continuance of any legal proceedings. SECTION X.5 Guarantee Absolute and Unconditional. The Company waives ------------------------------------ any and all notice of the creation, renewal, extension or accrual of any of the Obligations and notice of or proof of reliance by the Administrative Agent or any Lender upon this Agreement or -84- acceptance of this Agreement; the Obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred, or renewed, extended, amended or waived, in reliance upon this Agreement; and all dealings between the Foreign Subsidiary Borrower and the Company, on the one hand, and the Administrative Agent and the Lenders, on the other, shall likewise be conclusively presumed to have been had or consummated in reliance upon this Agreement. The Company waives diligence, presentment, protest, demand for payment and notice of default or nonpayment to or upon the Foreign Subsidiary Borrowers and the Company with respect to the Obligations. This Article X shall be construed as a continuing, absolute and unconditional guarantee of payment without regard to (a) the validity, regularity or enforceability of this Agreement, any other Loan Document, any of the Obligations or any other collateral security therefor or guarantee or right of offset with respect thereto at any time or from time to time held by the Administrative Agent or any Lender, (b) any defense, set-off or counterclaim (other than a defense of payment or performance) which may at any time be available to or be asserted by the Foreign Subsidiary Borrowers against the Administrative Agent or any Lender, or (c) any other circumstance whatsoever (with or without notice to or knowledge of the Foreign Subsidiary Borrowers or the Company) which constitutes, or might be construed to constitute, an equitable or legal discharge of the Foreign Subsidiary Borrowers for the Obligations, or of the Company under this Article X, in bankruptcy or in any other instance. When pursuing its rights and remedies hereunder against the Company, the Administrative Agent and any Lender may, but shall be under no obligation to, pursue such rights and remedies as it may have against the Foreign Subsidiary Borrowers or any other Person or against any collateral security or guarantee for the Obligations or any right of offset with respect thereto, and any failure by the Administrative Agent or any Lender to pursue such other rights or remedies or to collect any payments from the Foreign Subsidiary Borrowers or any such other Person or to realize upon any such collateral security or guarantee or to exercise any such right of offset, or any release of the Foreign Subsidiary Borrowers or any such other Person or of any such collateral security, guarantee or right of offset, shall not relieve the Company of any liability hereunder, and shall not impair or affect the rights and remedies, whether express, implied or available as a matter of law, of the Administrative Agent or any Lender against the Company. This Article X shall remain in full force and effect and be binding in accordance with and to the extent of its terms upon the Company and its successors and assigns, and shall inure to the benefit of the Administrative Agent and the Lenders, and their respective successors, indorsees, transferees and assigns, until all the Obligations and the obligations of the Company under this Agreement shall have been satisfied by payment in full and the Commitments shall be terminated, notwithstanding that from time to time during the term of this Agreement the Foreign Subsidiary Borrowers may be free from any Obligations. SECTION X.6 Reinstatement. This Article X shall continue to be ------------- effective, or be reinstated, as the case may be, if at any time payment, or any part thereof, of any of the Obligations is rescinded or must otherwise be restored or returned by the Administrative Agent or any Lender upon the insolvency, bankruptcy, dissolution, liquidation or reorganization of any Foreign Subsidiary Borrower or upon or as a result of the appointment of a receiver, intervenor or conservator of, or trustee or similar officer for, any Foreign Subsidiary Borrower or any substantial part of its property, or otherwise, all as though such payments had not been made. -85- SECTION X.7 Payments. The Company hereby agrees that all payments -------- required to be made by it hereunder will be made to the Administrative Agent without set-off or counterclaim in accordance with the terms of the Obligations, including, without limitation, in the currency in which payment is due. ARTICLE XI. EVENTS OF DEFAULT ----------------- If any of the following events shall occur and be continuing: (a) Any Borrower shall fail to pay any principal of any Loan made to it when due in accordance with the terms hereof; or any Borrower shall fail to pay any interest, or any other amount payable by it hereunder, within five days after any such interest or other amount becomes due in accordance with the terms hereof; or (b) Any representation or warranty made or deemed made by any Borrower herein or which is contained in any certificate, document or financial or other statement furnished at any time under or in connection with this Agreement shall prove to have been incorrect in any material respect on or as of the date made or deemed made; or (c) Any Borrower shall default in the observance or performance of any agreement contained in Sections 8.04(a) (with respect to the corporate existence of the Company) , 8.06 (with respect to notices of Default and Events of Default), 8.12 or Article IX; or (d) Any Borrower shall default in the observance or performance of any other agreement contained in this Agreement (other than as provided in paragraphs (a) through (c) of this Article), and such default shall continue unremedied for a period of 30 days after receipt by such Borrower of notice of such default from the Administrative Agent or any Lender; or (e) The Company or any of its Subsidiaries shall (i) default in any payment or payments of principal or interest in an aggregate amount for the Company and its Subsidiaries of more than $50,000,000 (or its equivalent in another currency) at any one time on any Indebtedness (other than the Loans) or in the payment of more than $50,000,000 in the aggregate under any Guaranties (other than the Company Guaranty), beyond the period of grace (not to exceed 30 days), if any, provided in the instrument or agreement under which such Indebtedness or Guaranty was created; or (ii) default in the observance or performance of any other agreement or condition relating to any Indebtedness (other than the Loans) the principal amount of which exceeds $50,000,000 in the aggregate for the Company and its Subsidiaries or any Guaranty (other than the Company Guaranty) guaranteeing Indebtedness the principal amount of which exceeds $50,000,000 in the aggregate for the Company and its Subsidiaries or contained in any -86- instrument or agreement evidencing, securing or relating to any such Indebtedness or Guaranty, beyond any applicable period of grace (not to exceed 30 days), or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such Indebtedness or beneficiary or beneficiaries of such Guaranty (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause, with the giving of notice if required, such Indebtedness to become due prior to its stated maturity or such Guaranty to become payable; or (f) (i) Any Borrower or any of its Significant Subsidiaries shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian, conservator or other similar official for it or for all or any substantial part of its assets, or any Borrower or any of its Significant Subsidiaries shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against any Borrower or any of its Significant Subsidiaries any case, proceeding or other action of a nature referred to in clause (i) above which (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed, undischarged or unbonded for a period of 60 days; or (iii) there shall be commenced against any Borrower or any of its Significant Subsidiaries any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been discharged, or stayed or bonded pending appeal within 60 days from the entry thereof; or (iv) any Borrower or any of its Significant Subsidiaries shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii), or (iii) above; or (v) any Borrower or any of its Significant Subsidiaries shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; or (g) (i) Any Person shall engage in any Prohibited Transaction involving any Plan, (ii) any Accumulated Funding Deficiency, whether or not waived, shall exist with respect to any Plan or any Lien in favor of the PBGC or a Plan shall arise on the assets of any Borrower or any Commonly Controlled Entity, (iii) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate, any Single Employer Plan, which Reportable Event or commencement of proceedings or appointment of a trustee is, in the reasonable opinion of the Required Lenders, likely to result in the termination of such Plan for purposes of Title IV of ERISA, (iv) any Single Employer Plan shall terminate for purposes of Title IV of ERISA, (v) any Borrower or any Commonly Controlled Entity shall, or in the reasonable opinion of the Required Lenders is likely to, incur any liability -87- in connection with a withdrawal from, or the Insolvency or Reorganization of, a Multiemployer Plan or (vi) any other event or condition shall occur or exist with respect to a Plan; and in each case in clauses (i) through (vi) above, such event or condition, together with all other such events or conditions, if any, could reasonably be expected to have a Material Adverse Effect; or (h) One or more judgments or decrees shall be entered against the Company or any of its Significant Subsidiaries involving in the aggregate a liability (not paid or fully covered by insurance as to which the insurance carrier has admitted liability) of $50,000,000 or more, and all such judgments or decrees shall not have been vacated, discharged, stayed or bonded pending appeal within 30 days from the entry thereof; or (i) The validity or enforceability of this Agreement, any Loan Document or any of the other documents required to be delivered in connection herewith shall be challenged by the Company or any of its Subsidiaries or shall fail to remain in full force and effect for any reason other than in accordance with its express terms; or (j) A Change of Control shall occur; or (k) The subordination provisions of any Subordinated Debt shall cease, for any reason, to be valid or any Loan Party shall so assert in writing; then, and in any such event, (A) if such event is an Event of Default specified in clause (i) or (ii) of paragraph (f) above with respect to the Company, automatically the Commitments shall immediately terminate and the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement and the Notes shall immediately become due and payable, and (B) if such event is any other Event of Default, either or both of the following actions may be taken (i) with the consent of the Majority Aggregate Revolving Credit Facility Lenders, the Administrative Agent may, or upon the request of the Majority Aggregate Revolving Credit Facility Lenders, the Administrative Agent shall, by notice to the Company, declare the Multicurrency Revolving Credit Commitments, the US$ Revolving Credit Commitments and the Additional US$ Revolving Credit Commitments to be terminated forthwith, whereupon such Revolving Credit Commitments shall immediately terminate, and (ii) with the consent of the Required Lenders, the Administrative Agent may, or upon the request of the Required Lenders, the Administrative Agent shall, by notice to the Company, declare the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement and the Notes to be due and payable forthwith, whereupon the same shall immediately become due and payable. Except as expressly provided above in this Article, presentment, demand, protest and all other notices of any kind are hereby expressly waived. ARTICLE XII. THE ADMINISTRATIVE AGENT ------------------------ -88- SECTION XII.1 Appointment. Each Lender hereby irrevocably designates ----------- and appoints Chase as the Administrative Agent of such Lender under this Agreement and the other Loan Documents, and each Lender irrevocably authorizes Chase to act as the Administrative Agent of such Lender, to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Administrative Agent by the terms of this Agreement and the other Loan Documents, together with such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement, the Administrative Agent shall not have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Administrative Agent. SECTION XII.2 Delegation of Duties. The Administrative Agent may -------------------- execute any of its duties under this Agreement and the other Loan Documents 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 XII.3 Exculpatory Provisions. Neither the Administrative ---------------------- Agent nor any of its respective officers, directors, employees, agents, attorneys-in-fact or affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or any other Loan Document (except for its or such Person's gross negligence or willful misconduct) or (ii) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by any Borrower or any officer thereof contained in this Agreement or any other Loan Document or in any certificate, report, statement or other document referred to or provided for in, or received by the Administrative Agent under or in connection with, this Agreement or any other Loan Document or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document or for any failure of a Borrower to perform its obligations hereunder or thereunder. The Administrative Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document or to inspect the properties, books or records of the Borrowers. SECTION XII.4 Reliance by Administrative Agent. The Administrative -------------------------------- Agent shall be entitled to rely, and shall be fully protected in relying, upon any Note, writing, resolution, notice, consent, certificate, affidavit, letter, telecopy, telex or teletype message, statement, order or other 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 Borrowers or any of them), independent accountants and other experts selected by the Administrative Agent. The Administrative Agent may deem and treat the payee of any Note as the owner thereof for all purposes unless a written notice of assignment or transfer thereof shall have been filed with the -89- Administrative Agent. The Administrative Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Required Lenders as it deems appropriate or it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement and the other Loan Documents in accordance with a request of the Required Lenders, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders and all future holders of the Loans. SECTION XII.5 Notice of Default. The Administrative Agent shall not ----------------- be deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Administrative Agent has received notice from a Lender or a Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". In the event that the Administrative Agent receives such a notice, the Administrative Agent shall give notice thereof to the Lenders. The Administrative Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Lenders; provided that unless and until the -------- Administrative Agent shall have received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Lenders. SECTION XII.6 Non-Reliance on Agents and Other Lenders-. Each Lender ----------------------------------------- expressly acknowledges that neither the Administrative Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates have made any representations or warranties to it and that no act by the Administrative Agent hereafter taken, including any review of the affairs of a Loan Party or any affiliate of a Loan Party, shall be deemed to constitute any representation or warranty by the Administrative Agent to any Lender. Each Lender represents to the Administrative Agent that it has, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Loan Parties and their affiliates and made its own decision to make its Loans hereunder and enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Loan Parties and their affiliates. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Administrative Agent hereunder, the Administrative Agent shall have no duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, condition (financial or otherwise), prospects or creditworthiness of any Loan Party or -90- any affiliate of a Loan Party which may come into the possession of the Administrative Agent or any of its officers, directors, employees, agents, attorneys-in-fact or affiliates. SECTION XII.7 Indemnification. The Lenders agree to indemnify the --------------- Administrative Agent in its capacity as such (to the extent not reimbursed by the Borrowers and without limiting the obligation of the Borrowers to do so), ratably according to their respective Revolving Credit Percentages, Tranche A Term Loan Percentages and Tranche B Term Loan Percentages in effect on the date on which indemnification is sought under this Section 12.07 (or, if indemnification is sought after the date upon which the Commitments shall have terminated and the Loans shall have been paid in full, ratably in accordance with such Percentages immediately prior to such date), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time (including, without limitation, at any time following the payment of the Loans) be imposed on, incurred by or asserted against the Administrative Agent in any way relating to or arising out of, the Commitments, this Agreement, any of the other Loan Documents or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Administrative Agent under or in connection with any of the foregoing; provided that no Lender shall be liable for the payment of -------- any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements which resulted from the Administrative Agent's gross negligence or willful misconduct. The agreements in this Section 12.07 shall survive the payment of the Loans and all other amounts payable hereunder. The Administrative Agent shall have the right to deduct any amount owed to it by any Lender under this Section from any payment made by it to such Lender hereunder. SECTION XII.8 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 any Loan Party as though the Administrative Agent were not the Administrative Agent. With respect to its Loans made or renewed by it the Administrative Agent shall have the same rights and powers under this Agreement and the other Loan Documents as any Lender and may exercise the same as though it were not the Administrative Agent, and the terms "Lender" and "Lenders" shall include the Administrative Agent in its individual capacity. -91- SECTION XII.9 Successor Administrative Agent. The Administrative ------------------------------ Agent may resign as Administrative Agent upon 30 days' notice to the Lenders and the Company. If the Administrative Agent shall resign as Administrative Agent under this Agreement and the other Loan Documents, then the Required Lenders shall appoint from among the Lenders a successors agent for the Lenders, which successor agent shall (unless an Event of Default under paragraph (a) or (f) of Article XI with respect to the Company shall have occurred and be continuing) be approved by the Company (which approval shall not be unreasonably withheld or delayed), whereupon such successor agent shall succeed to the rights, powers and duties of the Administrative Agent, and the term "Administrative Agent" shall mean such successor agent effective upon such appointment and approval, and the former Administrative Agent's rights, powers and duties as Administrative Agent shall be terminated, without any other or further act or deed on the part of such former Administrative Agent or any of the parties to this Agreement or any holders of the Loans. If no successor agent has accepted appointment as Administrative Agent by the date that is 30 days following a retiring Administrative Agent's notice of resignation, the retiring Administrative Agent's resignation shall nevertheless thereupon become effective and the Lenders shall assume and perform all of the duties of the Administrative Agent hereunder until such time, if any, as the Required Lenders appoint a successor agent as provided for above. After any retiring Administrative Agent's resignation as Administrative Agent, the provisions of this Article XII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement and the other Loan Documents. SECTION XII.10 Authorization to Release Liens. The Administrative ------------------------------ Agent is hereby irrevocably authorized by each of the Lenders to release, or direct the Trustee to release, any Lien created by any Security Document covering any Property of the Company or any of its Subsidiaries that is the subject of a Disposition which is permitted by this Agreement or which has been consented to in accordance with Section 13.01. In addition, the Administrative Agent is hereby authorized by each of the Lenders to release, and to direct the Trustee to release, the Liens on the Collateral on the Collateral Release Date. -92- ARTICLE XIII. MISCELLANEOUS ------------- SECTION XIII.1 Amendments and Waivers. (a) Neither this Agreement ---------------------- or any other Loan Document, nor any terms hereof or thereof may be amended, supplemented, waived or modified except in accordance with the provisions of this Section 13.01. The Required Lenders may, or, with the written consent of the Required Lenders, the Administrative Agent may, from time to time, (i) enter into with the relevant Loan Parties written amendments, supplements or modifications hereto and to the other Loan Documents for the purpose of adding any provisions to this Agreement or the other Loan Documents or changing in any manner the rights or obligations of the Lenders or of the Loans Parties hereunder or thereunder or (ii) waive at the Loan Parties' request, on such terms and conditions as the Required Lenders or the Administrative Agent, as the case may be, may specify in such instrument, any of the requirements of this Agreement or the other Loan Documents or any Default or Event of Default and its consequences; provided, however, that no such waiver and no such amendment, -------- ------- supplement or modification shall: (A) reduce the amount or extend the scheduled date of maturity of any Loan or any scheduled installment thereof, or reduce the stated rate of any interest or fee payable hereunder or extend the scheduled date of any payment thereof or increase the amount or extend the expiration date of any Lender's Commitment, or change the pro rata provisions contained in --- ---- Section 5.08, in each case without the consent of each Lender affected thereby; (B) amend, supplement, modify or waive any provision of this Section 13.01 or reduce the percentages specified in the definition of "Required Lenders" or consent to the assignment or transfer by any Borrower of any of its rights and obligations under this Agreement and the other Loan Documents or release the Company from its obligations under the Company Guaranty, in each case without the consent of all the Lenders; (C) release all or substantially all of the Collateral (except as provided in Sections 12.10 and 13.16) or all or substantially all of the guarantors under the Subsidiary Guarantees, in each case without the consent of all the Lenders; (D) amend, supplement, modify or waive any provision of Section 2.05, 2.06, 2.07, 2.08 or 2.09 or any other provision of this Agreement governing the rights and obligations of the Swing Line Lender, or the definitions used therein, without the consent of the Swing Line Lender; (E) amend, modify or waive any provision of Section 5.04(d) or 5.04(f) providing for the application of any mandatory prepayments which would reduce the amount or delay the application of any such prepayment to be applied to any Facility without the written consent of the Majority Facility Lenders in respect of such Facility; -93- (F) increase the Currency Sublimit applicable to any Available Foreign Currency without the written consent of the Majority Multicurrency Revolving Credit Facility Lenders; or (G) reduce the percentage specified in the definition of "Majority Facility Lenders" without the written consent of all Lenders under each affected Facility. Notwithstanding the foregoing provisions of this Section 13.01, the Company shall be permitted to amend this Agreement without the consent of any of the Lenders to increase the Applicable Margin applicable to any of the Loans or to increase the Facility Fee Rate. Any such waiver and any amendment, supplement or modification pursuant to this Section 13.01 shall apply to each of the Lenders and shall be binding upon the Loan Parties, the Lenders, the Administrative Agent, and all future holders of the Loans. In the case of any waiver, the Loan Parties, the Lenders and the Administrative Agent shall be restored to their former positions and rights hereunder and under the other Loan Documents, and any Default or Event of Default waived shall be deemed to be cured and not continuing; but no such waiver shall extend to any subsequent or other Default or Event of Default, or impair any right consequent thereon. (b) In addition to amendments effected pursuant to the foregoing paragraph (a), Schedule II may be amended as follows: (i) Schedule II will be amended to add Subsidiaries of the Company as additional Foreign Subsidiary Borrowers upon (A) execution and delivery by the Company, any such Foreign Subsidiary Borrower and the Administrative Agent, of a Joinder Agreement providing for any such Subsidiary to become a Foreign Subsidiary Borrower, and (B) delivery to the Administrative Agent of (I) a Foreign Subsidiary Opinion in respect of such additional Foreign Subsidiary Borrower and the documents required pursuant to Section 7.01(g) and Sections 7.02(a) and (b) and (II) such other documents with respect thereto as the Administrative Agent shall reasonably request. (ii) Schedule II will be amended to remove any Subsidiary as a Foreign Subsidiary Borrower upon (A) written notice by the Company to the Administrative Agent to such effect and (B) repayment in full of all outstanding Loans of such Foreign Subsidiary Borrower. (c) In addition to amendments effected pursuant to the foregoing paragraphs (a) and (b), the Security Documents, Subsidiary Guarantees and Trust Agreements may be amended, or amended and restated, by the Administrative Agent and each Loan Party and Trustee which is a party to such documents, to provide, in connection with the incurrence of Permitted Acquisition Debt, for such Permitted Acquisition Debt to be secured equally and ratably pursuant to the Security Documents by the Collateral securing the Loans, and guaranteed on a pari passu basis with the Loans pursuant to the Subsidiary Guarantees. The - - ---- ----- Administrative Agent may also -94- enter into additional Security Documents and/or guarantees and/or amendments to the Trust Agreements to provide for any additional Collateral or guarantees relating to any Permitted Acquisition Debt to apply to the Loans on an equal and ratable and pari passu basis. No such amendment, amendment and restatement, ---- ----- additional Security Document or guarantees shall require the consent of any Lender. (d) The Administrative Agent shall give prompt notice to each Lender of any amendment effected pursuant to Section 13.01(b) or 13.01(c). SECTION XIII.2 Notices. All notices, requests and demands to or upon ------- the respective parties hereto to be effective shall be in writing (including by facsimile transmission) and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made when delivered by hand, or three days after being deposited in the mail, postage prepaid (or, if later, the first Business Day after being so deposited), or, in the case of telecopy notice, when received (or if received on a day that is not a Business Day or if received after 5:00 p.m. local time at the place of reception on a Business Day, on the next succeeding Business Day), addressed as follows in the case of the Borrowers and the Administrative Agent, and as set forth in Schedule I in the case of the other parties hereto, or to such other address as may be hereafter notified by the respective parties hereto and any future holders of the Notes: The Company: Federal-Mogul Corporation World Headquarters 26555 Northwestern Highway Southfield, Michigan 48034 Attention: James Keller Telephone: 248-354-7700 Telecopy: 248-354-6746 The Foreign Subsidiary Borrowers: c/o Federal-Mogul Corporation World Headquarters 26555 Northwestern Highway Southfield, Michigan 48034 Attention: James Keller Telephone: 248-354-7700 Telecopy: 248-354-6746 The Administrative Agent (New York Office): The Chase Manhattan Bank One Chase Manhattan Plaza 8th Floor New York, New York 10081 Attention: James Tabois Telephone: 212-552-7952 Telecopy: 212-552-5650 -95- The Administrative Agent (London Office): Chase Manhattan International Ltd. 9 Thomas Moore Street London, E1 (YT) Attention: Steven Hurford Telephone: 011-44-171-777-2347 Telecopy: 011-44-171-777-2367 provided that any notice, request or demand to or upon (i) the Administrative - - -------- Agent or the Lenders pursuant to Section 2.03, 3.03, 4.02, 5.02, 5.04, 5.07 or 5.11 or (ii) the Swing Line Lender pursuant to Sections 2.05, 2.06, 2.07, 2.08 or 2.09, shall not be effective until received. All notices to the Administrative Agent in respect of Multicurrency Revolving Credit Loans shall be delivered to the Administrative Agent's London Office specified above. SECTION XIII.3 No Waiver; Cumulative Remedies. No failure to ------------------------------ exercise and no delay in exercising, on the part of any Borrower, the Administrative Agent or any Lender, any right, remedy, power or privilege hereunder or under the other Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. SECTION XIII.4 Survival of Representations and Warranties. All ------------------------------------------ representations and warranties made hereunder, in the other Loan Documents and in any certificate delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement and the Notes and the making of the Loans hereunder. SECTION XIII.5 Payment of Expenses and Taxes. The Company agrees (a) ----------------------------- to pay or reimburse the Administrative Agent for all of its reasonable out-of- pocket costs and expenses incurred in connection with the development, preparation, execution and delivery of, and any amendment, supplement or modification to, this Agreement and the other Loan Documents and any other documents prepared in connection herewith or therewith, and the consummation and administration of the transactions contemplated hereby, including, without limitation, the reasonable fees and disbursements of counsel (and any special or local counsel retained by such counsel to assist it) to the Administrative Agent, (b) to pay or reimburse each Lender and the Administrative Agent for all its costs and expenses incurred in connection with the enforcement or preservation of any rights under this Agreement, the other Loan Documents and any such other documents, (c) to pay, indemnify, and hold each Lender and the Administrative Agent harmless from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other similar taxes, if any, which may be payable or determined to be payable in connection with the execution and delivery of, or consummation or administration of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement, the other Loan Documents and any such other documents, and (d) to pay, -96- indemnify, and hold each Lender and the Administrative Agent (and their respective directors, officers, employees, trustees, agents, affiliates and successors) harmless from and against any and all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement, the other Loan Documents and any such other documents, including, without limitation, any of the foregoing relating to the use of proceeds of the Loans or the violation of, noncompliance with or liability under, any Environmental Law applicable to the operations of the Company, any of its Subsidiaries or any of the Properties (regardless of whether the Administrative Agent or any Lender is a party to the litigation or other proceeding giving rise thereto), (all the foregoing in this clause (d), collectively, the "indemnified liabilities"), provided, that the Company shall have no obligation hereunder to -------- the Administrative Agent or any Lender with respect to (i) indemnified liabilities arising from the gross negligence or willful misconduct of the party seeking indemnification or (ii) expenses incurred by the Administrative Agent or any Lender in connection with the assignment of Loans to an assignee (except pursuant to Section 5.14(b)(vi)) or the sale of any Loan to a Participant. The agreements in this Section shall survive repayment of the Loans and all other amounts payable hereunder. SECTION XIII.6 Successors and Assigns; Participations and ------------------------------------------ Assignments. (a) This Agreement shall be binding upon and inure to the benefit - - ------------ of the Borrowers, the Lenders, the Administrative Agent, all future holders of the Loans and their respective successors and assigns, except that no Borrower may assign or transfer any of its rights or obligations under this Agreement without the prior written consent of each Lender. (b) Any Lender may, in accordance with applicable law, at any time sell to one or more banks or other entities ("Participants") participating interests in any Loan owing to such Lender, any Commitment of such Lender or any other interest of such Lender hereunder and under the other Loan Documents. In the event of any such sale by a Lender of a participating interest to a Participant, such Lender's obligations under this Agreement to the other parties to this Agreement shall remain unchanged, such Lender shall remain solely responsible for the performance thereof, such Lender shall remain the holder of any such Loan for all purposes under this Agreement and the other Loan Documents, and the Borrowers and the Administrative Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and the other Loan Documents. No Lender shall be entitled to create in favor of any Participant, in the participation agreement pursuant to which the Participant's participating interest shall be created or otherwise, any right to vote on, consent to or approve any matter relating to this Agreement or any other Loan Document except for those specified in clauses (A) and (B) of the proviso to Section 13.01(a). Each Borrower agrees that if amounts outstanding under this Agreement are due or unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall be deemed to have, to the maximum extent permitted by law, the right of setoff in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement; provided that, in purchasing such participating interest, such -------- Participant shall be -97- deemed to have agreed to share with the Lenders the proceeds thereof as provided in Section 13.07(a) as fully as if it were a Lender hereunder. Each Borrower agrees that each Participant shall be entitled to the benefits of Sections 5.09, 5.10, 5.11 and 5.12 with respect to its participation in the Commitments and the Loans outstanding from time to time hereunder as if it was a Lender; provided that, in the case of Section 5.11, such Participant shall have complied with the requirements of said Section and provided, further, that no Participant shall be -------- ------- entitled to receive any greater amount pursuant to any such Section than the transferor Lender would have been entitled to receive in respect of the amount of the participation transferred by such transferor Lender to such Participant had no such transfer occurred. (c) Any Lender may, in accordance with applicable law, at any time and from time to time assign to any Lender or any Affiliate thereof or, with the prior written consent of the Administrative Agent (such consent not to be unreasonably withheld) and, prior to the occurrence and continuance of an Event of Default, the Company (such consent not to be unreasonably withheld), to an additional bank or financial institution or other entity that is regularly engaged in making or purchasing loans (an "Assignee") all or any part of its rights and obligations under this Agreement and the other Loan Documents including, without limitation, its Commitments and Loans, pursuant to an Assignment and Acceptance, substantially in the form of Exhibit G, executed by such Assignee, such assigning Lender (and, in the case of an Assignee that is not then a Lender or an Affiliate thereof, by the Administrative Agent and, prior to the occurrence and continuance of an Event of Default, the Company) and delivered to the Administrative Agent for their acceptance and recording in the Register; provided that (i) if any Lender assigns a part of its rights and -------- obligations in respect of Loans of a Class and/or Commitment to make Loans of such Class under this Agreement to an Assignee, such Lender shall assign proportionate interests in its respective Loans of such Class and Commitment to make Loans of such Class and other related rights and obligations hereunder to such Assignee, (ii) if any Lender assigns a part of its rights and obligations under this Agreement in respect of its US$Revolving Credit Loans and/or US$ Revolving Credit Commitments to an Assignee, such Lender shall assign proportionate interests in its participations in the Swing Line Loans and other rights and obligations hereunder in respect of the Swing Line Loans to such Assignee , (iii) if any Lender assigns a part of its rights and obligations under this Agreement in respect of its Multicurrency Revolving Credit Loans and/or Multicurrency Revolving Credit Commitments to an Assignee, such Lender shall assign proportionate interests in its Additional US$ Revolving Credit Loans and Additional US$ Revolving Credit Commitments, if any, and (iv) in the case of any such assignment to an additional bank, financial institution or other entity, the aggregate amount of any Commitment (or, if the Commitments have terminated or expired, the aggregate principal amount of any Loans) being assigned shall not be less than $5,000,000 (or (x) if less, the then outstanding amount of such Commitments and/or Loans or (y) such lesser amount as may be agreed by the Company and the Administrative Agent). Upon such execution, delivery, acceptance and recording, from and after the Closing Date determined pursuant to such Assignment and Acceptance, (I) the Assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Lender hereunder with Commitments and rights in respect of Loans as set forth therein, and (II) the assigning Lender thereunder shall be released from its obligations under this Agreement to the -98- extent that such obligations shall have been expressly assumed by the Assignee pursuant to such Assignment and Acceptance (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such assigning Lender shall cease to be a party hereto). (d) The Administrative Agent, on behalf of the Borrowers, shall maintain at its address referred to in Section 13.02 a copy of each Assignment and Acceptance delivered to it and a register (the "Register") for the recordation of (i) the names and addresses of the Lenders and the Commitments of, and principal amounts of the Loans owing to, each Lender from time to time and (ii) the other information required from time to time pursuant to Section 2.05 in respect of Swing Line Loans. The entries in the Register shall constitute prima facie evidence of the information recorded therein, and the Borrowers, the Administrative Agent and the Lenders may (and, in the case of any Loan or other obligation hereunder not evidenced by a Note, shall) treat each Person whose name is recorded in the Register as the owner of a Loan or other obligation hereunder as the owner thereof for all purposes of this Agreement and the other Loan Documents, notwithstanding any notice to the contrary. Any assignment of any Loan or other obligation hereunder whether or not evidenced by a Note shall be effective only upon appropriate entries with respect thereto being made in the Register. An assignment of a Note shall be registered in the Register only upon surrender for registration of assignment of the Note, accompanied by an Assignment and Acceptance duly executed by the Assignor thereof, and thereupon one or more new Notes shall be issued to the designated Assignee and the old Notes shall be returned by the Administrative Agent to the Company marked "cancelled". The Register shall be available for inspection by the Borrowers or any Lender at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an Assignee (and, in the case of an Assignee that is not then a Lender or an Affiliate thereof, executed by the Company and the Administrative Agent), together with payment to the Administrative Agent by the Lender or the Assignee of a registration and processing fee of $2,500, the Administrative Agent shall (i) promptly accept such Assignment and Acceptance and (ii) on the Closing Date determined pursuant thereto record the information contained therein in the Register and give prompt notice of such acceptance and recordation to the Lenders and the Borrowers. (f) Subject to Section 13.18, each Borrower authorizes each Lender to disclose to any Participant or Assignee (each, a "Transferee") and any prospective Transferee any and all financial information in such Lender's possession concerning such Borrower and its Affiliates which has been delivered to such Lender by or on behalf of such Borrower pursuant to this Agreement or which has been delivered to such Lender by or on behalf of such Borrower in connection with such Lender's credit evaluation of such Borrower and its Affiliates prior to becoming a party to this Agreement. (g) For avoidance of doubt, the parties to this Agreement acknowledge that the provisions of this Section concerning assignments of Loans and Notes relate only to absolute -99- assignments and that such provisions do not prohibit assignments creating security interests, including, without limitation, any pledge or assignment by a Lender of any Loan or Note to any Federal Reserve Bank in accordance with applicable law. (h) If, pursuant to this Section, any interest in this Agreement or any Loan is transferred to any Transferee (which is not a Lender) which is organized under the laws of any jurisdiction other than the United States or any state thereof, the transferor Lender shall cause such Transferee, concurrently with the effectiveness of such transfer, to agree (for the benefit of the transferor Lender, the Administrative Agent and the Company) to provide the transferor Lender (and, in the case of any Transferee registered in the Register, the Administrative Agent and the Company) the tax forms and other documents required to be delivered pursuant to Section 5.11(b) and to comply from time to time with all applicable U.S. laws and regulations with regard to such withholding tax exemption. (i) If, pursuant to this Section, any interest in this Agreement or any Loan is transferred to any Transferee, the transferor Lender shall cause such Transferee, concurrently with the effectiveness of such transfer, to agree (for the benefit of the transferor Lender, the Administrative Agent and the Foreign Subsidiary Borrowers) to provide the transferor Lender, the Administrative Agent and the Foreign Subsidiary Borrowers the tax forms and other documents required to be delivered pursuant to Section 5.11(c) and to comply from time to time with all applicable laws and regulations with regard to such withholding tax exemption. SECTION XIII.7 Adjustments; Set-Off-. (a) If any Lender (a --------------------- "Benefitted Lender") shall at any time receive any payment of all or part of its Loans then due and owing to it by any Borrower, or interest thereon, or receive any collateral in respect thereof (whether voluntarily or involuntarily, by set- off, pursuant to events or proceedings of the nature referred to in paragraph (f) of Article XI, or otherwise), in a greater proportion than any such payment to or collateral received by any other Lender, if any, in respect of such other Lender's Loans then due and owing to it by such Borrower, or interest thereon, such Benefitted Lender shall purchase for cash from the other Lenders a participating interest in such portion of each such other Lender's Loans owing to it by such Borrower, or shall provide such other Lenders with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such Benefitted Lender to share the excess payment or benefits of such collateral or proceeds ratably with each of the Lenders; provided, however, that -------- ------- if all or any portion of such excess payment or benefits is thereafter recovered from such benefitted Lender, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. (b) In addition to any rights and remedies of the Lenders provided by law, each Lender shall have the right, without prior notice to any Borrower, any such notice being expressly waived by the Borrowers to the extent permitted by applicable law, upon any amount becoming due and payable hereunder (whether at the stated maturity thereof, by acceleration or otherwise) to set-off and appropriate and apply against such amount any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or -100- contingent, matured or unmatured, at any time held or owing by such Lender or any branch, agency or Affiliate thereof to or for the credit or the account of any Borrower. Each Lender agrees promptly to notify the Borrowers and the Administrative Agent after any such set-off and application made by such Lender, provided that the failure to give such notice shall not affect the validity of - - -------- such set-off and application. SECTION XIII.8 Counterparts. This Agreement may be executed by one ------------ or more of the parties to this Agreement on any number of separate counterparts (including by facsimile transmission), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. A set of the copies of this Agreement signed by all the parties shall be delivered to the Borrowers and the Administrative Agent. SECTION XIII.9 Severability. Any provision of this Agreement which ------------ is 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 XIII.10 Integration. This Agreement and the other Loan ----------- Documents represent the agreement of the Borrowers, the Administrative Agent and the Lenders with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the Borrowers, the Administrative Agent or any Lender relative to the subject matter hereof not expressly set forth or referred to herein or in the other Loan Documents. SECTION XIII.11 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND ------------- OBLIGATIONS OF THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. SECTION XIII.12 Submission To Jurisdiction; Waivers. (a) The ----------------------------------- Company and each Foreign Subsidiary Borrower hereby irrevocably and unconditionally: (i) submits for itself and its property in any legal action or proceeding relating to this Agreement and the other Loan Documents to which it is a party, or for recognition and enforcement of any judgment in respect thereof, to the non-exclusive general jurisdiction of the Courts of the State of New York, the courts of the United States of America for the Southern District of New York, and appellate courts from any thereof; (ii) consents that any such action or proceeding may be brought in such courts and waives any objection that it may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agrees not to plead or claim the same; -101- (iii) agrees that service of process in any such action or proceeding may be effected by mailing a copy thereof by registered or certified mail (or any substantially similar form of mail), postage prepaid, to the Company or such Foreign Subsidiary Borrower, as the case may be, at the address specified in Section 13.02, or at such other address of which the Administrative Agent shall have been notified pursuant thereto; (iv) agrees that nothing herein shall affect the right to effect service of process in any other manner permitted by law or shall limit the right to sue in any other jurisdiction; and (v) waives, to the maximum extent not prohibited by law, any right it may have to claim or recover in any legal action or proceeding referred to in this Section any special, exemplary, punitive or consequential damages. (b) Each Foreign Subsidiary Borrower hereby irrevocably appoints the Company as its agent for service of process in any proceeding referred to in Section 13.12(a) and agrees that service of process in any such proceeding may be made by mailing or delivering a copy thereof to it care of Company at its address for notices set forth in Section 13.02. SECTION XIII.13 Acknowledgements. Each Borrower hereby acknowledges ---------------- that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents; (b) none of the Administrative Agent or any Lender has any fiduciary relationship with or duty to such Borrower arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between the Administrative Agents and the Lenders, on the one hand, and the Borrowers, 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 by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby among the Lenders or among the Borrowers and the Lenders. SECTION XIII.14 WAIVERS OF JURY TRIAL. THE BORROWERS, THE --------------------- ADMINISTRATIVE AGENT AND THE LENDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN. SECTION XIII.15 Power of Attorney. Each Foreign Subsidiary ------------------- Borrower hereby grants to the Company an irrevocable power of attorney to act as its attorney-in-fact with regard to matters relating to this Agreement and each other Loan Document, including, without -102- limitation, execution and delivery of any amendments, supplements, waivers or other modifications hereto or thereto, receipt of any notices hereunder or thereunder and receipt of service of process in connection herewith or therewith. Each Foreign Subsidiary Borrower hereby explicitly acknowledges that each of the Administrative Agent and each Lender has executed and delivered this Agreement and each other Loan Document to which it is a party, and has performed its obligations under this Agreement and each other Loan Document to which it is a party, in reliance upon the irrevocable grant of such power of attorney pursuant to this Section. The power of attorney granted by each Foreign Subsidiary Borrower hereunder is coupled with an interest. SECTION XIII.16 Release of Collateral. As promptly as practicable --------------------- after the Collateral Release Date, the Administrative Agent shall, and shall instruct the Trustee to, take all necessary action to release the Liens created by the Security Documents in all Collateral. SECTION XIII.17 Judgment. (a) If for the purpose of obtaining -------- judgment in any court it is necessary to convert a sum due hereunder in one currency into another currency, the parties hereto agree, to the fullest extent that they may effectively do so, that the rate of exchange used shall be that at which in accordance with normal banking procedures the Administrative Agent could purchase the first currency with such other currency in the city in which it normally conducts its foreign exchange operation for the first currency on the Business Day preceding the day on which final judgment is given. (b) The obligation of each Borrower in respect of any sum due from it to any Lender hereunder shall, notwithstanding any judgment in a currency (the "Judgment Currency") other than that in which such sum is denominated in - - ------------------ accordance with the applicable provisions of this Agreement (the "Agreement --------- Currency"), be discharged only to the extent that on the Business Day following - - -------- receipt by such Lender of any sum adjudged to be so due in the Judgment Currency such Lender may in accordance with normal banking procedures purchase the Agreement Currency with the Judgment Currency; if the amount of Agreement Currency so purchased is less than the sum originally due to such Lender in the Agreement Currency, such Borrower agrees notwithstanding any such judgment to indemnify such Lender against such loss, and if the amount of the Agreement Currency so purchased exceeds the sum originally due to any Lender, such Lender agrees to remit to such Borrower such excess. SECTION XIII.18 Confidentiality. Each Lender agrees to keep --------------- confidential any written information (a) provided to it by or on behalf of the Company or any of its Subsidiaries pursuant to or in connection with this Agreement or (b) obtained by such Lender based on a review of the books and records of the Company or any of its Subsidiaries; provided that nothing herein shall prevent any Lender from disclosing any such information (i) to the Administrative Agent or any other Lender, (ii) to any Transferee or prospective Transferee which agrees to comply with the provisions of this Section, (iii) to its employees, directors, agents, attorneys, accountants and other professional advisors, or to any direct or indirect contractual counterparties in swap agreements or such contractual counterparties' professional advisors provided that such contractual counterparty or professional advisor to such contractual agrees in writing to keep such information confidential to the same extent required of the Lenders hereunder, (iv) upon the -103- request or demand of any Governmental Authority (or the National Association of Insurance Commissioners) having jurisdiction over such Lender or as shall be required pursuant to any Requirement of Law, (v) in response to any order of any court or other Governmental Authority (or the National Association of Insurance Commissioners) or as may otherwise be required pursuant to any Requirement of Law, (vi) in connection with any litigation to which such Lender is a party, (vii) which has been publicly disclosed other than in breach of this Agreement, or (viii) to the extent reasonably necessary, in connection with the exercise of any remedy hereunder. -104- ANNEX A ------- PRICING GRID/1/ -
Applicable Margin for Multicurrency Revolving Credit Loans and Applicable Margin Revolving Credit for Revolving Applicable Margin Applicable Margin Consolidated Loans which are Credit Loans which for Tranche A Term for Tranche A Term Leverage Eurodollar are Loans which are Loans which are Facility Ratio Loans Base Rate Loans Eurodollar Loans Base Rate Loans Fee Rate ----- ----- --------------- ---------------- --------------- -------- less than and equal to 4.0 to 1 137.5 37.5 175 75 37.5 - - ---------------------------------------------------------------------------------------------------------------------------------- greater than 4.0 to 1 117.5 17.5 150 50 32.5 - - ---------------------------------------------------------------------------------------------------------------------------------- greater than 3.5 to 1 95 0 125 25 30 - - ---------------------------------------------------------------------------------------------------------------------------------- greater than 3.0 to 1 75 0 100 0 25 - - ----------------------------------------------------------------------------------------------------------------------------------
Changes in the Applicable Margin and Facility Fee Rate resulting from changes in the Consolidated Leverage Ratio shall become effective on the date (the "Adjustment Date") on which financial statements are delivered to the Lenders - - ---------------- pursuant to Section 8.01 (but in any event not later than the 60th day after the end of each of the first three quarterly periods of each fiscal year or the 120th day after the end of each fiscal year, as the case may be) and shall remain in effect until the next change to be effected pursuant to this paragraph. Each determination of the Consolidated Leverage Ratio pursuant to this definition shall be made with respect to the period of four consecutive fiscal quarters of the Company ending at the end of the period covered by the relevant financial statements. _________________________ /1/ Applicable Margins and Facility Fee expressed in basis points. SCHEDULE I ---------- COMMITMENTS; ADDRESSES Part A. Revolving Credit Commitment and Multicurrency Revolving Credit Commitment Amounts (Dollars)
========================================================================================================== LENDER REVOLVING CREDIT COMMITMENT MULTICURRENCY REVOLVING CREDIT COMMITMENT - - ---------------------------------------------------------------------------------------------------------- The Chase Manhattan Bank $ $ - - ---------------------------------------------------------------------------------------------------------- TOTAL $1,000,000,000 $______________ ==========================================================================================================
PART B. TERM LOAN COMMITMENTS
================================================================ LENDER TRANCHE A TRANCHE B - - ---------------------------------------------------------------- The Chase Manhattan Bank $ $ - - ---------------------------------------------------------------- TOTAL $400,000,000 $350,000,0000 ================================================================
SCHEDULE 6.20 ------------- PERFECTION ACTIONS ------------------ 1. Capital Stock of Domestic Subsidiaries: -------------------------------------- The certificates representing the shares of Capital Stock of issuers organized under the laws of a State of the United States shall be delivered to the Administrative Agent along with an undated stock power for each such certificate executed in blank by a duly authorized officer of the pledgor thereof. 2. Capital Stock of Foreign Subsidiaries: ------------------------------------- The customary steps for perfection of a pledge of stock of an issuer organized under the laws of a jurisdiction outside the United States, as advised by counsel qualified in such jurisdiction, shall be taken. 3. Pledged Notes: ------------- The promissory notes shall be delivered to the Administrative Agent along with an undated note allonge for each such note executed in blank by a duly authorized officer of the pledgor thereof. SCHEDULE 9.08 ------------- EXCLUDED ASSETS --------------- Federal-Mogul World Trade Chile Ltda. Federal-Mogul del Ecuador, S.A. Federal-Mogul Panama S.A. Federal-Mogul Puerto Rico Inc, Federal-Mogul World Trade Inc. Federal-Mogul de Venezuela C.A. La Font Repuestos C.A. Bertolotti Pietro c Figli, S.r.l, The chemicals division of the businesses acquired in connection, with the Fel- Pro Acquisition FEDER-MOGUL CORPORATION By: /s/ David E. Bozynski -------------------------- Title: Vice President & Treasurer THE CHASE MANHATTAN BANK, as Administrative Agent and Lender By: /s/ Andris G. Kalnins ------------------------- Title: Vice President EX-10.14 5 RECEIVABLES SALE AGREEMENT EXHIBIT 10.14 ================================================================================ ================================================================================ RECEIVABLES SALE AND CONTRIBUTION AGREEMENT DATED AS OF NOVEMBER 20, 1998 BETWEEN FEDERAL-MOGUL CORPORATION, CARTER AUTOMOTIVE COMPANY, INC. AND FEDERAL-MOGUL CANADA LIMITED AS THE ORIGINATORS AND FEDERAL-MOGUL FUNDING CORPORATION, AS THE 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..............................................................5 Section 1.4. Payments and Computations, Etc.................................................................5 Section 1.5. Transfer of Records............................................................................6 Section 1.6. Characterization...............................................................................6 ARTICLE II. REPRESENTATIONS AND WARRANTIES..................................................................7 Section 2.1. Originators' Representations and Warranties....................................................7 ARTICLE III. CONDITIONS OF PURCHASES.......................................................................10 Section 3.1. Conditions Precedent to Initial Purchase......................................................10 Section 3.2. Conditions Precedent to All Purchases.........................................................11 ARTICLE IV. COVENANTS......................................................................................11 Section 4.1. Affirmative Covenants of Originators..........................................................11 Section 4.2. Negative Covenants of Originators.............................................................16 ARTICLE V. ADMINISTRATION AND COLLECTION...................................................................17 Section 5.1. Designation of Sub-Servicer...................................................................17 ARTICLE VI. EVENTS OF PURCHASE AND SALE TERMINATION........................................................17 Section 6.1. Events of Purchase and Sale Termination.......................................................17 Section 6.2. Remedies......................................................................................19 ARTICLE VII. INDEMNIFICATION...............................................................................19 Section 7.1. Indemnities by the Originators................................................................19 Section 7.2. Other Costs and Expenses......................................................................21 ARTICLE VIII. MISCELLANEOUS................................................................................21 Section 8.1. Waivers and Amendments........................................................................21 Section 8.2. Notices.......................................................................................21 Section 8.3. Protection of Buyer's Interests...............................................................22 Section 8.4. Confidentiality...............................................................................22 Section 8.5. Bankruptcy Petition...........................................................................23 Section 8.6. Limitation of Liability.......................................................................23 SECTION 8.7. CHOICE OF LAW.................................................................................23 SECTION 8.8. CONSENT TO JURISDICTION.......................................................................24 SECTION 8.9. WAIVER OF JURY TRIAL..........................................................................24 Section 8.10. Binding Effect; Assignability................................................................24 Section 8.11. Subordination................................................................................25
i Section 8.12. Integration; Survival of Terms..............................................................25 Section 8.13. Counterparts; Severability..................................................................25 EXHIBIT I DEFINITIONS....................................................................................28 EXHIBIT II CHIEF EXECUTIVE OFFICE OF THE ORIGINATORS; LOCATIONS OF RECORDS; TRADE NAMES; FEDERAL EMPLOYER IDENTIFICATION NUMBER...........................................................................36 EXHIBIT III COLLECTION ACCOUNTS..........................................................................37 EXHIBIT IV [RESERVED]....................................................................................38 EXHIBIT V FORM OF COLLECTION ACCOUNT AGREEMENT...........................................................39 EXHIBIT VI CREDIT POLICIES...............................................................................40 EXHIBIT VII [RESERVED]...................................................................................41 EXHIBIT VIII FORM OF SETTLEMENT STATEMENT................................................................42 EXHIBIT IX FORM OF SUBSCRIPTION AGREEMENT................................................................43 EXHIBIT X FORM OF SUBORDINATED NOTE......................................................................49 SCHEDULE A DOCUMENTS AND RELATED ITEMS TO BE DELIVERED ON OR PRIOR TO THE INITIAL PURCHASE...............54
ii THIS RECEIVABLES SALE AND CONTRIBUTION AGREEMENT, dated as of November 20, 1998, is by and among FEDERAL-MOGUL CORPORATION, a Michigan corporation ("FEDERAL-MOGUL"), CARTER AUTOMOTIVE COMPANY, INC., a Delaware corporation ("CARTER"), and FEDERAL-MOGUL CANADA LIMITED, a Canadian corporation ("FEDERAL- MOGUL CANADA", and each of Federal-Mogul, Carter and Federal-Mogul Canada an "ORIGINATOR" and collectively, the "ORIGINATORS"), and FEDERAL-MOGUL FUNDING CORPORATION, a Michigan corporation (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 Originators now own, and from time to time hereafter will own, Receivables. Each Originator wishes to sell and assign to the Buyer, and the Buyer wishes to purchase from such Originator, all of such Originator's right, title and interest in and to its Receivables now owned and existing and hereafter arising. Each Originator and the Buyer believe that it is in their mutual best interests for such Originator 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 each Originator's right, title and interest in and to its Receivables existing on such date and all Related Security and Collections associated therewith. Each Originator and the Buyers intend the transactions contemplated hereby to be true sales of its Receivables from such Originator to the Buyer, providing the Buyer with the full benefits of ownership of such Receivables, and each Originator and the Buyer do not intend these transactions to be, or for any purpose to be characterized as, loans from the Buyer to such Originator. Upon each purchase of Receivables from the Originators, the Buyer will sell undivided interests therein and in the associated Related Security and Collections pursuant to that certain Receivable Interest Purchase Agreement dated as of November 20, 1998 (as the same may from time to time hereafter be amended, supplemented, restated or otherwise modified, the "PURCHASE AGREEMENT") among the Buyer, Federal-Mogul, as Servicer, Falcon Asset Securitization Corporation ("FALCON"), the financial institutions from time to time party thereto as "INVESTORS" and The First National Bank of Chicago or any successor agent appointed under Article X of the Purchase Agreement, as agent for Falcon and such Investors (in such capacity, the "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, each Originator 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 each Originator, all of such Originator'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 be obligated to purchase, or any Originator be obligated to sell, any Receivable arising after the Termination Date; PROVIDED, FURTHER, that in no event shall the Buyer be obligated to purchase from an Originator (other than Federal-Mogul), or such Originator be obligated to sell to the Buyer, any Receivable arising on or after the date that such Originator ceases to be a wholly-owned subsidiary of Federal-Mogul. On the date of the initial Purchase, the Buyer shall acquire all of each Originator'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 each Originator'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 any Originator in connection with each Purchase hereunder is conditioned upon and subject to such Originator'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 an Originator deliver, and such Originator shall deliver, such approvals, opinions, information, reports or documents as the Buyer and/or the 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), which sales are 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 any Originator; PROVIDED, HOWEVER, that (i) an Originator shall be liable to the Buyer for all representations, warranties and covenants made by such Originator individually, and in the case of Federal-Mogul, as the Sub-Servicer, pursuant to the terms of the Transaction Documents to which such Originator and the Sub-Servicer is a party, and (ii) such sale does not constitute and is not intended to result in an assumption by the Buyer or any assignee thereof of any obligation of any Originator or any other Person arising in connection with the Receivables, the related Contracts and/or other Related Security or any other obligations of any Originator. In view of the intention 2 of the parties hereto that the Purchases of Receivables made hereunder shall constitute sales of such Receivables rather than loans secured thereby, each Originator agrees on or prior to the date hereof to mark its master data processing records relating to the Receivables with a legend acceptable to the Buyer and to the Agent (as the Buyer's assignee), 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 the Agent (as the Buyer's assignee), an Originator will 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 the 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 applicable Originator on the date of such initial Purchase, and shall be paid to such Originator 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, with respect to only Federal-Mogul, a portion of such funds shall be offset by amounts owed by Federal-Mogul 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 $4,500,000, and (ii) the balance, with respect to Federal-Mogul and Carter, 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 an Originator 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 such Originator to the Buyer hereunder and which have become due but remain unpaid) and shall be paid to such Originator 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 each Originator 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 Agent for the benefit of the Purchasers under the Purchase Agreement or otherwise; provided that Buyer shall make such payments of such Sub-Servicer Fee and Purchase Price by 3 delivery of immediately available funds, first, to Originators other than Federal-Mogul and, second, to Federal-Mogul; SECOND, by borrowing from such Originator a subordinated revolving loan (each, a "SUBORDINATED LOAN") from such Originator (other than Federal-Mogul Canada) 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 THIRD, with respect to only Federal-Mogul, unless Federal-Mogul 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, each Originator 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) From and after the Termination Date, each Originator shall not be obligated to (but may, at its option): (i) sell Receivables to the Buyer, or (ii) with respect to only Federal-Mogul, contribute Receivables to the Buyer's capital pursuant to clause THIRD in SECTION 1.2(B) unless Federal-Mogul reasonably determines that the Purchase Price therefor will be satisfied with funds available to the Buyer from sales of interests in the Receivables pursuant to the Purchase Agreement, Collections, proceeds of Subordinated Loans or otherwise. (d) On each Business Day during a Collection Period after the date of the initial Purchase, all Collections received shall be applied by each Originator as payments toward the Purchase Price of Receivables sold or to be sold by the Originator to the Buyer during such Collection Period. Although amounts shall be paid directly to an Originator on a daily basis in accordance with the first sentence of this paragraph, settlement of the Purchase Price between the Buyer and an Originator 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 Statement for the Collection Period then most recently ended. In addition to such other information as may be included therein, each Settlement 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 such Originator 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 such Originator 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 4 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) with respect to only Federal-Mogul, the amount of any capital contribution made by Federal-Mogul 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 Federal-Mogul 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: (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 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 applicable Originator 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 applicable Originator 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 applicable Originator designated from time to time by such Originator or as otherwise directed by such Originator. 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; provided, however, that all computations of interest payable hereunder with respect to Federal-Mogul Canada shall be made 5 on the basis of a year of 365 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, each Originator 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, each Originator hereby grants to each of the Buyer, the Agent and the Servicer an irrevocable, non-exclusive license to use, without royalty or payment of any kind, all software used by such Originator to account for its Receivables, to the extent necessary to administer its Receivables, whether such software is owned by such Originator or is owned by others and used by such Originator under license agreements with respect thereto, PROVIDED THAT should the consent of any licensor of such Originator to such grant of the license described herein be required, such Originator hereby agrees that upon the request of the Buyer (or the Agent as the Buyer's assignee), such Originator will use its reasonable efforts to obtain the consent of such third-party licensor. The license granted hereby shall be irrevocable, and shall terminate on the date this Agreement terminates in accordance with its terms. (b) Each Originator (i) shall take such action requested by the Buyer and/or the 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 such Originator hereunder, and (ii) shall use its reasonable efforts to ensure that the Buyer, the Agent 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 an Originator to the Buyer of Receivables hereunder shall be characterized as a secured loan and not a sale, 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 thereof, each Originator hereby grants to the Buyer a duly perfected security interest in all of such Originator's right, title and interest 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 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. 6 ARTICLE II. REPRESENTATIONS AND WARRANTIES Section 2.1. Originators' Representations and Warranties. Each ------------------------------------------- Originator hereby represents and warrants, individually and, in the case of Federal-Mogul, in its capacity as the Sub-Servicer, to the Buyer and its assigns that: (a) Corporate Existence and Power. With respect to Federal-Mogul and ----------------------------- Carter, such Originator is a corporation duly organized and validly existing and in good standing under the laws of the State of its incorporation and, with respect to Federal-Mogul Canada Limited, such Originator is a corporation duly organized and validly existing and in good standing under the laws of the Province of Ontario, and with respect to Federal-Mogul, Carter and Federal-Mogul Canada, 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. Such 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. (c) Due Authorization; No Conflict. The execution and delivery of the ------------------------------ Transaction Documents to which such 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 such Originator is a party or by which it or its properties are bound. The execution and delivery of the Transaction Documents to which such Originator is a party, the performance of the transactions contemplated thereby and the fulfillment of the terms thereof which are applicable to such Originator, will not conflict with or violate any material Requirements of Law applicable to 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 such 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 such -------------- Originator is a party have been duly executed and delivered by such Originator and constitute the legal, valid and binding obligations of such Originator enforceable against 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 7 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 such Originator's knowledge, threatened, against or affecting the Buyer or any Originator, or any of the respective properties of the Buyer or any Originator, in or before any court, arbitrator or other body, which are reasonably likely to have a Material Adverse Effect. Such 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 ----------------------- such Originator or any of its Affiliates to the Buyer, the Agent 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 such Originator or any of its Affiliates to the Buyer, the Agent 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 quoted terms under Regulation G and 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 G, Regulation U and Regulation X) or any similar rule of any other Governmental Authority. (i) Good Title; Perfection. Immediately prior to each Purchase ---------------------- hereunder, such Originator 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 such Originator and the offices where such Originator keeps all its Records are located at the address(es) listed on EXHIBIT II or such other locations notified to the Buyer and the Agent (as the Buyer's assignee) in accordance with SECTION 4.2(A) in jurisdictions where all action required by SECTION 4.2(A) has been taken and completed. Such Originator's Federal Employer Identification Number is correctly set forth on EXHIBIT II. 8 (k) Collection Banks; etc. Except as otherwise notified to the Buyer --------------------- and the Agent (as the Buyer's assignee) in accordance with SECTION 4.2(B): (i) such 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 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. Such 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. (l) Names. In the past five years, such Originator 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, such Originator --------------- and the Sub-Servicer has complied in all material respects with the Credit Policies. (n) Payments to Originator. With respect to each Receivable sold to ---------------------- the Buyer under this Agreement, the Buyer has given reasonably equivalent value to such Originator 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 such Originator 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. (S)(S) 101 et seq.), as amended. (o) Ownership of the Buyer. Federal-Mogul 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. Such Originator 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. 9 (q) Purpose. Such Originator has determined that, from a business ------- viewpoint, the sale of Receivables to the Buyer contemplated hereby is in the best interest of such Originator. (r) Financial Statements; Material Adverse Effect. The consolidated --------------------------------------------- financial statements of the Originator and its consolidated Subsidiaries dated June 30, 1998 furnished by such Originator to the Buyer and the Agent 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 Originator and its consolidated Subsidiaries as of such date and for the period ended on such date. Since June 30, 1998, 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 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, such Originator shall be deemed to have knowledge of all facts attributable to the Plan administrator designated pursuant to ERISA. (t) Year 2000 Problem. Such Originator has reviewed its operations ----------------- with a view to assessing whether its business will, in the receipt, transmission, processing, manipulation, storage, retrieval, retransmission, or other utilization of data be vulnerable to a Year 2000 Problem that could reasonably be expected to have a Material Adverse Effect. Based on such review, such Originator has no reason to believe that a Material Adverse Effect will occur with respect to its business or operations resulting from a Year 2000 Problem. 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 applicable Originator that such statements are then true): 10 (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 Agent (as the Buyer's assignee) 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 Originators. Until the date ------------------------------------ this Agreement shall terminate in accordance with its terms, each Originator hereby covenants, individually and in its capacity as Sub-Servicer, that: (a) Financial Reporting and other Information. Such Originator will ----------------------------------------- maintain a system of accounting established and administered in accordance with generally accepted accounting principles, and furnish to the Buyer and the Agent (as assignee of the Buyer): (i) Annual Reporting. As soon as available, but in any event within ---------------- 120 days after the close of each fiscal year of such Originator, an audit report not qualified for anything under the control of such Originator, certified by independent public accountants acceptable to the Buyer and Agent (which until the Buyer and/or the Agent (as the Buyer's assignee) notifies such Originator 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 such Originator 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 such Originator, for such Originator and its Subsidiaries, consolidated unaudited balance sheets as at the close of each such period and consolidated profit and loss and 11 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. Such Originator ------------------------------------------ shall provide the Buyer and the Agent (as the Buyer's Assignee), promptly after the same are available, copies of all proxy statements, financial statements and reports as such Originator 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 such Originator 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 Agent 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. Notwithstanding the other provisions of this Section 4.1(a), (x) such Originator shall not be required to provide the financial information set forth in Sections 4.1(a)(i) and 4.1(a)(ii) if Federal-Mogul provides to the Buyer and the Agent (as assignee of the Buyer) such financial information on a consolidated basis and such Originator is included in the financial information provided by Federal-Mogul, and (y) such Originator shall not be required to provide to the Buyer and the Agent (as assignee of the Borrower) the documents and/or other information set forth in Section 4.1(a)(iii) through (and including) 4.1(a)(vi) if Federal Mogul provides to the Buyer and the Agent (as assignee of Borrower) such documents and information. (b) Notices. Such Originator will notify the Buyer and the Agent 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 Originator becomes aware. (ii) Litigation. The institution of any litigation, arbitration ---------- proceeding or governmental proceeding against such Originator or any of its Subsidiaries, or to which such Originator or any of its Subsidiaries becomes party, in either case which (A) remains 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 12 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 41 2 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 Group 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 which could reasonably be expected to have a Material Adverse Effect (collectively, "LABOR ACTIONS"). (c) Compliance with Laws. Such Originator 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. (d) Audits. Such Originator will furnish to the Buyer (and/or the ------ Agent on behalf of the Buyer) from time to time such information with respect to it and the Receivables as the Buyer or the Agent may reasonably request. Such Originator shall, from time to time during regular business hours as requested by Buyer (or the Agent on its behalf) upon reasonable notice, permit the Buyer or the 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 such Originator relating to Receivables and the Related Security, including, without limitation, the related Contracts, and (ii) to visit the offices and properties of such Originator for the purpose of examining such materials described in clause (i) above, and to discuss matters relating to such Originator's financial condition or the Receivables and the Related Security or such Originator's performance hereunder or such Originator's performance under the Contracts with any of the officers or employees of such Originator having knowledge of such matters. (e) Keeping and Marking of Records and Books. ---------------------------------------- (i) Such Originator will 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 13 Collections of and adjustments to each existing Receivable). Such Originator will give the Buyer and the Agent (as the Buyer's assignee) notice of any material change in the administrative and operating procedures referred to in the previous sentence. (ii) Such Originator will (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 Agent (as the Buyer's assignee), 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 the 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. Such Originator --------------------------------------------- will 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. Such Originator will pay when due any taxes payable in connection with the Receivables. (g) Ownership Interest. Such Originator 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. Such Originator acknowledges that the Agent -------------------- 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 such Originator. Therefore, from and after the date of execution and delivery of this Agreement, such Originator shall take all reasonable steps, including, without limitation, all steps that the Buyer or any assignee of the Buyer 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 such Originator and any Affiliates thereof and not just a division of such Originator. Without limiting the generality of the foregoing and in addition to the other covenants set forth herein, such Originator (i) shall not 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 such Originator 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. 14 (i) Collections. Such Originator shall 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, such Originator shall 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, such Originator 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 such Originator, such Originator shall 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, such Originator shall itself hold such Collections in trust, for the exclusive benefit of the Buyer and its assigns. In the case of any remittances received by such 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, such Originator shall promptly remit such items to the Person identified to it as being the owner of such remittances. From and after the date the Agent delivers to any of the Collection Banks a Collection Notice pursuant to SECTION 7.3 of the Purchase Agreement, the Agent, as assignee of the Buyer, may request that such Originator, and such Originator thereupon promptly shall, direct all Obligors on Receivables to remit all payments thereon to a new depositary account (the "NEW CONCENTRATION ACCOUNT") specified by the Agent and, at all times thereafter, such Originator shall not deposit or otherwise credit to the New Concentration Account any cash or payment item other than Collections. Alternatively, the Agent may request that such Originator, and such Originator thereupon promptly shall, 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. Such Originator shall 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. (k) Year 2000 Problems. Such Originator shall take all reasonable ------------------ actions to ensure that its computer-based system are able to effectively process data, including dates on and after January 1, 2000, without any Year 2000 Problem which could reasonably be expected to have a Material Adverse Effect. At the request of Agent, as the assignee of the Buyer, such Originator shall provide Agent with substantiation reasonably acceptable to Agent as to such Originator's capability to process data on and after, or otherwise with respect to dates occurring on or after, January 1, 2000 without any Year 2000 Problem. Section 4.2. Negative Covenants of Originators. Until the date this --------------------------------- Agreement shall terminate in accordance with its terms, each Originator hereby covenants, individually and in its capacity as Sub-Servicer, that: (a) Name Change, Offices, Records and Books of Accounts. Such --------------------------------------------------- Originator will not change its name, identity or corporate structure (within the meaning of Section 9-402(7) 15 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 Agent 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 the Agent on behalf of the Buyer) in connection with such change or relocation. (b) Change in Payment Instructions to Obligors. Such Originator will ------------------------------------------ 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 such Originator or payments to be made to any lock-box, Collection Account or Collection Bank, unless the Buyer and the 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 such Originator 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. Such Originator ---------------------------------------------- will not 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), such Originator, 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. Such Originator 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 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 Agent and the Purchasers provided for in the Purchase Agreement), and such Originator shall 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 such Originator. (e) Accounting for Purchases. Such Originator will 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 such Originator 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 16 Related Security by such Originator 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. Such Originator 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. 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, the Sub-Servicer shall prepare and forward to the Buyer and the Agent (as the Buyer's assignee) a Settlement Statement for the related Collection Period. 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 an Originator or the Sub-Servicer, and, in the case of an Involuntary Insolvency Event concerning an Originator or the Sub-Servicer, shall have continued undischarged or unstayed for a period of 60 days; (b) Failure on the part of an Originator or the Sub-Servicer, 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 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 an Originator or the Sub-Servicer, 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 such Originator or the Sub-Servicer, as applicable, becomes aware of such failure and (ii) the date on which written notice of such 17 failure, requiring the same to be remedied, shall have been received by the Originator or Sub-Servicer, as applicable; (e) Any representation or warranty made by an Originator or the Sub- Servicer 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 such Originator or such Sub- Servicer by the Buyer or the Agent, or (B) the date on which such Originator or such Sub-Servicer 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 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; (g) Any Plan of 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 such Originator or any of its Subsidiaries, or the PBGC shall institute proceedings to terminate any Plan of such 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; (h) A Change of Control shall occur; and/or (i) Failure of any Originator or any of its Subsidiaries to pay any Indebtedness in excess of $10,000,000 in aggregate principal amount ("MATERIAL DEBT") when due; or the default by any Originator 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 any Originator 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. Section 6.2. Remedies. Upon the occurrence and during the -------- continuation of an Event of Purchase and Sale Termination, the Buyer 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 each Originator; 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 18 respect to any 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 each Originator. Upon the occurrence of the Termination Date for any reason whatsoever, the Buyer and its assigns 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 Originators. Without limiting any ------------------------------ other rights which the Buyer may have hereunder or under applicable law, each Originator and each Sub-Servicer hereby agrees to indemnify the Buyer and its assignees (including the Agent and each Purchaser) and their respective officers, directors, agents and employees (each an "INDEMNIFIED PARTY") from and against any and all damages, losses, claims, taxes, liabilities, costs and expenses and for all other amounts payable, including reasonable attorneys' fees (which attorneys may be employees of the Buyer, the Agent 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: (i) any representation or warranty made by such Originator or such Sub-Servicer (or any officers of such Originator or such Sub-Servicer) under or in connection with this Agreement, any other Transaction Document, any Settlement Statement or any other information or report delivered by such Originator or such Sub-Servicer pursuant hereto or thereto, which shall have been false or incorrect when made or deemed made; (ii) the failure by such Originator or such Sub-Servicer to comply with any applicable law, rule or regulation with respect to any Receivable or Contract sold by it 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 such Originator or such Sub-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 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 related to such Receivable or the furnishing or failure to furnish such merchandise or services; 19 (vi) the commingling by such Originator 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 such 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 by such Originator 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 Statement to any Receivable sold by such Originator or serviced by the Sub-Servicer hereunder, as applicable, as an Eligible Receivable, which Receivable as of the date it was sold by such Originator to the Buyer and as of the date of the Settlement Statement 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 product of (A) 100% plus the Aggregate Reserve Percentage ---- multiplied by (B) the aggregate Capital outstanding. ---------- EXCLUDING, HOWEVER, the following: (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; (b) 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 (c) 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. Each Originator 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 20 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) or any Originator 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 Originators and the Buyer and, to the extent required under the Purchase Agreement, the Agent, the Investors and/or the Required Investors. Section 8.2. Notices. ------- Except as otherwise expressly provided herein, 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 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) Each Originator 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 the Buyer (or its assignees) 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) to exercise and enforce their rights and remedies hereunder. The Buyer (or its assignees) may, or the Buyer (or its assignees,) may direct an Originator to, notify the Obligors of Receivables, at any time following the replacement of such Originator as Sub-Servicer and at such Originator's expense, of the Buyer's (or its assignees') 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 an Originator or a Sub-Servicer fails to perform any of its obligations hereunder, the Buyer (or any of its assignees) 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) costs and expenses incurred in connection therewith shall be payable by such Originator or such Sub- 21 Servicer, as applicable, on demand. Each Originator 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 such Originator and such Sub-Servicer (i) to execute on behalf of such Originator 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) Each Originator and each Sub-Servicer shall 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 Agent and Falcon 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 each Originator, each Sub-Servicer and their respective officers and employees may disclose such information to such Originator's or such Sub-Servicer's external accountants and attorneys and as required by any applicable law or order of any judicial or administrative proceeding. In addition, each Originator and each Sub-Servicer 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, each Originator and each Sub-Servicer hereby consents to the disclosure of any nonpublic information with respect to it (i) to the Buyer, the Agent, the Investors or Falcon by each other, (ii) by the Buyer, the Agent or the Purchasers to any prospective or actual assignee or participant of any of them or (iii) by the Agent to any rating agency, commercial paper dealer or provider of a surety, guaranty or credit or liquidity enhancement to Falcon or any entity organized for the purpose of purchasing, or making loans secured by, financial assets for which First Chicago 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 Agent for the making of such disclosures generally to Persons of such types. In addition, the Buyer, the Purchasers and the Agent 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) Each Originator 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 22 indebtedness of Falcon, it will not institute against, or join any other Person in instituting against, 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. (b) Each Originator 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 will 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, the Agent or any Investor, no claim may be made by any Originator, the Sub-Servicer or any other Person against Falcon, the Agent or any Investor 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 each Originator 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 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. EACH ORIGINATOR 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 SUCH ORIGINATOR PURSUANT TO THIS AGREEMENT AND SUCH ORIGINATOR 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 AGENT OR ANY PURCHASER AS THE BUYER'S ASSIGNEES) TO BRING PROCEEDINGS AGAINST ANY ORIGINATOR IN THE COURTS OF ANY OTHER JURISDICTION WHEREIN ANY ASSETS OF SUCH ORIGINATOR MAY BE LOCATED. ANY JUDICIAL PROCEEDING BY ANY ORIGINATOR AGAINST THE BUYER, THE AGENT OR ANY PURCHASER, ANY AFFILIATE OF THE AGENT 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 23 AGREEMENT OR ANY DOCUMENT EXECUTED BY THE ORIGINATOR PURSUANT TO THIS AGREEMENT SHALL BE BROUGHT ONLY IN A COURT IN NEW YORK, NEW YORK. SECTION 8.9. WAIVER OF JURY TRIAL. EACH ORIGINATOR 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 ANY ORIGINATOR 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 Originators, the Buyer and their respective successors and permitted assigns (including any trustee in bankruptcy). No Originator may 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 any Originator. Without limiting the foregoing, each Originator acknowledges that the Buyer, pursuant to the Purchase Agreement, shall assign to the Agent, for the benefit of the Purchasers, its rights, remedies, powers and privileges hereunder and that the Agent may further assign such rights, remedies, powers and privileges to the extent permitted in the Purchase Agreement. Each Originator agrees that the Agent, as the assignee 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 each Originator agrees to cooperate fully with the Agent and the Servicer in the exercise of such rights and remedies. Each Originator further agrees to give to the Agent 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 an Originator 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. Each Originator 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 Agent or any Purchaser under the Purchase Agreement. The subordination provision contained herein is for the direct benefit of, and may be enforced by, the Agent and the Purchasers and/or any of their assignees under the Purchase Agreement. 24 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. 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. "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. "AGENT" means First Chicago in its capacity as "Agent" under the Purchase Agreement, and any successor Agent appointed under Article X of the Purchase Agreement. "AGGREGATE UNPAIDS" has the meaning set forth in the Purchase Agreement. "AGREEMENT" means this 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. "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. "BUSINESS DAY" means any day on which banks are not authorized or required to close in New York, New York, Detroit, Michigan 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. "CODE" means the Internal Revenue Code of 1 986, 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 Originator 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. "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 attached hereto as in EXHIBIT VI hereto, as modified from time to time in accordance with this Agreement. "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. Each Originator 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 such Originator 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 preamble to this Agreement and includes such entity's successors and assigns (but does not include the Investors as assignees under Section 3.01 of the Purchase Agreement). "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. "FIRST CHICAGO" means The First National Bank of Chicago in its individual capacity and its successors. "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. "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). "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 Agent'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. "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) Carter and (c) Federal-Mogul Canada, and shall include any other wholly-owned Subsidiary of Federal-Mogul which the Buyer, the Agent 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. "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 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 Originator 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 an Originator 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, 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. "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 subsidiary, and from time to time thereafter, arising from the sale of merchandise by Federal-Mogul or any subsidiary 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 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. "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 NBD Bank or such other bank as the Agent shall designate with the consent of the Buyer. "RELATED SECURITY" means, with respect to any Receivable: (i) all of the Originator'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 Originator'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 Originator; 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 $4,500,000. "REQUIRED INVESTORS" has the meaning set forth in the Purchase Agreement. "REQUIREMENT OF LAW" shall have the meaning specified in the Purchase Agreement. "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, the twentieth (20th) day of each month or, if such day is not a Business Day, the next succeeding Business Day, 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 Agent. "SETTLEMENT STATEMENT" means a report substantially in the form of Exhibit VIII hereto (appropriately completed) furnished by a Sub-Servicer to the Buyer and the Agent (as the Buyer's Assignee) pursuant to Section 5.5. "STOCK LIFT" shall mean 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. "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. Unless otherwise expressly provided, all references herein to a "SUBSIDIARY" shall mean a Subsidiary of the Originator. "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 any Originator 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 and all other instruments, documents and agreements executed and delivered by the Originator in connection herewith. "UCC" means the Uniform Commercial Code as from time to time in effect in the specified jurisdiction. "YEAR 2000 PROBLEM" means any significant risk that computer hardware or software used in the business or operations of any Originators will not, in the case of dates or time periods occurring after December 31, 1999, function at least as effectively and reliably as in the case of dates or time periods occurring before January 1, 2000. 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. EXHIBIT II CHIEF EXECUTIVE OFFICE OF THE ORIGINATORS; 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 and Assumed Names Federal Mogul Corporation Federal Employer Identification Number 38-0533580 CARTER AUTOMOTIVE COMPANY, INC. ------------------------------- Chief Executive Office and Location of Records 26555 Northwestern Highway Southfield, MI 48034 Trade Names and Assumed Names Carter Automotive Company, Inc. Federal Employer Identification Number 43-1374271 FEDERAL-MOGUL CANADA LIMITED ---------------------------- Chief Executive Office and Location of Records 590 Barmac Drive Toronto, Ontario Canada M9L 2X8 Trade Names and Assumed Names Federal-Mogul Canada Limited Federal Employer Identification Number None EXHIBIT III COLLECTION ACCOUNTS A. Lockbox number 67000, Department 148901 Comerica account number 1000013027, in the name of Federal-Mogul Funding Corporation B. Lockbox number 07922 Royal Bank of Canada account number 1113414, in the name of Federal-Mogul Funding Corporation 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 . 45 total employees . 4 part-time/associate . 41 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: - 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. . 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 . 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 - - --------------- * greater than 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 terms in general are 2% 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 October, 1998 month end, there were 6 open Notes Receivable for a total of $131,757.08. 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. AFTERMARKET - CUSTOMER BASE OVERVIEW . NUMBER OF AFTERMARKET AND RETAIL ACCOUNTS . 4,617 active Aftermarket accounts . 39 active Retail accounts . PRODUCT LINES PURCHASED . Engine parts - pistons, piston rings, engine bearings, camshafts . Chassis parts - rack & pinion, tie rods, ball joints, half-shafts . Anti-friction - ball and roller bearings . Sealing products - oil seals . Fuel products - fuel pumps, carburetors, emission control products . Lighting products - strobes, marker lights, reflective tape, wire harnesses . 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. ORIGINAL EQUIPMENT MARKET AND EXPORT OVERVIEW . OE EXPORT CUSTOMER BASE . 856 active OEM accounts . 106 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 LINES PURCHASED . Manufactured products include engine and transmission products, sealing devices, lighting products and fuel systems. . Aftermarket products sold in the OE market to the sales and service operations of our OE customers for their dealers. . 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. 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. 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 November 20, 1998, is entered into by and between Federal-Mogul Funding Corporation, a Michigan corporation ("SPC"), and Federal-Mogul Corporation, a Michigan corporation ("PARENT"). Except as otherwise specifically provided herein, capitalized terms used in this Agreement have the meanings ascribed thereto in the Receivables Sale and Contribution Agreement dated as of even date herewith among Parent, Carter Automotive Company, Inc., Federal-Mogul Canada Limited 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, Falcon Asset Securitization Corporation, certain financial institutions party thereto as "Investors," and The First National Bank of Chicago, as the "Agent," have entered into a 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 Agent for the benefit of the Purchasers. 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 $4,500,000 (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. (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 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 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. 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. 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, CORPORATION, a Michigan corporation a Michigan corporation By: _____________________________ By: ________________________ Name: Name: Title: Title: EXHIBIT X FORM OF SUBORDINATED NOTE _________ SUBORDINATED NOTE November 20, 1998 1. Note. FOR VALUE RECEIVED, the undersigned, FEDERAL-MOGUL FUNDING ---- CORPORATION, a Michigan corporation ("SPC"), hereby unconditionally promises to pay to the order of [ORIGINATOR NAME], a _________ corporation ("ORIGINATOR"), 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) the Originator 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 Originator to SPC pursuant to and in accordance with the terms of that certain Receivables Sale and Contribution Agreement dated as of November 20, 1998 among Originator, _____________, ___________ 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. Originator 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 Originator to make any such entry or any error therein shall expand, limit or affect the obligations of SPC hereunder. 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 Receivable Interest Purchase Agreement dated as of November 20, 1998 by and among SPC, Federal-Mogul Corporation, Falcon Asset Securitization Corporation, the financial institutions from time to time a party thereto, and The First National Bank of Chicago, as the "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 Agent 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 Letter" referenced therein (all such obligations, collectively, the "Senior Claim") have been indefeasibly paid and satisfied in full, Originator 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) Originator 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 Originator 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 Originator in violation of the immediately preceding sentence, Originator 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 Agent 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 "Discount" accruing under the Purchase Agreement after the commencement of any such proceeding, whether or not any or all of such Discount is an allowable claim in any such proceeding) before Originator 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 Agent 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 Note may not be amended or otherwise modified without the prior written consent of the Agent 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 8. Waivers. All parties hereto, whether as makers, endorsers, or ------- otherwise, severally waive presentment for payment, demand, protest and notice of dishonor. Originator 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 Originator without the prior written consent of the Agent, and any such attempted transfer shall be void. FEDERAL-MOGUL FUNDING CORPORATION By: ________________________________ Name: Title: SCHEDULE TO SUBORDINATED NOTE SUBORDINATED LOANS AND PAYMENTS OF PRINCIPAL --------------------------------------------
Amount Unpaid Amount of of Principal Notation Date Subordinated Loan Principal Paid Balance made by --------------- ------------------ ---------------- --------------- ------------- _______________ __________________ ________________ _______________ _____________ _______________ __________________ ________________ _______________ _____________ _______________ __________________ ________________ _______________ _____________ _______________ __________________ ________________ _______________ _____________ _______________ __________________ ________________ _______________ _____________ _______________ __________________ ________________ _______________ _____________ _______________ __________________ ________________ _______________ _____________ _______________ __________________ ________________ _______________ _____________ _______________ __________________ ________________ _______________ _____________ _______________ __________________ ________________ _______________ _____________ _______________ __________________ ________________ _______________ _____________ _______________ __________________ ________________ _______________ _____________ _______________ __________________ ________________ _______________ _____________ _______________ __________________ ________________ _______________ _____________ _______________ __________________ ________________ _______________ _____________ _______________ __________________ ________________ _______________ _____________
SCHEDULE A DOCUMENTS AND RELATED ITEMS TO BE DELIVERED ON OR PRIOR TO THE INITIAL PURCHASE I. Receivables Sale Agreement -------------------------- A. Receivables Sale and Contribution Agreement dated as of September __, 1998 (the "SALE AGREEMENT") by and among Federal-Mogul Corporation, a Michigan corporation, Carter Automotive Company, Inc., a Delaware corporation, and Federal-Mogul Canada Limited, a Canadian corporation (each, an "ORIGINATOR" and collectively the "ORIGINATORS"), and Federal-Mogul Funding Corporation, a Michigan corporation ("SPC"), with completed exhibits. B. Subordinated Notes dated November __, 1998 executed by SPC in favor of each Originator. C. Stockholder and Subscription Agreement dated as of November ___, 1998 by and between the Federal-Mogul Corporation and SPC. D. Certificate of each Originator's [Assistant] Secretary certifying: 1. An attached copy of such Originator's Articles of Incorporation (certified within 60 days prior to closing by the Secretary of State of the state of such Originator's incorporation) 2. An attached copy of such Originator's By-Laws 3. An attached copy of resolutions of such Originator's Board of Directors authorizing such Originator's execution, delivery and performance of the Sale Agreement and related documents 4. The names, titles and specimen signatures of such Originator's officers authorized to execute and deliver the Sale Agreement and related documents E. Good standing certificates for each Originator from the following states certified within 60 days prior to closing: 1. Michigan 2. ___________ F. Pre-filing state and federal tax lien, judgment lien and UCC lien searches against each Originator from the following jurisdictions: 1. Michigan 2. As applicable for tax and judgment liens, ________ County, ______ 3. _________________ G. UCC Financing Statements naming each Originator, as debtor, SPC, as secured party, and The First National Bank of Chicago, as Agent, as assignee of secured party, for filing in the following jurisdictions: 1. Secretary of State of Michigan 2. _____________ H. Post-filing UCC lien searches against the Originator from the following jurisdictions: [post closing] 1. Secretary of State of Michigan 2. _____________ I. Opinions: 1. Corporate/UCC opinions 2. True Sale/Non-consolidation opinion J. Each Originator's CFO's Certificate re no Event of Purchase and Sale Termination or Potential Event of Purchase and Sale Termination, and absence of Material Adverse Effect since June 30, 1998. K. If applicable, irrevocable letters of direction to third-parties storing Records, authorizing SPC and the Agent, as SPC's assignee, access to each Originator's Records and the right to make copies thereof at such Originator's expense. L. Collection Agreements. M. Copies of any Third-Party Consents. II. Receivables Interest Purchase Agreement --------------------------------------- A. Receivables Interest Purchase Agreement dated as of November ___, 1998 (the "INVESTOR AGREEMENT") by and among SPC, Federal-Mogul Corporation, Falcon Asset Securitization Corporation, financial institutions from time to time a party thereto and The First National Bank of Chicago, as Agent (in such capacity, the "AGENT") with completed exhibits. B. Fee Letter dated as of November ___, 1998 by and between SPC and the Agent. C. Certificate of SPC's [Assistant] Secretary certifying: 1. An attached copy of SPC's Certificate of Incorporation (certified within 30 days prior to closing by the Michigan Secretary of State) 2. An attached copy of SPC's By-Laws 3. An attached copy of resolutions of SPC's Board of Directors authorizing SPC's execution, delivery and performance of the Investor Agreement and related documents 4. The names, titles and specimen signatures of SPC's officers authorized to execute and deliver the Investor Agreement and related documents D. Good standing certificates for SPC from the following states certified within 30 days prior to closing: 1. Michigan 2. ____________ E. UCC Financing Statements naming SPC, as debtor, and the Agent, as secured party, for filing in the following jurisdictions: 1. Secretary of State of Michigan 2. ____________ F. Post-filing UCC lien searches against SPC from the following jurisdictions: [post closing] 1. Secretary of State of Michigan 2. ____________ G. Purchase Notice executed by SPC. H. Opinion of SPC's counsel re _____________ [similar to last transaction] I. SPC's CFO's Certificate re no Amortization Event or Potential Amortization Event and absence of Material Adverse Effect since June 30, 1998. J. If applicable, irrevocable letters of direction to third-parties storing Records, authorizing SPC and the Agent, as SPC's assignee, access to the Originator's Records and the right to make copies thereof at the Originator's expense. K. Collection Account Agreements. 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. ORIGINATORS AND SUB-SERVICER: FEDERAL-MOGUL CORPORATION, as Originator 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 CARTER AUTOMOTIVE COMPANY, INC., as Originator By: _____________________________ Name: Title: Address for Notices: Carter Automotive Company, Inc. 26555 Northwestern Highway Southfield, Ml 48034 Attention: Treasury Department Phone: (248) 354-7700 Fax: (248) 354-6746 FEDERAL-MOGUL CANADA LIMITED, as Originator By: ___________________________ Name: Title: Address for Notices: Federal-Mogul Canada Limited 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) 354-770 Fax: (248) 354 EX-10.15 6 RECEIVABLE INTEREST PURCHASE AGREEMENT EXHIBIT 10.15 -------------------------------------------------------------------------- -------------------------------------------------------------------------- $150,000,000 RECEIVABLE INTEREST PURCHASE AGREEMENT DATED AS OF NOVEMBER 20, 1998 AMONG FEDERAL-MOGUL FUNDING CORPORATION, AS SELLER, FEDERAL-MOGUL CORPORATION, AS SERVICER, FALCON ASSET SECURITIZATION CORPORATION, AS A PURCHASER, THE FINANCIAL INSTITUTIONS FROM TIME TO TIME PARTY HERETO, AS INVESTORS, AND THE FIRST NATIONAL BANK OF CHICAGO, AS AGENT -------------------------------------------------------------------------- -------------------------------------------------------------------------- TABLE OF CONTENTS -----------------
Page ---- ARTICLE I DEFINITIONS Section 1.01. Defined Terms................................................................................. 1 Section 1.02. Other Definitional Provisions................................................................. 20 ARTICLE II AMOUNTS AND TERMS OF THE PURCHASES Section 2.01. Purchase Facility; Reduction of Purchase Limit................................................ 20 Section 2.02. Making the Initial Purchase and Subsequent Incremental Purchases.............................. 20 Section 2.03. Selection of Tranche Periods and Discount Rates............................................... 21 Section 2.04. Percentage Evidenced by Receivable Interests.................................................. 22 Section 2.05. Dividing or Combining Receivable Interests.................................................... 22 Section 2.06. Reinvestments and Pre-Liquidation Settlements................................................. 22 Section 2.07. Liquidation Settlement Procedures............................................................. 23 Section 2.08. Deemed Collection of Dilutions and Certain Other Recourse Obligations................................................................................... 24 Section 2.09. Discount: Payments and Computations, Etc...................................................... 25 Section 2.11. Seller's Extinguishment....................................................................... 26 Section 2.12. Servicing Compensation........................................................................ 26 ARTICLE III LIQUIDITY FACILITY Section 3.01. Transfer to Investors......................................................................... 26 Section 3.02. Transfer Price Reduction Discount............................................................. 27 Section 3.03. Payments to Falcon............................................................................ 27 Section 3.04. Limitation on Commitment to Purchase from Falcon.............................................. 27 Section 3.05. Defaulting Investors.......................................................................... 27 ARTICLE IV REPRESENTATIONS AND WARRANTIES Section 4.01. Seller Representations and Warranties......................................................... 28 (a) Corporate Existence and Power................................................................... 28 (b) Due Qualification............................................................................... 28 (c) Due Authorization; No Conflict.................................................................. 28 (d) No Consents..................................................................................... 28 (e) Binding Effect.................................................................................. 28 (f) No Proceedings.................................................................................. 29 (g) Accuracy of Information......................................................................... 29 (h) Use of Proceeds................................................................................. 29 (i) Title to Receivables............................................................................ 29 (j) Good Title; Perfection.......................................................................... 29 (k) Places of Business.............................................................................. 30 (l) Collection Banks; etc........................................................................... 30
i (m) Names.............................................................................................. 30 (n) Credit Policies.................................................................................... 30 (o) Payments to Originator............................................................................. 31 (p) Ownership of the Seller............................................................................ 31 (q) Not an Investment Company.......................................................................... 31 (r) Purpose............................................................................................ 31 (s) Net Receivables Balance............................................................................ 31 (t) Year 2000 Problem.................................................................................. 31 Section 4.02. Investor Representations and Warranties.................................................. 31 (a) Existence and Power................................................................................ 31 (b) No Conflict........................................................................................ 31 (c) Governmental Authorization......................................................................... 32 (d) Binding Effect. ARTICLE V CONDITIONS OF PURCHASES Section 5.01. Conditions Precedent to Initial Purchase...................................................... 32 Section 5.02. Conditions Precedent to All Purchases and Reinvestments....................................... 32 ARTICLE VI COVENANTS OF THE SELLER Section 6.01. Affirmative Covenants of Seller............................................................... 33 (a) Notices............................................................................................ 33 (i) Amortization Events or Potential Amortization Events........................................... 33 (ii) Judgment...................................................................................... 33 (iii) Litigation................................................................................... 33 (iv) Termination Date under Sale Agreement......................................................... 33 (v) Downgrade...................................................................................... 33 (vi) Copies of Notices, Etc. under Sale Agreement and Other Transaction Documents....................................................................................... 33 (vii) Change in Credit Policies.................................................................... 33 (viii) Other Information........................................................................... 33 (b) Compliance with Laws............................................................................... 34 (c) Audits; Inspection Rights.......................................................................... 34 (d) Keeping and Marking of Records and Books........................................................... 34 (e) Compliance with Invoices and Credit Policies; Taxes................................................ 34 (f) Purchase of Receivables from the Originators....................................................... 35 (g) Ownership Interest................................................................................. 35 (h) Payment to the Originators......................................................................... 35 (i) Performance and Enforcement of Sale Agreement...................................................... 35 (j) Purchasers' Reliance............................................................................... 35 (k) Collections........................................................................................ 36 (l) Minimum Net Worth.................................................................................. 37 (m) Year 2000 Problems................................................................................. 37 Section 6.02. Negative Covenants of Seller.................................................................. 37
ii (a) Name Change, Offices, Records and Books of Accounts................................................ 37 (b) Change in Payment Instructions to Obligors......................................................... 38 (c) Modifications to Credit Policies................................................................... 38 (d) Sales, Liens, Etc.................................................................................. 38 (e) Nature of Business; Other Agreements; Other Indebtedness........................................... 38 (f) Amendments to Sale Agreement....................................................................... 39 (g) Amendments to Corporate Documents.................................................................. 39 (h) Merger............................................................................................. 39 (i) Restricted Junior Payments......................................................................... 39 ARTICLE VII SERVICING, ADMINISTRATION AND COLLECTION OF THE RECEIVABLES Section 7.01. Designation of Servicer....................................................................... 40 Section 7.02. Duties of Servicer............................................................................ 40 Section 7.03. Collection Notices............................................................................ 41 Section 7.04. Responsibilities of the Seller................................................................ 41 Section 7.05. Settlement Statements......................................................................... 41 Section 7.06. Quarterly Servicer's Certificate.............................................................. 41 Section 7.07. Weekly Report and Distribution................................................................ 42 Section 7.08. Reporting Covenants of the Servicer........................................................... 42 (a) Financial Reporting................................................................................ 42 (i) Annual Reporting............................................................................... 42 (ii) Quarterly Reporting........................................................................... 42 (iii) Securities and Exchange Commission Filings................................................... 43 (b) Notices............................................................................................ 43 Section 7.09. Inspection Rights............................................................................. 43 Section 7.10. Credit Policies............................................................................... 43 ARTICLE VIII AMORTIZATION EVENTS Section 8.01. Amortization Events........................................................................... 44 (a) Insolvency Events.................................................................................. 44 (b) Failure to Make Payments and Deposits.............................................................. 44 (c) Settlement Statements.............................................................................. 44 (d) Other Covenants.................................................................................... 44 (e) Material Misrepresentations........................................................................ 44 (f) Investment Company................................................................................. 45 (g) Delinquency Ratio.................................................................................. 45 (h) Loss-to-Liquidation Ratio.......................................................................... 45 (i) Dilution Ratio..................................................................................... 45 (j) Nonpayment of Coverage Shortfall................................................................... 45 (k) Minimum Enhancement Amount......................................................................... 45 (l) Change of Control.................................................................................. 45 (m) Event of Default in Material Debt.................................................................. 45
iii ARTICLE IX INDEMNIFICATION Section 9.01. Indemnities by the Seller..................................................................... 46 Section 9.02. Increased Cost and Reduced Return............................................................. 47 Section 9.03. Costs and Expenses Relating to this Agreement................................................. 48 Section 9.04. Taxes......................................................................................... 48 ARTICLE X THE AGENT Section 10.01. Authorization and Action..................................................................... 50 Section 10.02. Delegation of Duties......................................................................... 50 Section 10.03. Exculpatory Provisions....................................................................... 50 Section 10.04. Reliance by Agent............................................................................ 51 Section 10.05. Non-Reliance on Agent and Other Purchasers................................................... 51 Section 10.06. Reimbursement and Indemnification............................................................ 51 Section 10.07. Agent in its Individual Capacity............................................................. 52 Section 10.08. Successor Agent.............................................................................. 52 ARTICLE XI ASSIGNMENTS; PARTICIPATIONS Section 11.01. Assignments.................................................................................. 52 Section 11.02. Participations............................................................................... 53 ARTICLE XII MISCELLANEOUS Section 12.01. Waivers and Amendments....................................................................... 53 Section 12.02. Notices...................................................................................... 54 Section 12.03. Ratable Payments............................................................................. 55 Section 12.04. Protection of Ownership Interests of the Agent on behalf of the Purchasers................................................................................... 55 Section 12.05. Confidentiality.............................................................................. 56 Section 12.06. Bankruptcy Petition.......................................................................... 57 Section 12.07. Limitation of Liability...................................................................... 57 Section 12.08. CHOICE OF LAW................................................................................ 57 Section 12.09. CONSENT TO JURISDICTION...................................................................... 57 Section 12.10. WAIVER OF JURY TRIAL......................................................................... 58 Section 12.11. Integration; Survival of Terms............................................................... 58 Section 12.12. Counterparts; Severability................................................................... 58 Section 12.13. First Chicago Roles.......................................................................... 58 Section 12.14. Characterization............................................................................. 58 Section 12.15. Acknowledgments.............................................................................. 59
iv THIS RECEIVABLE INTEREST PURCHASE AGREEMENT, dated as of November 20, 1998, is by and among FEDERAL-MOGUL FUNDING CORPORATION, a Michigan corporation (the "SELLER"), FEDERAL-MOGUL CORPORATION, a Michigan corporation (initially, the "SERVICER"), FALCON ASSET SECURITIZATION CORPORATION, a Delaware corporation ("FALCON"), THE FINANCIAL INSTITUTIONS LISTED FROM TIME TO TIME ON THE SIGNATURE PAGES HERETO AS INVESTORS (individually, an "INVESTOR" and collectively, the "INVESTORS"), and THE FIRST NATIONAL BANK OF CHICAGO, as Agent. PRELIMINARY STATEMENTS WHEREAS, the Seller desires to transfer and assign Receivable Interests to the Agent for the benefit of Falcon or the Investors from time to time; WHEREAS, on the terms and subject to the conditions hereinafter set forth, Falcon may, in its absolute and sole discretion, purchase Receivable Interests from the Seller from time to time and, in the event Falcon does not purchase a particular Receivable Interest, unless the Seller otherwise directs, the Investors shall purchase such Receivable Interest from the Seller; WHEREAS, the Investors have also agreed to provide a liquidity facility to Falcon with respect to Receivable Interests purchased by Falcon; 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; and WHEREAS, The First National Bank of Chicago has been requested to act, and is willing to act, as Agent on behalf of Falcon and the Investors 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: ARTICLE I DEFINITIONS Section 1.01. Defined Terms. As used in this Agreement, the following ------------- terms shall have the following meanings: "ACQUISITION AMOUNT" means, on the date of any purchase by the Investors from Falcon of Receivable Interests pursuant to SECTION 3.01: (a) with respect to each Investor other than NBD Bank, the lesser of (i) such Investor's Pro Rata Share of the Falcon Transfer Price and (ii) such Investor's unused Commitment, and (b) with respect to NBD Bank, the difference between (i) the Falcon Transfer Price and (ii) the aggregate amount payable by all other Investors on such date pursuant to clause (a) above. "ADJUSTED LIQUIDITY PRICE" means, in determining the Falcon Transfer Price for any Receivable Interest, an amount equal to: RI x [ (i) DC + (ii) NDR ] --- ARP where: RI = the undivided percentage interest represented by such Receivable Interest. DC = the Deemed Collections. NDR = the Outstanding Balance of all Receivables that are not Defaulted Receivables. ARP = 1 + (.50 x the Aggregate Reserve Percentage). Each of the foregoing shall be determined from the most recent Settlement Statement received from the Servicer. "ADMINISTRATION FEE" shall have the meaning specified in the Fee Letter. "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 INVESTOR" shall have the meaning assigned to such term in Section 11.01(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. 2 "AGENT" means First Chicago in its capacity as agent for the Purchasers pursuant to ARTICLE X, and not in its individual capacity, and any successor Agent appointed pursuant to ARTICLE X. "AGGREGATE RESERVE PERCENTAGE" means, as of any Report Date, the sum of (a) the Loss Reserve Percentage, (b) the Floating Dilution Reserve Percentage, and (c) the Fee Reserve Percentage. "AGGREGATE RESERVES" shall equal, as of any Report Date, the product of (a) the Aggregate Reserve Percentage times (b) the Available Receivables. "AGGREGATE UNPAIDS" means, at any time, an amount equal to the sum of all accrued and unpaid Discount, Capital and all other amounts owed (whether due or accrued) hereunder or under the Fee Letter to the Agent and the Purchasers at such time, plus all accrued and unpaid Monthly Servicing Fees owed hereunder to the Servicer. "AGREEMENT" means this Receivable Interest Purchase Agreement, as it may be amended, restated or otherwise modified and in effect from time to time. "AMORTIZATION EVENT" has the meaning assigned to that term in SECTION 8.01. "ASSIGNMENT AND ACCEPTANCE" means an assignment and acceptance in form reasonably acceptable to the Agent pursuant to which an Investor assigns all or a portion of its rights and obligations under this Agreement in accordance with the terms of SECTION 11.01(B). "AVAILABLE FUNDING AMOUNT" means, as of any date of determination, the lesser of (a) the Available Receivables less the Aggregate Reserves and (b) $150,000,000. "AVAILABLE RECEIVABLES" means, as of any Report Date, the excess of the Net Receivables Balance over the Contractual Dilution Balance. "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 Amortization Event, and during the continuation thereof, the "BASE RATE" shall mean a rate per annum equal to the sum of 2% per annum PLUS 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. "BREAKAGE COSTS" means, for any Receivable Interest which has its Capital reduced, or its Tranche Period terminated, prior to the date on which it was originally scheduled to end, the excess, if any, of (a) the Discount that would have accrued during the remainder of the Tranche Period subsequent to the date of such reduction or termination on the Capital of such Receivable Interest if such reduction or termination had not occurred, over (b) the sum of (i) to the extent all or a portion of such Capital is allocated to another Receivable Interest, the Discount actually accrued during such period on such Capital for the new Receivable Interest, and (ii) to 3 the extent such Capital is not allocated to another Receivable Interest, the income, if any, actually received during such period by the holder of such Receivable Interest from investing the portion of such Capital not so allocated. In the event that 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. "BUSINESS DAY" means any day on which banks are not authorized or required to close in New York, New York, Detroit, Michigan, 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, the Purchase Price of such Receivable Interest (and after giving effect to any adjustments contemplated in SECTION 3.05), minus the sum of the aggregate amount of Collections and other payments received by the Agent which in each case are applied to reduce such Capital; PROVIDED THAT such Capital shall be restored in the amount of any Collections or payments so received and applied if at any time the distribution of such Collections or payments are rescinded or must otherwise be returned for any reason. "CARTER" means Carter Automotive Company, Inc., a Delaware corporation. "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 shares of voting stock of Federal-Mogul; or (ii) during any period of twelve (12) consecutive months, commencing before or after the date hereof, 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) 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. "CLOSING DATE" means November 20, 1998. "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. 4 "COLLECTION NOTICE" means a notice in the form attached to a Collection Account Agreement, from the 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 Agent for the account of the applicable Purchaser(s) by the Seller pursuant to SECTION 2.08. "COMMERCIAL PAPER" means promissory notes of Falcon issued by Falcon in the commercial paper market. "COMMITMENT" means, for each Investor, the commitment of such Investor to purchase its Pro Rata Share of Receivable Interests from (i) the Seller and (ii) Falcon, such Pro Rata Share not to exceed, in the aggregate, the amount set forth opposite such Investor's name on the signature pages of this Agreement, as such amount may be modified in accordance with the terms hereof. "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. "CONTRACTUAL DILUTION BALANCE" means, as of any 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, the excess, if any, of (a) outstanding Capital as of such Report Date, over (b) the Available Receivables determined as of such Report Date minus the Aggregate Reserves determined as of such Report Date. "CP RATE" means the rate, requested by the Seller and agreed to by Falcon, equivalent to the rate (or if more than one rate, the weighted average of the rates) at which Commercial Paper having a term equal to the relevant Tranche Period may be sold by any 5 placement agent or commercial paper dealer reasonably selected by Falcon, as agreed between each such dealer or agent and Falcon plus any and all applicable issuing and paying agent fees and commissions of placement agents and commercial paper dealers in respect of such Commercial Paper; PROVIDED, HOWEVER, that if the rate (or rates) as agreed between any such agent or dealer and Falcon is a discount rate (or rates), the "CP RATE" for such Tranche Period shall be the rate (or if more than one rate, the weighted average of the rates) resulting from Falcon's converting such discount rate (or rates) to an interest-bearing equivalent rate per annum. "CREDIT MEMO" means any credit memo relating to (a) the North American Aftermarket obsolescence, (b) the North American Aftermarket stock lifts, (d) the North American Aftermarket core deposits, (e) the North American Aftermarket billing adjustments, (f) the North American Aftermarket customer accommodation returns, (g) the North American Aftermarket other and (h) 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. "DEEMED COLLECTIONS" means the aggregate of all amounts owing to Falcon pursuant to SECTIONS 2.08 and 9.01. "DEFAULT FEE" means with respect to any amount due and payable by the Seller hereunder or under the Fee Letter, an amount equal to interest on any such amount at a rate per annum equal to 2% above the 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 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. "DEFAULTING INVESTOR" shall have the meaning assigned to such term in SECTION 3.05. "DELINQUENCY RATIO" means, as of any Report Date, the percentage equivalent of a fraction, the numerator of which is 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 the denominator of which is the Pool Balance as of such Business Day. "DILUTION HORIZON RATIO" or "DHR" means, for any 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. 6 "DILUTION RATIO" means, as of any 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 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" means, for each Receivable Interest for any Tranche Period: DR x C x AD --- 360 where: DR = the Discount Rate for such Receivable Interest for such Tranche Period; C = the Capital of such Receivable Interest during 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 Discount in excess of the maximum permitted by applicable law; and PROVIDED FURTHER, that Discount 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. "DISCOUNT RATE" means the LIBO Rate, the CP Rate or the Base Rate, as applicable; PROVIDED THAT from and after the occurrence of an Amortization Event, the Discount Rate in respect of each Receivable Interest and Tranche Period shall be the Base Rate. "ELIGIBLE ORIGINATOR" means Federal-Mogul and each other Originator at any time while it is wholly-owned by Federal-Mogul. "ELIGIBLE RECEIVABLE" means each Receivable which meets the following criteria: (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; or is related to an original equipment manufacturer export and is denominated in U.S. dollars; 7 (2) the related Obligor is a resident of the United States or Canada or is an original equipment manufacturer; (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 not more than 90 days past due; (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) the Agent has not 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) there are no offset arrangements with the related 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; PROVIDED, HOWEVER, that if, as of any 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." "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, the sum of the Obligor Overconcentrations on such date. "EXPECTED FLOATING DILUTION RATIO" or "EFD" means, as of any Report Date, the average of the Floating Dilution Ratios for the twelve immediately preceding Collection Periods. 8 "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 2.11, (iii) any date selected by the Seller on not less than 30 days' prior written notice to the Agent; PROVIDED THAT if any Person then acting as Agent hereunder shall have elected or been required to resign as Agent pursuant to SECTION 10.08, the Seller may elect, by written notice to the Agent 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 Required Investors declare in writing to be the Facility Termination Date, and (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. "FALCON" has the meaning assigned to that term in the preamble to this Agreement and includes such entity's successors and assigns (but does not include the Investors as assignees under SECTION 3.01). "FALCON RESIDUAL" means the sum of the Falcon Transfer Price Reductions. "FALCON TRANSFER PRICE" means, with respect to the assignment by Falcon of one or more Receivable Interests to the Agent for the benefit of the Investors pursuant to SECTION 3.01, the sum of (i) the lesser of (a) the Capital of each Receivable Interest and (b) the Adjusted Liquidity Price of each Receivable Interest and (ii) all accrued and unpaid Discount for such Receivable Interests. "FALCON TRANSFER PRICE DEFICIT" has the meaning assigned to that term in SECTION 3.05. "FALCON TRANSFER PRICE REDUCTION" means in connection with the assignment of a Receivable Interest by Falcon to the Agent for the benefit of the Investors, the positive difference between (i) the Capital of such Receivable Interest and (ii) the Adjusted Liquidity Price for such Receivable Interest. "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 average of the quotations at approximately 10:30 a.m. (Chicago time) for such day on such transactions received by the Reference Bank from three federal funds brokers of recognized standing selected by it. 9 "FEDERAL-MOGUL" means Federal-Mogul Corporation, a Michigan corporation, and its successors in interest to the extent permitted hereunder, as amended, modified or supplemented and in effect from time to time. "FEDERAL-MOGUL AFFILIATE" means Federal-Mogul or any of its Subsidiaries or Affiliates. "FEDERAL-MOGUL CANADA" means Federal-Mogul Canada Limited, a Canadian corporation. "FEE RESERVE PERCENTAGE" means (a) as of any 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 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. "FEE LETTER" means that certain letter agreement dated as of the date hereof between the Seller and the Agent, as it may be amended or modified and in effect from time to time. "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. "FIRST CHICAGO" means The First National Bank of Chicago in its individual capacity and its successors. "FIRST CHICAGO ROLES" has the meaning assigned to that term in SECTION 12.13. "FLOATING DILUTION RATIO" means, as of any Report Date, the percentage equivalent of a fraction, the numerator of which shall be the Floating Dilution determined as of such 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" means, as of any 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 RESERVE PERCENTAGE" or "FDRP" shall equal, as of any Report Date, the greater of: (a) 15%, and 10 (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, 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 Falcon. "FUNDING SOURCE" means (i) any Investor or (ii) any insurance company, bank or other financial institution providing liquidity, credit enhancement or back-up purchase support or facilities to Falcon. "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. "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 hereunder. "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. 11 "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, 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. "INVESTORS" means the financial institutions listed on the signature pages of this Agreement under the heading "INVESTORS" and their respective successors and assigns. "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 12 Reserve Requirement (expressed as a decimal) applicable to such Tranche Period plus (ii) 0.75%. The LIBO Rate shall be rounded, if necessary, to the next higher 1/16 of 1%. "LIQUIDITY TERMINATION DATE" means November 19, 1999, unless such date is extended by mutual written agreement of the Seller, the Agent and each of the Purchasers. "LOSS RESERVE PERCENTAGE" means, as of any Report Date, the greater of (a) 5% and (b) 3 times the Loss-to-Liquidation Ratio. "LOSS-TO-LIQUIDATION RATIO" means, as of any 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, 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 and (ii) a fraction the numerator of which is equal to outstanding Capital as of such Report Date and the denominator of which is 1 minus such Aggregate Reserve Percentage plus (iii) the Contractual Dilution as of such Report Date and (b) $5,000,000. "MONTHLY SERVICING FEE" shall have the meaning specified in SECTION 2.12. "NET RECEIVABLES BALANCE" means, at anytime, the aggregate Outstanding Balance of all Eligible Receivables at such time, reduced by the Excess Concentration Amount. "NEW CONCENTRATION ACCOUNT" has the meaning assigned to that term in SECTION 6.01(K). "NON-DEFAULTING INVESTOR" shall have the meaning assigned to such term in SECTION 3.05. "OBLIGOR" means a Person obligated to make payments pursuant to an invoice. 13 "OBLIGOR OVERCONCENTRATION" means, as of any 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 over (b) 2% 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 4% Ford 7% General Motors 7% Caterpillar 3% Canadian Receivables 6% OEM Export Receivables 5% ; provided, further, that the Obligor Overconcentration with respect to Genuine Parts shall be an amount equal to the lesser of (i) $11,000,000 and (ii) the applicable amount described in clause (a) in excess of 6% of the Eligible Receivables on the last day of such immediately preceding Collection Period; provided, further, that the Obligor Overconcentration with respect to Autozone shall be an amount equal to the lesser of (x) 15,000,000 and (y) the applicable amount described in clause (a) in excess of 9% of the Eligible Receivables on the last day of such immediately preceding Collection Period. "ORIGINATOR" means each of (a) Federal-Mogul, (b) Carter, (c) Federal- Mogul Canada, and shall include any other wholly-owned Subsidiary of Federal- Mogul which the Agent 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. "PERSON" means an individual, partnership, corporation, association, trust, or any other entity, or organization, including a Governmental Authority or other government or political subdivision or agent or instrumentality thereof. "POOL BALANCE" means, as of the time of determination thereof, the aggregate Outstanding Balance of all Receivables owned by the Seller at such time. "POTENTIAL AMORTIZATION EVENT" means an event which, with the passage of time or the giving of notice, or both, would constitute an Amortization Event. 14 "PRO RATA SHARE" means, for each Investor, the Commitment of such Investor divided by the Purchase Limit, adjusted as necessary to give affect to the application of the terms of SECTION 2.05. "PROGRAM FEE" shall have the meaning specified in the Fee Letter. "PURCHASE LIMIT" means the aggregate of the Commitments of the Investors hereunder (which aggregate amount is $150,000,000 as of the date of this Agreement). "PURCHASE DATE" means the date of the sale by Seller, and the purchase by Falcon or the Agent on behalf of the Investors, of any Receivables Interests hereunder. "PURCHASE NOTICE" shall have the meaning specified in SECTION 2.02(A). "PURCHASE PRICE" means, with respect to any Incremental Purchase, the least of: (a) the amount of Capital requested by the Seller, (b) the remaining unused portion of the Purchase Limit, and (c) the maximum amount by which the aggregate outstanding Capital could be increased such that after giving effect to such increase in Capital, the Net Receivables Balance will equal or exceed the product of (i) the sum of 100% plus the Aggregate Reserve Percentage, times (ii) the aggregate outstanding Capital after giving effect to such Incremental Purchase. "PURCHASER" means Falcon and/or an Investor, as applicable. "PURCHASING INVESTORS" has the meaning assigned to that term in SECTION 11.01(B). "REASSIGNMENT AMOUNT" means, with respect to 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 on such Settlement Date, (ii) the amount of accrued and unpaid Discount relating to such Settlement Date or any prior Settlement Date which was previously due and unpaid, and (iii) the amount of any accrued and unpaid Fees and Breakage 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 Originator, and from time to time thereafter, arising from the sale of merchandise by Federal-Mogul or any Originator in the ordinary course of business; 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, an undivided percentage ownership interest associated with a designated amount of Capital, Discount Rate and Tranche Period selected pursuant to SECTION 2.03 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 15 of such undivided interest pursuant to Section 2.04, (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 --------------------------------- NRB - (ARP x NRB) where: C = the Capital of such Receivable Interest. ARP = the Aggregate Reserve Percentage. NRB = the Net Receivables Balance. "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 PERCENTAGE" means, for any Receivable Interest acquired by the Investors from Falcon for less than the Capital of such Receivable Interest, a percentage equal to a fraction the numerator of which is the Falcon Transfer Price Reduction for such Receivable Interest and the denominator of which is the Capital of such Receivable Interest. "REFERENCE BANK" means NBD Bank or such other bank as the Agent shall designate with the consent of the Seller. "REINVESTMENT" has the meaning assigned to that term in SECTION 2.06(C). "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 invoice 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, 16 (v) all of the Seller's right, title and interest in, to and under the Sale Agreement and 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. "REPORT DATE" means the fifteenth day of each month, or if such day is not a Business Day, the next succeeding Business Day. "REPURCHASE PRICE" means, on any date of determination pursuant to Section 2.11, an amount equal to the Aggregate Unpaids. "REQUIRED INVESTORS" means, at any time, Investors with Commitments in excess of 66-2/3% of the Purchase Limit. "REQUIRED NOTICE TIME" means, with respect to the Purchase Date of any Incremental Purchase other than the initial purchase of Receivable Interests hereunder or the selection of any new Discount Rate or Tranche Period with respect to a maturing Tranche Period, not later than 11:00 a.m. (New York City time): (i) at least three Business Days prior to such date if the LIBO Rate is being requested as the Discount Rate relating to such Incremental Purchase, (ii) at least three Business Days prior to such date if the CP Rate is being requested as the Discount Rate relating to such Incremental Purchase and (iii) at least one Business Day prior to such date if the Base Rate is being requested as the Discount Rate relating to such Incremental Purchase. "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). "RESERVE REQUIREMENT" means the maximum aggregate reserve requirement (including all basic, supplemental, marginal and 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. "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 17 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. "SALE AGREEMENT" means that certain Receivables Sale and Contribution Agreement of even date herewith between the Seller, as purchaser, and the Originators, as sellers, 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. "SERVICER" means at any time the Person (which may be the Agent) then 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, the twentieth (20/th/) day of each month or, if such day is not a Business Day, the next succeeding Business Day, and (b) from and after the earlier to occur of (i) an Amortization Event or (ii) the Facility Termination Date, the twentieth (20/th/) 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 Agent. "SETTLEMENT STATEMENT" means a report, in substantially the form of EXHIBIT C hereto (appropriately completed), furnished by the Servicer to the Agent pursuant to SECTION 7.05. "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. "TAXES" shall have the meaning set forth in SECTION 3.03. "TERM" means, with respect to each Investor's Commitment, November 19, 1999. "TRANCHE PERIOD" means, with respect to any Receivable Interest: (i) if Discount for such Receivable Interest is calculated with respect to the CP Rate, a period of days not to exceed 270 days commencing on a Business Day requested by the Seller and agreed to by Falcon; 18 (ii) if Discount for such Receivable Interest is calculated on the basis of the LIBO Rate, a period of one, two or three months, or such other period as may be mutually agreeable to the Agent and the Seller, commencing on a Business Day selected by the Seller or the 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; and (iii) if Discount for such Receivable Interest is calculated on the basis of the Base Rate, a period of 30 days commencing on a Business Day. 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 Tranche Periods corresponding to the LIBO Rate, if such next succeeding Business Day falls in a new month, such Tranche Period shall end on the immediately preceding Business Day. In the case of any Tranche Period for any Receivable Interest of 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 Agent. "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 Collections Notice and all other instruments, documents and agreements executed and delivered by the Seller or any Originator in connection herewith. "TURNOVER DAYS" means, as of any 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. "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. "YEAR 2000 PROBLEM" means any significant risk that computer hardware or software used in the business or operations of the Seller, in the case of dates or time periods occurring after December 31, 1999, function at least as effectively and reliably as in the case of dates or time periods occurring before January 1, 2000. 19 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. (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 AMOUNTS AND TERMS OF THE PURCHASES Section 2.01. Purchase Facility; Reduction of Purchase Limit. ---------------------------------------------- (a) Upon the terms and subject to the conditions hereof, from time to time prior to the Facility Termination Date: (i) the Seller may, at its option, sell and assign Receivable Interests to the Agent for the benefit of Falcon or the Investors, and (ii) Falcon may, at its option, instruct the Agent to purchase one or more Receivable Interests on behalf of Falcon, or if Falcon shall decline to purchase a particular Receivable Interest, unless the Seller cancels such purchase in accordance with SECTION 2.02(B), the Agent shall purchase such Receivable Interest on behalf of the Investors. (b) The Seller may, upon at least 30 days' prior written irrevocable notice to the Agent, terminate in whole or permanently reduce in part, ratably among the Investors, the unused portion of the Purchase Limit; PROVIDED 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. Section 2.02. Making the Initial Purchase and Subsequent Incremental ------------------------------------------------------ Purchases. - - --------- (a) The Seller shall provide the Agent with a prior written notice, in substantially the form of EXHIBIT A hereto (each, a "PURCHASE NOTICE"): (i) in the case of the initial purchase of Receivable Interests hereunder, not later than 12:00 noon (New York City time) on the Business Day immediately preceding such purchase, and 20 (ii) in the case of all subsequent Incremental Purchases, not later than the Required Notice Time. Each Purchase Notice shall, except as set forth below, be irrevocable and shall specify the Purchase Price (in each case, not to be less than $2,000,000 or a larger integral multiple of $1,000,000) and the proposed Purchase Date, initial Tranche Period and initial Discount Rate related thereto. The Agent shall promptly (and in any event on or prior to 11:00 a.m. (New York City time) on the applicable Purchase Date) notify the Seller and each Investor if Falcon elects in its discretion not to make the initial Purchase or any subsequent Incremental Purchase. (b) Following receipt of a Purchase Notice, the Agent will determine whether Falcon agrees to make the purchase. If Falcon declines to make the initial purchase or any subsequent Incremental Purchase, the Agent shall promptly advise the Seller and the Servicer of such fact, and: (i) the Seller may thereupon cancel the Purchase Notice or (ii) in the absence of such a cancellation, such initial purchase or any Incremental Purchase will be made by the Investors. (c) On each Purchase Date, upon satisfaction of the applicable conditions precedent set forth in ARTICLE V, Falcon or each Investor, as applicable, shall deposit to the Facility Account, in immediately available funds, no later than 1:00 p.m. (New York City time), an amount equal to: (i) in the case of Falcon, the aggregate Purchase Price of each Receivable Interest Falcon is then purchasing, or (ii) in the case of an Investor, such Investor's Pro Rata Share of the aggregate Purchase Price of each of the Receivable Interests the Investors are purchasing. Section 2.03. Selection of Tranche Periods and Discount Rates. ----------------------------------------------- (a) Each Receivable Interest shall at all times have an associated amount of Capital, a Discount Rate and Tranche Period applicable to it. Not less than $2,000,000 of Capital (or a larger integral multiple of $1,000,000) may be allocated to any single Receivable Interest. The Seller shall request Discount Rates and Tranche Periods for the Receivable Interests of the Purchasers as follows (i) for the Receivable Interests of Falcon, the Seller may select a CP Rate (with the concurrence of the Agent) or the Base Rate; and (ii) for the Receivable Interests of the Investors, the Seller may select the LIBO Rate or the Base Rate. The Seller shall select Discount Rates and Tranche Period by giving the Agent irrevocable notice of the new Tranche Period and Discount Rate for the Receivable Interest associated with such expiring Tranche Period not later than the Required Notice Time. The Agent shall, promptly following its knowledge thereof, advise the Seller in any instance if the Tranche Period selected by the Seller at any time is not acceptable to Falcon or the Investors, as applicable. If the Seller fails to request a Discount Rate and/or a Tranche Period for any Receivable Interest pursuant to the terms of this SECTION 2.03 on a timely basis, or the Seller and the Agent fail to agree on an acceptable duration for any Tranche Period, the Discount Rate shall be the CP Rate (if Falcon is the applicable Purchaser) or the Base Rate, in the Agent's sole discretion, and the applicable Tranche Period shall be a period of one 21 Business Day commencing on the day requested in the Purchase Notice or the last day of the then expiring Tranche Period for such Receivable Interest, as applicable. Until the Seller gives timely notice to the Agent of another Discount Rate, the initial Discount Rate for any Receivable Interest transferred from Falcon to the Investors pursuant to SECTION 3.01 shall be the Base Rate. (b) If any Investor notifies the Agent that it has determined that funding its Pro Rata Share of the Receivable Interests of the Investors at a LIBO Rate would violate any applicable law, rule, regulation, or directive of any governmental or regulatory authority, whether or not having the force of law, or that (i) deposits of a type and maturity appropriate to match fund its Receivable Interests at such LIBO Rate are not available or (ii) such LIBO Rate does not accurately reflect the cost of acquiring or maintaining a Receivable Interest at such LIBO Rate, then the Agent shall suspend the availability of such LIBO Rate and require the Seller to select a new Discount Rate for any Receivable Interest accruing Discount at such LIBO Rate. Section 2.04. Percentage Evidenced by Receivable Interests. Each -------------------------------------------- Receivable Interest shall be initially computed on its Purchase Date. Thereafter, until the Facility Termination Date, each Receivable Interest shall be automatically recomputed (or deemed to be recomputed) on each day prior to the Facility Termination Date. The variable percentage represented by any Receivable Interest as computed (or deemed recomputed) as of the close of business on the day immediately preceding the Facility Termination Date shall remain constant at all times thereafter. Section 2.05. Dividing or Combining Receivable Interests. The Seller ------------------------------------------ or the Agent may, upon notice to and consent by the other received not later than the Required Notice Time for any Receivable Interest, take any of the following actions with respect to such Receivable Interest: (i) divide the Receivable Interest into two or more Receivable Interests having aggregate Capital equal to the Capital of such divided Receivable Interest, (ii) combine the Receivable Interest with another Receivable Interest with a Tranche Period ending on the same day, creating a new Receivable Interest having Capital equal to the Capital of the two Receivable Interests combined or (iii) combine the Receivable Interest with a Receivable Interest to be purchased on such day by such Purchaser, creating a new Receivable Interest having Capital equal to the Capital of the two Receivable Interests combined, provided that a Receivable Interest of Falcon may not be combined with a Receivable Interest of the Investors. Section 2.06. Reinvestments and Pre-Liquidation Settlements. At any --------------------------------------------- time that any Collection is received by the Servicer from and after its Purchase Date and on or prior to the Facility Termination Date: (a) the Servicer (at any time the Servicer is not a Federal-Mogul Affiliate) may retain a portion of such Collection in payment of any Monthly Servicing Fee then due and owing; (b) thereafter, the Servicer is hereby directed to pay a portion of the remainder, if any, of such Collection to the Agent in payment of any accrued and unpaid 22 Discount, Fees and Breakage Costs (if any), in each case that are due and owing on such day; and (c) thereafter, except to the extent the Seller wishes to reduce the outstanding amount of Capital of a Receivable Interest (in which case the provisions of SECTION 2.07 shall be applicable to the portion of such Receivable Interest represented by such reduction in Capital), the Seller hereby requests and the Purchasers hereby agree to make, simultaneously with such receipt, a reinvestment (each, a "REINVESTMENT") with that portion of the remainder of such Collection that is part of such Receivable Interest such that after giving effect to such Reinvestment, the amount of the Capital of such Receivable Interest immediately after any such receipt and corresponding Reinvestment shall be equal to the amount of the Capital immediately prior to such receipt; (d) thereafter, the Servicer (if the Servicer is a Federal-Mogul Affiliate) may retain a portion of the remainder, if any, of such Collection to payment of the Monthly Servicing Fee; (e) thereafter, if requested by the Seller, any remaining portion of such Collection may be applied to making an additional Incremental Purchase in accordance with the terms of this Agreement; and (f) finally, any remaining portion of such Collection shall be paid to the Seller, as the Seller may direct. Section 2.07. Liquidation Settlement Procedures. On the Facility --------------------------------- Termination Date and on each day thereafter, the Servicer shall set aside and hold in trust: (a) for the Purchasers, the percentage evidenced by each Receivable Interest of Collections received on such day, and (b) for the Seller, all remaining Collections. On each Settlement Date following the Facility Termination Date: (i) the Servicer shall remit to the Agent, by transfer of immediately available funds to the account specified in SECTION 2.09(D), the amounts set aside pursuant to SECTION 2.07(A), together with any remaining amounts set aside pursuant to SECTION 2.08 prior to such day, but not to exceed the sum of (A) the accrued Discount for such Receivable Interest, (B) the Capital of such Receivable Interest, (c) the aggregate of all fees and other amounts then owed hereunder or under the Fee Letter by Seller to the Agent or any of the Purchasers, and (D) the accrued Monthly Servicing Fee for such Receivable Interest; and (ii) the Servicer shall remit to the Seller the Seller's undivided percentage interest of all Collections in respect of such Receivable Interest which are received on and after the Facility Termination Date. If there shall be insufficient funds on deposit for the Servicer to distribute funds to the Agent in payment in full of the amounts described in the foregoing clause (i), the Servicer shall distribute such funds: 23 first, to reimbursement of the Agent's costs of collection and ----- enforcement of the Transaction Documents, second, to the Servicer (if the Servicer is not a Federal-Mogul ------ Affiliate) in payment of all accrued Monthly Servicing Fee in respect of such Receivable Interest, third, in payment of all accrued Discount and Breakage Costs for such ----- Receivable Interest, fourth, in reduction of the Capital of the Receivable Interests, ------ fifth, in payment of all Fees and Indemnified Amounts, if any, then ----- due and owing hereunder to the Agent or the Purchasers, and sixth, to the Servicer (if the Servicer is a Federal-Mogul Affiliate) ----- in payment of all accrued Monthly Servicing Fee in respect of such Receivable Interest. Collections allocated to the Receivable Interests of the Investors shall be shared ratably by the Investors in accordance with their Pro Rata Shares. Collections applied to the payment of costs of collection and enforcement, Discount, Fees, Breakage Costs and/or Indemnified Amounts shall be allocated ratably among the Agent and the Purchasers in accordance with such amounts owing to each of them. To the extent Collections are available for such purpose in accordance with the foregoing, the accrued Monthly Servicing Fee in respect of each Receivable Interest shall be remitted to the Servicer. Following the date on which the Aggregate Unpaids are reduced to zero, the Servicer shall pay to Seller any remaining Collections set aside and held by the Servicer pursuant to this SECTION 2.07. Section 2.08. Deemed Collection of Dilutions and Certain Other ------------------------------------------------ Recourse Obligations. - - -------------------- (a) If on any day the Outstanding Balance of any Receivable is either (i) reduced as a result of any defective or rejected services, any cash discount or any adjustment by the Seller, the Servicer or any Originator or (ii) 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), the Seller shall be deemed to have received on such day a Collection of such Receivable in the amount of such reduction or cancellation. (b) If on any day any of the representations or warranties in SECTIONS 4.01(I), (J), (L), (N) OR (O) are no longer true with respect to a Receivable, the Seller shall be deemed to have received on such day, a Collection of such Receivable in full. (c) If on any day the representation and warranty in Section 4.01(s) is no longer true, the Seller shall be deemed to have received on such day Collections of Receivables in full such that the representation and warranty in Section 4.01(s) is true and correct on such day. 24 (d) If the Seller receives any Collections or is deemed to receive Collections pursuant to this SECTION 2.08 or otherwise, the Seller shall pay such Collections or deemed Collections to the Servicer prior to the next succeeding Settlement Date 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 Agent. Section 2.09. Discount: Payments and Computations, Etc. ---------------------------------------- (a) Discount shall accrue for each Receivable Interest for each day occurring during the Tranche Period for such Receivable Interest. On each Settlement Date, the Agent shall deduct from Collections remitted to it pursuant to SECTION 2.06 OR 2.07, as applicable, an amount equal to the accrued and unpaid Discount for the Collection Period then most recently ended. (b) Notwithstanding any limitation on recourse contained in this Agreement, the Seller shall pay to the Agent, for the account of the relevant Purchasers, the Administration Fee and Program Fees pursuant to the Fee Letter, all amounts payable pursuant to ARTICLE IX, if any, all Servicer costs, if any, payable pursuant to SECTION 7.02 and on demand therefor, any Breakage Costs. If any Person fails to pay any amount when due hereunder, such Person agrees to pay, on demand, the Default Fee. (c) All amounts to be paid or deposited by any Person hereunder shall be paid or deposited in accordance with the terms hereof no later than 1:00 p.m. (New York City time) on the day when due in immediately available funds; if such amounts are payable to a Purchaser they shall be paid to the Agent, for the account of such Purchaser, at the account specified in SECTION 2.09(D) until otherwise notified by the Agent. The Agent shall, in accordance with its customary practice, provide monthly invoices from time to time to the Seller in respect of Discount and other fees and expenses payable by the Seller hereunder. In the event the Seller shall at any time fail to pay any amount when due hereunder, the Agent may, on notice to the Seller, debit the Facility Account for such amount. All computations of Discount and per annum fees hereunder and under the Fee Letter shall be made on the basis of a year of 360 days for the actual number of days elapsed (including the first but excluding the last day). All per annum fees shall be payable monthly in arrears on Settlement Dates. 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. (d) All amounts payable to the Agent or any Purchaser under this Agreement or the Fee Letter shall be made in immediately available funds to FMSD Clearing Account no. 7521-7683 at The First National Bank of Chicago, in Chicago, Illinois, ABA No. 071000013, Reference: Federal-Mogul Funding Corporation, until otherwise notified by the Agent. (e) In the event that the amount in clause (b) of the definition of Breakage Costs exceeds the amount referred to in clause (a) of the definition of Breakage Costs, the relevant Purchaser or Purchasers agree to pay to the Seller the amount of such excess. Section 2.10. Maximum Aggregate of Receivable Interests; Grant of --------------------------------------------------- Security Interest. The Seller shall ensure that the aggregate Receivable - - ----------------- Interests of the Purchasers shall at 25 no time exceed 100%. If, on any day, the aggregate Receivable Interests of the Purchasers exceeds 100%, the Seller shall, not later than the next succeeding Settlement Date, pay to the Agent an amount to be applied to reduce the Capital of the Receivable Interests, such that after giving effect to such payment the aggregate of the Receivable Interest equals or is less than 100%. Such amount shall be applied to the reduction of the Capital of the Receivable Interests ratably in accordance with the percentages of the Receivable Interests. Any amounts received by the Investors pursuant to the preceding sentence shall be applied ratably in accordance with their Pro Rata Shares. The Seller hereby grants to the Agent for the ratable benefit of the Purchasers a security interest in all of its interest in the Receivables, Related Security, Collections and proceeds thereof to secure payment of the Aggregate Unpaids, including its indemnity obligations under ARTICLE IX and all other obligations owed hereunder to the Purchasers. Section 2.11. Seller's Extinguishment. The Seller shall have the ----------------------- right, on not less than thirty (30) days' written notice to the Agent, 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 by paying the Repurchase Price therefor in immediately available funds to the Facility Account. Such repurchase shall be without representation, warranty or recourse of any kind by, on the part of, or against any Purchaser or the Agent, except that the Receivable Interests reconveyed to the Seller have been reconveyed free and clear of any Adverse Claim created by the Agent or any of the Purchasers. Section 2.12. 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 2.06 AND 2.07 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 III LIQUIDITY FACILITY Section 3.01. Transfer to Investors. Each Investor hereby agrees, --------------------- subject to SECTION 3.04, that immediately upon written notice from Falcon delivered on or prior to the Liquidity Termination Date, it shall acquire by assignment from Falcon. without recourse or warranty, its Pro Rata Share of one or more of the Receivable Interests of Falcon as specified by Falcon. Each Investor shall promptly pay to the Agent at an account designated by the Agent, for the benefit of Falcon, its Acquisition Amount. Unless an Investor has notified the Agent that it does not intend to pay its Acquisition Amount, the Agent may assume that such payment has been made and may, but shall not be obligated to, make the amount of such payment available to 26 Falcon in reliance upon such assumption. Falcon hereby sells and assigns to the Agent for the ratable benefit of the Investors, and the Agent hereby purchases and assumes from Falcon, effective upon the receipt by Falcon of the Falcon Transfer Price, the Receivable Interests of Falcon which are the subject of any transfer pursuant to this ARTICLE III. Section 3.02. Transfer Price Reduction Discount. If the Adjusted --------------------------------- Liquidity Price is included in the calculation of the Falcon Transfer Price for any Receivable Interest, each Investor agrees that the Agent shall pay to Falcon the Reduction Percentage of any Discount received by the Agent with respect to such Receivable Interest. Section 3.03. Payments to Falcon. In consideration for the ------------------ reduction of the Falcon Transfer Prices by the Falcon Transfer Price Reductions, effective only at such time as the aggregate amount of the Capital of the Receivable Interests of the Investors equals the Falcon Residual, each Investor hereby agrees that the Agent shall not distribute to the Investors and shall immediately remit to Falcon any Discount, Collections or other payments received by it to be applied pursuant to the terms hereof or otherwise to reduce the Capital of the Receivable Interests of the Investors. Section 3.04. Limitation on Commitment to Purchase from Falcon. ------------------------------------------------ Notwithstanding anything to the contrary in this Agreement, no Investor shall have any obligation to purchase any Receivable Interest from Falcon, pursuant to SECTION 3.01 or otherwise, if an Insolvency Event with respect to Falcon has occurred. Section 3.05. Defaulting Investors. If one or more Investors -------------------- defaults in its obligation to pay its Acquisition Amount pursuant to SECTION 3.01 (each such Investor shall be called a "DEFAULTING INVESTOR" and the aggregate amount of such defaulted obligations being herein called the "FALCON TRANSFER PRICE DEFICIT"), then upon notice from the Agent, each Investor other than the Defaulting Investors (a "NON-DEFAULTING INVESTOR") shall promptly pay to the Agent, in immediately available funds, an amount equal to the lesser of (x) such Non-Defaulting Investor's proportionate share (based upon the relative Commitments of the Non-Defaulting Investors) of the Falcon Transfer Price Deficit and (y) the unused portion of such Non-Defaulting Investor's Commitment. A Defaulting Investor shall forthwith upon demand pay to the Agent for the account of the Non-Defaulting Investors all amounts paid by each Non-Defaulting Investor on behalf of such Defaulting Investor, together with interest thereon, for each day from the date a payment was made by a Non-Defaulting Investor until the date such Non-Defaulting Investor has been paid such amounts in full, at a rate per annum equal to the Federal Funds Effective Rate plus 0.5% for the two Business Days and 2.0% per annum thereafter. In addition, without prejudice to any other rights that Falcon may have under applicable law, each Defaulting Investor shall pay to Falcon forthwith upon demand, the difference between such Defaulting Investor's unpaid Acquisition Amount and the amount paid with respect thereto by the non-Defaulting Investors, together with interest thereon, for each day from the date of the Agent's request for such Defaulting Investor's Acquisition Amount pursuant to SECTION 3.01 until the date the requisite amount is paid to Falcon in full, at a rate per annum equal to the Federal Funds Effective Rate plus 2.0%. 27 ARTICLE IV REPRESENTATIONS AND WARRANTIES Section 4.01. Seller Representations and Warranties. The Seller ------------------------------------- hereby represents and warrants to the Agent 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). 28 (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, 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 Agent 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 G and 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 G, 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 an Originator 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 29 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. (l) Collection Banks; etc. Except as otherwise notified to the --------------------- 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 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 Originator. With respect to each Receivable ---------------------- transferred to the Seller, the Seller has given reasonably equivalent value to the applicable Originator 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 any Originator 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. 30 (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 1 940, as amended from time to time, or any successor statute. (r) Purpose. The Seller has determined that, from a business ------- viewpoint, the purchase of Receivables and related interests from the Originators 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 product of (i) 100% + the Aggregate Reserve Percentage, multiplied by (ii) the aggregate Capital outstanding. (t) Year 2000 Problem. Seller has reviewed its operations with a view ----------------- to assessing whether its business will, in the receipt, transmission, processing, manipulation, storage, retrieval, retransmission, or other utilization of data be vulnerable to a Year 2000 Problem that could reasonably be expected to have a Material Adverse Effect. Based on such review, Seller has no reason to believe that a Material Adverse Effect will occur with respect to its business or operations resulting from a Year 2000 Problem. Section 4.02. Investor Representations and Warranties. Each Investor --------------------------------------- hereby represents and warrants to the Agent, the other Purchasers and the Seller that: (a) Existence and Power. Such Investor 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 ----------- Investor 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 law, rule or regulation applicable to it, (iii) any restrictions under any 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 Investor. (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 Investor of this Agreement. 31 (d) Binding Effect. This Agreement constitutes the legal, valid and -------------- binding obligation of such Investor enforceable against such Investor 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 Agent shall have received on or before the date of such purchase those documents listed on SCHEDULE A hereto, and (b) the Agent shall have been paid all fees required to be paid on such date pursuant to the terms of the Fee Letter. Section 5.02. Conditions Precedent to All Purchases and ----------------------------------------- Reinvestments. Each purchase of a Receivable Interest (other than pursuant to - - ------------- SECTION 3.01) 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 Agent on or prior to the Purchase Date all Settlement Statements as 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 32 (c) the Agent shall have received such other approvals, opinions or documents as it may reasonably request. ARTICLE VI COVENANTS OF THE SELLER Section 6.01. Affirmative Covenants of Seller. Until the date on ------------------------------- which the Aggregate Unpaids have been indefeasibly paid in full, the Seller hereby covenants and agrees that: (a) Notices. Except as set forth in clauses (vii) and (viii) below, ------- the Seller will notify the Agent in writing of any of (x) the events specified below in clauses (i) and (iv) immediately, and (y) 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: (i) Amortization Events or Potential Amortization Events. The ---------------------------------------------------- occurrence of each Amortization Event 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 Standard & Poor's Ratings Group or by Moody's Investors Service, Inc., setting forth the Indebtedness affected 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 Agent or Falcon, 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 the Agent or any Purchaser may from time to time reasonably request. 33 (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 the Agent from time to time such information with respect to it and the Receivables as the Agent may reasonably request. The Seller shall, from time to time during regular business hours as requested by the Agent upon reasonable notice, permit the Agent, or its agents or representatives (and shall require the Originators and the Servicer to permit the 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 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 Agent 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 Agent, describing the Receivable Interests and (b) upon the request of the Agent following an Amortization Event: (A) mark each invoice with a legend describing the Receivable Interests and (B) deliver to the 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 34 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 the 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 Agent and the Purchasers, including, without limitation, taking such action to perfect, protect or more fully evidence the interest of the Agent and the Purchasers hereunder as the Agent may reasonably request. (h) Payment to the Originators. With respect to any Receivable -------------------------- purchased by the Seller from an Originator, 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 the applicable Originator 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 the 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 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 the 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: 35 (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; (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 36 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 Agent. 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 Agent delivers to any of the Collection Banks a Collection Notice pursuant to SECTION 7.03, the 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 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 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 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 3% of the Outstanding Balance of the Receivables at such time. (m) Year 2000 Problems. Seller shall take all reasonable actions to ------------------ ensure that its computer-based system are able to effectively process data, including dates on and after January 1, 2000, without any Year 2000 Problem which could reasonably be expected to have a Material Adverse Effect. At the request of Agent or any Purchaser, Seller shall provide Agent or such Purchaser with substantiation reasonably acceptable to Agent or such Purchaser as to Seller's capability to process data on and after, or otherwise with respect to dates occurring on or after, January 1, 2000 without any Year 2000 Problem. 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 Agent at least 45 days prior notice thereof (or 37 such lesser number of days as the parties hereto may agree upon) and (ii) delivered to the Agent all financing statements, instruments and other documents requested by the 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 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. (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 Agent and the Purchasers provided for herein), and the Seller shall defend the right, title and interest of the Agent and the Purchasers 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: 38 (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 the applicable Originator thereunder for the purchase of Receivables from such Originator 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 Agent under this Agreement, on such terms as shall be satisfactory to the Agent. (f) Amendments to Sale Agreement. The Seller shall not, without the ---------------------------- prior written consent of the Agent: (i) cancel or terminate the Sale Agreement, (ii) give any consent, waiver, directive or approval under the Sale Agreement, (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. 39 ARTICLE VII SERVICING, ADMINISTRATION AND COLLECTION OF THE RECEIVABLES Section 7.01. Designation of Servicer. 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. The 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. 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 Agent after the occurrence of an Amortization Event segregate, in a manner acceptable to the Agent, 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 Agent 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 Agent or the Purchasers under this Agreement. Notwithstanding anything to the contrary contained herein, from and after the occurrence of an Amortization Event, the Agent 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 the Agent following the occurrence of an Amortization Event, deliver or make available to the Agent all 40 such Records to such location as the 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 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 the Agent or any Purchaser, furnish to the 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 Agent, 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. The Agent is authorized at any time ------------------ to date and to deliver to the Collection Banks a Collection Notice under any Collection Account Agreement. The Seller hereby transfers to the Agent for the benefit of the Purchasers, effective when the 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 Agent, and agrees that the Agent shall be entitled to (i) endorse the Seller'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 Agent rather than the Seller. Section 7.04. Responsibilities of the Seller. Anything herein to the ------------------------------ contrary notwithstanding, the exercise by the Agent 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. 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 Statements. On or prior to the Report Date, --------------------- the Servicer will provide to the Agent a Settlement Statement substantially in the form of EXHIBIT C, and on each Settlement Date the Agent shall forward to each Purchaser such statement. Section 7.06. Quarterly Servicer's Certificate. The Servicer shall -------------------------------- deliver to the Agent 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 41 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, upon the occurrence of an Amortization Event, the 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 Agent. 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") for each line item in Section 5.01(c). On each Weekly Settlement Date the Agent, in accordance with the Weekly Report delivered by the Servicer, shall make a distribution to the Purchasers pursuant to Section 5.01(c). 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 the 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 Agent: (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 Agent (which until the Agent notifies 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 of each such period and consolidated profit and loss and reconciliation of surplus 42 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 Agent, 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 Agent 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 the ----------------- 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 the 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 Agent, which consent shall not be unreasonably withheld. Upon any amendment, modification or supplement to the Credit Policies consented to by the Agent, the Servicer shall deliver to the Agent, for distribution to the Purchasers, such amendment, 43 modification or supplement and EXHIBIT G shall be deemed to be amended by such amendment, modification or supplement. 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 or the Servicer, as applicable, to make any payment or deposit required by the terms of any of the Transaction Documents; (c) Settlement Statements. Failure on the part of the Servicer to --------------------- deliver a Settlement Statement within 5 days of the date such item is due to be delivered under any of the Transaction Documents; (d) Other Covenants. Failure on the part of the Seller, the Servicer --------------- or Federal-Mogul, 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 or Federal-Mogul, 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 or Federal-Mogul, as applicable; (e) Material Misrepresentations. Any representation or warranty made --------------------------- by the Seller or Federal-Mogul 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 the Agent, or (B) the date on which the Seller, the Servicer or Federal-Mogul, 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; 44 (f) Investment Company. The Seller shall become an "investment ------------------ company" within the meaning of the Investment Company Act; (g) Delinquency Ratio. The average Delinquency Ratio for any two ----------------- consecutive Collection Periods is a rate equal to or greater than 6.00%; (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 3.50%; (i) Dilution Ratio. The average Dilution Ratio for any three -------------- consecutive Collection Periods is a rate equal to or greater than 8.00%; (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; and/or ----------------- (m) Event of Default in Material Debt. Failure of the Servicer or any --------------------------------- of its Subsidiaries to pay any Indebtedness in excess of $10,000,000 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. 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 the Agent or any of the Purchasers, immediately upon the occurrence of such event and the Agent, 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 appoint a successor Servicer hereunder. 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. 45 ARTICLE IX INDEMNIFICATION Section 9.01. Indemnities by the Seller. Without limiting any other ------------------------- rights which the Agent or any Purchaser may have hereunder or under applicable law, the Seller hereby agrees to indemnify the Agent and each Purchaser and their respective officers, directors, agents and employees (each, an "INDEMNIFIED PARTY") from and against any and all damages, losses, claims, taxes, liabilities, costs, expenses and for all other amounts payable, including reasonable attorneys' fees (which attorneys may be employees of the Agent 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; (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 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 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 Agent 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 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; 46 (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 contemplated hereby or thereby other than (a) litigation between the Seller on the one hand and the Agent and one or more of the Investors 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 the Agent or one or more Investors or (ii) the unlawful conduct of the Agent or one or more Investors; (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 47 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 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 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. (c) Each Investor will promptly notify the Seller and the Agent of any event of which it has knowledge which is reasonably likely to entitle such Investor 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 Investor to such compensation. Section 9.03. Costs and Expenses Relating to this Agreement. The --------------------------------------------- Seller shall pay to the Agent and 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 Falcon'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 Falcon and the Agent (which such counsel may be employees of Falcon or the Agent) with respect thereto and with respect to advising Falcon and the Agent as to their respective rights and remedies under this Agreement. The Seller shall pay to the Agent on demand any and all costs and expenses of the Agent 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 Falcon or any Investor shall be made free and clear of and without deduction for any and all present or 48 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 Falcon or such Investor by any of (i) the United States or any State thereof, (ii) the state jurisdiction under the laws of which Falcon or such Investor 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 Falcon or any Investor, (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 Falcon or the relevant Investor, 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 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 Agent and the Seller. A certificate as to the amount of such indemnification submitted to the Seller and the 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 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 Investor 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 Agent from time to time prior to the initial Settlement Date on which the Agent, acting on behalf of such Investor, 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 49 the Seller or the Servicer to make payments to, and deposit funds to or for the account of, the Agent, acting on behalf of such Investor, 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 AGENT Section 10.01. Authorization and Action. Each Purchaser hereby ------------------------ designates and appoints The First National Bank of Chicago to act as its agent hereunder and under each other Transaction Document, and authorizes the Agent to take such actions as agent on its behalf and to exercise such powers as are delegated to the Agent by the terms of the Transaction Documents together with such powers as are reasonably incidental thereto. The 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, and no implied covenants, functions, responsibilities, duties, obligations or liabilities on the part of the Agent shall be read into this Agreement or any other Transaction Document or otherwise exist for the Agent. In performing its functions and duties hereunder and under the other Transaction Documents, the Agent shall act solely as agent for the Purchasers 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 Agent shall not be required to take any action which exposes the Agent to personal liability or which is contrary to this Agreement, any other Transaction Document or applicable law. The appointment and authority of the Agent hereunder shall terminate upon the indefeasible payment in full of all Aggregate Unpaids. Each Purchaser hereby authorizes the Agent to execute on behalf of such Purchaser (the terms of which shall be binding on such Purchaser) each of the Uniform Commercial Code financing statements, together with such other instruments or documents determined by the Agent to be necessary or desirable in order to perfect, evidence or more fully protect the interest of the Purchasers contemplated hereunder. Section 10.02. Delegation of Duties. The 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 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 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 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 50 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 Agent shall not be under any obligation to any Purchaser 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 Agent shall not be deemed to have knowledge of an Amortization Event or a Potential Amortization Event unless the Agent has received notice from the Seller or a Purchaser. Section 10.04. Reliance by Agent. The 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 Agent. The 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 Falcon or the Required Investors 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 Agent shall have received such advice, the Agent may take or refrain from taking any action, as the Agent shall deem advisable and in the best interests of the Purchasers. The Agent shall in all cases be fully protected in acting, or in refraining from acting, in accordance with a request of Falcon or the Required Investors 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. Section 10.05. Non-Reliance on Agent and Other Purchasers. Each ------------------------------------------ Purchaser expressly acknowledges that neither the 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 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 Agent. Each Purchaser represents and warrants to the Agent that it has and will, independently and without reliance upon the Agent or any other Purchaser 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 Purchasers --------------------------------- agree to reimburse and indemnify the 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 Agent, acting in its capacity as Agent, is entitled to reimbursement by the Seller hereunder and (ii) for any other expenses incurred by the Agent, in 51 its capacity as Agent and acting on behalf of the Purchasers, in connection with the administration and enforcement of the Transaction Documents. Section 10.07. Agent in its Individual Capacity. The 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 Agent were not the Agent hereunder. With respect to the acquisition of Receivable Interests pursuant to this Agreement, the 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 Agent, and the terms "Investor," "Purchaser," "Investors" and "Purchasers" shall include the Agent in its individual capacity if applicable. Section 10.08. Successor Agent. The Agent may, upon ten days' notice --------------- to the Seller and the Purchasers, and the Agent will, upon the direction of all of the Purchasers (other than the Agent, in its individual capacity) resign as Agent. If the Agent shall resign, then the Required Investors during such five- day period shall appoint from among the Purchasers a successor agent. If for any reason no successor Agent is appointed by the Required Investors during such five-day period, then effective upon the termination of such five day period, the Purchasers shall perform all of the duties of the 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 Agent's resignation hereunder as Agent, the retiring 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 Agent under this Agreement and under the other Transaction Documents. ARTICLE XI ASSIGNMENTS; PARTICIPATIONS Section 11.01. Assignments. (a) The Seller and each Investor hereby ----------- agree and consent to the complete or partial assignment by Falcon of all of its rights under, interest in, title to and obligations under this Agreement to the Investors pursuant to SECTION 3.01 or to any other Person, and upon such assignment, Falcon shall be released from its obligations so assigned. Further, the Seller and each Investor hereby agree that any assignee of Falcon of this Agreement or all or any of the Receivable Interests of Falcon shall have all of the rights and benefits under this Agreement as if the term "FALCON" explicitly referred to such party, and no such assignment shall in any way impair the rights and benefits of Falcon hereunder. The Seller shall not have the right to assign its rights or obligations under this Agreement. (b) Any Investor may at any time and from time to time assign to one or more Persons ("PURCHASING INVESTORS") all or any part of its rights and obligations under this Agreement pursuant to an assignment agreement, in a form and substance satisfactory to the Agent (the "ASSIGNMENT AND ACCEPTANCE"), executed by such Purchasing Investor and such selling Investor. The consent of Falcon shall be required prior to the effectiveness of any such 52 assignment; provided, however, that the consent of Falcon shall not be required if a Purchasing Investor is an Affiliate of the assigning Investor. Each assignee of an Investor must have a short-term debt rating of A-1 or better by Standard & Poor's Ratings Group and P-1 by Moody's Investors Service, Inc. and must agree to deliver to the Agent, promptly following any request therefor by the Agent or Falcon, an enforceability opinion in form and substance satisfactory to the Agent and Falcon. Upon delivery of the executed Assignment and Acceptance to the Agent, such selling Investor shall be released from its obligations hereunder to the extent of such assignment. Thereafter the Purchasing Investor shall for all purposes be an Investor party to this Agreement and shall have all the rights and obligations of an Investor 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 Agent shall be required. (c) Each of the Investors agrees that in the event that it shall cease to have a short-term debt rating of A-1 or better by Standard & Poor's Corporation and P-1 by Moody's Investors Service, Inc. (an "AFFECTED INVESTOR"), such Affected Investor shall be obliged, at the request of Falcon or the Agent, to assign all of its rights and obligations hereunder to (x) another Investor or (y) another financial institution nominated by the Agent and acceptable to Falcon, and willing to participate in this Agreement through the Liquidity Termination Date in the place of such Affected Investor; provided that the Affected Investor receives payment in full, pursuant to an Assignment and Acceptance, of an amount equal to such Investor's Pro Rata Share of the Capital and Discount owing to the Investors and all accruing but unpaid fees and other costs and expenses payable in respect of its Pro Rata Share of the Receivable Interests. Section 11.02. Participations. Any Investor 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 Investors, its obligation to pay Falcon its Acquisition Amounts or any other interest of such Investor hereunder. Notwithstanding any such sale by an Investor of a participating interest to a Participant, such Investor's rights and obligations under this Agreement shall remain unchanged, such Investor shall remain solely responsible for the performance of its obligations hereunder, and the Seller, Falcon and the Agent shall continue to deal solely and directly with such Investor in connection with such Investor's rights and obligations under this Agreement. Each Investor agrees that any agreement between such Investor and any such Participant in respect of such participating interest shall not restrict such Investor'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 12.01(B). ARTICLE XII MISCELLANEOUS Section 12.01. 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. 53 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 12.01(B). Falcon, the Seller and the Agent, at the direction of the Required Investors, 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 Discount (or any component thereof), (C) reduce any fee payable to the Agent for the benefit of the Purchasers, (D) except pursuant to ARTICLE XL hereof, change the amount of the Capital of any Purchaser, an Investor's Pro Rata Share or an Investor's Commitment, (E) amend, modify or waive any provision of the definition of Required Investors or this SECTION 12.01(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," "DILUTION RESERVE", "DISCOUNT RESERVE," "LOSS RESERVE PERCENTAGE," or "AGGREGATE RESERVE PERCENTAGE" or (H) amend or modify any defined term (or any defined term used directly or indirectly in such defined term) used in clauses (A) through (G) above in a manner which would circumvent the intention of the restrictions set forth in such clauses; or (ii) without the written consent of the then 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) without the consent of the Investors, the Agent may, with the consent of the Seller, amend this Agreement solely to add additional Persons as Investors hereunder and (ii) without the consent of the Seller, the Agent, the Required Investors and Falcon may enter into amendments to modify any of the terms or provisions of ARTICLE III, ARTICLE X, ARTICLE XI or SECTION 12.13 provided that such amendment has no negative impact upon the Seller. Any modification or waiver made in accordance with this SECTION 12.01 shall apply to each of the Purchasers equally and shall be binding upon the Seller, the Purchasers and the Agent. (c) Neither the Seller nor the Agent shall consent to any amendment of the Sale Agreement without the prior written consent of the Required Investors if such amendment would have a material adverse effect on any Investor. Section 12.02. 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 54 facsimile transmission or similar writing) and shall be given to the other parties hereto at their 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 Agent 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 Agent to effect purchases and Tranche Period and Discount Rate selections based on telephonic notices made by any Person whom the Agent in good faith believes to be acting on behalf of the Seller. The Seller agrees to deliver promptly to the Agent 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 Agent, the records of the Agent shall govern absent manifest error. Section 12.03. Ratable Payments. If any Purchaser, whetherby 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 12.04. Protection of Ownership Interests of the Agent on ------------------------------------------------- behalf of the Purchasers. - - ------------------------ (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 the Agent may request, to perfect, protect or more fully evidence the Receivable Interests, or to enable the Agent or the Purchasers to exercise and enforce their rights and remedies hereunder. The Agent may, or the 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 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, the Agent or any Purchaser may (but shall not be required to) perform, or cause performance of, such obligation; and the Agent's or such Purchaser's costs and expenses incurred in connection therewith shall be payable by the Seller (if the Servicer that fails to so 55 perform is the Seller or an Affiliate thereof) as provided in SECTION 9.03, as applicable. The Seller and the Servicer each irrevocably authorizes the Agent at any time and from time to time in the sole discretion of the Agent, and appoints the 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 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 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 12.05. Confidentiality. Each of the Seller, Federal-Mogul, --------------- the Servicer (if other than Federal-Mogul), the Agent 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 the 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) the 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 the 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 the 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 the Agent, such Purchaser or Funding Source is a party, or (vii) if any Amortization Event has occurred and is continuing, to the extent the 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. 56 The Agent and the Purchasers agree to allow the Seller to inspect their security and confidentiality arrangements from time to time upon reasonable prior notice and during normal business hours. The Agent 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 provide the Seller with five day's advance notice of any disclosure pursuant to clause (vi) of this Section 12.05. Section 12.06. Bankruptcy Petition. The Seller, the Agent and each ------------------- Investor 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, it will not institute against, or join any other Person in instituting against, 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 12.07. Limitation of Liability. Except with respect to any ----------------------- claim arising out of the willful misconduct or gross negligence of Falcon, the Agent or any Investor, no claim may be made by the Seller, the Servicer or any other Person against Falcon, the Agent or any Investor 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 12.08. 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 12.09. 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 THE 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 THE AGENT OR ANY PURCHASER OR ANY AFFILIATE OF THE AGENT OR A PURCHASER INVOLVING, DIRECTLY OR INDIRECTLY, ANY 57 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 12.10. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO -------------------- 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 THE TRANSACTION DOCUMENTS OR THE RELATIONSHIPS ESTABLISHED THEREUNDER. Section 12.11. 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 12.06 shall survive any termination of this Agreement. Section 12.12. 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 12.13. First Chicago Roles. Each of the Investors ------------------- acknowledges that First Chicago and certain of its Affiliates including (First Chicago Capital Markets, Inc.) act, or may in the future act, (i) as administrative agent for Falcon, (ii) as issuing and paying agent for the Commercial Paper, (iii) to provide credit or liquidity enhancement for the timely payment for the Commercial Paper and (iv) to provide other services from time to time for Falcon (collectively, the "FIRST CHICAGO ROLES"). Without limiting the generality of this SECTION 12.13, each Investor hereby acknowledges and consents to any and all First Chicago Roles and agrees that in connection with any First Chicago Role, First Chicago may take, or refrain from taking, any action which it, in its discretion, deems appropriate, including, without limitation, in its role as administrative agent for Falcon, the giving of notice to the Agent of a mandatory purchase pursuant to SECTION 3.01. Section 12.14. Characterization. ---------------- (a) It is the intention of the parties hereto that, except for income tax purposes, each purchase hereunder shall constitute an absolute and irrevocable sale, 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 of a Receivable Interest 58 hereunder is made without recourse to the Seller; PROVIDED, HOWEVER, that (i) the Seller shall be liable to each Purchaser and the Agent for all representations, warranties and covenants made by the Seller pursuant to the terms of this Agreement, and (ii) such sale does not constitute and is not intended to result in an assumption by any Purchaser or the 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 income 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 Agent for the ratable benefit of the Purchasers a duly perfected security interest in all of the Seller's right, title and interest 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, and all proceeds of any thereof prior to all other liens on and security interests therein. After an Amortization Event, the Agent and the Purchasers 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. Section 12.15. Acknowledgments. The Seller hereby acknowledges that: --------------- (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement; (b) neither the Agent nor 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 Agent 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 Agent. [signature pages follow] 59 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 60 AGENT: THE FIRST NATIONAL BANK OF CHICAGO, as Agent By:____________________________________ Authorized Agent Address for Notices: The First National Bank of Chicago Suite 0079, 1-21 One First National Plaza Chicago, Illinois 60670-0079 Attention: Caitlin Kelly Phone: (312) 732-2566 Fax: (312) 732-4487 FALCON: FALCON ASSET SECURITIZATION CORPORATION By: _________________________________ Authorized Signatory Address for Notices: Falcon Asset Securitization Corporation c/o The First National Bank of Chicago Asset-Backed Finance One First National Plaza Chicago, Illinois 60670-0079 Attention: Caitlin Kelly Fax: (312) 732-4487 Phone: (312) 732-2566 61 INVESTORS: Commitment NBD BANK ---------- $100,000,000 By:_______________________________ Authorized Agent Address for Notices: NBD Bank 611 Woodward Avenue Detroit, Michigan 48226 Attention: Alison K. Dolin Phone: (313) 225-3182 Fax: (313) 225-4533 Commitment DRESDNER BANK AG, NEW YORK ---------- AND GRAND CAYMAN BRANCHES $50,000,000 By: _______________________________ Authorized Agent By:________________________________ Authorized Agent Address for Notices: Dresdner Bank AG, New York and Grand Cayman Branches 190 South LaSalle Suite 2700 Chicago, Illinois 6063 Attention: Michael Petix Phone: (312) 444-1313 Fax: (312) 444-1192 62 EXHIBIT A --------- FORM OF PURCHASE NOTICE [DATE] The First National Bank of Chicago, as Agent for the Purchasers parties to the Receivables Interest Purchase Agreement referred to below Suite 0079, 1-21 One First National Plaza Chicago, Illinois 60670 Attention: Asset-Backed Finance Gentlemen: The undersigned, Federal-Mogul Funding Corporation, refers to the Receivables Interest Purchase Agreement, dated as of November 20, 1998 (the "RECEIVABLES PURCHASE AGREEMENT", the terms defined therein being used herein as therein defined), among the undersigned, Federal-Mogul Corporation, Falcon Asset Securitization Corporation ("FALCON"), certain Investors parties thereto and The First National Bank of Chicago, as Agent for FALCON and such Investors, 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 , 19 . (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] [are the Investors]. (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 [CP] [LIBOR] [Base] Rate. 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): (B) the representations and warranties set forth in Section 4.02 of the Receivables Purchase Agreement are correct on and as of such date, as though made on and as of such date; (C) 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 (D) 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 B --------- FORM OF COLLECTION ACCOUNT AGREEMENT [Letterhead of Federal-Mogul Funding Corporation] _____________, 19__ [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 ____________, 19__ 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"). Federal-Mogul Corporation (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 November 20, 1998, in lieu of being deposited in the Existing Account, all checks and other evidences of payment that are sent to the Lock-Box be endorsed and deposited in SPC's account no. _____________ (the "LOCK-BOX ACCOUNT") in the name of ["Federal-Mogul Corporation, as 'Servicer' for the benefit of The First National Bank of Chicago, as Agent under that certain Receivables Interest Purchase Agreement dated as of November 20, 1998 among SPC, as seller, Federal-Mogul Corporation, as servicer, Falcon Asset Securitization Corporation, as purchaser, the financial institutions from time to time a party thereto, as investors, and The First National Bank of Chicago, as agent"]. SPC hereby irrevocably instructs you, and you hereby agree, that upon receiving notice from The First National Bank of Chicago, as Agent (the "AGENT") in the form attached hereto as Annex A: (i) the name of the Lock-Box Account will be changed to "The First National Bank of Chicago, as Agent" (or any designee of the Agent), and the 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 Agent may otherwise request, (iii) you will transfer monies on deposit in the Lock-Box Account, at any time, as directed by the Agent, (iv) all services to be performed by you under the Agreement will be performed on behalf of the Agent, and (v) all correspondence or other mail which you have agreed to send to either Originator or SPC will be sent to the Agent at the following address: The First National Bank of Chicago, as Agent Suite 0079, 1-21 One First National Plaza Chicago, Illinois 60670-0079 Attention: ________ Kelly Moreover, upon such notice, the 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 Agent for the purpose of receiving funds from the Lock-Box are subject to the liens of the 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 2 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. 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 ___________, 199_: [COLLECTION BANK] By: ___________________________________ Name: Title: _________________________, as Agent By_____________________________________ Authorized Agent 3 ANNEX A FORM OF COLLECTION NOTICE [ON LETTERHEAD OF THE 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, THE FIRST NATIONAL BANK OF CHICAGO as Agent By: ________________________________ Authorized Agent 4 EXHIBIT C --------- FORM OF SETTLEMENT DATE STATEMENT MONTH ENDED - - ------------ 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: Balances greater than 90 dpd APS Deferred Balance Contra Accounts less than 91 dpd Cross-agings less than 91 dpd Terms over 90 but less than 180 less than 91 dpd Less Intercompany Receivables Less T&N Receivables Eligible Receivables ----------- Excess Concentrations ----------- Net Receivables Balance Contractual Dilution Available Receivables Aggregate Reserve Percentage Aggregate Reserves Available Funding Amount (max $150 MM) IV. EARLY AMORTIZATION EVENTS Delinquency Ratio Trigger - greater than or equal to 6.0% for two consecutive months Prior Current Month ------- ----- greater than 60 dpd/Total - - ------------------------------------------------------------------ Early Amortization? No - - ------------------------------------------------------------------ LOSS-TO-LIQUIDATION RATIO TRIGGER - 3-month rolling average greater than or equal to 3.50% Prior 2 months 3-month Current Month Prior Average ------- ----- ---- ------- 61-90 days past due change in placed accounts cash collections Loss/Liquidation Ratio - - ------------------------------------------------------------------ Early Amortization? - - ------------------------------------------------------------------ DILUTION RATIO TRIGGER - 3-month rolling average greater than or equal to 8.00% Prior 2 months 3-month Current Month Prior Average ----- ---- ------- NAA Credit Memos OEM Credit Memos Dilutive adjustments Pool Balance Dilution Ratio - - ----------------------------------------------------------------- Early Amortization? - - ------------------------------------------------------------------ 2 COVERAGE AMOUNT =Capital minus Available Funding Amount Capital Outstanding Available Funding Amount Coverage Amount to be paid on Distribution Date MINIMUM ENHANCEMENT AMOUNT Contractual Dilution Aggregate Reserve Minimum Enhancement Amount V. CALCULATION OF CAPITAL 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 Falcon VII. WIRING INSTRUCTIONS Wiring instructions to pay interest and fees: Amount: To: Falcon Asset Securitization Corporation, account # 51-14810 at FNBC, ABA #071-000-013, reference: Federal-Mogul Funding Corp. Other wiring instructions: [insert] The undersigned hereby represents and warrants that the foregoing is a true and accurate accounting in accordance with the Receivable Interest Purchase Agreement dated as of November 20, 1998 and that all representations and warranties are restated and reaffirmed. 3 _____________________________________________________________________ Sandra Galac Assistant Treasurer 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 --------- COLLECTION BANKS AND COLLECTION ACCOUNTS A. Lockbox number 67000, Department 148901 Comerica account number 1000013027, in the name of Federal-Mogul Funding Corporation B. Lockbox number 07922 Royal Bank of Canada account number 1113414, in the name of Federal-Mogul Funding Corporaiton EXHIBIT F --------- FORM OF COMPLIANCE CERTIFICATE To: The First National Bank of Chicago, as Agent This Compliance Certificate is furnished pursuant to that certain Receivables Interest Purchase Agreement dated as of November 20, 1998, among Federal-Mogul Funding Corporation (the "SELLER"), Federal-Mogul Corporation, the Purchasers party thereto, and The First National Bank of Chicago, as agent for such Purchasers (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: 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 . 45 total employees . 4 part-time/associate . 41 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: . 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. 2 . 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 . 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 PAYMENT TERMS 3 . 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 terms in general are 2% 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 October, 1998 month end, there were 6 open Notes Receivable for a total of $131,757.08. 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. 4 . 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. AFTERMARKET - CUSTOMER BASE OVERVIEW . NUMBER OF AFTERMARKET AND RETAIL ACCOUNTS . 4,617 active Aftermarket accounts . 39 active Retail accounts . PRODUCT LINES PURCHASED . Engine parts - pistons, piston rings, engine bearings, camshafts . Chassis parts - rack & pinion, tie rods, ball joints, half-shafts Anti-friction - ball and roller bearings . Sealing products - oil seals . Fuel products - fuel pumps, carburetors, emission control products . Lighting products - strobes, marker lights, reflective tape, wire harnesses . 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. 5 . Retail customers buy product for resale in their own company owned store. Examples are CSK Automotive, Advance and AutoZone. ORIGINAL EQUIPMENT MARKET AND EXPORT OVERVIEW . OE EXPORT CUSTOMER BASE . 856 active OEM accounts . 106 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 LINES PURCHASED . Manufactured products include engine and transmission products, sealing devices, lighting products and fuel systems. . Aftermarket products sold in the OE market to the sales and service operations of our OE customers for their dealers. . 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. 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 6 . 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. 7 EX-23.1 7 CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23.1 Consent of Independent Auditors We consent to the incorporation by reference in the registration statements (33-55135, 33-54717, 33-51265, 333-50413, 333-56725, 333-53853, 333-67805, 333-74661) on Form S-3 and the registration statements (333-38961, 33-54301, 33-51403, 33-32429, 33-32323, 33-30172, 2-93179) on Form S-8 of our report dated February 3, 1999, except for Note 23, as to which the date is February 24, 1999, with respect to the consolidated financial statements and schedule of Federal- Mogul Corporation; January 29, 1999 with respect to the consolidated financial statements of Federal-Mogul Ignition Company (and the Cooper Automotive division of Cooper Industries, Inc., its predecessor); January 29, 1999 with respect to the consolidated financial statements of Federal-Mogul Products, Inc. (and the Moog Automotive division of Cooper Industries, Inc., its predecessor); and February 12, 1999 with respect to the financial statements of Federal-Mogul Aviation, Inc. (and Champion Aviation, Inc., a subsidiary of Cooper Industries, Inc., its predecessor), all of which are included in its Annual Report on Form 10-K for the year ended December 31, 1998. /s/ Ernst and Young LLP Detroit, Michigan March 31, 1999 EX-21 8 LIST OF 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, 1998, are as follows:
Percentage of Voting Stock Jurisdiction Owned by FM Name of Subsidiary of Incorporation & Other Subs ------------------ ---------------- ------------- Federal-Mogul Canada, Ltd. Canada 100% Federal-Mogul, S.A. France 100% Federal-Mogul Motorenteile Holding GmbH Germany 100% Federal-Mogul Weisbaden GmbH Germany 100% T & N Holdings GmbH Germany 100% Federal-Mogul Ignition SpA Italy 100% Federal-Mogul Cuorgne, S.p.A. Italy 100% Bertolotti Pietro e Figli, S.r.l. Italy 100% Federal-Mogul Aftermarket Italia SRL Italy 100% Federal-Mogul Friction Products, SpA 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, S.A. Switzerland 100% Federal-Mogul Global Growth Ltd. United Kingdom 100% F-M UK Holding Ltd. United Kingdom 100% T & N Limited United Kingdom 100% Fleetside Investments Ltd. United Kingdom 100% T & N Trademarks Ltd. United Kingdom 100% Carter Automotive Company, Inc. Delaware 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 Jurisdiction Owned by FM Name of Subsidiary of Incorporation & Other Subs ------------------ ---------------- ------------- 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% F-M International Group Inc. 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-24 9 POWERS 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 31,1998, hereby nominates, constitutes and appoints Thomas W. Ryan and James J. Zamoyski, 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 ___ day of March, 1999. /s/ RICHARD A. SNELL --------------------------- RICHARD A. SNELL Chairman of the Board and Chief Executive Officer; Director /s/ JOHN J. FANNON /s/ ANTONIO MADERO - - -------------------- ------------------------------ JOHN J. FANNON ANTONIO MADERO Director Director /s/ RODERICK M. HILLS /s/ ROBERT S. MILLER, JR. - - -------------------- ----------------------------- RODERICK M. HILLS ROBERT S. MILLER 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 EX-27 10 FINANCIAL DATA SCHEDULE
5 1,000,000 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 77 0 1085 60 1069 2600 2797 320 9940 2029 3130 0 177 337 1472 9940 4469 4469 3290 781 8 0 204 186 94 92 0 (38) 0 54 1.04 .96
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