<PAGE> 1
Filed Pursuant to Rule 424 (b) (3)
Registration No. 333-49777
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION AND DECLARED EFFECTIVE. THESE SECURITIES MAY
NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME A FINAL
PROSPECTUS SUPPLEMENT IS DELIVERED. THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL
PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH
JURISDICTION.
Subject to Completion, Dated August 6, 1998
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 4, 1998)
MERITOR AUTOMOTIVE, INC.
$100,000,000 % Notes due
ISSUE PRICE: %
$100,000,000 % Debentures due
ISSUE PRICE: %
Interest payable and .
Interest on the % Notes due , (the " % Notes") and the %
Debentures due , (the " % Debentures") will be payable on
and , commencing on , 1999. Each of the % Notes and the
% Debentures (collectively, the "Securities") will be redeemable prior to
maturity, as a whole at any time or in part from time to time, at the option of
Meritor Automotive, Inc., a Delaware corporation (the "Company" or "Meritor"),
at a redemption price equal to the greater of (i) 100% of the principal amount
of such Securities being redeemed and (ii) the sum of the present values of the
Remaining Scheduled Payments (as defined herein) discounted to the redemption
date on a semiannual basis at the Treasury Rate (as defined herein) plus
basis points in the case of the % Notes and basis points in the case of
the % Debentures, together, in each case, with accrued interest to the date
of redemption. See "Description of the Securities -- Optional Redemption."
Each series of the Securities will be represented by one or more global
securities registered in the name of a nominee of The Depository Trust Company,
as depositary (the "Depositary" or "DTC"). Beneficial interests in the
Securities will be shown on, and transfers thereof will be effected only
through, records maintained by the Depositary and its participants. Except as
described in this Prospectus Supplement or the accompanying Prospectus,
Securities in definitive form will not be issued. See "Description of the
Securities -- Book-Entry System."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT
RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(1)(3)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per % Note % % %
- --------------------------------------------------------------------------------------------------------------
Total $ $ $
- --------------------------------------------------------------------------------------------------------------
Per % Debenture % % %
- --------------------------------------------------------------------------------------------------------------
Total $ $ $
- --------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued interest, if any, from , 1998.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as amended.
See "Underwriting" herein.
(3) Before deducting expenses payable by the Company estimated to be $ .
The Securities are offered, subject to prior sale, when, as and if accepted by
the several Underwriters and subject to approval of certain legal matters by
Dewey Ballantine LLP, counsel for the Underwriters. It is expected that delivery
of the Securities will be made on or about , 1998 through the book-entry
facilities of DTC against payment therefor in immediately available funds.
J.P. MORGAN & CO.
MORGAN STANLEY DEAN WITTER
WARBURG DILLON READ LLC
August , 1998
<PAGE> 2
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING,
AND MAY ALSO BID FOR, AND PURCHASE, THE SECURITIES IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained or
incorporated by reference in this Prospectus Supplement and the accompanying
Prospectus, and, if given or made, such information or representations must not
be relied upon as having been authorized by the Company or by any Underwriter.
This Prospectus Supplement and the accompanying Prospectus do not constitute an
offer to sell or the solicitation of an offer to buy the Securities by anyone in
any jurisdiction in which such offer or solicitation is not authorized or in
which the person making such offer or solicitation is not qualified to do so or
to any person to whom it is unlawful to make such offer or solicitation. Neither
the delivery of this Prospectus Supplement or the accompanying Prospectus, nor
any sale made hereunder and thereunder shall, under any circumstances, create
any implication that there has been no change in the affairs of the Company
since the date hereof or thereof or that the information contained or
incorporated by reference herein or therein is correct as of any time subsequent
to the date of such information.
------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
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PAGE
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<S> <C>
Forward-Looking Statements.................................. S-2
Use of Proceeds............................................. S-3
Pro Forma Capitalization.................................... S-3
The Company................................................. S-4
Selected Financial Data..................................... S-13
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. S-14
Ratio of Earnings to Fixed Charges.......................... S-21
Description of the Securities............................... S-21
Underwriting................................................ S-25
PROSPECTUS
Available Information....................................... 2
Documents Incorporated by Reference......................... 2
The Company................................................. 3
Use of Proceeds............................................. 3
Ratio of Earnings to Fixed Charges.......................... 3
Description of the Debt Securities.......................... 4
Plan of Distribution........................................ 14
Experts..................................................... 15
Legal Matters............................................... 16
</TABLE>
FORWARD-LOOKING STATEMENTS
This Prospectus Supplement contains statements relating to future results
of the Company (including certain projections and business trends) that are
"forward-looking statements" as defined in the Private Securities Litigation
Reform Act of 1995. Actual results may differ materially from those projected as
a result of various risks and uncertainties, including but not limited to global
economic and market conditions, such as the demand for commercial, specialty and
light vehicles for which the Company supplies products; risks inherent in
operating abroad; original equipment manufacturer program delays; demand for and
market acceptance of new and existing products; successful development of new
products; reliance on major original equipment manufacturer customers; labor
relations of the Company, its customers and suppliers; and competitive product
and pricing pressures, as well as other risks and uncertainties, including those
detailed herein and from time to time in other filings of the Company with the
Securities and Exchange Commission. See also "The Company -- Customers; Sales
and Marketing", "-- Competition", "-- Raw Materials and Supplies",
"-- Acquisitions and Dispositions", "-- Seasonality; Cyclicality" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" herein.
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USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
Securities will be applied to repay approximately $200 million aggregate
principal amount of borrowings under the Company's bank revolving credit
facility, which were incurred primarily to fund payments to Rockwell
International Corporation in connection with the Distribution (defined below).
These borrowings bear interest at fluctuating rates which, on August 6, 1998,
ranged from 5.075% to 7.82845%. Pending application of the funds, the Company
will use the net proceeds of the Securities for short-term investments.
PRO FORMA CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1998 and as adjusted to give effect to the sale of the Securities offered
hereby and the application of the net proceeds therefrom as described under "Use
of Proceeds". This table should be read in conjunction with "Use of Proceeds",
"Selected Financial Data", "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and related notes of the Company appearing elsewhere or incorporated by
reference herein. The pro forma information may not reflect the cash, short-term
debt and capitalization of the Company in the future.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
--------------------------------------
PRO FORMA COMPANY
HISTORICAL ADJUSTMENTS PRO FORMA
<S> <C> <C> <C>
Cash....................................................... $ 68 $ -- $ 68
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Short-term debt............................................ 51 -- 51
===== ===== =====
Long-term debt:
Bank revolving credit facility........................ 394 (200) 194
Other obligations..................................... 46 -- 46
% Notes.......................................... -- 100 100
% Debentures..................................... -- 100 100
----- ----- -----
Total long-term debt....................................... 440 -- 440
Minority interests......................................... 39 -- 39
Shareowners' equity:
Common Stock.......................................... 69 -- 69
Additional paid-in-capital............................ 155 -- 155
Retained earnings..................................... 102 -- 102
Cumulative currency translation adjustments........... (101) -- (101)
----- ----- -----
Total shareowners' equity.................................. 225 -- 225
----- ----- -----
Total capitalization..................................... $ 704 $ -- $ 704
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</TABLE>
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THE COMPANY
The Company, headquartered in Troy, Michigan, is a leading global supplier
of a broad range of components and systems for use in commercial, specialty and
light vehicles. The Company was incorporated in Delaware in May 1997 in
connection with the September 30, 1997 distribution by Rockwell International
Corporation, a Delaware corporation and Meritor's former parent company
("Rockwell"), to Rockwell shareowners on a pro rata basis of all of the issued
and outstanding shares of the Company (the "Distribution"). In the Distribution,
Rockwell shareowners received one share of Company Common Stock for every three
shares of Rockwell Common Stock owned on September 17, 1997, the record date for
the Distribution. Prior to the Distribution, Rockwell transferred substantially
all of its operations, assets and liabilities related to the automotive
businesses then owned and operated by Rockwell (the "Automotive Business")
(including liabilities relating to former operations) to the Company or to
subsidiaries of the Company. As used herein, the terms "Company" or "Meritor"
include subsidiaries and predecessors unless the context indicates otherwise.
References herein to the Company's being a leading supplier or the world's
leading supplier, and other similar statements as to the Company's relative
market position, are based principally on calculations made by the Company based
on information collected by the Company, including Company and industry sales
data obtained from internal and available external sources, as well as Company
estimates. In addition to such quantitative data, the Company's statements are
based also on other competitive factors such as the Company's technological
capabilities, its research and development efforts and innovations and the
quality of its products and services, in each case relative to that of its
competitors in its addressed markets.
Meritor serves a broad range of original equipment manufacturer ("OEM")
customers worldwide, including truck OEMs, light vehicle OEMs, semi-trailer
producers and off-highway and specialty vehicle manufacturers. Its ten largest
customers accounted for 59% of total fiscal 1997 sales. The Company operates 46
manufacturing facilities around the world. Sales outside North America accounted
for approximately 41% of total sales in fiscal 1997.
The Company serves its customers worldwide through Heavy Vehicle Systems
("HVS") and Light Vehicle Systems ("LVS"). HVS, which had fiscal 1997 sales of
approximately $2.0 billion, supplies drivetrain systems and components,
including axles, brakes, transmissions, clutches and drivelines, for heavy-duty
and medium-duty trucks, trailers, off-highway equipment, buses and coaches, as
well as other specialty and military vehicles. LVS, which had fiscal 1997 sales
of approximately $1.3 billion, supplies electromechanical and other components
and systems, including roof, door, access control and seat adjusting systems, as
well as suspension products and steel wheels, for passenger cars, light trucks
and sport utility vehicles.
The Company conducts operations in the United States and in 15 foreign
countries. Nearly one-half of Meritor's total assets and 41 percent of sales for
the year ended September 30, 1997, were outside North America, primarily in
France, the United Kingdom, Germany, Brazil and Italy.
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The Company's sales by product class for the three fiscal years ended
September 30, 1997 were as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 30,
-------------------------------
1997 1996 1995
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(IN MILLIONS)
<S> <C> <C> <C>
Heavy Vehicle Systems:
Truck and Trailer Products........................... $1,441 $1,360 $1,504
Off-Highway, Specialty and Military Vehicle
Products.......................................... 516 467 433
Light Vehicle Systems.................................. 1,352 1,317 1,188
------ ------ ------
Total........................................ $3,309 $3,144 $3,125
====== ====== ======
</TABLE>
The following tables provide HVS sales by product and geographic region for
the fiscal year ended September 30, 1997:
HEAVY VEHICLE SYSTEMS
<TABLE>
<S> <C>
1997 Sales by Product:
Truck and Trailer Axles and Brakes........................ 65%
Off-Highway, Specialty and Military Vehicle Products...... 26
Transmissions, Clutches, Drivelines and Other Products.... 9
1997 Sales by Geographic Region:
North America............................................. 75%
Europe.................................................... 17
South America............................................. 5
Asia-Pacific.............................................. 3
</TABLE>
In fiscal 1997, aftermarket sales represented 15% of total HVS sales and
were made primarily in North America.
The following tables provide LVS sales by product and geographic region for
the fiscal year ended September 30, 1997:
LIGHT VEHICLE SYSTEMS
<TABLE>
<S> <C>
1997 Sales by Product:
Roof Systems.............................................. 31%
Door Systems.............................................. 29
Access Control Systems.................................... 14
Suspension Products....................................... 12
Steel Wheels.............................................. 11
Seat Adjusting Systems.................................... 3
1997 Sales by Geographic Region:
Europe.................................................... 51%
North America............................................. 34
South America............................................. 11
Asia-Pacific.............................................. 4
</TABLE>
Meritor began operations separate from Rockwell on October 1, 1997 and,
accordingly, does not have an operating history as an independent company prior
to that date. The financial information included or incorporated by reference in
this Prospectus Supplement or the accompanying Prospectus for periods prior to
September 30, 1997 reflects the Automotive Business as part of Rockwell and may
not necessarily be indicative of the results of operations, financial position
and cash flows of the Company had it been a separate, independent company during
these periods. The consolidated financial statements for periods after September
30, 1997 are those of the Company and its subsidiaries.
S-5
<PAGE> 6
INDUSTRY TRENDS
The automotive industry is experiencing several significant trends that
present opportunities and challenges to industry suppliers. These trends, which
influence the Company's business strategies, include the globalization of OEMs
and their suppliers, increased outsourcing by OEMs, increased demand for modules
and systems by OEMs and the consolidation of suppliers worldwide.
As OEMs expand geographically to access new markets, they are able to
achieve significant cost savings and enhanced product quality and consistency by
sourcing from the most capable, full-service global suppliers. OEMs and
suppliers also have the opportunity to take advantage of economies of scale
through global sourcing of components and systems and by designing platforms
that can be used in different geographic markets, but still be adapted to local
preferences.
OEMs are responding to global competitive pressures to improve quality and
reduce manufacturing costs and related capital investments by outsourcing
products which they historically have engineered and manufactured internally.
Outsourcing enables OEMs to focus on their core design, assembly and marketing
capabilities. In markets addressed by LVS, this increased outsourcing trend has
extended not only to components, but to entire modules and systems, requiring
suppliers to provide a higher level of engineering, design, electromechanical
and systems integration expertise in order to remain competitive. Increased
outsourcing by light vehicle OEMs has produced higher overall per vehicle sales
by independent suppliers. Such increased outsourcing can result in supplier
sales growth independent of the overall automotive industry growth trend.
OEMs also are reducing their total number of suppliers and are more
frequently entering into supply arrangements with the most capable global
suppliers. Increasingly, the criteria for selection include not only quality,
cost and responsiveness, but also certain full-service capabilities, including
design and engineering. This trend and the globalization trend described above
have contributed to the consolidation of automotive suppliers into larger, more
efficient and more capable companies.
BUSINESS STRATEGIES
Meritor has developed leadership market positions as it has grown into a
global supplier of a broad range of components and systems for use in
commercial, specialty and light vehicles worldwide. Meritor seeks to enhance its
leadership positions and capitalize on its existing customer, product and
geographic strengths, as well as the industry trends described above, and to
increase its sales, earnings and profitability by employing the following
business strategies:
Continuously Improve Core Business Processes. The Company is continuously
seeking to improve its core business processes through investment in information
technology and capital equipment, rationalization of production among
facilities, deintegration of non-core processes, establishment of flexible
assembly sites and simplification and increased commonality of products in order
to reduce product costs and improve product quality while lowering required
asset investment levels, reducing product development times and increasing
flexibility to meet customer needs.
Capitalize on Customer Outsourcing Activities. A significant growth
strategy of the Company is to provide lower cost and higher quality products to
customers in connection with their increasing outsourcing activities. Management
believes truck and trailer OEMs in Europe will increasingly outsource in order
to achieve cost and efficiency advantages. The Company intends to work closely
with current and prospective customers worldwide to identify and implement
mutually beneficial outsourcing opportunities. The Company has sought and will
continue to seek to utilize its broad product line and design, engineering and
manufacturing expertise by expanding its sales of higher value modules and
systems. The Company will seek to utilize its leadership positions in the supply
of electromechanical systems to light vehicle OEMs and its ability to provide
drivetrain systems to truck and specialty vehicle OEMs to capitalize on this
anticipated customer demand.
Leverage Geographic Strengths. Geographic expansion to meet the global
sourcing needs of customers and to address new markets will continue to be an
important element of the Company's growth strategy.
S-6
<PAGE> 7
Management believes opportunities exist to increase further the Company's
presence in the North American light vehicle markets, where its sales of light
vehicle products increased from approximately $415 million in fiscal 1996
($27.48 content per light vehicle manufactured in North America) to
approximately $466 million in fiscal 1997 ($30.66 content per light vehicle
manufactured in North America). The Company also believes there are
opportunities to increase sales to heavy-duty and medium-duty commercial vehicle
OEMs in Europe, building on established customer relationships with their North
American affiliates and the Company's existing manufacturing presence in Europe.
Emerging markets such as the Asia-Pacific region and South America also present
growth opportunities as demand for commercial, specialty and light vehicles
increases in these areas.
Introduce New Systems and Technologies. Meritor plans to continue
investing in new technologies, including electronics, and product development
and working closely with its customers to develop and implement design,
engineering, manufacturing and quality improvements. The Company will draw upon
the engineering resources of its Technical Center in Troy, Michigan and its
engineering centers of expertise in the United States, Brazil, Canada, France,
Germany and the United Kingdom, as well as its ongoing relationship with the
Rockwell Science Center. See "-- Research and Development."
Management believes that its strategy of continuing to introduce new and
improved systems and technologies will be an important factor in its efforts to
achieve its growth objectives.
Expand Aftermarket Business. Meritor intends to pursue growth of its
aftermarket business, which historically has generated higher profit margins
than those associated with original equipment sales. The Company's fiscal 1997
aftermarket sales were $290 million, representing sales of components and
services principally to HVS North American customers. The Company will seek to
expand its aftermarket business by utilizing its advanced distribution center in
Florence, Kentucky, and leveraging its existing aftermarket channels with new
products, both those manufactured by the Company and those manufactured by
others and sold by the Company under distribution agreements.
Selectively Pursue Strategic Opportunities. The Company regularly
evaluates various strategic and business development opportunities, including
license agreements, marketing arrangements, joint ventures and acquisitions. The
Company intends to continue selectively to pursue alliances and acquisitions
that would allow it to gain access to new customers and technologies, penetrate
new geographic markets and enter new product markets.
PRODUCTS
Meritor designs, develops, manufactures, markets, distributes, sells,
services and supports a broad range of products for use in commercial, specialty
and light vehicles. In addition to sales to the OEM market, the Company provides
its truck and trailer products and off-highway and specialty products to OEMs,
dealers, distributors, fleets and other end-users in the aftermarket. Principal
products of the Company include the following:
HEAVY VEHICLE SYSTEMS
Truck and Trailer Products
Truck Axles. Meritor is one of the world's leading independent suppliers
of axles for heavy-duty commercial vehicles. The Company's five axle
manufacturing facilities located in the United States, Brazil, England and Italy
produce axles for heavy-duty and medium-duty commercial vehicles. The Company's
extensive truck axle product line includes a wide range of drive and non-drive
front steer axles and single and tandem rear drive axles, which can include
driver-controlled differential lock for extra traction, aluminum carriers to
reduce weight and pressurized filtered lubrication systems for longer life. The
Company's front steer and rear drive axles can be equipped with the Company's
cam, wedge or air disc brakes, automatic slack adjusters and anti-lock braking
systems.
On June 11, 1998, Meritor and Volvo Truck Corporation signed a memorandum
of understanding that could allow Meritor to acquire Volvo's heavy truck axle
manufacturing operations based in Lindesberg,
S-7
<PAGE> 8
Sweden. Under the terms of the proposed agreement, Meritor would become the
primary supplier of heavy duty axles for Volvo's global heavy truck operations.
Completion of the transaction is subject to due diligence reviews (which are
underway), execution of a definitive agreement, corporate and regulatory
approvals and other customary closing conditions. Meritor believes that this
acquisition would enhance its position as a global leader in commercial axle
production.
Brakes. The Company is a leading independent supplier of air brakes to
heavy-duty and medium-duty commercial vehicle manufacturers. Through four
manufacturing facilities located in the United States, Canada, England and
Italy, the Company manufactures a broad range of foundation air brakes, as well
as automatic slack adjusters for brake systems. The Company's foundation air
brake products include cam drum brakes, which offer improved lining life and
tractor/trailer interchangeability, air disc brakes, which provide fade
resistant braking for demanding applications, and wedge drum brakes, which are
lightweight and provide automatic internal wear adjustment.
Through its 50%-owned joint venture with WABCO Automotive Products, Inc.
("WABCO"), a wholly-owned subsidiary of American Standard, Inc., the Company is
the leading supplier of anti-lock braking systems ("ABS") and a supplier of
other electronic and pneumatic control systems for North American heavy-duty
commercial vehicles. Through the joint venture, the Company also supplies
hydraulic ABS to the North American medium-duty truck market.
In 1995, federal regulations were adopted requiring that new heavy-duty and
medium-duty vehicles sold in the United States be equipped with ABS. The first
phase of this regulation requiring truck-tractors to be ABS equipped became
effective in March 1997. ABS also are required on all trailers, single-unit
trucks and buses with air brakes manufactured after March 1, 1998 and will be
required on all trucks and buses with hydraulic brakes manufactured after March
1, 1999.
Trailer Products. Meritor believes it is the world's leading manufacturer
of heavy-duty trailer axles, with leadership positions in North America and in
Europe. The Company's trailer axles are available in over forty models in
capacities from 20,000 to 30,000 pounds for virtually all heavy trailer
applications, and are available with the Company's broad range of brake
products, including ABS. In addition, the Company supplies trailer air
suspension products, for which it has strong market positions in Europe and
growing market presence in North America.
Transmissions. The Company introduced its transmission product line in
1989, enabling it to supply a complete drivetrain system to heavy-duty
commercial vehicle manufacturers in North America. The Company's range of
transmission models includes its Engine Synchro Shift(TM) transmission for
heavy-duty trucks that is designed to reduce gear shifting effort for drivers
and reduce wear on clutches and other drivetrain components in a cost efficient
manner by synchronizing engine speed to road speed shifts without use of the
clutch. See "-- Legal Proceedings" for information with respect to a patent
infringement lawsuit filed against the Company by Eaton Corporation and a recent
adverse jury verdict and judgment in the case.
Clutches, Drivelines and Other Products. Meritor also supplies universal
joints and driveline components, as well as clutches, including diaphragm-spring
clutches. The Company believes that its Permalube(TM) universal joint is
currently the only permanently lubricated universal joint used in the high
mileage on-highway market. The Company also supplies Tripmaster(R) on-board
computers, which provide trip and vehicle diagnostics, to truck OEMs and fleet
operators.
OFF-HIGHWAY, SPECIALTY AND MILITARY VEHICLE PRODUCTS
Off-Highway Vehicle Products. The Company supplies heavy-duty axles,
brakes and drivelines for use in numerous off-highway vehicle applications,
including construction, material handling, agriculture, mining and forestry, in
North America, South America, Europe and China. These products are designed to
tolerate high tonnages and operate under extreme conditions.
Specialty Vehicle Products. The Company supplies axles, brakes and
transfer cases for use in buses, coaches and recreational, fire and other
specialty vehicles in North America and Europe, and is the leading supplier of
bus and coach axles and brakes in North America.
S-8
<PAGE> 9
Military Vehicle Products. The Company supplies axles, brakes, brake
system components including ABS, trailer products, transfer cases and drivelines
for use in medium-duty and heavy-duty military tactical wheeled vehicles,
principally in North America.
LIGHT VEHICLE SYSTEMS
Roof Systems. Meritor is one of the world's leading independent suppliers
of sunroofs and roof systems products, including its Golde(R) brand sunroofs,
for use in passenger cars, light trucks and sport utility vehicles. The Company
has roof system manufacturing facilities in North America, Europe and the
Asia-Pacific region.
Door Systems. The Company is the world's leading supplier of manual and
power window regulators and a leading supplier of integrated door modules and
systems. The Company manufactures approximately 23 million window regulators
annually at plants in North America, South America, Europe and the Asia-Pacific
region for light vehicle and heavy-duty commercial vehicle manufacturers. The
Company's wide range of power and manual door system products utilize numerous
technologies and offer the Company's own electric motors, which are designed for
individual applications and to maximize operating efficiency and reduce noise
levels.
Access Control Systems. Meritor supplies manual and power activated latch
systems to light vehicle and heavy-duty commercial vehicle manufacturers, with
leadership market positions in Europe and a growing market presence in North
America and the Asia-Pacific region. The Company's access control products
include modular and integrated door latches, actuators, trunk and hood latches
and fuel flap locking devices. From its access control systems manufacturing
facilities in North America, Europe and the Asia-Pacific region, the Company
manufactures over 18 million latches and 6 million actuators annually.
Seat Adjusting Systems. The Company supplies manual and power seat
adjusting systems for passenger cars, light trucks and sport utility vehicles,
principally in North America. The Company's seat adjusting system products,
first introduced in 1994, feature systems with integrated electronic memory and
electric motors manufactured by the Company which are designed with speed and
power capabilities to meet the specific requirements of each vehicle platform.
Suspension Products. Through its 57%-owned joint venture with Mitsubishi
Steel Mfg. Co., the Company is one of the leading independent suppliers of
products used in suspension systems for passenger cars, light trucks and sport
utility vehicles in North America. The Company's suspension system products,
which are manufactured at three facilities in the United States and Canada,
include coil springs, stabilizer bars and torsion bars. This business has
experienced significant sales growth over the past five years as light vehicle
OEMs have increased their outsourcing of suspension system products and the
light vehicle market has grown.
Steel Wheels. Meritor is a leading supplier of steel wheels to the light
vehicle OEM market, principally in North and South America. The Company's wheel
manufacturing facility in Brazil, and its recently established facility in
Mexico, combine to produce more than ten million wheels annually.
CUSTOMERS; SALES AND MARKETING
Meritor has numerous customers worldwide and has developed long-standing
business relationships with many of these customers. The Company markets and
sells its products principally to OEMs. In North America, the Company also
markets its truck and trailer products directly to dealers, fleets and other
end-users, who may designate the components and systems of a particular supplier
for installation in the vehicles they purchase from OEMs. Most of the Company's
sales to OEMs, consistent with industry practice, are made through open purchase
orders, which do not require the purchase of a minimum number of products and
typically may be canceled by the customer on reasonable notice without penalty.
The Company also sells products to certain customers under long-term
arrangements that require the Company to provide annual cost reductions (through
price reductions or other cost benefits for the OEMs) by certain percentages
each year. If the Company were unable to generate sufficient production costs
savings in the future to offset such price reductions, the Company's gross
margins could be adversely affected. In addition to sales to the OEM market,
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<PAGE> 10
the Company also provides its truck and trailer products and off-highway and
specialty products to OEMs, dealers, distributors, fleets and other end-users in
the aftermarket.
The Company is dependent upon large OEM customers with substantial
bargaining power, including with respect to price and other commercial terms.
Although the Company believes that it generally enjoys good relations with its
OEM customers, loss of all or a substantial portion of the Company's sales to
any of its large volume customers for whatever reason (including, but not
limited to, loss of contracts, reduced or delayed customer requirements or
strikes or other work stoppages affecting production by such customers) could
have a significant adverse effect on the Company's financial results. During
fiscal 1997, Freightliner Corporation and Mercedes-Benz A.G. (each of which is
owned by Daimler-Benz A.G.) together accounted for approximately 11% of total
sales of the Company. In 1997, Freightliner Corporation purchased the heavy
truck business of Ford Motor Company, also a customer of the Company.
Freightliner, Mercedes and Ford's heavy truck business together accounted for
approximately 15% of total fiscal 1997 sales of the Company. In addition,
Daimler-Benz A.G. has entered into an agreement to merge with Chrysler
Corporation, and the combined companies together accounted for approximately 23%
of the Company's total fiscal 1997 sales.
Except as noted above with respect to the North American market for
heavy-duty trucks, the Company generally competes for new business from OEMs
both at the beginning of the development of new vehicle platforms and upon the
redesign of existing platforms. New platform development generally begins two to
four years prior to start-up of production. Once a supplier has been designated
to supply products to a new platform, an OEM will generally continue to purchase
those products from the supplier for the life of the platform, which typically
lasts four to six years.
COMPETITION
The Company operates in a highly competitive environment. Principal
competitive factors are price, quality, service, product performance, design and
engineering capabilities, new product innovation and timely delivery. The
Company competes worldwide with a number of United States and international
manufacturers that are both larger and smaller than the Company in terms of
resources and market shares. In addition, certain OEMs manufacture for their own
use products of the type supplied by the Company. In North America, the major
competitors of HVS are Eaton Corporation and Dana Corporation. LVS has numerous
competitors across its various product lines worldwide.
RAW MATERIALS AND SUPPLIES
The Company believes it has adequate sources for the supply of raw
materials and components for its manufacturing needs with suppliers located
around the world. The Company does, however, concentrate its purchases of
certain raw materials and parts over a limited number of suppliers and is
dependent upon the ability of its suppliers to meet performance and quality
specifications and delivery schedules. Although the Company historically has not
experienced any significant difficulties in obtaining an adequate supply of raw
materials and components necessary for its manufacturing operations, the loss of
a significant supplier or the inability of a supplier to meet performance and
quality specifications or delivery schedules could have an adverse effect on the
Company.
JOINT VENTURES
As the automotive industry has become more globalized, joint ventures and
other cooperative arrangements have become an important element of the business
strategies of the Company. The Company currently has interests in 13 joint
ventures with operations in the United States, Australia, Brazil, Canada, China,
India, Japan, Mexico and Turkey. In accordance with generally accepted
accounting principles, operating results of the seven joint ventures more than
50% owned are consolidated in the financial statements of the Company. Joint
ventures of the Company include its 50%-owned joint venture with WABCO for the
manufacture and supply of ABS systems for heavy-duty commercial vehicles and its
57%-owned joint venture with Mitsubishi Steel Mfg. Co. for the manufacture and
supply of suspension products for passenger cars, light trucks and sport utility
vehicles.
S-10
<PAGE> 11
ACQUISITIONS AND DISPOSITIONS
Meritor regularly considers various strategic and business opportunities,
including license agreements, marketing arrangements and acquisitions, and
reviews the prospects of its existing businesses to determine whether any of
them should be modified, sold or otherwise discontinued. Although no assurance
can be given as to whether or when any acquisitions or dispositions will be
consummated, if agreement with respect to any acquisitions were to be reached,
the Company could finance such acquisitions by issuance of additional debt or
equity securities. The additional debt from any acquisitions, if consummated,
would increase the Company's debt to capitalization ratio and such acquisitions
and related financing might, at least in the near term, have a dilutive effect
on earnings per share. See "Products -- Heavy Vehicle Systems -- Truck and
Trailer Products -- Truck Axles" above for information with respect to the
possible purchase by the Company of Volvo Truck Corporation's heavy truck axle
manufacturing operations.
The industry in which the Company operates has recently experienced
significant consolidation among suppliers, due in part to globalization and
increased outsourcing of product engineering and manufacturing by OEMs, and in
part to OEMs more frequently awarding long-term, sole-source or preferred
supplier contracts to the most capable global suppliers, thereby reducing the
total number of suppliers from whom components and systems are purchased. While
the Company will consider acquisitions as a means of further expansion, there
can be no assurance that the Company will participate in this industry
consolidation, or that any such consolidation by the Company with other
suppliers will ultimately be advantageous to the Company or that the Company
will not be disadvantaged as a result of consolidation by other suppliers.
RESEARCH AND DEVELOPMENT
The Company has significant research, development, engineering and product
design capabilities. The Company spent approximately $54 million, $51 million
and $58 million in fiscal 1997, 1996 and 1995, respectively, on research and
development. At September 30, 1997, the Company employed approximately 570
professional engineers and scientists. Pursuant to a transitional services
agreement entered into with Rockwell in connection with the Distribution,
Rockwell's Science Center continues to provide assistance to the Company in the
development of various technological and product advancements.
PATENTS AND TRADEMARKS
Numerous United States and foreign patents and patent applications are
owned or licensed by the Company in its manufacturing operations and other
activities. While in the aggregate the patents and licenses of the Company are
considered important to the operation of its business, management does not
consider them of such importance that the loss or termination of any one of them
would materially affect the Company. See "-- Legal Proceedings."
The Company's name, its registered trademark "Meritor" and its symbol are
important to its business. Other significant trademarks owned by the Company
include Golde(R) (sunroofs), Fumagalli(TM) (wheels) and ROR(TM) (trailer axles).
Under the terms of the Distribution Agreement (the "Distribution Agreement")
entered into with Rockwell in connection with the Distribution, the Company may
continue to apply the "Rockwell" brand name to its products for a period of ten
years after the Distribution.
EMPLOYEES
At September 30, 1997, the Company had more than 16,000 full-time
employees. Approximately 3,400 Company employees in the United States and Canada
are covered by collective bargaining agreements. The Company believes its
relationship with unionized employees is satisfactory. No significant work
stoppages have occurred in the past five years.
ENVIRONMENTAL MATTERS
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Environmental Matters."
S-11
<PAGE> 12
LEGAL PROCEEDINGS
On July 17, 1997 Eaton Corporation ("Eaton") filed suit against Rockwell in
the U.S. District Court in Wilmington, Delaware, asserting infringement of
Eaton's U.S. Patent No. 4850236, which covers certain aspects of heavy-duty
truck transmissions, by the Company's Engine Synchro Shift(TM) transmission for
heavy-duty trucks, and seeking damages and injunctive relief. Meritor was joined
as a defendant on June 11, 1998, and trial in this matter began on June 23,
1998. On July 1, 1998, the jury rendered a verdict in favor of Eaton, finding
that Meritor had infringed Eaton's patent and awarded compensatory damages in
the amount of $1.25 million, and a judgment was entered on July 17, 1998.
Because the jury found the infringement to be willful, the judge in the case has
discretion to increase the damages to an amount up to three times the amount of
the award. Eaton's request for a permanent injunction is pending. Meritor is
evaluating the jury's verdict and the judgment and is pursuing further actions,
including post-trial motions and an appeal to the United States Court of Appeals
for the Federal Circuit. Based on advice of M. Lee Murrah, Esq., Assistant
General Counsel of the Company, management believes the Company's truck
transmissions do not infringe Eaton's patent. The Company intends to continue to
defend this suit vigorously.
Various other lawsuits, claims and proceedings have been or may be
instituted or asserted against Rockwell or the Company or their respective
subsidiaries relating to the conduct of the Company's business, including those
pertaining to product liability, intellectual property, environmental, safety
and health, and employment matters.
Although the outcome of litigation cannot be predicted with certainty and
some lawsuits, claims or proceedings may be disposed of unfavorably to the
Company, based on its evaluation of matters which are pending or asserted and
after consulting with David W. Greenfield, Esq., General Counsel of the Company,
management believes the disposition of such matters will not have a material
adverse effect on the Company's financial statements.
Pursuant to the terms of the Distribution Agreement, the Company assumed
responsibility for all litigation (including environmental proceedings) against
Rockwell or its subsidiaries in respect of the Automotive Business.
GEOGRAPHIC INFORMATION
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- International Operations."
SEASONALITY; CYCLICALITY
The Company may experience seasonal variations in the demand for its
products to the extent automotive vehicle production fluctuates. Historically,
such demand has been somewhat lower in the Company's first and fourth fiscal
quarters (the fourth and third calendar quarters, respectively) when OEM plants
may close during model changeovers and vacation and holiday periods.
In addition, the industry in which the Company operates has been
characterized historically by periodic fluctuations in overall demand for
trucks, passenger cars and other vehicles for which the Company supplies
products, resulting in corresponding fluctuations in demand for products of the
Company. Cycles in the major automotive industry markets of North America and
Europe are not necessarily concurrent or related. The cyclical nature of the
automotive industry is outside the control of the Company and cannot be
predicted with certainty. The Company has sought and will continue to seek to
expand its operations globally to mitigate the effect of periodic fluctuations
in demand of the automotive industry in one or more particular countries.
S-12
<PAGE> 13
SELECTED FINANCIAL DATA
The following selected consolidated financial data have been excerpted or
derived from, and should be read in conjunction with, the consolidated financial
statements and other information and data contained or incorporated by reference
in the Company's Annual Report on Form 10-K for the fiscal year ended September
30, 1997 and the Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1998. Information as of June 30, 1998 and 1997 and for the
nine-month periods then ended is unaudited, but in the opinion of management of
the Company, contains all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of the results of operations for
such interim periods. The results of operations for the nine-month period ended
June 30, 1998 are not necessarily indicative of the results that may be expected
for the fiscal year ending September 30, 1998.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
AND AT JUNE 30, FISCAL YEAR ENDED AND AT SEPTEMBER 30,
----------------- -----------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------- ------- ------- ------- ------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY OF OPERATIONS
Sales.......................................... $2,882 $2,467 $ 3,309 $ 3,144 $ 3,125 $ 2,653 $ 2,358
Gross margin................................... 416 332 438 397 381 282 282
Selling, general and administrative............ 184 168 228 215 203 191 182
Operating earnings............................. 232 164 181(1) 146(1) 178 91 100
As a percent of sales:
Gross margin................................. 14.4% 13.5% 13.2% 12.6% 12.2% 10.6% 12.0%
Selling, general and administrative.......... 6.4% 6.8% 6.9% 6.8% 6.5% 7.2% 7.7%
Operating earnings........................... 8.0% 6.6% 5.5% 4.6% 5.7% 3.4% 4.2%
Interest expense............................... 32 6 10 10 11 12 13
Income before income taxes..................... 210 168 186 182 185 88 102
Net income..................................... 124 100 109 114 123 51 57
FINANCIAL POSITION
Working capital(2)............................. $ 278 $ 280 $ 235 $ 240 $ 216 $ 204 $ 185
Property -- net................................ 626 611 635 643 647 617 588
Goodwill....................................... 40 43 42 45 40 30 25
Total assets................................... 2,074 1,897 2,002 1,830 1,766 1,638 1,488
Short-term debt................................ 51 23 21 8 14 17 28
Long-term debt................................. 440 21 465 24 31 35 9
Minority interests............................. 39 36 37 29 24 21 21
Equity......................................... 225 631 151 599 561 509 468
OTHER DATA
EBITDA(3)...................................... $ 319 $ 250 $ 296 $ 294 $ 293 $ 193 $ 207
Depreciation and amortization.................. 77 76 100 102 97 93 92
Cash provided by operating activities.......... 88 99 201 197 203 156 162
Cash used for investing activities............. 86 69 127 101 127 99 90
Cash used for financing activities............. 67 36 15 84 80 41 64
Capital expenditures........................... 80 59 119 144 119 102 100
Employees at year end.......................... 16,900 15,300 16,700 17,200 16,300
Annual sales per employee (in thousands)(4).... $ 203 $ 198 $ 182 $ 159 $ 150
</TABLE>
- ---------------
(1) Operating earnings for fiscal year 1997 and fiscal year 1996 includes
restructuring and spin-off costs of $29 million and restructuring costs of
$36 million, respectively.
(2) Working capital consists of all current assets and liabilities, including
cash and short-term debt.
(3) EBITDA is defined as income before income taxes, plus interest expense,
depreciation and amortization. EBITDA should not be considered as a
substitute for operating earnings, net income, cash flow or other statement
of consolidated income or cash flow data computed in accordance with
generally accepted accounting principles or as a measure of a company's
results of operations or liquidity. Although EBITDA is not defined in
generally accepted accounting principles, it is widely used as a measure of
a company's operating performance and its ability to service its
indebtedness because it assists in comparing performance on a consistent
basis across companies without regard to depreciation and amortization,
which can vary significantly depending on accounting methods (particularly
where acquisitions are involved) or non-operating factors such as historical
cost bases and capital structure.
(4) Annual sales per employee is based on the average of the monthly ending
number of employees during the year.
S-13
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the consolidated
financial statements and other information and data contained or incorporated by
reference in the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1997 and the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1998, which are incorporated by reference in
this Prospectus Supplement and the accompanying Prospectus.
OVERVIEW AND OUTLOOK
For Meritor and its shareowners, 1997 was an exciting year. The successful
spin-off from Rockwell and the strong financial results contribute to the
establishment of Meritor as a leading independent global supplier of a broad
range of components and systems for use in commercial, specialty and light
vehicles. With sales of $3.3 billion in fiscal 1997, the year provides strong
momentum for the achievement of Meritor's long-term financial goals of average
annual sales growth of 8 percent, average annual earnings per share growth of 15
percent and long-term debt to capitalization ratio of 45 percent, with a strong
emphasis on cash generation. The long-term average annual goals have been
established with the recognition that the industry in which the Company operates
has been characterized historically by periodic fluctuations in overall demand
for commercial, specialty and light vehicles for which the Company supplies
products, resulting in corresponding fluctuations in demand for products of the
Company. Accordingly, the Company will measure its performance against these
goals over a multi-year period.
The achievement of these goals is supported by the Company's strong balance
sheet which includes, at September 30, 1997, $2 billion in assets, cash of $133
million (which includes approximately $58 million relating to Canadian income
tax liabilities), as well as the $1 billion unsecured revolving credit facility
which the Company entered into in August 1997 (discussed below under "Financial
Condition"). Meritor believes this credit facility and the cash flows provided
by operations will provide an adequate source of funds and liquidity to support
its future growth and the achievement of its long-term goals. Pro forma pre-tax
interest coverage, excluding the 1997 restructuring and spin-off costs of $29
million, would have been 6.5x for the year ended September 30, 1997, based on
the initial interest rate on the borrowings. EBITDA (defined as income before
income taxes plus interest expense, depreciation and amortization) was $296
million for fiscal 1997.
Assuming generally favorable economic conditions and the anticipated
benefits of the Company's restructuring programs, long-term average annual sales
and earnings per share growth objectives should be achievable in fiscal 1998.
Meritor's envisioned future is to be the best developer of quality automotive
systems and technology solutions worldwide and the partner of choice to those
customers who value outstanding service.
Meritor began operations separate from Rockwell on September 30, 1997 and,
accordingly, does not have an operating history as an independent company prior
to that date. The financial information for periods prior to September 30, 1997
that is included or incorporated by reference in this Prospectus Supplement or
the accompanying Prospectus reflects the Automotive Business as part of
Rockwell, and may not necessarily reflect the results of operations, financial
position and cash flows of the Automotive Business had the Company been operated
independently during those periods. While the Automotive Business was profitable
as part of Rockwell, there is no assurance that profits will continue at a
similar level for periods subsequent to the Distribution.
RESULTS OF OPERATIONS
The following sales, operating earnings and net income of the Company for
the nine months ended June 30, 1998 and for the years ended September 30, 1997,
1996 and 1995 and pro forma amounts for the nine months ended June 30, 1997 and
the year ended September 30, 1997 have been excerpted or derived from, and
should be read in conjunction with, the consolidated financial statements and
other information and data contained or incorporated by reference in the
Company's Annual Report on Form 10-K for the fiscal year
S-14
<PAGE> 15
ended September 30, 1997 and the Company's Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1998. Information as of June 30, 1998 and 1997
and for the nine-month periods then ended is unaudited, but in the opinion of
management of the Company, contains all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the results of
operations for such interim periods. The results of operations for the
nine-month period ended June 30, 1998 are not necessarily indicative of the
results that may be expected for the fiscal year ending September 30, 1998.
<TABLE>
<CAPTION>
PRO FORMA(1)
NINE MONTHS NINE MONTHS PRO FORMA(1)
ENDED ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30,
JUNE 30, JUNE 30, SEPTEMBER 30, --------------------------
1998 1997 1997 1997 1996 1995
----------- ------------ ------------- ------ ------ ------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Sales
Heavy Vehicle Systems........... $1,759 $1,419 $1,957 $1,957 $1,827 $1,937
Light Vehicle Systems........... 1,123 1,048 1,352 1,352 1,317 1,188
------ ------ ------ ------ ------ ------
Total sales....................... $2,882 $2,467 $3,309 $3,309 $3,144 $3,125
====== ====== ====== ====== ====== ======
Gross margin...................... $ 416 $ 332 $ 438 $ 438 $ 397 $ 381
====== ====== ====== ====== ====== ======
Operating earnings................ $ 232 $ 172 $ 192(2) $ 181(2) $ 146(2) $ 178
Other income -- net............... 10 10 15 15 46 18
Interest expense.................. (32) (26) (38) (10) (10) (11)
Provision for income taxes........ (86) (63) (70) (77) (68) (62)
------ ------ ------ ------ ------ ------
Net income........................ $ 124 $ 93 $ 99 $ 109 $ 114 $ 123
====== ====== ====== ====== ====== ======
Earnings Per Share................ $ 1.79 $ 1.35 $ 1.44(2)
Earnings Per Share Before
Restructuring and Spin-Off
Costs........................... $ 1.79 $ 1.35 $ 1.74
Shares Outstanding (in
millions)....................... 69.0 68.9 68.9
====== ====== ======
</TABLE>
- ---------------
(1) Pro forma information reflects (a) the 68.9 million shares of common stock
issued at the date of the spin-off, (b) management's estimate that corporate
costs would have been $8 million and $11 million lower on a stand-alone
basis for the nine months ended June 30, 1997 and the year ended September
30, 1997, respectively, than those allocated to the Automotive Business by
Rockwell and (c) $20 million and $28 million of interest expense at an
annual rate of 6 percent for the nine months ended June 30, 1997 and the
year ended September 30, 1997, respectively, related to the debt incurred by
the Company in connection with the $445 million pre-Distribution payment to
Rockwell.
(2) Operating earnings for pro forma and actual fiscal 1997 includes
restructuring and spin-off costs of $29 million ($21 million after-tax or
$.30 per share on a pro-forma basis) and for fiscal 1996 includes
restructuring costs of $36 million ($24 million after-tax).
NINE MONTHS ENDED JUNE 30, 1998 COMPARED TO NINE MONTHS ENDED JUNE 30, 1997
For the first nine months of fiscal 1998, sales were $2,882 million, up 17
percent over the same period a year ago. The strong sales growth for the nine
months was driven by a robust North American heavy truck market, which was up
substantially compared to last year, and higher penetration across most product
lines of Heavy Vehicle and Light Vehicle Systems.
Net income for 1998's first nine months was $124 million, or $1.79 per
share, up $31 million above last year's pro forma net income of $93 million, or
$1.35 per share. This was an improvement of 33 percent in earnings per share.
The increase in net income and earnings per share was a result of higher sales
and savings generated from cost and productivity improvement programs related to
(i) purchasing, which includes outsourcing non-core manufacturing and using
lower cost global sourcing of materials and supply base management, and (ii)
manufacturing, which includes shifting production to lower cost facilities,
consolidating common processes, improving material flow and investing in capital
and systems.
S-15
<PAGE> 16
Operating earnings of $232 million increased 35 percent for the first nine
months of 1998, from $172 million in the first nine months of 1997 pro forma.
Operating margins increased to 8.0 percent for the first nine months, from 7.0
percent in last year's period on a pro forma basis, reflecting savings generated
from cost and productivity improvement programs (described above), and higher
sales.
Heavy Vehicle Systems sales were $1,759 million in the first nine months of
fiscal 1998, an increase of $340 million, or 24 percent, compared to the first
nine months of fiscal 1997. Almost all product lines within Heavy Vehicle
Systems showed an increase in sales, primarily as a result of the strong North
American heavy truck and trailer market and greater market penetration in North
America. If current market conditions continue, the Company anticipates a growth
rate of more than 20 percent in the North American heavy truck market for fiscal
1998 over last year. The Company estimates that the heavy truck market was up
about 25 percent for the first nine months of fiscal 1998 over last year, but
expects to see a more moderate growth rate -- in the 10 percent range -- over
last year's fourth quarter.
Light Vehicle Systems sales were reported at $1,123 million, an increase of
$75 million, or 7 percent, over the first nine months of fiscal 1997. The sales
growth was driven by penetration gains in the door, suspension, access control
and seat adjusting systems and wheel product lines. This growth was partially
offset by the negative impact on European sales of currency translation and
lower European sunroof demand.
Performance for the Company's first nine months of fiscal 1998 provides
strong momentum for the achievement of the Company's stated long-term financial
goals to grow, on an average annual basis, sales by 8 percent and earnings per
share by 15 percent. At the same time, the Company continues to assess the
economic situation in the Asia/Pacific region and its potential effect on the
Company's businesses and served markets, although the Company's sales in the
Asia/Pacific region represent only 3 percent of the Company's total annual sales
volume.
The Company's fourth quarter is also typically seasonably lower, due to
annual OEM model changeovers and plant shutdowns.
1997 COMPARED TO 1996
Sales for fiscal 1997 were up by $165 million, or 5 percent, above fiscal
1996.
Heavy Vehicle Systems product sales grew to nearly $2 billion in fiscal
1997, an increase of $130 million, or 7 percent, over fiscal 1996. This sales
growth was driven largely by increased sales in North America which benefited
from higher sales in the aftermarket as well as greater market penetration by
the Company's truck drivetrain products and trailer axle and brake products.
Sales also increased in emerging markets including Brazil and China, while sales
declined in Europe, where industry volumes were lower.
Light Vehicle Systems product sales in fiscal 1997 increased $35 million,
or 3 percent, over fiscal 1996. The sales performance is linked to ongoing
growth in North America, offset somewhat by a decline in European sales, due
principally to the currency translation impact of a strong U.S. dollar in fiscal
1997 and decreased sunroof demand. North American sales growth of 13 percent in
generally flat light vehicle markets was chiefly the result of stronger market
penetration in steel wheels and door, suspension and seat adjusting systems
products.
Gross margin for fiscal 1997 improved $41 million, or 10 percent, over
fiscal 1996. Operating earnings for fiscal 1997, before restructuring and
spin-off costs of $29 million in fiscal 1997 and restructuring costs of $36
million in fiscal 1996, increased $28 million, or 15 percent, over fiscal 1996.
This growth in gross margin and operating earnings is due principally to the
fiscal 1996 restructuring program as well as other productivity and cost
improvement programs. The Company expects that the ongoing cost reduction and
productivity improvement programs, together with global plans to launch new
products, will further strengthen its ability to achieve its sales growth and
profitability goals. Productivity and cost improvement programs related to (i)
purchasing, which includes outsourcing non-core manufacturing and using lower
cost global sourcing of materials and supply base management; and (ii)
manufacturing, which includes shifting production to lower cost facilities,
consolidating common processes, improving material flow and investing in capital
and systems.
S-16
<PAGE> 17
In fiscal 1997, the Company recorded a $21 million ($16 million after-tax)
restructuring charge related to workforce reductions and other manufacturing
cost reduction programs, mostly outside the United States. The provision
includes severance and other employee costs of $16 million and other
facility-related costs of $5 million. These actions, which are already in
process, are expected to reduce ongoing operating costs by an estimated $10
million per year, beginning in fiscal 1998. The Company also recorded an $8
million ($5 million after-tax) charge in fiscal 1997 related to costs associated
with its spin-off from Rockwell including costs for communications, brand
advertising, recruitment and other professional services. Operating margins
before the restructuring and spin-off costs were 6.3 percent in fiscal 1997, as
compared to 5.8 percent in fiscal 1996, principally due to higher sales of
higher margin aftermarket products, continued improvement in production
processes and cost improvements from the 1996 restructuring, which offset
investments in new product development, continuing launch costs related to seat
adjusting systems products and higher engineering costs. Selling, general and
administrative expenses in fiscal 1997 increased $13 million, or 6 percent, over
fiscal 1996, due to increased sales volume and increased spending on information
technology projects.
Other income in fiscal 1997 decreased $31 million from fiscal 1996,
primarily due to one-time gains in fiscal 1996 which included a $14 million ($10
million after-tax) gain on the sale of Brazilian assets and $15 million ($9
million after-tax) from the settlement of certain environmental insurance
claims.
On a pro forma basis, operating earnings for fiscal 1997 would have been
$11 million higher than actual fiscal 1997 results, due to a reduction in
corporate costs from those allocated by Rockwell compared to management's
estimate of stand-alone corporate costs. Pro forma interest expense for fiscal
1997 would have been $28 million higher than actual fiscal 1997 interest
expense, due to additional annual interest expense of approximately 6 percent on
the borrowings under the Company's credit facility related to the $445 million
pre-Distribution payment to Rockwell.
1996 COMPARED TO 1995
Sales for fiscal 1996 were slightly higher than fiscal 1995 principally due
to an 11 percent sales increase in Light Vehicle Systems products, which offset
a 6 percent decrease in Heavy Vehicle Systems product sales. The increased sales
of Light Vehicle Systems products resulted primarily from the expansion of the
Company's customer base in the light truck and sport utility vehicle markets in
North America. This expansion was fueled by product placement on new vehicle
platforms, a strong vehicle market and new product introductions.
The decrease in sales of Heavy Vehicle Systems products was due to lower
vehicle production levels, principally in the North and South American markets.
North American heavy truck and trailer production decreased approximately 18
percent from the high levels achieved in 1995. The Brazilian medium-duty and
heavy-duty vehicle markets experienced a 38 percent decline due to depressed
economic conditions.
Gross margin for the fiscal 1996 period improved $16 million, or 4 percent,
in comparison to the fiscal 1995 period as a result of continued product cost
reductions. Operating earnings for fiscal 1996 decreased by 18 percent after
restructuring charges of $36 million. The $36 million restructuring charges
related to manufacturing cost reduction programs at several locations, mostly
outside the United States. The restructuring charges included severance and
other employee costs of $22 million, asset impairments of $8 million and other
costs of $6 million. Operating earnings before the restructuring charges
increased $4 million, or 2 percent, from 1995, principally due to continued
product cost reductions which were offset by launch costs related to the
introduction of door systems and seat adjusting systems products in the North
American market and an increase in selling, general and administrative expenses.
Selling, general and administrative expenses in fiscal 1996 increased $12
million, or 6 percent, over fiscal 1995, primarily due to higher marketing costs
and increased reserves for uncollectible receivables. The increased reserves for
uncollectible receivables were established for certain trailer OEM customers,
due to the downturn in the trailer industry and such customers' financial
condition.
Other income in fiscal 1996 increased by $28 million as compared to fiscal
1995 primarily due to a $14 million gain on the sale of Brazilian assets and $15
million of proceeds from the settlement of certain environmental insurance
claims.
S-17
<PAGE> 18
FINANCIAL CONDITION
Historically, Meritor's operations have provided strong cash flows, as
demonstrated by cash provided by operating activities of $201 million in fiscal
1997, $197 million in fiscal 1996 and $203 million in fiscal 1995. Sales growth
related to both Heavy Vehicle Systems and Light Vehicle Systems products
resulted in an increase in commercial accounts receivable and payable at the end
of each fiscal year. Inventory levels at the end of fiscal 1997 increased
primarily due to the increased level of business.
These cash flows have allowed the Company to fund capital expenditures of
$119 million for fiscal 1997, $144 million for fiscal 1996 and $119 million for
fiscal 1995, as the Company continued to invest in the property, plant and
equipment needed for future business requirements. Capital expenditures included
equipment to support new product introductions (roof systems, door systems, seat
adjusting systems and the Permalube(TM) driveline products), capacity expansion
(wheels and electric motors) and new production processes.
In fiscal 1997, $16 million used for acquisitions of businesses and
investments consisted primarily of further investments in the Company's Chinese
heavy axle joint venture with Xuzhou Construction Machinery Axle and Case Co. In
fiscal 1996, $101 million of net cash used for investing activities included, in
addition to capital expenditures, proceeds of $58 million from the disposition
of property and businesses, primarily due to the sale of Brazilian assets, and
$15 million used for investments in joint ventures. In fiscal 1995, $127 million
of net cash used for investing activities included $19 million in cash used for
acquisitions and investments, relating primarily to the acquisition of a window
regulator business.
Net cash used for financing activities for fiscal 1997 was $15 million.
This was comprised primarily of $445 million of proceeds from borrowings under
the Company's credit facility (described below) used to fund a cash payment to
Rockwell in connection with the Distribution. In addition, Rockwell agreed to
indemnify the Company for certain Canadian tax obligations incurred in
connection with the transfer of assets prior to the Distribution, and $58
million in cash was provided by Rockwell at September 30, 1997 to fund these tax
obligations. This amount partially offset $84 million in cash distributions to
Rockwell from the Company. Net cash used for financing activities was $84
million in fiscal 1996, and $80 million in fiscal 1995, primarily related to
cash distributions to Rockwell.
Cash provided by operating activities for the first nine months of fiscal
1998 was $88 million, a decrease of $11 million as compared to the first nine
months of fiscal 1997. The decrease was due primarily to higher working capital
requirements in receivables and inventories to support the higher sales levels
experienced during the first nine months of the year and anticipated for the
remainder of fiscal 1998. The decrease was partially offset by increased net
income and by a decrease in working capital requirements for other assets and
liabilities.
Capital expenditures of $80 million in the first nine months of fiscal 1998
included equipment for continued new product introductions, capacity expansion
and new production processes. The Company anticipates full-year fiscal 1998
capital expenditures of approximately $140 million.
For the first nine months of fiscal 1998, cash used for financing
activities was $67 million, including a $72 million payment of the Canadian tax
obligations referred to above. Rockwell had provided $58 million at September
30, 1997, as well as an additional $14 million during the quarter ended December
31, 1997, to pay for such taxes.
The cumulative currency translation adjustments increased $29 million in
the first nine months of fiscal 1998, primarily due to the strength of the U.S.
dollar, principally in relation to the Canadian, French, Mexican and Australian
currencies.
The Company paid quarterly dividends of 10.5 cents per share on the
Company's common stock on December 15, 1997 and March 9, 1998 to shareowners of
record on November 24, 1997 and February 23, 1998, respectively. In addition,
the Company paid a quarterly dividend of 10.5 cents per share on June 1, 1998 to
shareowners of record on May 11, 1998, and the board of directors of the Company
has declared a quarterly dividend of 10.5 cents per share, payable September 8,
1998 to shareowners of record on August 17, 1998.
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<PAGE> 19
The Company's long-term debt to capitalization ratio improved to 63 percent
at June 30, 1998 from 71 percent at September 30, 1997. Although the Company
currently expects this trend of improvement to continue, consistent with the
Company's long-term financial goal for its long-term debt to capitalization
ratio of 45 percent, the ratio may vary depending on several factors, including
the Company's results of operations and any acquisitions, dispositions or
financings by the Company. Based on the closing price of the Company's common
stock of $24 at June 30, 1998, the long-term debt to capitalization ratio on a
market value basis was 21 percent at that date. The Company's pre-tax interest
coverage increased to 7.9x for the first nine months of 1998, as compared to
7.3x for the first nine months of 1997 pro forma.
Meritor has retirement medical and pension plans which cover most of its
United States and certain non-United States employees. Retirement medical plan
cash payments aggregated $36 million in fiscal 1997, $35 million in fiscal 1996
and $30 million in fiscal 1995 and are expected to approximate $36 million in
fiscal 1998. The Automotive Business, as a participant in Rockwell pension
plans, made pension plan contributions of $5 million in fiscal 1997, $2 million
in fiscal 1996 and $3 million in fiscal 1995. The Company has established a U.S.
pension plan and will continue existing non-U.S. pension plans. Pension
contributions of $16 million were made by the Company in the first nine months
of fiscal 1998, and the Company anticipates that pension plan funding during
fiscal 1998 will approximate $25 million.
The Company has a $1 billion unsecured revolving credit facility which the
Company entered into with a group of banks in August 1997 and which was
partially used to fund a $445 million pre-Distribution payment to Rockwell.
Management of the Company believes that this credit facility and the cash flows
provided by operations will provide an adequate source of funds and liquidity to
support the future growth of Meritor and the achievement of the Company's
long-term goals. Borrowings under the credit facility are subject to interest
based on quoted market rates, principally LIBOR (London Interbank Offered Rate)
and eurocurrency rates, at the date of borrowing plus an applicable margin based
on the Company's credit rating or financial ratios, and to a facility fee on the
committed amount, which also varies based on the Company's credit rating or
financial ratios. The initial margin over the LIBOR-based and eurocurrency rates
was 20 basis points, and the facility fee on the committed amount was 10 basis
points. The Company's debt has been rated BBB by Standard & Poor's Ratings
Services and Baa2 by Moody's Investor Service.
On April 9, 1998, concurrent with the filing of the Registration Statement
under which the Securities are being offered, and in connection with the
anticipated offering of the Securities pursuant thereto, the Company entered
into forward treasury lock agreements with creditworthy financial institutions
pursuant to which the Company will make or receive, respectively, payments in
respect of an aggregate notional principal amount of $200 million depending upon
whether certain interest rates fall or rise during the term of the agreements.
These agreements expire on August 31, 1998, unless earlier terminated or
extended. The Company anticipates terminating these agreements upon the sale of
the Securities offered hereby and does not anticipate any material adverse
effect on its results of operations or financial position in respect of these
agreements.
Meritor regularly considers various strategic and business opportunities,
including acquisitions. Although no assurance can be given as to whether or when
any acquisitions will be consummated, if agreement were to be reached, the
Company could finance such acquisitions by issuance of additional debt or equity
securities. The additional debt from any acquisitions, if consummated, would
increase the Company's debt to capitalization ratio and such acquisitions and
related financing might, at least in the near term, have a dilutive effect on
earnings per share.
INCOME TAXES
The Company's effective income tax rate in fiscal 1997 was 41.3 percent
compared to 37.6 percent in fiscal 1996 and 33.4 percent in fiscal 1995. The
higher tax rate in fiscal 1997 was due primarily to a lower level of foreign net
operating loss utilization in fiscal 1997 and a refund of certain foreign income
taxes in fiscal 1996. The lower tax rate in 1995 was due principally to the
realization of foreign net operating loss carryforwards combined with relatively
higher levels of U.S. taxable income related to improved sales in the North
American truck markets.
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<PAGE> 20
ENVIRONMENTAL MATTERS
In connection with the Distribution, the Company assumed all liabilities in
respect of environmental matters related to current and former operations of the
Automotive Business.
Federal, state and local requirements relating to the discharge of
substances into the environment, the disposal of hazardous wastes, and other
activities affecting the environment have had and will continue to have an
impact on the manufacturing operations of the Company. Thus far, compliance with
environmental requirements and resolution of environmental claims have been
accomplished without material effect on the Company's liquidity and capital
resources, competitive position or financial statements.
Meritor has been designated as a potentially responsible party at three
Superfund sites, excluding sites as to which the Company's records disclose no
involvement or as to which the Company's potential liability has been fully
determined. Management estimates the total reasonably possible costs the Company
could incur for the remediation of Superfund sites at September 30, 1997 to be
about $19 million, of which $12 million had been accrued at that date.
Various other lawsuits, claims, and proceedings have been asserted against
the Company alleging violation of federal, state and local environmental
protection requirements, or seeking remediation of alleged environmental
impairments, principally at previously disposed of properties. For these
matters, management has estimated the total reasonably possible costs the
Company could incur at September 30, 1997 to be about $28 million. As of
September 30, 1997, the Company had recorded environmental accruals for these
matters of $13 million.
At September 30, 1997, the Company had no receivables recorded from third
parties related to environmental matters.
Management believes that at June 30, 1998, there had been no material
change to this information.
Based on its assessment and after consulting with David W. Greenfield,
Esq., General Counsel of the Company, management believes that the Company's
expenditures for environmental capital investment and remediation necessary to
comply with present regulations governing environmental protection and other
expenditures for the resolution of environmental claims will not have a material
adverse effect on the Company's liquidity and capital resources, competitive
position or financial statements. Management cannot assess the possible effect
of compliance with future requirements.
INTERNATIONAL OPERATIONS
Nearly one-half of Meritor's total assets and 41 percent of sales for the
year ended September 30, 1997, were outside North America, primarily in France,
the United Kingdom, Germany, Brazil and Italy. The borrowings utilized to
finance the payment to Rockwell in connection with the Distribution were
incurred primarily in the United States, Canada, Italy and the United Kingdom.
Management believes that international operations have significantly benefited
the financial performance of the Company.
The Company's international operations are subject to a number of risks
inherent in operating abroad, including, but not limited to, risks with respect
to currency exchange rate fluctuations, local economic and political conditions,
disruptions of capital and trading markets, restrictive governmental actions
(such as restrictions on transfer of funds and trade protection measures,
including export duties and quotas and customs duties and tariffs), changes in
legal or regulatory requirements, import or export licensing requirements,
limitations on the repatriation of funds, difficulty in obtaining distribution
and support, nationalization, the laws and policies of the United States
affecting trade, foreign investment and loans, and tax laws. There can be no
assurance that these factors will not have a material adverse impact on the
Company's ability to increase or maintain its foreign sales or on its financial
condition or results of operations.
The Company enters into foreign currency forward exchange contracts to
minimize risk of loss from currency exchange rate fluctuations on firm and
identifiable foreign currency commitments entered into in the ordinary course of
business. The Company has not experienced nor does it anticipate any material
adverse effect on its results of operations or financial condition related to
these foreign currency forward exchange contracts. The Company has not entered
into foreign currency forward exchange contracts for other purposes,
S-20
<PAGE> 21
and the Company's financial condition and results of operations could be
affected (negatively or positively) by currency fluctuations.
YEAR 2000
The Company has developed plans to address issues related to the impact of
the year 2000 on its computer systems. Financial and operational systems have
been assessed and plans are being developed to address systems modification
requirements. The financial impact of making the required systems changes is not
expected to be material to the Company's consolidated financial position,
results of operations or cash flows.
RATIO OF EARNINGS TO FIXED CHARGES
The Company has calculated a ratio of earnings to fixed charges of 6.3 for
the nine months ended June 30, 1998. "Earnings" are defined as pre-tax income
from continuing operations, adjusted for income or loss attributable to minority
interests in subsidiaries, undistributed earnings of less than majority owned
subsidiaries, and fixed charges excluding capitalized interest. "Fixed charges"
are defined as interest on borrowings (whether expensed or capitalized) and that
portion of rental expense applicable to interest.
DESCRIPTION OF THE SECURITIES
The % Notes and the % Debentures offered hereby each constitutes a
single series of Debt Securities described in the accompanying Prospectus and
each such series will be limited to $100,000,000 aggregate principal amount, and
will be issued only in registered form in denominations of $1,000 and any
integral multiple thereof. The Indenture is qualified under the Trust Indenture
Act of 1939, as amended (the "1939 Act"). Reference is made to the 1939 Act and
the accompanying Prospectus for a detailed summary of additional provisions of
the Securities and of the Indenture under which the Securities will be issued.
The Chase Manhattan Bank is the Trustee under the Indenture.
INTEREST
The Securities will bear interest from , 1998 at the respective
rates per annum stated in their titles, payable semi-annually on and
of each year, beginning , 1999. Interest is payable to
the persons in whose names the % Notes and the % Debentures are registered
at the close of business on the or , as the case may be,
preceding such interest payment date, which will be the Regular Record Dates
with respect to such series.
OPTIONAL REDEMPTION
Each of the % Notes and the % Debentures will be redeemable as a whole
at any time or in part from time to time, at the option of the Company, on not
less than 30 or more than 60 days' notice mailed to holders thereof, at a
redemption price equal to the greater of (i) 100% of the principal amount of
such % Notes or % Debentures being redeemed and (ii) the sum of the
present values of the Remaining Scheduled Payments (as defined below),
discounted to the redemption date on a semiannual basis (assuming a 360-day year
consisting of twelve 30-day months) at the Treasury Rate plus basis points in
the case of the % Notes and basis points in the case of the % Debentures,
together, in each case, with accrued interest on the principal amount at
maturity being redeemed to the date of redemption.
"Comparable Treasury Issue" means the United States Treasury Security
selected by an Independent Investment Banker that would be utilized, at the time
of selection and in accordance with customary financial practice, in pricing new
issues of corporate debt securities of comparable maturity to the remaining term
of the % Notes or the % Debentures, as the case may be. "Independent
Investment Banker" means one of the Reference Treasury Dealers appointed by the
Company.
"Comparable Treasury Price" means, with respect to any redemption date, (i)
the average of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal
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<PAGE> 22
amount) on the third business day preceding such redemption date, as set forth
in the daily statistical release (or any successor release) published by the
Federal Reserve Bank of New York and designated "Composite 3:30 p.m. Quotations
for U.S. Government Securities" or (ii) if such release (or any successor
release) is not published or does not contain such prices on such business day,
the average of the Reference Treasury Dealer Quotations for such redemption
date. "Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any redemption date, the average, as determined by
the Trustee, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the Trustee by such Reference Treasury Dealer as of 3:30 p.m., New
York City time, on the third business day preceding such redemption date.
"Reference Treasury Dealer" means each of J.P. Morgan Securities Inc.,
Morgan Stanley & Co. Incorporated and Warburg Dillon Read LLC and their
respective successors; provided, however, that if any of the foregoing shall
cease to be a primary U.S. Government securities dealer in New York City (a
"Primary Treasury Dealer"), the Company shall substitute therefor another
nationally recognized investment banking firm that is a Primary Treasury Dealer.
"Remaining Scheduled Payments" means, with respect to each Security to be
redeemed, the remaining scheduled payments of the principal thereof and interest
thereon that would be due after the related redemption date but for such
redemption; provided, however, that if such redemption date is not an interest
payment date with respect to such Security, the amount of the next succeeding
scheduled interest payment thereon will be reduced by the amount of interest
accrued thereon to such redemption date.
"Treasury Rate" means, with respect to any redemption date, the rate per
annum equal to the semiannual equivalent yield to maturity (computed as of the
second business day immediately preceding such redemption date) of the
Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue
(expressed as a percentage of its principal amount) equal to the Comparable
Treasury Price for such redemption date.
On and after the redemption date, interest will cease to accrue on the
Securities or any portion thereof called for redemption. On or before any
redemption date, the Company shall deposit with a paying agent (or the Trustee)
money sufficient to pay the redemption price of and accrued interest on the
Securities to be redeemed on such date. If less than all the Securities of any
series are to be redeemed, the Securities to be redeemed shall be selected by
the Trustee by such method as the Trustee shall deem fair and appropriate.
DEFEASANCE
The provisions of the Indenture relating to defeasance described under
"Description of the Debt Securities -- Defeasance and Covenant Defeasance" in
the accompanying Prospectus apply to each of the % Notes and the %
Debentures.
BOOK-ENTRY SYSTEM
The Depository Trust Company (the "Depositary" or "DTC") will act as
securities depositary for the Securities. The Securities will be issued as
permanent fully registered securities registered in the name of Cede & Co. (the
Depositary's partnership nominee). One or more fully registered global
certificates representing the Securities (the "Global Securities") will be
issued for each series of the Securities, in the aggregate principal amount of
each such series, and will be deposited with the Depositary. The provisions set
forth under "Description of the Debt Securities -- Global Securities" in the
accompanying Prospectus will be applicable to the Securities.
The following is based on information furnished by the Depositary.
The Depositary is a limited-purpose trust company organized under the New
York Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Securities
Exchange Act of 1934, as amended. The Depositary holds securities that its
participants ("Participants") deposit with the Depositary. The Depositary also
facilitates the settlement among Participants of securities transactions, such
S-22
<PAGE> 23
as transfers and pledges, in deposited securities through electronic
computerized book-entry changes in Participants' accounts, thereby eliminating
the need for physical movement of securities certificates. Direct participants
("Direct Participants") include securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations. The Depositary
is owned by a number of its Direct Participants and by the New York Stock
Exchange, Inc., the American Stock Exchange, Inc. and the National Association
of Securities Dealers, Inc. Access to the Depositary's system is also available
to others such as securities brokers and dealers, banks and trust companies that
clear through or maintain a custodial relationship with a Direct Participant,
either directly or indirectly ("Indirect Participants"). The rules applicable to
the Depositary and its Participants are on file with the Securities and Exchange
Commission.
Purchases of Securities under the Depositary's system must be made by or
through Direct Participants, which will receive a credit for such Securities on
the Depositary's records. The ownership interest of each actual purchaser of
each Security represented by a Global Security ("Beneficial Owner") is in turn
to be recorded on the Direct and Indirect Participants' records. Beneficial
Owners will not receive written confirmation from the Depositary of their
purchase, but Beneficial Owners are expected to receive written confirmations
providing details of the transaction, as well as periodic statements of their
holdings, from the Direct or Indirect Participants through which such Beneficial
Owners entered into the transaction. Transfers of ownership interests in any
Global Security representing Securities are to be accomplished by entries made
on the books of Participants acting on behalf of Beneficial Owners. Beneficial
Owners of any Global Security representing Securities will not receive
Securities in definitive form representing their ownership interests therein,
except in the event that use of the book-entry system for such Securities is
discontinued or upon the occurrence of certain other events described herein.
To facilitate subsequent transfers, all Global Securities representing
Securities which are deposited with the Depositary are registered in the name of
the Depositary's partnership nominee, Cede & Co. The deposit of Global
Securities with the Depositary and their registration in the name of Cede & Co.
effect no change in beneficial ownership. The Depositary has no knowledge of the
actual Beneficial Owners of the Global Securities representing the Securities;
the Depositary's records reflect only the identity of the Direct Participants to
whose accounts such Securities are credited, which may or may not be the
Beneficial Owners. The Participants will remain responsible for keeping account
of their holdings on behalf of their customers.
Conveyance of notices and other communications by the Depositary to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements
that may be in effect from time to time.
Neither the Depositary nor Cede & Co. will consent or vote with respect to
the Global Securities representing the Securities. Under its usual procedures,
the Depositary mails an omnibus proxy (an "Omnibus Proxy") to the Company as
soon as possible after the applicable record date. The Omnibus Proxy assigns
Cede & Co.'s consenting or voting rights to those Direct Participants to whose
accounts the Securities are credited on the applicable record date (identified
in a listing attached to the Omnibus Proxy).
Principal and interest payments on the Global Securities representing the
Securities will be made to Cede & Co., as nominee of the Depositary. The
Depositary's practice is to credit Direct Participants' accounts on the
applicable payment date in accordance with their respective holdings shown on
the Depositary's records unless the Depositary has reason to believe that it
will not receive payment on such date. Payments by Participants to Beneficial
Owners will be governed by standing instructions and customary practices, as is
the case with securities held for the account of customers in bearer form or
registered in "street name", and will be the responsibility of such Participants
and not of the Depositary, the Trustee or the Company, subject to any statutory
or regulatory requirements as may be in effect from time to time. Payment of
principal and interest to Cede & Co. is the responsibility of the Company or the
Trustee, disbursement of such payments to Direct Participants shall be the
responsibility of the Depositary, and disbursement of such payments to the
Beneficial Owners shall be the responsibility of Direct and Indirect
Participants. Neither the Company nor the Trustee will have any responsibility
or liability for the disbursements of payments in respect of ownership interests
in the Securities by the Depositary or the Direct or Indirect Participants or
for maintaining or
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<PAGE> 24
reviewing any records of the Depositary or the Direct or Indirect Participants
relating to ownership interests in the Securities or the disbursement of
payments in respect thereof.
The Depositary may discontinue providing its services as securities
depositary with respect to the Securities at any time by giving reasonable
notice to the Company or the Trustee. Under such circumstances, and in the event
that a successor securities depositary is not obtained, Securities in definitive
form are required to be printed and delivered. The Company may decide to
discontinue use of a system of book-entry transfers through the Depositary (or a
successor securities depositary). In that event, Securities in definitive form
will be printed and delivered.
The information in this section concerning the Depositary and the
Depositary's book-entry system has been obtained from sources that the Company
believes to be reliable. The Company and the Underwriters take no responsibility
for its accuracy. This information is subject to any changes to the arrangements
between the Company and the Depositary and any changes to such procedures that
may be instituted unilaterally by the Depositary.
GENERAL
Other than the protections which may otherwise be afforded holders of the
Securities as a result of the operation of the covenants described under
"Covenants" in the accompanying Prospectus, there are no covenants or other
provisions which may afford holders of the % Notes or the % Debentures
protection in the event of a leveraged buyout or other highly leveraged
transaction involving the Company or any similar occurrence.
The Securities will not be subject to any sinking fund provisions.
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<PAGE> 25
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
dated the date hereof (the "Underwriting Agreement"), the Company has agreed to
sell to each of the underwriters named below (the "Underwriters"), and each of
the Underwriters has severally and not jointly agreed to purchase, the
respective amounts of the Securities set forth opposite its name below:
<TABLE>
<CAPTION>
PRINCIPAL PRINCIPAL
AMOUNT OF AMOUNT OF
UNDERWRITER % NOTES % DEBENTURES
- ----------- ---------- ---------------
<S> <C> <C>
J.P. Morgan Securities Inc....................... $ $
Morgan Stanley & Co. Incorporated................
Warburg Dillon Read LLC..........................
-------- --------
Total.................................. $ $
</TABLE>
The Underwriting Agreement provides that the obligation of the Underwriters
to pay for and accept delivery of the Securities is subject to the approval of
certain legal matters by their counsel and to certain other conditions. Under
the terms and conditions of the Underwriting Agreement, the Underwriters are
committed to take and pay for all of the Securities if any are taken.
The Company has been advised by the Underwriters that they initially
propose to offer the Securities in part directly to purchasers at the respective
initial public offering prices set forth on the cover page of this Prospectus
Supplement and in part to certain securities dealers at such prices less a
concession of . % of the principal amount of the % Notes and . % of the
principal amount of the % Debentures. The Underwriters may allow, and such
dealers may reallow, a concession not to exceed . % of the principal amount of
the % Notes and . % of the principal amount of the % Debentures to certain
brokers and dealers. After the initial offering of the Securities, the offering
prices and other selling terms may from time to time be varied by the
Underwriters.
There is no public trading market for the % Notes or the % Debentures
and the Company does not intend to apply for listing of the Securities on any
national securities exchange or for quotation of the Securities on any automated
dealer quotation system. The Company has been advised by the Underwriters that
they presently intend to make a market in the Securities after the consummation
of the offering contemplated hereby, although they are under no obligation to do
so and may discontinue any market-making activities at any time without any
notice. No assurance can be given as to the liquidity of the trading market for
any of the Securities or that an active public market for any of the Securities
will develop. If an active public trading market for any of the Securities does
not develop, the market price and liquidity of such Securities may be adversely
affected. If any of the Securities are traded, they may trade at a discount from
their initial offering prices, depending on prevailing interest rates, the
market for similar securities, the performance of the Company and certain other
factors.
In order to facilitate the offering of the Securities, the Underwriters may
engage in transactions that stabilize, maintain or otherwise affect the prices
of the Securities. Specifically, the Underwriters may overallot in connection
with the offering, creating a short position in the Securities for their own
account. In addition, to cover allotments or to stabilize the price of the
Securities, the Underwriters may bid for, and purchase the Securities in the
open market. Finally, the underwriting syndicate may reclaim selling concessions
allowed to an underwriter or dealer for distributing the Securities in the
offering if the syndicate repurchases previously distributed Securities in
transactions to cover syndicate short positions in stabilization transactions or
otherwise. Any of these activities may stabilize or maintain market prices of
the Securities above independent market levels. The Underwriters are not
required to engage in these activities and may end any of these activities at
any time.
The Underwriting Agreement provides that the Company will indemnify the
several Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended, and will be required to contribute to
payments which the Underwriters may be required to make in respect thereof.
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<PAGE> 26
From time to time certain Underwriters and their affiliates have provided,
and continue to provide, investment banking and commercial banking services to
the Company, including, in the case of affiliates of J.P. Morgan Securities Inc.
and Warburg Dillon Read LLC, acting as lenders under the Company's bank
revolving credit facility. Accordingly, such affiliates will receive certain
amounts as repayment under the Company's bank revolving credit facility from the
net proceeds of the offering of the Securities. See "Use of Proceeds" herein.
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<PAGE> 27
PROSPECTUS
- ----------
MERITOR AUTOMOTIVE, INC.
DEBT SECURITIES
------------------------
Meritor Automotive, Inc., a Delaware corporation (the "Company"), may offer
its debt securities ("Debt Securities"), in one or more series from time to
time, in an aggregate principal amount (or, in the case of Debt Securities
issued at an original issue discount, net proceeds) not to exceed $500,000,000,
or the equivalent of that amount in one or more foreign or composite currencies,
on terms to be determined at the time of sale. This Prospectus will be
supplemented by a prospectus supplement (the "Prospectus Supplement") that will
set forth, as applicable, the specific designation, aggregate principal amount,
authorized denominations, purchase price, maturity, interest rate (or manner of
calculation of interest rate) and time of payment of interest, if any, any
redemption terms, the currency or composite currency in which the Debt
Securities or any interest on the Debt Securities will be payable, and other
specific terms, and any listing on a securities exchange, of the series of Debt
Securities in respect of which this Prospectus is being delivered (the "Offered
Debt Securities"), together with the terms of offering of the Offered Debt
Securities.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The Company may sell the Debt Securities through underwriters, dealers or
agents designated from time to time, or directly to one or more purchasers. See
"Plan of Distribution". The Prospectus Supplement will set forth the names of
any underwriters, dealers or agents involved in the sale of the Offered Debt
Securities, any applicable commissions or discounts and the net proceeds to the
Company from any such sale.
------------------------
THE DATE OF THIS PROSPECTUS IS JUNE 4, 1998.
<PAGE> 28
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Securities and Exchange Commission (the "SEC"). This Prospectus contains
information concerning the Company, but does not contain all of the information
set forth in the Registration Statement of which this Prospectus is a part, and
exhibits and amendments to the Registration Statement that the Company has filed
or may file with the SEC under the Securities Act of 1933, as amended (the
"Securities Act"). Such reports, proxy statements, Registration Statement,
exhibits and other information filed by the Company can be inspected and copied
at the public reference facilities maintained by the SEC at 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549; 7 World Trade Center, Suite 1300, New
York, New York 10048; and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such material can also be obtained at prescribed rates from the
Public Reference Section of the SEC at its principal office at 450 Fifth Street,
N.W., Washington, D.C. 20549. The SEC also maintains a web site that contains
reports, proxy and information statements and other information regarding
registrants (including the Company) that file electronically with the SEC
(http://www.sec.gov).
The Company's Common Stock, par value $1 per share, is listed on the New
York Stock Exchange. Reports, proxy statements and other information concerning
the Company can be inspected at the office of the New York Stock Exchange at 20
Broad Street, New York, New York 10005.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents, or portions of documents, filed with the SEC
pursuant to the Exchange Act (File No. 1-13093), are incorporated in this
Prospectus by reference and made a part hereof:
(a) the Company's Annual Report on Form 10-K for the Fiscal Year Ended
September 30, 1997 (including the portions of the Company's 1997 Annual
Report to Shareowners and the Company's Proxy Statement on Schedule 14A for
the Company's 1998 Annual Meeting of Shareowners that are incorporated
therein by reference);
(b) the Company's Quarterly Report on Form 10-Q for the Quarterly
Period Ended December 31, 1997; and
(c) the Company's Quarterly Report on Form 10-Q for the Quarterly
Period Ended March 31, 1998.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the Debt Securities hereunder shall be deemed
to be incorporated by reference in this Prospectus and to be a part hereof from
the date of the filing of such documents (such documents, and the documents
listed above, being referred to as the "Incorporated Documents"). Any statement
contained herein or in an Incorporated Document shall be deemed to be modified
or superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any subsequently filed Incorporated Document, or in an
accompanying Prospectus Supplement, modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company undertakes to provide without charge to each person, including
any beneficial owner, to whom a copy of this Prospectus is delivered, on the
written or oral request of such person, a copy of any or all of the Incorporated
Documents, other than exhibits to such documents, unless such exhibits are
specifically incorporated by reference therein. Requests should be directed to
David W. Greenfield, Senior Vice President, General Counsel and Secretary,
Meritor Automotive, Inc., 2135 West Maple Road, Troy, Michigan, 48084, telephone
number (248) 435-7708.
2
<PAGE> 29
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE DEBT SECURITIES,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES, AND THE IMPOSITION OF A PENALTY BID IN CONNECTION WITH THE OFFERING.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN OF DISTRIBUTION".
THE COMPANY
The Company is a leading global supplier of a broad range of components and
systems for use in commercial, specialty and light vehicles and serves its
customers worldwide through Heavy Vehicle Systems ("HVS") and Light Vehicle
Systems ("LVS"). HVS supplies drivetrain systems and components, including
axles, brakes, transmissions, clutches and drivelines, for heavy-duty and
medium-duty trucks, trailers, off-highway equipment, buses and coaches, as well
as other specialty and military vehicles. LVS supplies electromechanical and
other components and systems, including roof, door, access control and seat
adjusting systems, as well as suspension products and steel wheels, for
passenger cars, light trucks and sport utility vehicles.
The Company was incorporated in Delaware in May 1997 in connection with the
September 30, 1997 distribution by Rockwell International Corporation
("Rockwell"), the Company's former parent company, to Rockwell shareowners on a
pro rata basis of all of the issued and outstanding shares of the Company (the
"Distribution"). Prior to the Distribution, Rockwell transferred substantially
all of its operations, assets and liabilities related to the automotive
businesses then owned and operated by Rockwell (including liabilities relating
to former operations) to the Company or to subsidiaries of the Company.
The Company's principal executive offices are located at 2135 West Maple
Road, Troy, Michigan 48084. Its telephone number is (248) 435-1000.
USE OF PROCEEDS
Except as may otherwise be set forth in a Prospectus Supplement, the net
proceeds to be received by the Company from the issuance and sale of the Debt
Securities will be added to the Company's general funds which will be available
for general corporate purposes, including the repayment of existing
indebtedness, working capital needs, capital expenditures and acquisitions.
Pending application of the funds, the Company will use the net proceeds of the
Debt Securities for short-term investments.
RATIO OF EARNINGS TO FIXED CHARGES
The Company has calculated ratios of earnings to fixed charges for the
periods indicated, as follows:
<TABLE>
<CAPTION>
SIX
PRO FORMA MONTHS
YEAR ENDED SEPTEMBER 30,(1) YEAR ENDED ENDED
------------------------------------- SEPTEMBER 30, MARCH 31,
1993 1994 1995 1996 1997 1997(2) 1998
----- ----- ----- ----- ----- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed
Charges(3).......................... 6.8 5.6 10.3 11.7 11.7 4.7 6.1
</TABLE>
- ---------------
(1) The financial information presented for periods prior to September 30, 1997
has been prepared based on the combined historical financial position,
results of operations and cash flows of the ongoing automotive businesses of
Rockwell prior to the Distribution and is not necessarily indicative of what
the financial position, results of operations or cash flows would have been
had the Company been an independent public company during the periods
presented.
(2) Pro forma financial information presented as if the Company was a
stand-alone entity in fiscal 1997. Pro forma information reflects (a) the
68.9 million shares of the Company's common stock issued on the date of the
Distribution, (b) management's estimate that corporate costs would have been
$11 million lower on a stand-alone basis than those allocated to the
automotive businesses by Rockwell and (c) $28 million of interest expense at
6 percent for the year ended September 30, 1997, related to the debt
incurred by the Company in connection with the $445 million pre-Distribution
payment to Rockwell.
(3) "Earnings" are defined as pre-tax income from continuing operations,
adjusted for income or loss attributable to minority interests in
subsidiaries, undistributed earnings of less than majority owned
subsidiaries, and fixed charges excluding capitalized interest. "Fixed
charges" are defined as interest on borrowings (whether expensed or
capitalized) and that portion of rental expense applicable to interest.
3
<PAGE> 30
DESCRIPTION OF THE DEBT SECURITIES
The Debt Securities are to be issued under an Indenture, dated as of April
1, 1998 (the "Indenture"), between the Company and The Chase Manhattan Bank, as
trustee (the "Trustee"). The Indenture is filed as an exhibit to the
Registration Statement, and copies of the Indenture may be obtained from the
Commission in the manner set forth above under "Available Information". Certain
provisions of the Indenture are summarized below. Such summaries are subject to,
and are qualified by reference to, all provisions of the Indenture, including
the definitions therein of certain terms. Numerical references in parentheses
below are to sections of the Indenture. Whenever particular provisions or
sections of the Indenture or terms defined in the Indenture are referred to in
this Prospectus, such provisions, sections or definitions are incorporated by
reference as a part of the statements made, and the statements are qualified by
such reference. Unless otherwise indicated, capitalized terms used in this
section that are defined in the Indenture have the meanings ascribed to such
terms in the Indenture.
The description below sets forth certain general terms and provisions of
the Debt Securities. The specific terms of the Offered Debt Securities, as well
as any modifications of or additions to the general terms of the Debt Securities
set forth below that may be applicable in the case of the Offered Debt
Securities, are described in the Prospectus Supplement. For a description of the
terms of the Offered Debt Securities, reference must be made to both the
Prospectus Supplement and the description of the Debt Securities in this
Prospectus.
GENERAL
The Indenture does not limit the amount of Debt Securities which may be
issued thereunder and provides that Debt Securities may be issued thereunder up
to the aggregate principal amount which may be authorized from time to time by
the Company, in one or more series. Under the Indenture, the Company has the
ability to issue Debt Securities with terms different from those of Debt
Securities previously issued thereunder, and without the consent of the holders
thereof, to issue additional amounts of a series of Debt Securities (with
different dates for payments, different rates of interest and in a different
Currency or Currencies). Reference is made to the Prospectus Supplement for the
following terms of the Offered Debt Securities, as applicable: (1) the title of
the Offered Debt Securities; (2) any limit on the aggregate principal amount of
the Offered Debt Securities and any limit on the aggregate principal amount of
Debt Securities of such series; (3) if other than Dollars, the Currency or
Currencies in which the Offered Debt Securities are to be denominated, the
manner in which the Dollar equivalent of the principal amount is to be
determined upon original issuance and if any payment of principal of (or
premium, if any) or interest, if any, on or any other amount in respect of the
Offered Debt Securities will be payable other than in Dollars, the Currency or
Currencies in which such payment shall be payable; (4) the date or dates, or the
method by which such date or dates will be determined or extended, on which the
principal of (and premium, if any, on) the Offered Debt Securities will be
payable; (5) the rate or rates, or the method of determination thereof, at which
the Offered Debt Securities shall bear interest, if any, the date or dates from
which such interest shall accrue or the method by which such date or dates shall
be determined, the date or dates on which such interest shall be payable and for
any Registered Securities the Regular Record Dates, if any, for such interest
payment dates, or the method by which such date or dates shall be determined,
and the basis on which any interest shall be calculated if other than on the
basis of a 360-day year of twelve 30-day months; (6) the place or places where
principal of (and premium, if any) and interest, if any, on the Offered Debt
Securities may be payable, where any Registered Securities may be surrendered
for registration of transfer and where Offered Debt Securities may be exchanged
and notices and demands may be served or published; (7) the period or periods
within which, the price or prices at which, the Foreign Currency or Foreign
Currencies, if any, in which and the other terms and conditions upon which the
Offered Debt Securities may be redeemed, in whole or in part, at the option of
the Company; (8) the obligation, if any, of the Company to redeem or purchase
the Offered Debt Securities pursuant to any sinking fund or analogous provisions
or at the option of a holder thereof, and the period or periods within which,
the price or prices at which, the Foreign Currency or Foreign Currencies, if
any, in which, and the other terms and conditions upon which Offered Debt
Securities shall be redeemed or purchased, in whole or in part, pursuant to such
obligation; (9) the denomination of any Registered Security (if other than
$1,000 or any integral
4
<PAGE> 31
multiple thereof) and of any Bearer Security (if other than $10,000 or any
integral multiple thereof); (10) the portion of the principal amount of the
Offered Debt Securities, if other than the principal amount thereof, payable
upon acceleration of Maturity thereof or the method by which such portion shall
be determined; (11) whether Offered Debt Securities are to be Registered
Securities, Bearer Securities or both, are to be issuable with or without
coupons or both, and the terms upon which Bearer Securities may be exchanged for
Registered Securities, if other than in the manner provided in the Indenture,
and, in the case of Bearer Securities, the date as of which such Bearer
Securities shall be dated (if other than the date of original issuance of the
first security of like tenor and term to be issued); (12) whether Offered Debt
Securities are to be issued in whole or in part in the form of a Global
Security, and in such case the Depositary, whether such global form is temporary
or permanent, whether beneficial owners of interests in any Permanent Global
Security may exchange such interests for Debt Securities of such series in
certificated form and of like tenor of any authorized form and denomination and
the circumstances under which any such exchanges may occur, if other than in the
manner provided in the Indenture, and any applicable Exchange Date; (13) whether
any additional amounts will be payable by the Company on the Offered Debt
Securities in respect of any tax, assessment or governmental charge and whether
the Company will have the option to redeem the Offered Debt Securities rather
than pay such additional amounts or to redeem the Offered Debt Securities in the
event of the imposition of any certification, documentation, information or
other reporting requirement (and the terms and conditions of any such option);
(14) if the amount of payments of principal of (and premium, if any) or
interest, if any, on the Offered Debt Securities may be determined with
reference to an index, the manner in which such amounts shall be determined;
(15) the person to whom any interest on any Registered Security shall be
payable, if other than the person in whose name such Registered Security (or one
or more Predecessor Securities) is registered at the close of business on the
Regular Record Date, the manner in which, or person to whom, any interest on any
Bearer Security will be payable, if other than upon presentation and surrender
of the coupons appertaining thereto as they mature, and the extent to which any
interest payable on an Interest Payment Date on any temporary Global Security
will be paid if other than in the manner provided in the Indenture; (16) any
additions to or changes in any Events of Default or covenants applicable to the
Offered Debt Securities set forth in the Indenture; (17) the application, if
any, of the defeasance or covenant defeasance provisions of the Indenture to the
Offered Debt Securities; (18) the designation of the initial Exchange Rate
Agent, if applicable; (19) if other than the Trustee, the identity of the
trustee, Authenticating Agent, Security Registrar and/or Paying Agent; and (20)
any other terms of the Offered Debt Securities. (Section 3.01).
Additional provisions of the Indenture, such as interest rate reset and
extension provisions, may be made applicable to the Offered Debt Securities, as
described in the Prospectus Supplement.
If any series of Debt Securities is sold for, is payable in or is
denominated in one or more Foreign Currencies, applicable restrictions,
elections, tax consequences, specific terms and other information with respect
to such series of Debt Securities and such Foreign Currency or Foreign
Currencies shall be set forth in the Prospectus Supplement relating thereto.
If the Debt Securities are being issued as original issue discount
securities (bearing no interest or interest at a rate which at the time of
issuance is below market rates) to be sold at a substantial discount below the
stated principal amount, the United States federal income tax consequences and
other considerations applicable to such original issue discount securities will
be described in the related Prospectus Supplement.
The Debt Securities will be unsecured and will rank on a parity with all
other unsecured and unsubordinated indebtedness of the Company, unless otherwise
indicated in the applicable Prospectus Supplement. Other than the protections
which may otherwise be afforded holders of Debt Securities as a result of the
operation of the covenants described under "Covenants" below or as may be made
applicable to the Offered Debt Securities as described in the Prospectus
Supplement, there are no covenants or other provisions which may afford holders
of Debt Securities protection in the event of a leveraged buyout or other highly
leveraged transaction involving the Company or any similar occurrence.
5
<PAGE> 32
FORM, DENOMINATIONS, REGISTRATION, TRANSFER AND EXCHANGE
Debt Securities of a series may be issuable solely as Registered
Securities, solely as Bearer Securities or as both Registered Securities and
Bearer Securities. Unless otherwise provided in the applicable Prospectus
Supplement, Registered Securities denominated in Dollars (other than Registered
Securities in global form, which may be in any denomination) are issuable in
denominations of $1,000 and any integral multiple thereof and Bearer Securities
denominated in Dollars (other than Bearer Securities in global form, which may
be in any denomination) are issuable in denominations of $10,000 and any
integral multiple thereof. The Indenture provides that Debt Securities of a
series may be issuable in global form. See "Global Securities" below. Unless
otherwise indicated in the applicable Prospectus Supplement, Bearer Securities
(other than Global Securities) will have interest coupons attached. (Sections
2.01 and 3.02).
Registered Securities of any series will be exchangeable for other
Registered Securities of the same series of any authorized denominations, of
like aggregate principal amount, tenor and terms. In addition, if Debt
Securities of any series are issuable as both Registered Securities and Bearer
Securities, at the option of the holder, but subject to applicable laws, upon
request confirmed in writing and subject to the terms of the Indenture, Bearer
Securities (with all unmatured coupons, except as provided below, and all
matured coupons in default) of such series will be exchangeable into Registered
Securities of the same series of any authorized denominations and of like
aggregate principal amount, tenor and terms. Bearer Securities surrendered in
exchange for Registered Securities of the same series between the close of
business on a Regular Record Date or a Special Record Date and the relevant date
for payment of interest shall be surrendered without the coupon relating to such
date for payment of interest, and such interest will not be payable in respect
of the Registered Security issued in exchange for such Bearer Security, but will
be payable only to the holder of such coupon when due in accordance with the
terms of the Indenture. Unless otherwise specified in the applicable Prospectus
Supplement, Bearer Securities will not be issued in exchange for Registered
Securities. (Section 3.05).
In connection with its original issuance, no Bearer Security shall be
mailed or otherwise delivered to any location in the United States (as defined
below under "Limitations on Issuance of Bearer Securities") and, unless
otherwise specified in the applicable Prospectus Supplement, a Bearer Security
may be delivered in connection with its original issuance only if the person
entitled to receive such Bearer Security furnishes written certification, in the
form required by the Indenture.
Debt Securities may be presented for exchange as provided above, and
Registered Securities may be presented for registration of transfer (duly
endorsed or accompanied by a satisfactory written instrument of transfer), at
the office of the Security Registrar or at the office of any transfer agent
designated by the Company for such purpose with respect to such series of Debt
Securities, without service charge and upon payment of any taxes and other
governmental charges. (Section 3.05). If the Prospectus Supplement refers to any
transfer agent (in addition to the Security Registrar) initially designated by
the Company with respect to any series of Debt Securities, the Company may at
any time rescind the designation of any such transfer agent or approve a change
in the location through which any such transfer agent (or Security Registrar)
acts, except that, if Debt Securities of a series are issuable as Registered
Securities, the Company will be required to maintain a transfer agent in each
Place of Payment for such series and, if Debt Securities of a series are
issuable as Bearer Securities, the Company will be required to maintain (in
addition to the Security Registrar) a transfer agent in a Place of Payment for
such series located outside the United States. The Company may at any time
designate additional transfer agents with respect to any series of Debt
Securities. (Section 10.02).
In the event of any redemption, the Company shall not be required to (i)
issue, register the transfer of or exchange Debt Securities of any series during
a period of 15 days before any selection of Debt Securities of that series to be
redeemed and ending at the close of business on (A) if Debt Securities of the
series are issuable only as Registered Securities, the day of mailing of the
relevant notice of redemption and (B) if Debt Securities of the series are
issuable as Bearer Securities, the day of the first publication of the relevant
notice of redemption or, if Debt Securities of the series are also issuable as
Registered Securities and there is no publication, the mailing of the relevant
notice of redemption; (ii) register the transfer of or exchange any Registered
Security so selected for redemption in whole or in part, except the unredeemed
portion of any
6
<PAGE> 33
Registered Security being redeemed in part; or (iii) exchange any Bearer
Security selected for redemption except that such a Bearer Security may be
exchanged for a Registered Security of like tenor and terms of that series,
provided that such Registered Security shall be simultaneously surrendered for
redemption. (Section 3.05).
GLOBAL SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more Global Securities that will be deposited with, or on behalf
of, a Depositary identified in the Prospectus Supplement relating to such series
and registered in the name of the Depositary or the Depositary's nominee. Global
Securities may be issued in fully registered or bearer form and may be issued in
either temporary or permanent form.
The Company anticipates that the following provisions will generally apply
to depository arrangements. The specific terms of the depository arrangement
with respect to a series of Debt Securities and whether all or any part of the
Offered Debt Securities will be issued in the form of one or more Global
Securities will be described in the Prospectus Supplement relating to such
series.
Unless and until it is exchanged in whole or in part for the individual
Debt Securities represented thereby, a Global Security may not be transferred
except as a whole between the Depositary for such Global Security and its
nominee or by the Depositary or any nominee to a successor of the Depositary or
a nominee of such successor.
Upon the issuance of a Global Security, the Depositary for such Global
Security or its nominee will credit on its book-entry registration and transfer
system the respective principal amounts of the individual Debt Securities
represented by such Global Security to the accounts of persons that have
accounts with such Depositary ("Participants"). Such accounts shall be
designated by the underwriters, dealers or agents with respect to such Debt
Securities or by the Company if such Debt Securities are offered and sold
directly by the Company. Ownership of beneficial interests in a Global Security
will be limited to Participants or persons that may hold interests through
Participants. Ownership of beneficial interests in such Global Security will be
shown on, and the transfer of that ownership will be effected only through,
records maintained by the applicable Depositary or its nominee (with respect to
interests of Participants) and records of Participants (with respect to
interests of persons who hold through Participants). The laws of some states
require that certain purchasers of securities take physical delivery of
securities in definitive form. Such limits and such laws may impair the ability
to own, pledge or transfer beneficial interests in a Global Security.
So long as the Depositary for a Global Security or its nominee is the
registered owner of such Global Security, such Depositary or such nominee, as
the case may be, will be considered the sole owner or holder of the Debt
Securities represented by such Global Security for all purposes under the
Indenture. Except as provided below, owners of beneficial interests in a Global
Security will not be entitled to have any of the individual Debt Securities of
the series represented by such Global Security registered in their names, will
not receive or be entitled to receive physical delivery of any such Debt
Securities of such series in definitive form and will not be considered the
owners or holders thereof under the Indenture.
Payments of principal of (and premium, if any) and interest, if any, on
individual Debt Securities represented by a Global Security registered in the
name of a Depositary or its nominee will be made to the Depositary or its
nominee, as the case may be, as the registered owner of the Global Security
representing such Debt Securities. None of the Company, the Trustee, any Paying
Agent or the Security Registrar for such Debt Securities or any agent,
underwriter or dealer through which such Debt Securities are offered or sold
will have any responsibility or liability for any aspect of the records relating
to or payments made on account of beneficial ownership interests in the Global
Security for such Debt Securities or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests.
The Company expects that the Depositary for a series of Debt Securities or
its nominee, upon receipt of any payment of principal (or premium, if any) or
interest, if any, in respect of a permanent Global Security representing any of
such Debt Securities, immediately will credit Participants' accounts with
payments in
7
<PAGE> 34
amounts proportionate to their respective beneficial interests in the principal
amount of such Global Security for such Debt Securities as shown on the records
of such Depositary or its nominee. The Company also expects that payments by
Participants to owners of beneficial interests in such Global Security held
through such Participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in "street name". Such payments will be
the responsibility of such Participants.
If a Depositary for a series of Debt Securities is at any time unwilling,
unable or ineligible to continue as depository and a successor depository is not
appointed by the Company within 90 days, the Company will issue individual Debt
Securities of such series to Participants in exchange for the Global Security
representing such series of Debt Securities. In addition, the Company may, at
any time and in its sole discretion, subject to any limitations described in the
Prospectus Supplement relating to such Debt Securities, determine not to have
any Debt Securities of such series represented by one or more Global Securities
and, in such event, will issue individual Debt Securities of such series to
Participants in exchange for the Global Security or Securities representing such
series of Debt Securities. (Section 3.05).
LIMITATIONS ON ISSUANCE OF BEARER SECURITIES
Unless otherwise provided in the applicable Prospectus Supplement, in
compliance with United States federal tax laws and regulations, Bearer
Securities (including Debt Securities in global form) may not be offered, sold,
resold or delivered in connection with their original issuance in the United
States or to United States persons (each as defined below) other than to a
Qualifying Branch of a United States Financial Institution (as defined below) or
a United States person acquiring Bearer Securities through a Qualifying Branch
of a United States Financial Institution and any underwriters, agents and
dealers participating in the offering of Debt Securities must agree that they
will not offer any Bearer Securities for sale or resale in the United States or
to United States persons (other than a Qualifying Branch of a United States
Financial Institution or a United States person acquiring Bearer Securities
through a Qualifying Branch of a United States Financial Institution) or deliver
Bearer Securities within the United States. In addition, any such underwriters,
agents and dealers must agree to send confirmations to each purchaser of a
Bearer Security confirming that such purchaser represents that it is not a
United States person or is a Qualifying Branch of a United States Financial
Institution and, if such person is a dealer, that it will send similar
confirmations to purchasers from it. The term "Qualifying Branch of a United
States Financial Institution" means a branch located outside the United States
of a United States securities clearing organization, bank or other financial
institution listed under Treasury Regulation Section 1.165-12(c)(1)(v) that
agrees to comply with the requirements of Section 165(j)(3)(A), (B) or (C) of
the United States Internal Revenue Code of 1986, as amended (the "Code"), and
the regulations thereunder.
Bearer Securities and any coupons appertaining thereto will bear a legend
substantially to the following effect: "Any United States person who holds this
obligation will be subject to limitations under the United States income tax
laws, including the limitations provided in Sections 165(j) and 1287(a) of the
Internal Revenue Code." Under Sections 165(j) and 1287(a) of the Code, holders
that are United States persons, with certain exceptions, will not be entitled to
deduct any loss on Bearer Securities and must treat as ordinary income any gain
realized on the sale or other disposition (including the receipt of principal)
of Bearer Securities.
The term "United States person" means a citizen or resident of the United
States, a corporation, partnership or other entity created or organized in or
under the laws of the United States or of any political subdivision thereof or
therein (other than a partnership that is not treated as a United States person
under any applicable Treasury Regulation which may be issued), and an estate or
trust the income of which is subject to United States federal income taxation
regardless of its source, and the term "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.
8
<PAGE> 35
PAYMENT AND PAYING AGENTS
Unless otherwise provided in the applicable Prospectus Supplement, the
Place of Payment for a series of Debt Securities issuable solely as Registered
Securities will be New York, New York and the Company has initially designated
an office of the Trustee in New York, New York for this purpose. Notwithstanding
the foregoing, at the option of the Company, interest, if any, may be paid on
Registered Securities by (i) check mailed to the address of the person entitled
thereto as such person's address appears in the Security Register or (ii)
transfer to an account located in the United States maintained by the person
entitled thereto as specified in the Security Register. (Sections 3.07, 10.01
and 10.02). Unless otherwise provided in the applicable Prospectus Supplement,
payment of any installment of interest on Registered Securities will be made to
the person in whose name such Registered Security is registered at the close of
business on the Regular Record Date for such interest payment. (Section 3.07).
If Debt Securities of a series are issuable as Bearer Securities, unless
otherwise provided in the applicable Prospectus Supplement, the Company will be
required to maintain an office or agency outside the United States at which,
subject to any applicable laws and regulations, the principal of (and premium,
if any) and interest, if any, on such series will be payable; provided that, if
required in connection with any listing of such Debt Securities on the London
Stock Exchange Limited, the Luxembourg Stock Exchange or any other stock
exchange located outside the United States, the Company will maintain an office
or agency for such Debt Securities in London or Luxembourg or any city located
outside the United States required by such stock exchange. (Section 10.02). The
initial locations of such offices and agencies will be specified in the
applicable Prospectus Supplement. Unless otherwise provided in the applicable
Prospectus Supplement, payment of principal of (and premium, if any) and
interest, if any, on Bearer Securities may be made, at the holder's option, by
(i) check in the Currency designated by the Bearer Security presented or mailed
to an address outside the United States or (ii) transfer to an account in such
Currency maintained by the person entitled thereto with a bank located outside
the United States. (Sections 3.07 and 10.02). Unless otherwise provided in the
applicable Prospectus Supplement, payment of installments of interest on any
Bearer Securities on or before Maturity will be made only against surrender of
coupons for such interest installments as they severally mature. (Section
10.01). Unless otherwise provided in the applicable Prospectus Supplement, no
payment with respect to any Bearer Security will be made at any office or agency
of the Company in the United States or by check mailed to an address in the
United States or by transfer to an account maintained with a bank located in the
United States. Notwithstanding the foregoing, payments of principal of (and
premium, if any) and interest, if any, on Bearer Securities payable in Dollars
may be made at an office of the Company's Paying Agent in the United States if
(but only if) payment of the full amount thereof in Dollars at all offices
outside the United States is illegal or effectively precluded by exchange
controls or other similar restrictions and the Trustee has received an Opinion
of Counsel that such payment within the United States is legal. (Sections 3.07
and 10.02).
The Company may from time to time designate additional offices or agencies
for payment with respect to any Debt Securities, approve a change in the
location of any such office or agency and, except as provided above, rescind the
designation of any such office or agency. (Section 10.02).
Unless otherwise provided in the applicable Prospectus Supplement, all
payments of principal of (and premium, if any) and interest, if any, on any Debt
Security that is payable in a Currency other than Dollars will be made in
Dollars in the event that such Currency (i) ceases to be used both by the
government of the country that issued the Currency and by a central bank or
other public institution of or within the international banking community for
the settlement of transactions, (ii) is the ECU and ceases to be used both
within the European Monetary System and for the settlement of transactions by
public institutions of or within the European Communities or (iii) is any
Currency unit (or composite Currency) other than the ECU and ceases to be used
for the purposes for which it was established. (Section 3.10).
All moneys deposited with the Trustee or any Paying Agent or held for the
payment of principal of (or premium, if any) or interest, if any, on any Debt
Security or any coupon appertaining thereto that remains unclaimed at the end of
two years after such principal, premium or interest shall have become due and
payable
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will, at the request of the Company, be repaid to the Company and the holder of
such Debt Security or any coupon appertaining thereto will thereafter look only
to the Company for payment thereof. (Section 10.03).
CERTAIN DEFINITIONS
"Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary. "Unrestricted Subsidiary" means any Subsidiary
designated as such from time to time by the Company. (Section 1.01). Subject to
various limitations, the Company may from time to time designate any Restricted
Subsidiary as an Unrestricted Subsidiary and any Unrestricted Subsidiary as a
Restricted Subsidiary. (Section 10.07). Unrestricted Subsidiaries will not be
restricted by the various provisions of the Indenture applicable to Restricted
Subsidiaries, and the debt of Unrestricted Subsidiaries will not be consolidated
with that of the Company and its Restricted Subsidiaries in calculating
Consolidated Funded Debt under the Indenture.
"Funded Debt" means (a) indebtedness for money borrowed having a maturity
of more than 12 months, (b) certain obligations in respect of lease rentals and
(c) the higher of the par value or liquidation value of preferred stock of a
Restricted Subsidiary that is not owned by the Company or a Wholly-owned
Restricted Subsidiary, but, in the case of the Company, does not include certain
debt subordinate to the Debt Securities. (Section 1.01).
"Secured Debt" means indebtedness for money borrowed (other than
indebtedness among the Company and Restricted Subsidiaries), which is secured by
a mortgage or other lien on any Principal Property of the Company or a
Restricted Subsidiary or a pledge, lien or other security interest on the stock
or indebtedness of a Restricted Subsidiary. (Section 1.01).
"Principal Property" includes any real property (including buildings and
other improvements) of the Company or any Restricted Subsidiary, owned at the
date of the Indenture or thereafter acquired (other than any pollution control
facility, cogeneration facility or small power production facility acquired
after the date of the Indenture), which (i) has a book value in excess of 2.5%
of Consolidated Net Tangible Assets and (ii) in the opinion of the Board of
Directors is of material importance to the total business conducted by the
Company and its Restricted Subsidiaries as a whole. (Section 1.01).
"Consolidated Net Tangible Assets" means, at any date of computation, the
total amount of consolidated assets of the Company and its consolidated
subsidiaries, less the sum of (a) all current liabilities, except for (i) any
short-term debt, (ii) any current portion of long-term debt and (iii) any
current portion of obligations under capital leases, and (b) all goodwill, trade
names, trademarks, patents, unamortized debt discount and expense (less
unamortized debt premium) and other like intangibles as shown on a balance sheet
of the Company and its consolidated subsidiaries prepared not more than 90 days
prior to the date of computation, in all cases computed in accordance with
generally accepted accounting principles. (Section 1.01).
"Sale and Lease-Back Transaction" means, subject to certain exceptions,
sales or transfers of any Principal Property owned by the Company or any
Restricted Subsidiary which has been in full operation for more than 180 days
prior to such sale or transfer, where the Company or such Restricted Subsidiary
has the intention of leasing back such property for more than 36 months but
discontinuing the use of such property on or before the expiration of the term
of such lease. (Section 10.06).
COVENANTS
Limitations on Liens. The Company and its Restricted Subsidiaries are
prohibited from creating, incurring, assuming or suffering to exist any Secured
Debt without equally and ratably securing the outstanding Debt Securities. The
foregoing restrictions are not applicable to (i) Secured Debt existing at the
date of the Indenture; (ii) liens on property acquired or constructed after the
date of the Indenture by the Company or a Restricted Subsidiary and created
contemporaneously with, or within twelve months after, such acquisition or the
completion of such construction to secure all or any part of the purchase price
of such property or the cost of such construction; (iii) mortgages on property
of the Company or a Restricted Subsidiary created within twelve months of
completion of construction of a new plant or plants on such
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property to secure all or part of the cost of such construction; (iv) liens on
property existing at the time such property is acquired; (v) liens on stock
acquired after the date of the Indenture by the Company or a Restricted
Subsidiary if the aggregate cost thereof does not exceed 15% of Consolidated Net
Tangible Assets; (vi) liens securing indebtedness of a successor corporation to
the Company to the extent permitted by the Indenture; (vii) liens securing
indebtedness of a Restricted Subsidiary outstanding at the time it became a
Restricted Subsidiary; (viii) liens securing indebtedness of any person
outstanding at the time it is merged with or substantially all its properties
are acquired by the Company or any Restricted Subsidiary; (ix) liens on property
or on the outstanding shares or indebtedness of a corporation existing at the
time such corporation becomes a Restricted Subsidiary; (x) liens created,
incurred or assumed in connection with an industrial revenue bond, pollution
control bond or similar financing arrangement between the Company or any
Restricted Subsidiary and any Federal, state or municipal government or other
governmental body or agency; (xi) extensions, renewals or replacements of the
foregoing permitted liens to the extent of the original amounts thereof; (xii)
liens in connection with government and certain other contracts; (xiii) certain
liens in connection with taxes or legal proceedings; (xiv) certain other liens
not related to the borrowing of money; and (xv) liens in connection with Sale
and Lease-Back Transactions as described under "Limitations on Sale and
Lease-Back". (Section 10.05).
In addition, the Company and its Restricted Subsidiaries may have Secured
Debt not otherwise permitted without equally and ratably securing the
outstanding Debt Securities if the sum of (a) the amount of such Secured Debt
plus (b) the aggregate value of Sale and Lease-Back Transactions (subject to
certain exceptions) described below, does not exceed 15% of Consolidated Net
Tangible Assets. (Section 10.05).
Limitations on Sale and Lease-Back. The Company and its Restricted
Subsidiaries are prohibited from engaging in Sale and Lease-Back Transactions
unless (a) the Company or its Restricted Subsidiaries would be entitled to incur
Secured Debt equal to the amount realizable upon such sale or transfer secured
by a mortgage on the property to be leased without equally and ratably securing
the outstanding Debt Securities; or (b) an amount equal to the greater of net
proceeds of the sale or fair value of the property sold (subject to certain
limitations contained in the Indenture) as determined by the Board of Directors
is applied within 180 days of any such transaction (i) to the retirement (other
than a mandatory retirement) of Consolidated Funded Debt or indebtedness of the
Company or a Restricted Subsidiary that was Funded Debt at the time it was
created (other than Consolidated Funded Debt or indebtedness owned by the
Company or any Restricted Subsidiary) or (ii) to the purchase of other Principal
Property having a value at least equal to the greater of such amounts; or (c)
the Sale and Lease-Back Transaction involved was an industrial revenue bond,
pollution control bond or similar financing arrangement between the Company or
any Restricted Subsidiary and any Federal, state, municipal government or other
governmental body or agency. (Section 10.06).
Certain Limitations on Merger of the Company. The Company may consolidate
with or merge into any other corporation, or convey or transfer its properties
and assets substantially as an entirety to any other Person, provided that (i)
the corporation formed by such consolidation or into which the Company is merged
or which acquires such assets, is organized under the laws of the United States,
any State thereof or the District of Columbia and expressly assumes in a
supplemental indenture the Company's obligations on the Debt Securities and
under the Indenture, (ii) after giving effect to such transaction no Event of
Default, and no event which, after notice or lapse of time or both, would become
an Event of Default, shall have happened and be continuing and (iii) certain
other conditions are met. (Section 8.01). If, upon any consolidation or merger
of the Company with or into any other corporation or upon any conveyance or
transfer of its properties and assets substantially as an entirety to any other
Person, any Principal Property of the Company or a Restricted Subsidiary would
thereupon become subject to any mortgage, security interest, pledge, lien or
encumbrance not otherwise permitted under the Indenture, the Company will, prior
to such transaction, secure the outstanding Debt Securities, equally and ratably
with any other indebtedness of the Company then entitled to be so secured, by a
direct lien on such Principal Property and certain other properties. (Section
8.03). The successor corporation formed by any consolidation or merger, or any
conveyance or transfer of the properties and assets of the Company substantially
as an entirety, shall succeed to and be substituted for the Company under the
Indenture and thereafter the Company shall be relieved of all obligations and
covenants under the Indenture, the Debt Securities and any coupons. (Section
8.02).
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DEFEASANCE AND COVENANT DEFEASANCE
Defeasance. The Indenture provides as to any series of Debt Securities to
which the provisions described in this paragraph are made applicable, that the
Company will be discharged from any and all obligations in respect of the Debt
Securities of such series (except for certain obligations to register the
transfer and exchange of such Debt Securities, to replace mutilated, destroyed,
lost or stolen Debt Securities, to compensate, reimburse and indemnify the
Trustee, to maintain an office or agency with respect to the Debt Securities and
to hold moneys for payment in trust) upon irrevocable deposit with the Trustee,
in trust, of money or U.S. government securities (as described in the Indenture)
or a combination thereof, which through the payment of interest and principal in
respect thereof in accordance with their terms will provide money in an amount
sufficient to pay (without reinvestment) and discharge (i) the principal of (and
premium, if any) and each installment of principal of (and premium, if any) and
interest, if any, on such Debt Securities on the Stated Maturity of such
principal or installment of principal or interest, if any, and (ii) any
mandatory sinking fund payments or analogous payments applicable to Debt
Securities of such series on the day on which such payments are due and payable
in accordance with the terms of the Indenture and such Debt Securities. Such a
trust may only be established if, among other things, the Company has delivered
to the Trustee an Opinion of Counsel (as specified in the Indenture) to the
effect that the holders of such Debt Securities will not recognize income, gain
or loss for Federal income tax purposes as a result of such deposit, defeasance
and discharge 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. Such opinion must refer to
or be based upon a ruling of the Internal Revenue Service or a change in
applicable Federal income tax law occurring after the date of the Indenture. In
the event of any such deposit and discharge, the holders of such Debt Securities
would thereafter be entitled to look only to such trust fund for payment of
principal of (and premium, if any) and interest, if any, on the Debt Securities.
(Section 4.03).
Covenant Defeasance. The Indenture provides, as to any series of Debt
Securities to which the provisions described in this paragraph are made
applicable, that (i) the Company may omit to comply with the covenants contained
in Sections 10.05 (Limitations on Liens), 10.06 (Limitations on Sale and Lease-
Back) and 10.07 (Limitations on Change in Subsidiary Status) of the Indenture
and (ii) such noncompliance shall not be deemed to be an Event of Default under
the Indenture and the Debt Securities upon irrevocable deposit with the Trustee,
in trust, of money or U.S. government securities (as described in the Indenture)
or a combination thereof, which through the payment of interest and principal in
respect thereof in accordance with their terms will provide money in an amount
sufficient to pay (without reinvestment) and discharge (x) the principal of (and
premium, if any) and each installment of principal of (and premium, if any) and
interest, if any, on such Debt Securities on the Stated Maturity of such
principal or installment of principal or interest, if any, and (y) any mandatory
sinking fund payments or analogous payments applicable to Debt Securities of
such series on the day on which such payments are due and payable in accordance
with the terms of the Indenture and such Debt Securities. Such a trust may be
established only if, among other things, the Company has delivered to the
Trustee an Opinion of Counsel (as specified in the Indenture) to the effect that
the holders of such Debt Securities will not recognize income, gain or loss for
Federal income tax purposes as a result of such deposit and defeasance of
certain obligations 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 and defeasance had not occurred. The obligations of the Company under
the Indenture and Debt Securities other than with respect to the covenants
referred to above and the Events of Default other than the Event of Default
referred to above shall remain in full force and effect. (Section 10.09).
The Prospectus Supplement will state if any defeasance provision will apply
to the Debt Securities.
MODIFICATION OF INDENTURE AND WAIVER OF CERTAIN COVENANTS
With the consent of the holders of at least a majority in principal amount
of the outstanding Debt Securities of each series affected, the Trustee and the
Company may execute a supplemental indenture to change the Indenture or modify
the rights of the holders of Debt Securities of any such series, but, without
the consent of the holder of each outstanding Debt Security so affected, a
supplemental indenture may not, among other things, (i) change (except as
otherwise provided with respect to Debt Securities of any series) the
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Stated Maturity of principal or interest, if any, on any Debt Security, or
reduce the principal amount thereof or the rate of interest, if any, thereon or
any premium payable on redemption, or reduce the amount of principal of an
Original Issue Discount Security that would be due and payable upon a
declaration of acceleration of Maturity pursuant to the Indenture, or change the
Currency in which any Debt Security (or the premium, if any) or the interest, if
any, 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 or repayment, on or after the Redemption Date or
Repayment Date), or (ii) reduce the aforesaid percentage of holders of Debt
Securities of such series whose consent shall be required to authorize any such
supplemental indenture or to waive certain provisions of the Indenture. (Section
9.02).
The holders of a majority in principal amount of the Debt Securities of any
series at the time outstanding may waive compliance by the Company with certain
covenants in the Indenture with respect to Debt Securities of such series.
(Section 10.08).
The Indenture provides that in determining whether the holders of the
requisite principal amount of the Debt Securities of a series then outstanding
have given any request, demand, authorization, direction, notice, consent or
waiver thereunder or whether a quorum is present at a meeting of holders of Debt
Securities, (i) the principal amount of an Original Issue Discount Security that
will be deemed to be outstanding will be the amount of the principal thereof
that would be due and payable as of the date of such determination upon
acceleration of the Maturity thereof, (ii) the principal amount of a Security
denominated in one or more Foreign Currencies shall be deemed to be the Dollar
equivalent, determined on the date of original issuance of such Security, of the
principal amount thereof (or, in the case of an Original Issue Discount Security
or Indexed Security, the Dollar equivalent on the original issuance date of such
Security of the principal amount determined as provided in (i) above or (iii)
below), (iii) the principal amount of any Indexed Security that will be deemed
outstanding will be equal to the principal face amount of such Indexed Security
at original issuance unless otherwise provided with respect to such Security
pursuant to the Indenture, and (iv) Securities owned by the Company or any other
obligor upon the Securities or any Affiliate of the Company or of such obligor
will be disregarded and deemed not to be outstanding. (Section 1.01).
The Indenture contains provisions for convening meetings of the holders of
Debt Securities of a series if Debt Securities of that series are issuable as
Bearer Securities. (Section 13.01). A meeting may be called at any time by the
Trustee for such Debt Securities, and also, upon request, by the Company or the
holders of at least 10% in principal amount of the outstanding Debt Securities
of such series, in any such case upon notice given as provided in the Indenture.
(Section 13.02). Except for any consent that must be given by the holder of each
Debt Security affected thereby, as described above, any resolution presented at
a meeting or adjourned meeting duly reconvened at which a quorum is present may
be adopted by the affirmative vote of the holders of a majority in principal
amount of the outstanding Debt Securities of that series; provided, however,
that any resolution with respect to any request, demand, authorization,
direction, notice, consent, waiver or other action that may be made, given or
taken by the holders of a specified percentage in principal amount of Debt
Securities of a series may be adopted at a meeting or adjourned meeting duly
reconvened at which a quorum is present by the affirmative vote of the holders
of such specified percentage in principal amount of the outstanding Debt
Securities of that series. Any resolution passed or decision taken at any
meeting of holders of Debt Securities of any series duly held in accordance with
the Indenture will be binding on all holders of Debt Securities of that series.
The quorum at any meeting called to adopt a resolution, and at any reconvened
meeting, will be persons holding or representing a majority in principal amount
of the outstanding Debt Securities of a series; provided, however, that if any
action is to be taken at such meeting with respect to a consent or waiver which
may be given by the holders of not less than a specified percentage, which is
greater than a majority, in principal amount of the outstanding Debt Securities
of a series, the persons holding or representing such specified percentage in
principal amount of the Debt Securities of such series will constitute a quorum.
(Section 13.04).
DEFAULTS AND CERTAIN RIGHTS ON DEFAULT
An Event of Default with respect to any series of Debt Securities is
defined as being any of the following events: default for 30 days in payment of
any interest on the Debt Securities of such series; default in payment
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of principal of (and premium, if any, on) the Debt Securities of such series at
Maturity; default for 90 days after notice in performance of any other covenant
in the Indenture; certain events of bankruptcy, insolvency, receivership or
reorganization relating to the Company; or any other Event of Default provided
with respect to Debt Securities of that series. An Event of Default with respect
to Debt Securities of a particular series does not necessarily constitute an
Event of Default with respect to any other series. The Company will be required
to deliver to the Trustee annually a written statement as to the fulfillment of
its obligations under the Indenture. In case an Event of Default should occur
and be continuing with respect to any series of Debt Securities, the Trustee or
the holders of not less than 25% in principal amount of the Debt Securities of
such series then outstanding may declare the principal of all the Debt
Securities of such series to be immediately due and payable. Such declaration
may, under certain circumstances, be rescinded by the holders of a majority in
principal amount of the Debt Securities of such series at the time outstanding.
(Sections 5.01, 5.02 and 10.04).
Subject to the provisions of the Indenture relating to the duties of the
Trustee in case an Event of Default shall occur and be continuing, the Trustee
shall be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of Debt Securities,
unless such holders of Debt Securities shall have offered to the Trustee
security or indemnity. Subject to such provisions for indemnification and
certain limitations contained in the Indenture, the holders of a majority in
principal amount of the Debt Securities of any series at the time outstanding
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 the Trustee with respect to Debt Securities of such series.
The holders of a majority in principal amount of the Debt Securities of any
series at the time outstanding may, in certain cases, waive any past default
with respect to Debt Securities of such series except a default (i) in payment
of principal of, or premium, if any, or interest on any of the Debt Securities
of such series or (ii) in respect of a covenant or provision which under the
Indenture cannot be modified or amended without the consent of the holder of
each Debt Security of such series affected. (Sections 5.12, 5.13 and 6.03).
GOVERNING LAW
The Indenture and the Debt Securities and any coupons appertaining thereto
will be governed by and construed in accordance with the laws of the State of
New York. (Section 1.12).
CONCERNING THE TRUSTEE
The Trustee is one of a number of banks with which the Company maintains
ordinary banking relationships and with which the Company maintains credit
facilities.
PLAN OF DISTRIBUTION
The Company may sell the Debt Securities: (i) through one or more
underwriters or dealers; (ii) directly to a limited number of purchasers or a
single purchaser; (iii) through one or more agents; or (iv) through a
combination of such methods of sale. The Prospectus Supplement relating to the
Offered Debt Securities will set forth the terms of the offering, including the
name or names of any underwriters or dealers and the respective amounts of the
Offered Debt Securities underwritten or purchased by each of them, the purchase
price of the Offered Debt Securities and the proceeds to the Company from such
sale, any underwriting discounts, commissions and other items constituting
underwriters' compensation from the Company, any initial public offering price,
any discounts or concessions allowed or reallowed or paid to dealers and any
securities exchanges on which the Offered Debt Securities may be listed.
If underwriters are used in the sale, the Debt Securities will be acquired
by the underwriters for their own account and may be resold from time to time in
one or more transactions, including negotiated transactions, at a fixed public
offering price or at varying prices determined at the time of the sale. The Debt
Securities may be offered to the public through underwriting syndicates
represented by managing underwriters or directly by underwriters. Unless
otherwise set forth in the Prospectus Supplement, the obligations of the
underwriters to purchase the Offered Debt Securities will be subject to certain
conditions precedent, and the underwriters will
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<PAGE> 41
be obligated to purchase all the Offered Debt Securities if any are purchased.
Any initial public offering price and any discounts or concessions allowed or
reallowed or paid to dealers may be changed from time to time.
If agents are used in the sale, the Prospectus Supplement will set forth
the name of any agent involved in the offer or sale of the Offered Debt
Securities in respect of which the Prospectus Supplement is delivered as well as
any commissions payable by the Company to such agent. Unless otherwise indicated
in the Prospectus Supplement, any such agent will be acting on a best efforts
basis for the period of its appointment.
If so indicated in the Prospectus Supplement, the Company will authorize
agents, underwriters or dealers to solicit offers by certain specified investors
to purchase Offered Debt Securities from the Company at the public offering
price set forth in the Prospectus Supplement pursuant to delayed delivery
contracts providing for payment and delivery on a specified date in the future.
Such contracts will be subject to those conditions set forth in the Prospectus
Supplement, and the Prospectus Supplement will set forth the commission payable
for solicitation of such contracts and the date or dates in the future for
delivery of the Offered Debt Securities pursuant to such contracts.
In connection with an offering of Debt Securities, the underwriters or
agents, as the case may be, may purchase and sell the Debt Securities in the
open market. These transactions may include over-allotment and stabilizing
transactions and purchases to cover syndicate short positions created in
connection with the offering. Stabilizing transactions consist of certain bids
or purchases for the purpose of preventing or retarding a decline in the market
price of the Debt Securities; and syndicate short positions involve the sale by
underwriters or agents, as the case may be, of a greater number of Debt
Securities than they are required to purchase from the Company in the offering.
The underwriters may also impose a penalty bid, whereby selling concessions
allowed to syndicate members or other broker-dealers in respect of the Debt
Securities sold in the offering for their account may be reclaimed by the
syndicate if such Debt Securities are repurchased by the syndicate in
stabilizing or covering transactions. These activities may stabilize, maintain
or otherwise affect the market price of the Debt Securities, which may be higher
than the price that might otherwise prevail in the open market. Underwriters or
agents are not required to engage in these activities, and may end any of these
activities at any time.
Subject to certain conditions, the Company may agree to indemnify
underwriters, dealers, agents or purchasers and their controlling persons
against certain civil liabilities, including liabilities under the Securities
Act, or to contribute with respect to payments which such persons may be
required to make in respect thereof. Such persons may be customers of, engage in
transactions with, or perform services for the Company in the ordinary course of
business.
EXPERTS
The consolidated financial statements as of September 30, 1997 and 1996 and
for each of the three years in the period ended September 30, 1997 and the
related financial statement schedule incorporated by reference in this
Prospectus from the Company's Annual Report on Form 10-K for the year ended
September 30, 1997 have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports, which are incorporated herein by
reference, and have been so incorporated in reliance upon the reports of such
firm given upon their authority as experts in accounting and auditing.
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LEGAL MATTERS
The legality of the Debt Securities offered hereby has been passed upon for
the Company by Chadbourne & Parke LLP, 30 Rockefeller Plaza, New York, New York
10112, and, if the Debt Securities are distributed in an underwritten offering,
will be passed upon for the underwriters by Dewey Ballantine LLP, 1301 Avenue of
the Americas, New York, New York 10019-6092.
------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN THIS
PROSPECTUS OR, WITH RESPECT TO ANY OFFERED DEBT SECURITIES, IN THE RELATED
PROSPECTUS SUPPLEMENT, IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND
ANY RELATED PROSPECTUS SUPPLEMENT, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR ANY UNDERWRITER OR AGENT. THIS PROSPECTUS AND ANY RELATED PROSPECTUS
SUPPLEMENT DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION IN WHICH SUCH OFFER
OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF
THIS PROSPECTUS OR ANY RELATED PROSPECTUS SUPPLEMENT, NOR ANY SALE MADE
HEREUNDER OR THEREUNDER, SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THEREOF OR THAT THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE
HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
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