<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON [ ], 1998
SUBJECT TO AMENDMENT
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
FEDERAL-MOGUL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
--------------
MICHIGAN 38-0533580
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
26555 NORTHWESTERN HIGHWAY
SOUTHFIELD, MICHIGAN 48034
(248) 354-7700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
EDWARD W. GRAY, JR., ESQ.
FEDERAL-MOGUL CORPORATION
26555 NORTHWESTERN HIGHWAY
SOUTHFIELD, MICHIGAN 48034
(248) 354-7700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
--------------
The Commission is requested to mail signed copies of all orders, notices and
communications to:
LAURENT ALPERT, ESQ. THOMAS A. COLE, ESQ.
CLEARY, GOTTLIEB, STEEN & HAMILTON SIDLEY & AUSTIN
ONE LIBERTY PLAZA ONE FIRST NATIONAL PLAZA
NEW YORK, NEW YORK 10006 CHICAGO, ILLINOIS 60603
(212) 225-2000 (312) 853-7000
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(b)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
--------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER UNIT(2)(3) PRICE(2)(3) FEE
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, without
par value offered by
Federal-Mogul
Corporation(4).........
- -----------------------------------------------------------------------------------
Debt Securities offered
by Federal-Mogul
Corporation............
- -----------------------------------------------------------------------------------
Preferred Stock offered
by Federal-Mogul
Corporation(4).........
- -----------------------------------------------------------------------------------
Total Securities offered
by Federal-Mogul
Corporation............
- -----------------------------------------------------------------------------------
Common Stock, without
par value offered by
Selling Shareholders...
- -----------------------------------------------------------------------------------
Total................... $2,500,000,000 100% $2,500,000,000 $737,500
- -----------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------------------
<PAGE>
- --------
(1) Such indeterminate number or amount of Common Stock, Debt Securities and
Preferred Stock as may from time to time be issued at indeterminate
prices. The amount registered is in United States dollars or the
equivalent thereof in any other currency, currency unit or units, or
composite currency or currencies.
(2) The proposed maximum offering price per unit will be determined from time
to time by the Registrant or the Selling Shareholders in connection with
the issuance by the Registrant or the sale by the Selling Shareholders of
the securities registered hereunder.
(3) The proposed maximum aggregate offering price has been estimated solely
for the purpose of calculating the registration fee pursuant to Rule 457
under the Securities Act of 1933. The aggregate public offering price of
the Common Stock, Debt Securities and Preferred Stock offered by Federal-
Mogul Corporation and the Selling Shareholders will not exceed $2.5
billion or the equivalent thereof in one or more foreign currencies,
foreign currency units or composite currencies.
(4) Also includes such indeterminate number of shares of Preferred Stock and
Common Stock as may be issued upon conversion of or exchange for any Debt
Securities or Preferred Stock that provide for conversion or exchange into
other securities. No separate consideration will be received for the
Preferred Stock or Common Stock issuable upon conversion of or in exchange
for Debt Securities or Preferred Stock.
----------------
PURSUANT TO THE PROVISIONS OF RULE 429 UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, THE PROSPECTUS CONSTITUTING A PART OF THIS REGISTRATION STATEMENT
ALSO RELATES TO AN ADDITIONAL $77,343,750 PRINCIPAL AMOUNT OF COMMON STOCK,
DEBT SECURITIES AND PREFERRED STOCK REGISTERED BY THE REGISTRANT UNDER THE
SECURITIES ACT OF 1933 IN REGISTRATION STATEMENT NO. 33-54717 AND THIS
REGISTRATION STATEMENT ALSO CONSTITUTES POST EFFECTIVE AMENDMENT NO. . WITH
RESPECT TO SUCH REGISTRATION STATEMENT.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
The securities registered hereby may be offered from time to time by means
of the base prospectus included herein and an applicable prospectus
supplement. If Common Stock registered hereby is offered or sold in reliance
upon the procedures contemplated by Rule 430A under the Securities Act of
1933, as amended, such Common Stock will be offered or sold by means of the
base prospectus included herein and a prospectus supplement in the form
included herein. Securities registered hereby, including Common Stock, which
are not offered or sold in reliance upon the procedures contemplated by Rule
430A may be offered or sold by means of the base prospectus included herein
and a prospectus supplement in a form other than the form of prospectus
supplement included herein.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS +
+SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY +
+NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH +
+OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR +
+QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS SUPPLEMENT DATED . , 1998
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED . , 1998)
[LOGO]
. SHARES
FEDERAL-MOGUL CORPORATION
COMMON STOCK
-----------
Of the . shares of Common Stock, without par value (the "Common Stock"), of
Federal-Mogul Corporation (the "Company" or "Federal-Mogul"), being offered
hereby, . shares are being offered by Federal-Mogul and . shares are being
offered by certain shareholders of Federal-Mogul (the "Selling Shareholders").
Federal-Mogul will not receive any of the proceeds from the sale of shares of
Common Stock by the Selling Shareholders. See "Selling Shareholders" and
"Underwriting."
Of the . shares of Common Stock offered hereby, . are being offered
initially in the United States and Canada (the "U.S. Offering") and . shares
are being offered initially in a concurrent international offering outside the
United States and Canada (the "International Offering," and together with the
U.S. Offering, the "Offerings"). The public offering price and the underwriting
discount per share are identical for both Offerings. See "Underwriting."
The Common Stock is listed on the New York Stock Exchange, Inc. (the "NYSE")
under the trading symbol "FMO." On . , 1998, the last reported sale price of
Common Stock on the NYSE was $ . per share. See "Price Range of Common Stock
and Dividends."
SEE "RISK FACTORS" BEGINNING ON PAGE . FOR A DISCUSSION OF CERTAIN RISK
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK
OFFERED HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO
WHICH IT RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROCEEDS TO PROCEEDS TO
PRICE TO UNDERWRITING FEDERAL- SELLING
PUBLIC DISCOUNTS (1) MOGUL(2) SHAREHOLDERS
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share........................
- -----------------------------------------------------------------------------------
Total(3).........................
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Federal-Mogul and the Selling Shareholders have agreed to indemnify the
several Underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, as amended (the "Securities Act"). See
"Underwriting."
(2) Before deducting expenses of the Offerings payable by Federal-Mogul
estimated at $ . .
(3) Federal-Mogul has granted an option to the U.S. Underwriters, exercisable
within 30 days of the date hereof, to purchase up to . additional shares
of Common Stock and an option to the International Managers, exercisable
within 30 days of the date hereof, to purchase up to . additional shares
of Common Stock, solely to cover over-allotments, if any. If such options
are exercised in full, the total Price to Public, Underwriting Discount and
Proceeds to Federal-Mogul will be $ . , $ . and $ . , respectively. See
"Underwriting."
-----------
The shares of Common Stock are being offered by the several Underwriters,
subject to prior sale, when, as and if delivered to and accepted by them,
subject to approval of certain legal matters by counsel to the Underwriters and
to certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of Common Stock will be made in New York, New York on or
about . , 1998.
-----------
[UNDERWRITERS]
-----------
The date of this Prospectus Supplement is . , 1998.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THESE OFFERINGS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF COMMON STOCK TO
COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
PRESENTATION OF FINANCIAL INFORMATION
All references herein to "U.S. dollar," "dollar" or "$" are to the lawful
currency of the United States of America, and all references herein to
"pounds," "pounds sterling," "(Pounds)," "pence" or "p" are to the lawful
currency of the United Kingdom. T&N plc ("T&N"), a subsidiary of Federal-
Mogul, has published its consolidated financial statements in pounds sterling.
Solely for the convenience of the reader, this Prospectus Supplement and the
accompanying Prospectus contain translations of certain amounts in pounds
sterling into U.S. dollars at specified rates. No representation is made that
the pounds sterling amounts actually represent such U.S. dollar amounts or
could be converted into U.S. dollars at those or any other rates. Unless
otherwise stated, the translations of U.S. dollars into pounds sterling have
been made at the rate of $1.68 = (Pounds)1.00, the Noon Buying Rate in New
York City for cable transfers in pounds sterling, as certified for customs
purposes by the Federal Reserve Bank of New York (the "Noon Buying Rate") in
effect on March 31, 1998. This rate may differ from the rates used in the
preparation of the financial statements included in this Prospectus Supplement
and the accompanying Prospectus. The noon buying rate on . , 1998 was
(Pounds) . = $1.00. See "Exchange Rates" for historical information regarding
the Noon Buying Rate.
Federal-Mogul acquired T&N on March 6, 1998 and acquired Fel-Pro,
Incorporated and certain affiliated entities, which constitute the operating
businesses of the Fel-Pro group of companies ("Fel-Pro") on February 24, 1998.
See "T&N and Fel-Pro Acquisitions." The financial information relating to
Federal-Mogul set forth in this Prospectus Supplement and the accompanying
Prospectus (i) to the extent it relates to the years ended December 31, 1995,
1996 and 1997, or is stated at those dates, has been derived from Federal-
Mogul's audited consolidated financial statements of and for the years ended
December 31, 1995, 1996 and 1997 included in Federal-Mogul's Annual Report on
Form 10-K and contained elsewhere herein (the "Federal-Mogul Audited Financial
Statements") and (ii) to the extent it relates to the three-month periods
ended March 31, 1997 and 1998, or is stated at those dates, has been derived
from Federal-Mogul's unaudited interim consolidated financial statements of
and for the three-month periods ended March 31, 1997 and 1998 (which includes
the results of operations and cash flows of T&N and Fel-Pro from March 6, 1998
and February 24, 1998, respectively) incorporated by reference herein (the
"Federal-Mogul Unaudited Interim Financial Statements" and, together with the
Federal-Mogul Audited Financial Statements, the "Federal-Mogul Financial
Statements"). The financial information relating to Fel-Pro set forth in this
Prospectus Supplement and the accompanying Prospectus has been derived from
the audited consolidated financial statements of Fel-Pro for the years ended
December 28, 1997 and December 29, 1996 contained elsewhere in this Prospectus
Supplement (the "Fel-Pro Financial Statements") and the financial information
relating to T&N set forth in this Prospectus Supplement and the accompanying
Prospectus has been derived from the audited consolidated financial statements
of T&N contained elsewhere in this Prospectus Supplement (the "T&N Financial
Statements" and, together with the Federal-Mogul Financial Statements and the
Fel-Pro Financial Statements, the "Financial Statements"). The T&N Financial
Statements have been prepared in accordance with generally accepted accounting
principles in the United Kingdom ("U.K. GAAP"), which differ in certain
significant respects from generally accepted accounting principles in the
United States ("U.S. GAAP"). The significant differences between U.S. GAAP and
U.K. GAAP as they relate to T&N are summarized in Note 29 to the T&N Financial
Statements.
S-2
<PAGE>
FORWARD-LOOKING STATEMENTS
Certain statements contained or incorporated in this Prospectus Supplement
and the accompanying Prospectus which are not statements of historical fact
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995 (the "Act"). Such statements are made
in good faith by Federal-Mogul pursuant to the "safe harbor" provisions of the
Act.
Forward-looking statements include financial projections and estimates and
statements regarding plans, objectives and expectations of Federal-Mogul and
its management, including, without limitation, plans to integrate the
businesses of T&N and Fel-Pro into Federal-Mogul, to address computer software
issues related to the approach of the year 2000, estimated proceeds of planned
dispositions and the effects of such dispositions on Federal-Mogul's balance
sheet and statement of operations, and the scope and effect of T&N's asbestos
liability. Such matters are discussed under the captions "Risk Factors," "T&N
and Fel-Pro Acquisitions," "Business," "Selected Pro Forma Financial Data,"
"Pro Forma Financial Information" and elsewhere in this Prospectus Supplement,
the accompanying Prospectus or in the information incorporated by reference
herein or therein.
Forward-looking statements may involve known and unknown risks,
uncertainties and other factors which may cause the actual results,
performance or achievements of Federal-Mogul to differ materially from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such risks, uncertainties and other factors
include, without limitation, those relating to the combination of Federal-
Mogul's business with those of T&N and Fel-Pro and the anticipated synergies
and operating efficiencies and restructuring charges in connection therewith,
conditions in the automotive components industry, certain global and regional
economic conditions and other factors detailed herein and from time to time in
the documents incorporated by reference herein. Moreover, Federal-Mogul's
plans, objectives and intentions are subject to change based on these and
other factors (some of which are beyond Federal-Mogul's control). Some of the
factors that may cause such material differences are set forth herein under
the caption "Risk Factors."
S-3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and the consolidated Financial
Statements appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus or incorporated herein or therein by reference. Except
as otherwise indicated, all information in this Prospectus Supplement and the
accompanying Prospectus assumes no exercise of the Underwriters' over-allotment
options. Prospective investors should carefully consider the matters discussed
under the caption "Risk Factors."
FEDERAL-MOGUL CORPORATION
OVERVIEW
Federal-Mogul, founded in 1899, is a global manufacturer and distributor of a
broad range of vehicular components for automobiles and light trucks, heavy
duty trucks, farm and construction vehicles and industrial products. Such parts
include powertrain systems components (primarily bearings and piston products),
sealing systems components (dynamic seals and gaskets) and general products
(primarily camshafts, friction products, sintered products and systems
protection products). Federal-Mogul's principal customers include many of the
world's major original equipment ("OE") manufacturers of automobiles, light
trucks, heavy duty trucks, farm and construction vehicles and industrial
products. Federal-Mogul also manufactures and supplies its products and related
parts to the aftermarket (the market for replacement parts) relating to each of
these categories of equipment.
On February 24, 1998, Federal-Mogul acquired Fel-Pro, a group of privately-
owned automotive parts manufacturers, for total consideration of $717 million.
Fel-Pro is a premier gasket manufacturer for the North American aftermarket and
OE heavy duty market. On March 6, 1998, Federal-Mogul acquired the share
capital of T&N, a U.K. based supplier of engine and transmission products, for
total consideration of approximately (Pounds)1.5 billion ($2.4 billion). T&N
manufactures and supplies high technology engineered automotive components and
industrial materials including pistons, friction products, bearings, systems
protection, camshafts and sealing products. See "T&N and Fel-Pro Acquisitions."
Federal-Mogul operates facilities at over 240 locations in 24 countries. On a
pro forma basis, Federal-Mogul's total sales for 1997 were $4.8 billion. See
"Unaudited Pro Forma Financial Data."
The following charts set forth Federal-Mogul's net sales by manufacturing
division, geographic region and customer group as a percentage of total net
sales for the year ended December 31, 1997, on a pro forma basis.
[Pie chart setting forth Federal-Mogul's 1997 pro forma net sales by
manufacturing division, geographic region and customer group.]
Federal-Mogul is a Michigan corporation with its principal executive offices
located at 26555 Northwestern Highway, Southfield, Michigan 48034. The
telephone number of those offices is (248) 354-7700.
S-4
<PAGE>
THE OFFERINGS
<TABLE>
<C> <S>
Common Stock offered by (1):
Federal-Mogul (2)............................ . shares
Selling Shareholders (3)..................... . shares
Common Stock to be Outstanding
after the Offerings (4)..................... . shares
Use of Proceeds.............................. To prepay certain indebtedness
of Federal-Mogul, which was
incurred to finance the
acquisitions of T&N and Fel-
Pro. Federal-Mogul will not
receive any of the proceeds
from the sale of Common Stock
offered by the Selling
Shareholders. See "Use
of Proceeds" and "Selling
Shareholders."
NYSE Symbol.................................. FMO.
Risk Factors................................. For a discussion of certain
risks that should be considered
by prospective investors before
investing in the Common Stock
offered hereby, see "Risk
Factors."
</TABLE>
- --------
(1) Assumes no exercise of the Underwriters' over-allotment options for up to .
shares.
(2) Of the . shares of Common Stock to be sold in the Offerings by Federal-
Mogul, . shares are being offered initially in the United States and Canada
by the U.S. Underwriters and . shares are being offered initially in a
concurrent international offering outside the United States and Canada by
the International Managers. See "Underwriting."
(3) Of the . shares of Common Stock to be sold in the Offerings by the Selling
Shareholders, . shares are being offered initially in the United States and
Canada by the U.S. Underwriters and . shares are being offered initially in
a concurrent international offering outside the United States and Canada by
the International Managers. See "Underwriting."
(4) Includes . shares issuable upon the conversion of the Series E Stock.
Does not include: (i) . shares issuable upon exercise of outstanding
options under Federal-Mogul's various stock option and incentive stock
plans as of . , 1998 and (ii) . additional shares reserved for issuance
upon exercise of options not yet granted under those plans.
S-5
<PAGE>
SUMMARY FINANCIAL DATA
The following summary historical financial information is derived from the
consolidated historical financial statements of Federal-Mogul, T&N and Fel-Pro.
The information provided below should be read in conjunction with the Federal-
Mogul Financial Statements, T&N Financial Statements and Fel-Pro Financial
Statements contained elsewhere herein.
FEDERAL-MOGUL
The historical consolidated financial statements of Federal-Mogul for each
year in the three-year period ended December 31, 1997 were audited by Ernst &
Young LLP. The financial information of Federal-Mogul for the three-month
periods ended March 31, 1998 and 1997 is unaudited, but in the opinion of
management, reflects all adjustments necessary for a fair presentation of such
information.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
YEAR ENDED DECEMBER 31, (UNAUDITED)
------------------------------------- -----------------
1997 1996 1995 1998(1) 1997
--------- --------- --------- --------- -------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net sales............... $ 1,806.6 $2 ,032.7 $ 1,999.8
Costs and expenses...... (1,703.7)(2) (2,258.0)(3) (2,000.7)(4)
Other expense........... (3.4) (3.4) (2.4)
Income tax (expense)
benefit................ (27.5) 22.4 (2.5)
--------- --------- --------- ------- -------
Net earnings (loss)
before extraordinary
item................... 72.0 (206.3) (5.8)
Extraordinary item --
loss on early
retirement of debt, net
of applicable income
tax benefit............ (2.6) -- --
--------- --------- --------- ------- -------
Net earnings (loss)..... $ 69.4 $ (206.3) $ (5.8)
========= ========= ========= ======= =======
COMMON SHARE SUMMARY
(DILUTED):
Average shares and
equivalents outstanding
(in thousands)......... 41,854 34,659 34,642
Earnings (loss) per
share:
Before extraordinary
item.................. $ 1.67 $ (6.20) $ (0.42)
Extraordinary item --
loss on early
retirement of debt,
net of applicable
income tax benefit.... (0.06) -- --
--------- --------- --------- ------- -------
Net earnings (loss) per
share.................. $ 1.61 $ (6.20) $ (0.42)
========= ========= ========= ======= =======
Dividends declared per
share.................. $ 0.48 $ 0.48 $ 0.48
========= ========= ========= ======= =======
CONSOLIDATED BALANCE
SHEET DATA:
Total assets............ $ 1,802.1 $ 1,455.2 $ 1,701.1
Short-term debt (5)..... 28.6 280.1 111.9
Long-term debt.......... 273.1 209.6 481.5
Shareholder's equity.... 369.3 318.5 550.3
OTHER FINANCIAL
INFORMATION:
Net cash provided from
(used by) operating
activities............. $ 215.7 $ 149.0 $ (34.7)
Expenditures for
property, plant,
equipment and other
long term assets....... 49.7 54.2 78.5
Depreciation and
amortization expense... 52.8 63.7 61.0
</TABLE>
- --------
(1) Reflects first time consolidation of T&N and Fel-Pro as of March 6, 1998
and February 24, 1998, respectively.
(2) Includes $1.1 million for a net restructuring credit, a $2.4 million charge
for an adjustment of assets held for sale to fair value and other long
lived assets, a $1.6 million credit for reengineering and other related
charges, and a $10.5 million net charge related to the British pound
currency option.
(3) Includes $57.6 million for a restructuring charge, $151.3 million for
adjustment of assets held for sale to fair value and other long lived
assets and $11.4 million relating to reengineering and other related
charges.
(4) Includes $26.9 million for restructuring charges, $51.8 million for
adjustment of assets held for sale to fair value and other long lived
assets and $13.9 million relating to reengineering and other related
charges.
(5) Includes current maturities of long-term debt.
S-6
<PAGE>
T&N
The historical consolidated financial statements of T&N for the years ended
December 31, 1997 and 1996 were audited by KPMG Audit plc and are stated in
accordance with U.K. GAAP.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------------
1997 1996
T&N HISTORICAL IN U.K. GAAP --------------- ---------------
(POUNDS STERLING IN MILLIONS)
<S> <C> <C>
CONSOLIDATED PROFIT AND LOSS ACCOUNTS
DATA:
Total turnover excluding associated
undertakings............................. (Pounds)1,799.1 (Pounds)1,956.0
Cost of sales............................. (1,293.5) (1,418.3)
Other operating expenses.................. (331.6) (370.3)
Other, net................................ 11.2 (560.2)(1)
Tax on profit (loss) on ordinary
activities............................... (62.8) (8.0)
--------------- ---------------
Profit/(loss) attributable to
shareholders............................. (Pounds) 122.4 (Pounds) (400.8)
=============== ===============
CONSOLIDATED BALANCE SHEET DATA:
Total assets.............................. (Pounds)1,576.2 (Pounds)1,558.3
Borrowings due within one year............ 103.7 77.2
Borrowings due after more than one year... 285.4 260.2
Equity shareholders' funds at end of year. 191.4 118.3
OTHER FINANCIAL INFORMATION:
Net cash inflow from operating activities. (Pounds) 111.4 (Pounds) 215.7
The following T&N unaudited pro forma amounts are stated in accordance with
U.S. GAAP.
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------------
1997 1996
T&N UNAUDITED PRO FORMA IN U.S. GAAP(2) --------------- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................. $ 3,004.5 $ 3,267.0
Costs and expenses........................ (2,750.1) (4,340.2)(1)
Income tax (expense) benefit.............. (162.3) 298.3
--------------- ---------------
Net earnings (loss)....................... $ 92.0 $ (774.9)
=============== ===============
CONSOLIDATED BALANCE SHEET DATA:
Total assets.............................. $ 3,179.8 $ 3,233.2
Short-term debt........................... 127.8 66.7
Long-term debt............................ 478.5 436.3
Shareholders' equity...................... 475.5 447.2
OTHER FINANCIAL INFORMATION:
Net cash provided from operating
activities............................... $ 274.0 $ 123.6
</TABLE>
- --------
(1) Includes charge for asbestos-related costs of (Pounds)515 million under
U.K. GAAP and $1.244 billion under U.S. GAAP.
S-7
<PAGE>
(2) The T&N historical financial statements were prepared in accordance with
U.K. GAAP, which differs in certain significant respects from U.S. GAAP
(see Note 29 to the T&N Financial Statements). The following table
reconciles the T&N profit/(loss) attributable to shareholders as reported
under U.K. GAAP to net earnings/(loss) as stated under U.S. GAAP:
<TABLE>
<CAPTION>
1997 1996
------------- --------------
(IN MILLIONS)
<S> <C> <C>
Profit/(loss) attributable to shareholders as
reported under U.K. GAAP--stated in pound
sterling....................................... (Pounds)122.4 (Pounds)(400.8)
Converted to U.S. dollars at 1.6766 U.S. dollars
to 1 pound sterling............................ $ 205.2 $ (672.0)
U.S. GAAP adjustments (in U.S. dollars):
Amortization of goodwill...................... (11.4) (5.7)
Amortization of patents....................... (2.7) (2.7)
Deferred taxation--full provision............. (68.4) 169.7
Tax effect of other U.S. GAAP reconciling
items........................................ 3.0 130.3
Pension costs................................. (11.7) (25.3)
Asbestos provision discount................... (0.8) (380.6)
Depreciation on fixed asset revaluations...... 9.7 10.4
Carrying value of investments................. (32.2) --
Other......................................... 2.2 2.2
Minority interests............................ (0.8) (1.2)
------------- --------------
Net earnings (loss) under U.S. GAAP............. $ 92.0 $ (774.9)
============= ==============
</TABLE>
FEL-PRO
The historical consolidated financial statements of Fel-Pro for the years
ended December 28, 1997 and December 29, 1996 were audited by Ernst & Young
LLP.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 28, DECEMBER 29,
1997 1996
------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................................ $ 489.3 $ 448.0
Costs and expenses................................... (442.3) (408.7)
Income tax expense................................... (25.5) (6.9)
------- -------
Net earnings......................................... $ 21.5 $ 32.4
======= =======
CONSOLIDATED BALANCE SHEET DATA:
Total assets......................................... $ 270.1 $ 261.8
Short-term debt...................................... -- --
Long-term debt....................................... -- --
Shareholder's equity................................. 139.9 151.8
OTHER FINANCIAL INFORMATION:
Net cash provided from operating activities.......... $ 51.7 $ 31.1
Expenditures for property, plant, equipment and other
long term assets.................................... 18.3 14.1
Depreciation and amortization expense................ 11.5 11.3
</TABLE>
S-8
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following table sets forth certain unaudited pro forma financial data for
Federal-Mogul for the year ended December 31, 1997 and for the three-month
period ended March 31, 1998, which are presented to reflect the pro forma
effect of the T&N and Fel-Pro acquisitions as if they had occurred at the
beginning of each period presented. The unaudited pro forma balance sheet as of
December 31, 1997 has been prepared to illustrate the effect of the
acquisitions of T&N and Fel-Pro as if it had occurred on such date. The
unaudited pro forma financial information is presented for illustrative
purposes only and is not necessarily indicative of the financial position or
results of operations which may occur in the future or that would have occurred
had the acquisitions of T&N and Fel-Pro been consummated on the dates
indicated, nor are they necessarily indicative of Federal-Mogul's future
results of operations or financial position. The unaudited pro forma financial
information should be read in conjunction with the audited consolidated
financial statements of Federal-Mogul, the audited financial statements of the
acquired companies, as well as the Unaudited Pro Forma Financial Data included
herein.
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA COMBINED
COMBINED THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1997 (1) 1998 (1)
------------ ------------
(DOLLARS
IN MILLIONS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.......................................... $4,824.0
Costs of goods sold................................ 3,534.7
Other expense, net................................. 1,257.1
Income tax expense................................. 93.5
--------
Net loss........................................... $ (61.3)(2)
========
COMMON SHARE SUMMARY (DILUTED):
Average shares and equivalents outstanding (in
thousands)........................................ 36,647
Loss per share..................................... $ (2.16)(3)
BALANCE SHEET DATA:
Total assets....................................... $6,885.6 --
Total debt......................................... 2,606.2 --
Shareholders' equity............................... 549.2 --
</TABLE>
- --------
(1) As a result of the use of proceeds from the Offerings, Federal-Mogul will
recognize an extraordinary loss of approximately $ . million from the
early extinguishment of debt. In addition, shareholders' equity will
increase by $ . million from the issuance of Common Stock (net of the
extraordinary loss), total debt will decrease by $ . million from the use
of proceeds to pay down existing debt, total assets will decrease by
approximately $ . million and basic and diluted shares and equivalents
outstanding will increase by . shares. These changes are excluded from
the above pro forma amounts.
(2) The unaudited pro forma statements of operations include only the results
of ongoing operations and excludes such impacts as extraordinary items,
one-time items relating to the acquisitions and synergies and expected cost
savings associated with the integration of the acquisitions (see Note m to
the Notes to the Unaudited Pro Forma Statement of Operations).
(3) Loss per share as calculated for the pro forma combined entity includes an
increase to the net loss of $17.8 million in preferred dividend
requirements.
S-9
<PAGE>
RISK FACTORS
Prospective purchasers of Common Stock offered hereby should carefully
review the information contained elsewhere in this Prospectus Supplement and
the accompanying Prospectus or incorporated by reference herein and therein
and should particularly consider the following matters.
EFFECT OF SUBSTANTIAL LEVERAGE
As a result of its acquisition of T&N and Fel-Pro, Federal-Mogul is
substantially leveraged. As of March 31, 1998, Federal-Mogul had total long-
term debt of $ . million and shareholders' equity of $ . million, producing
a total capitalization of $ . million, so that total long-term debt as a
percentage of total capitalization was approximately . %. Federal-Mogul may
also incur substantial additional indebtedness in the future, including,
without limitation, in connection with any future acquisitions, although its
ability to do so is restricted by the Credit Agreements (as hereinafter
defined). See "Description of Certain Indebtedness." Federal-Mogul intends to
use the proceeds to it of the Offerings to repay existing long-term debt,
resulting in a reduction of long-term debt by approximately $ . million. See
"Use of Proceeds."
Federal-Mogul's leverage may have important consequences to holders of the
Common Stock, including: (i) limiting Federal-Mogul's ability to obtain
additional financing to fund future working capital requirements, capital
expenditures, debt service requirements, acquisitions or other general
corporate requirements; (ii) requiring a substantial portion of Federal-
Mogul's cash flow from operations to be dedicated to payment of principal and
interest on its indebtedness, thereby reducing the funds available for
operations and future business opportunities; (iii) placing Federal-Mogul at a
competitive disadvantage to companies with which it competes that may be less
leveraged; and (iv) increasing Federal-Mogul's vulnerability to adverse
economic and industry conditions. In addition, since certain of Federal-
Mogul's borrowings are at variable rates of interest, Federal-Mogul will be
vulnerable to increases in interest rates, which could have a material adverse
effect on Federal-Mogul's results of operations, liquidity and financial
condition. Federal-Mogul's ability to make scheduled payments of the principal
of, to pay interest on or to refinance its indebtedness depends on its future
performance, which to a certain extent is subject to economic, financial,
competitive and other factors beyond its control. There can be no assurance
that Federal-Mogul's business will continue to generate cash flow from
operations in the future sufficient to service its debt and make necessary
capital expenditures. If unable to generate such cash flow, Federal-Mogul may
be required to adopt one or more alternatives, such as reducing or delaying
planned expansion, selling assets, restructuring debt or obtaining additional
equity capital. There can be no assurance that any of these strategies could
be effected on satisfactory terms or without substantial additional expense
for Federal-Mogul. These and other factors could have a material adverse
effect on the results of operations, liquidity and financial condition of
Federal-Mogul and on the marketability, price and future value of the Common
Stock.
The Credit Agreements impose financial and other restrictions on Federal-
Mogul, including limitations on the incurrence of debt and on Federal-Mogul's
ability to dispose of assets. The Credit Agreements also require Federal-Mogul
to make periodic payments in respect of interest and outstanding principal,
including from material disposals, "excess cash flow" and the proceeds of
certain issuances of capital stock or indebtedness, and to maintain compliance
with certain financial ratios and minimum net worth tests. See "Description of
Certain Indebtedness." There can be no assurance that these requirements will
be met in the future. Failure to achieve compliance would result in a default
under the Credit Agreements and could lead to acceleration of the related debt
and the acceleration of debt under other instruments evidencing indebtedness
that contain cross-acceleration or cross-default provisions. In such a case,
there can be no assurance that Federal-Mogul would be able to refinance or
otherwise repay such indebtedness.
INTEGRATION OF THE BUSINESSES OF T&N AND FEL-PRO
The acquisitions of T&N and Fel-Pro substantially increased the size and
complexity of Federal-Mogul's operations and have created the need for
Federal-Mogul to integrate three businesses that have previously
S-10
<PAGE>
operated independently. There can be no assurance that Federal-Mogul will not
encounter difficulties in integrating T&N's and Fel-Pro's operations with its
own or that the expected benefits will be realized from such integration. Any
material delays or unexpected costs incurred in connection with such
integration could have a material adverse effect on Federal-Mogul and its
results of operations, liquidity and financial condition. Furthermore, there
can be no assurance that the operations, management and personnel of Federal-
Mogul, T&N and Fel-Pro will be compatible. Among the factors considered by
Federal-Mogul in connection with the acquisitions of T&N and Fel-Pro were the
opportunities for synergies expected to be achieved. However, there can be no
assurance that Federal-Mogul will achieve the desired levels of synergies when
anticipated or at all. Failure to achieve the desired levels of synergies
could have a material adverse effect on the business, results of operations,
liquidity and financial condition of Federal-Mogul.
In addition, Federal-Mogul has announced that it intends, in connection with
its targeted synergies, to incur one-time costs in an amount approximately
equal to the annual level of synergy benefits anticipated in the second year
of operations following the acquisition. See "T&N and Fel-Pro Acquisitions."
No assurance can be given that such costs will not be substantially greater
than this amount or that achieving such synergies will be possible without
additional cost or charges to earnings in future periods. Any such charges
could have a material adverse effect on the business, results of operations,
liquidity and financial condition of Federal-Mogul.
T&N'S ASBESTOS LIABILITY
T&N and certain of its subsidiaries are among many defendants named in a
large number of court actions brought in the United States, and a smaller
number of claims brought in the United Kingdom, relating to alleged asbestos-
related diseases resulting from exposure to asbestos or products containing
asbestos. T&N is also one of many defendants named in a small number of U.S.
property damage claims. T&N has incurred significant charges to income in
connection with settling claims and the establishment of reserves for asbestos
liabilities and has obtained insurance coverage for certain asbestos
liabilities. See "Business--Legal Proceedings" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations--T&N--Asbestos
Related Costs and Litigation." No assurance can be given that T&N will not be
subject to material additional liabilities and significant additional
litigation relating to asbestos that would result in significant additional
charges not covered by reserves or insurance. Any such liabilities or
litigation could have a material adverse effect on Federal-Mogul's results of
operations, business, liquidity and financial condition.
ACQUISITION STRATEGY
One of Federal-Mogul's principal business strategies is to expand its core
competencies in manufacturing and distribution through acquisitions of
companies that Federal-Mogul identifies as complementary to its existing
businesses and capable of achieving satisfactory rates of return. Federal-
Mogul is usually engaged in various stages of evaluation of potential
acquisition candidates, of both smaller and more substantial sizes. If
Federal-Mogul determines that any one or more of these potential acquisitions
or other transactions would meet its criteria and may be accomplished on
appropriate terms, it expects to act to attempt to consummate them as quickly
as possible. There can be no assurance that any of the discussions in which
Federal-Mogul is currently engaged will result in the completion of any
acquisitions, that Federal-Mogul will in the future succeed in locating or
acquiring appropriate companies on attractive terms or that Federal-Mogul will
be successful in integrating acquired companies or realizing desired benefits
of such acquisitions.
Federal-Mogul believes that successful implementation of this strategy will
require significant capital expenditures which it might not be able to fund
from its cash from operations. Therefore, Federal-Mogul may be required to
borrow money or otherwise obtain financing for future acquisitions. Increased
leverage of Federal-Mogul may have important consequences to holders of the
Common Stock. See "--Effect of Substantial Leverage." If Federal-Mogul is
unable to procure suitable financing, it may be unable to complete desired
acquisitions.
S-11
<PAGE>
CYCLICAL NATURE OF AUTOMOTIVE INDUSTRY
Federal-Mogul's principal operations are directly related to domestic and
foreign automotive vehicle production. Automobile sale and production are
cyclical and can be affected by the strength of a country's general economy.
In addition, automobile production and sales can be affected by labor
relations issues, regulatory requirements, trade agreements and other factors.
A decline in automotive sales and production could result in a decline in
Federal-Mogul's results of operations or a deterioration in Federal-Mogul's
financial condition. If demand changes and Federal-Mogul fails to respond
accordingly, its results of operations could be adversely affected in any
given quarter.
INTERNATIONAL OPERATIONS
Federal-Mogul has manufacturing and distribution facilities for its products
located in many countries, principally in North America, Europe and Latin
America. See "Business--Information About International and Domestic
Operations and Export Sales." The acquisition of T&N significantly increased
the portion of Federal-Mogul's business located outside the United States.
International operations are subject to certain risks inherent in doing
business abroad, including exposure to local economic conditions,
expropriation and nationalization, currency exchange rate fluctuations and
currency controls, and export and import restrictions. The likelihood of such
occurrences and their potential effect on Federal-Mogul vary from country to
country and are unpredictable.
FOREIGN CURRENCY TRANSLATION AND TRANSACTION RISK
The financial condition and results of operations of certain Federal-Mogul
operating entities are reported in various foreign currencies (principally
pounds sterling, German marks, and to a lesser extent South African rand and
French francs, among others) and then translated into U.S. dollars at the
applicable exchange rate for inclusion in Federal-Mogul's financial
statements. As a result, the appreciation of the dollar against these foreign
currencies will have a negative impact on the reported sales and operating
margin of T&N and other subsidiaries, as consolidated into Federal-Mogul (and
conversely, the depreciation of the dollar against these foreign currencies
will have a positive impact). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Federal-Mogul--Foreign Currency
and Commodity Contracts."
In addition, Federal-Mogul incurs currency transaction risk whenever it or
one of its foreign subsidiaries enters into either a purchase or sales
transaction using a different currency than the relevant entity's functional
currency. Currency transaction risk is reduced by matching revenues and costs
with the same currency. Currency hedging is generally used by businesses to
protect against transaction risk. Given the volatility of currency exchange
rates, there can be no assurance that Federal-Mogul will be able to
effectively manage its currency transaction risks or that any volatility in
currency exchange rates will not have a material adverse effect on Federal-
Mogul's financial condition or results of operations.
S-12
<PAGE>
USE OF PROCEEDS
The net proceeds to Federal-Mogul from the sale of the . shares of Common
Stock offered by Federal-Mogul hereby are estimated to be $ . , assuming a
public offering price of $ . per share, after deducting the estimated
underwriting discount and offering expenses, estimated at $ . .
Federal-Mogul intends (i) to apply net proceeds to it of the Offerings to
prepay the entire outstanding $500 million principal amount of the Senior
Subordinated Loans (as defined herein), and (ii) to apply any remaining
balance of the net proceeds to repay a portion of the Interim Loans (as
defined herein), the outstanding principal amount of which was $1 billion at
. , 1998. However, if the net proceeds of the Offerings are less than $500
million, the proceeds will be applied solely to prepay the Interim Loans. The
Senior Subordinated Loans currently bear interest at a floating rate which is
the offering rate of The Chase Manhattan Bank, N.A. ("Chase") in the London
interbank eurodollar market for U.S. dollar deposits, plus an initial margin
of 4.5% (which will increase to 5.5% on September 12, 1998 and to 6% on
December 12, 1998). The Interim Loans (as hereinafter defined) bear interest
at a floating rate based upon either, at Federal-Mogul's option, (i) the
higher of the prime rate of Chase and .5% in excess of the overnight federal
funds rate, plus a margin of 1% or (ii) the average of the offering rates of
banks in the London interbank eurodollar market for U.S. dollar deposits plus
a margin of 2%. The Senior Subordinated Loans are scheduled to mature on March
12, 1999. If such loans have not been repaid on or prior to such date, they
will be converted to loans maturing on March 12, 2008 and bearing interest at
variable rates but in no event less than 0.5% above the rate in effect on
March 12, 1999. The Interim Loans are scheduled to mature on September 12,
1999. Amounts borrowed under the Senior Subordinated Loans and the Interim
Loans were used as part of the financing of the acquisition of T&N and the
refinancing of the acquisition of Fel-Pro. See "T&N and Fel-Pro Acquisitions--
Financing of the Acquisitions" and "Description of Certain Indebtedness."
Federal-Mogul will not receive any proceeds from the sale of shares of
Common Stock by the Selling Shareholders.
EXCHANGE RATES
The following table sets forth, for the periods and dates indicated, certain
information concerning the Noon Buying Rate for pounds sterling expressed in
U.S. dollars per (Pounds)1.00. On . , 1998, the Noon Buying Rate was
(Pounds)1.00=$ . .
<TABLE>
<CAPTION>
CALENDAR PERIOD HIGH LOW AVERAGE(1) PERIOD END
- --------------- ----- ----- ---------- ----------
(DOLLARS PER POUND)
<S> <C> <C> <C> <C>
1998, through . .............................. . . . .
1997.......................................... $1.71 $1.49 $1.60 $1.64
1996.......................................... $1.62 $1.50 $1.57 $1.53
1995.......................................... $1.64 $1.46 $1.57 $1.62
1994.......................................... $1.59 $1.46 $1.50 $1.49
1993.......................................... $2.00 $1.42 $1.68 $1.51
</TABLE>
- --------
(1)The average of the Noon Buying Rates on the last business day of each month
during the relevant period.
S-13
<PAGE>
T&N AND FEL-PRO ACQUISITIONS
As part of its strategy to expand its core competencies in manufacturing and
distribution, Federal-Mogul acquired T&N and Fel-Pro, two other significant
automotive parts manufacturers and distributors in March and February 1998,
respectively.
THE T&N ACQUISITION
On March 6, 1998, Federal-Mogul acquired all outstanding common stock of T&N
for total consideration of approximately (Pounds)1.5 billion ($2.4 billion).
T&N, headquartered in Manchester, England, manufactures and supplies high
technology engineered automotive components and industrial materials. In 1997,
T&N had sales of approximately (Pounds)1.799 billion ($3.016 billion) with
about 80% of such sales relating to the world automotive industry. At the time
of its acquisition, T&N's major product lines consisted of piston products,
bearings, friction products, composites and camshafts (incorporating sintered
products) and sealing products and it was active in both the original
equipment and the aftermarket markets. T&N operated in approximately 200
locations in 24 countries, employed over 28,000 people worldwide and served
customers in more than 150 countries. T&N's assets included technical centers
in the U.K. and Germany and North America.
In connection with securing regulatory approvals for the acquisition of T&N,
Federal-Mogul agreed with the U.S. Federal Trade Commission (the "FTC") to
divest T&N's thinwall and dry bearings (polymer bearings) operations (the "T&N
Bearings Business"). See "Business--Reorganization" and the Unaudited Pro
Forma Financial Statements.
THE FEL-PRO ACQUISITION
On February 24, 1998, Federal-Mogul acquired all the equity interests of
Fel-Pro, a group of privately-owned automotive parts manufacturers
headquartered in Skokie, Illinois. The total consideration paid for Fel-Pro
was approximately $717 million, which included 1,030,325.6 shares of Federal-
Mogul Series E Mandatory Exchangeable Preferred Stock with an imputed value of
$225 million and approximately $492 million in cash.
Fel-Pro is a leading gaskets manufacturer for the North American aftermarket
and OE heavy duty market. In 1997, Fel-Pro had sales of approximately $500
million. At the time of its acquisition, Fel-Pro's primary product lines
consisted of gaskets, heavy duty diesel engine products, diesel products, high
performance gaskets and other equipment and chemical products. Fel-Pro's
gasket sales for 1997 were approximately $350 million and included a full
range of automotive, heavy duty, marine and performance gaskets. Fel-Pro had
more than 2,700 employees in 16 locations. Its gasket facilities are located
in Illinois, Michigan, Canada and Mexico. Federal-Mogul is in the process of
reselling Fel-Pro's chemical manufacturing operations (representing
approximately $32.8 million of Fel-Pro's 1997 net sales and $2.6 million of
Fel-Pro's 1997 net income). Excluding intercompany items, net assets of Fel-
Pro Chemical were $12.2 million as of December 31, 1997.
STRATEGIC RATIONALE FOR THE ACQUISITIONS
The principal benefits to Federal-Mogul from the acquisitions of T&N and
Fel-Pro are:
. Establishing Federal-Mogul as a highly competitive first tier automotive
supplier worldwide.
. Expanding Federal-Mogul's manufactured product portfolio to offer systems
and modules.
. Enhancing Federal-Mogul's position as a supplier of engine and
transmission parts.
. Reinforcing Federal-Mogul's ability to provide high quality service to
both its original equipment and aftermarket customers.
. Extending Federal-Mogul's international presence and accelerating its
worldwide aftermarket growth.
S-14
<PAGE>
Federal-Mogul expects significant synergies and operating efficiencies to be
achieved as a result of the acquisitions of T&N and Fel-Pro. Based on the
information currently available to it, Federal-Mogul is anticipating annual
pre-tax synergies starting from the second full year following the acquisition
of T&N in an amount approximately equal to the costs incurred in connection
with realization of synergies from the acquisitions.
FINANCING OF THE ACQUISITIONS
The acquisition of T&N was funded primarily through a $2.75 billion floating
rate Senior Credit Agreement (consisting of a $2.35 billion term loan facility
and a $400 million revolving loan facility) and a $500 million floating rate
Senior Subordinated Credit Agreement. The senior term loan facility was
reduced to $2.275 billion effective as of March 11, 1998. The entire amount of
the senior term loan facility, as well as the entire amount of the senior
subordinated credit facility, have been drawn down. These credit facilities
also refinanced Federal-Mogul's $350 million indebtedness under a revolving
credit facility (which had been used to finance the acquisition of Fel-Pro)
and $150 million of other indebtedness incurred in the acquisition of Fel-Pro.
It is anticipated that the net proceeds to Federal-Mogul of the Offerings will
be used to prepay the entire outstanding principal amount of the Senior
Subordinated Loans (as hereinafter defined) ($500 million), with the balance
of the net proceeds used to repay a portion of the Interim Loans (the
outstanding principal balance of which is $1 billion at April . , 1998). See
"Use of Proceeds" and "Description of Certain Indebtedness."
Additional funds for the acquisition of T&N were obtained through the sale
in December 1997 of 11,500,000 7% Trust Convertible Preferred Securities
(generating gross proceeds of $575 million) by Federal-Mogul Financing Trust,
a subsidiary of Federal-Mogul which invested the net proceeds of that offering
in 7% Convertible Junior Subordinated Debentures of Federal-Mogul. See
"Description of Capital Stock--Trust Preferred Securities." Federal-Mogul also
issued 1,030,325.6 shares of Series E Mandatory Exchangeable Preferred Stock,
with an imputed value of $225 million, as partial consideration for the
acquisition of Fel-Pro. See "Description of Capital Stock--Series E Mandatory
Exchangeable Preferred Stock."
S-15
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
Federal-Mogul Common Stock is listed on the NYSE under the symbol "FMO."
The following table sets forth the reported high and low sale prices per
share for the Common Stock on the New York Stock Exchange Composite Tape and
the cash dividends declared on the Common Stock for such periods:
<TABLE>
<CAPTION>
PRICE RANGE
----------------- DIVIDENDS PER
HIGH LOW COMMON SHARE
--------- ------- -------------
<S> <C> <C> <C>
1996
First Quarter................................. $20 7/8 $17 3/8 $.12
Second Quarter................................ 19 7/8 17 7/8 .12
Third Quarter................................. 22 1/2 16 1/4 .12
Fourth Quarter................................ 24 1/2 20 3/8 .12
1997
First Quarter................................. 26 3/4 21 5/8 .12
Second Quarter................................ 35 3/8 24 1/2 .12
Third Quarter................................. 39 15/16 32 3/4 .12
Fourth Quarter................................ 47 5/8 36 3/4 .12
1998
First Quarter................................. 54 3/8 39 .12
Second Quarter (through . , 1998)............ . . .
</TABLE>
On . , 1998, the reported last sale price of the Common Stock on the NYSE
was $ . per share. On that date, there were approximately . shareholders of
record of Common Stock.
Dividends on the capital stock of Federal-Mogul are payable at the
discretion of Federal-Mogul's Board of Directors out of funds legally
available therefor. Future payments of dividends (and the amounts thereof)
will depend on Federal-Mogul's financial condition, results of operations and
capital factors as the Board of Directors of Federal-Mogul deems relevant. The
Credit Agreements contain certain limits upon dividends. See "Description of
Certain Indebtedness."
S-16
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of Federal-
Mogul at March 31, 1998, and as adjusted to reflect the Offerings by Federal-
Mogul.
<TABLE>
<CAPTION>
MARCH 31, 1998
---------------------
AS
ACTUAL ADJUSTED
---------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Short-term debt:
Subordinated notes...................................... $ $
Other short-term debt(1)................................
Total short-term debt.................................
---------- ----------
Long-term debt:
Revolving credit facility............................... $ $
Medium-term notes.......................................
Private placement debt..................................
Senior notes............................................
ESOP Obligation.........................................
Senior loans............................................
Other...................................................
---------- ----------
Total long-term debt(3)...............................
Minority interest-preferred securities of affiliate(4)....
Shareholders' equity:
Series C ESOP Convertible Preferred Stock...............
Series E Mandatory Exchangeable Preferred Stock.........
Common Stock............................................
Additional paid-in capital..............................
Accumulated deficit(2)(5)...............................
Unearned ESOP compensation..............................
Currency translation and other..........................
---------- ----------
Total shareholders' equity............................
---------- ----------
Total capitalization.................................. $ $
========== ==========
</TABLE>
- --------
(1) Other short-term debt includes current maturities of long-term debt.
(2) Does not include an extraordinary loss of $ . million resulting from a
contractual penalty incurred in April 1998 in connection with the
prepayment of T&N private placement debt.
(3) Less current maturities included in short-term debt.
(4) This consists of Federal-Mogul-obligated 7% Trust Convertible Preferred
Securities of Federal-Mogul Financing Trust. Substantially all of the
assets of Federal-Mogul Financing Trust consist of the 7% Convertible
Junior Subordinated Debentures of Federal-Mogul.
(5) Excludes the extraordinary loss from the early retirement of debt of
approximately $ . million resulting from the use of proceeds of the
Offerings.
S-17
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
As previously reported in Federal-Mogul's Current Report on Form 8-K filed
March 11, 1998, Federal-Mogul completed the acquisition of Fel-Pro, for $716.8
million on February 24, 1998. The acquisition has been accounted for using the
purchase method of accounting. The purchase price consists of 1,030,325.6
shares of newly issued Series E Mandatory Exchangeable Preferred Stock
(exchangeable into 5,151,628 shares of Common Stock) with an imputed value of
$225 million and $491.8 million in cash. The cash was provided through an
existing revolving credit facility provided by a syndicate led by Chase and
three short-term loans, each in the amount of $50 million, from Chase, ABN
Amro Bank NV and First Chicago NBD Bank, respectively.
Also, as previously reported in Federal-Mogul's Current Report on Form 8-K
filed March 23, 1998, Federal-Mogul completed its cash offer to acquire all
the outstanding common stock of T&N for 260 pence per share on March 6, 1998.
The acquisition has been accounted for using the purchase method of
accounting. The acquisition cost of approximately (Pounds)1.5 billion ($2.4
billion) was funded primarily through a $2.75 billion floating rate Senior
Credit Agreement (consisting of a $2.35 billion (reduced to $2.275 billion
effective as of March 11, 1998) term loan facility, $1.8 billion of which was
drawn down, and a $400 million revolving loan facility) and a $500 million
floating rate Senior Subordinated Credit Agreement (the full amount of which
was drawn down), each from a syndicate led by Chase. These credit facilities
also refinanced the borrowings used to finance the cash portion of the
purchase price for Fel-Pro. Additional funds for the acquisition of T&N were
obtained through the December 1997 sale of 7% Trust Convertible Preferred
Securities (generating gross proceeds of $575 million) by Federal-Mogul
Financing Trust, a subsidiary of the Company. The Company intends to put into
place a permanent capital structure with an appropriate combination of debt
and equity which will partially replace the Senior Credit Agreement and Senior
Subordinated Credit Agreement debt.
The estimated cost of the acquisitions of Fel-Pro and T&N are computed as
follows:
<TABLE>
<CAPTION>
FEL-
PRO T&N
------ --------
(DOLLARS
IN MILLIONS)
<S> <C> <C>
Cash................................................. $491.8 $2,434.2
Series E Mandatory Exchangeable Preferred Stock...... 225.0 --
Expected proceeds from exercisable options........... -- (52.6)
Direct transaction costs............................. .9 29.3
------ --------
Estimated acquisition cost........................... $717.7 $2,410.9
====== ========
</TABLE>
The pro forma preliminary allocations of the purchase price of the
acquisitions of Fel-Pro and T&N are expected to be as follows:
<TABLE>
<CAPTION>
FEL-
PRO T&N
------ --------
(DOLLARS
IN MILLIONS)
<S> <C> <C>
Current assets..................................... $173.1 $1,087.6
Liabilities assumed*............................... (133.1) (3,143.9)
Property, plant and equipment...................... 110.2 1,055.4
Identifiable intangible assets..................... 16.7 315.7
Other noncurrent assets............................ 31.4 525.9
Purchased research and development................. -- 18.6
Goodwill........................................... 519.4 1,990.7
Estimated fair value of T&N Bearings Business (see
below)............................................ -- 560.9
------ --------
Total.......................................... $717.7 $2,410.9
====== ========
</TABLE>
* Includes an increase of $329 million to adjust the acquired asbestos
liability to estimated fair value and an increase of $124 million to adjust
the acquired income tax liability in relation to the anticipated gain on
the sale of the T&N Bearings Business.
S-18
<PAGE>
In connection with securing regulatory approvals for the acquisition of T&N,
Federal-Mogul executed an Agreement Containing Consent Order with the FTC on
February 27, 1998. Pursuant to this agreement Federal-Mogul must divest the
T&N Bearings Business within eight months from the date of the consent order
and must provide for independent management of the T&N Bearings Business
pending such divestiture. The assets to be divested consist principally of
T&N's thinwall and dry bearings (polymer bearings) operations. The agreement
stipulates that the T&N Bearings Business is to be maintained as a viable,
independent competitor of Federal-Mogul and that Federal-Mogul shall not
attempt to direct the activities of, or exercise control over, the T&N
Bearings Business or have contact with the T&N Bearings Business outside of
normal business activities.
Federal-Mogul has separately identified the estimated effect of the
divestiture of the T&N Bearings Business in the unaudited pro forma statement
of operations and balance sheet. The estimated net cash flows from operations
of the T&N Bearings Business from March 6, 1998 to the date of sale, the
interest expense on debt incurred during this period and the proceeds from the
sale will be accounted for as adjustments to the purchase price of T&N.
Proceeds are estimated to be between $500 and $650 million, calculated using
multiples of earnings similar to recent automotive industry transactions. An
amount within the low end of this range has been used in the pro forma
financial information. There can be no assurance that the actual proceeds
received from the disposition will fall within the estimated range.
The unaudited pro forma statement of operations for the year ended December
31, 1997, has been prepared to illustrate the effect of the acquisitions of
T&N and Fel-Pro as if they had occurred on January 1, 1997. The unaudited pro
forma statement of operations includes only the results of ongoing operations
and excludes such impacts as extraordinary items, one-time items relating to
the acquisitions and synergies and expected cost savings associated with the
integration of the acquisitions. The unaudited pro forma balance sheet as of
December 31, 1997, has been prepared to illustrate the effect of the
acquisitions of T&N and Fel-Pro as if they had occurred on that date.
The unaudited pro forma financial information gives effect to the
acquisition transactions using the purchase method of accounting. The pro
forma adjustments are described in the accompanying notes to the unaudited pro
forma financial information and are based upon preliminary available
information and upon certain assumptions made by management of Federal-Mogul.
Accordingly, the pro forma adjustments reflected in the unaudited pro forma
financial information are preliminary and subject to revision. Such revision
could be material.
The unaudited pro forma financial information is presented for illustrative
purposes only and is not necessarily indicative of the financial position or
results of operations which may occur in the future or that would have
occurred had the acquisitions of T&N and Fel-Pro been consummated on the dates
indicated, nor are they necessarily indicative of Federal-Mogul's future
results of operations or financial position. The unaudited pro forma financial
information should be read in conjunction with the audited consolidated
financial statements of Federal-Mogul, as well as the audited financial
statements of the acquired companies.
S-19
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
FEDERAL- DISPOSITION OF
MOGUL T&N FEL-PRO T&N BEARINGS
HISTORICAL HISTORICAL HISTORICAL BUSINESS
---------- ---------- ---------- --------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Sales.......................... $1,806.6 $2,948.4 $489.3 $(393.1)(a)
Cost of products sold.......... 1,381.8 2,187.6 268.5 (295.4)(a)
-------- -------- ------ -------
Gross margin................... 424.8 760.8 220.8 (97.7)
Selling general and
administrative expenses....... 286.2 500.3 173.8 (46.1)(a)
Restructuring charges
(credits)..................... (1.1) -- -- --
Reengineering and other related
charges (benefits)............ (1.6) -- -- --
Adjustment of assets held for
sale to fair value............ 2.4 -- -- --
Interest expense............... 32.0 60.5 -- (16.9)(a)
Interest income................ (7.1) (17.9) -- 2.3 (a)
International currency exchange
losses........................ 0.6 4.4 -- (0.3)(a)
British pound currency option,
net........................... 10.5 -- -- --
Gain on sale of Kolbenschmidt
AG share purchase options..... -- (21.7) -- --
Other (income) expense, net.... 3.4 (14.5) -- (1.3)(a)
-------- -------- ------ -------
Earnings before income taxes,
extraordinary item and
nonrecurring charges........ 99.5 249.7 47.0 (35.4)
Income tax expense (benefit)... 27.5 159.3 25.5 (9.4)(a)
-------- -------- ------ -------
Net earnings (loss) before
extraordinary item and
nonrecurring charges........ $ 72.0 $ 90.4 $ 21.5 $ (26.0)
======== ======== ====== =======
Earnings (loss) per common
share:
Basic........................ $ 1.81
Diluted...................... $ 1.67
Weighted average shares out-
standing (thousands):
Basic........................ 36,647
========
Diluted...................... 41,854
========
</TABLE>
<TABLE>
<CAPTION>
T&N FEL-PRO
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS COMBINED
----------- ----------- --------
(DOLLARS IN MILLIONS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Sales..................................... $ (15.3)(b) $(11.9)(i) $4,824.0
Cost of products sold..................... (0.9)(c) (6.9)(j) 3,534.7
------- ------ --------
Gross margin.............................. (14.4) (5.0) 1,289.3
Selling general and administrative ex-
penses................................... 58.9 (d) 13.0 (k) 986.1
Restructuring charges (credits)........... -- -- (1.1)
Reengineering and other related charges
(benefits)............................... -- -- (1.6)
Adjustment of assets held for sale to fair
value.................................... -- -- 2.4
Interest expense.......................... 148.5 (e) 38.2 (l) 262.3
Interest income........................... 13.7 (f) -- (9.0)
International currency exchange losses.... -- -- 4.7
British pound currency option, net........ -- -- 10.5
Gain on sale of Kolbenschmidt AG share
purchase options......................... -- -- (21.7)
Other (income) expense, net............... 36.9 (g) -- 24.5
------- ------ --------
Earnings before income taxes, extraordi-
nary item and
nonrecurring charges................... (272.4) (56.2) 32.2
Income tax expense (benefit).............. (85.2)(h) (24.2)(m) 93.5
------- ------ --------
Net earnings (loss) before extraordinary
item and
nonrecurring charges................... $(187.2) $(32.0) $ (61.3)
======= ====== ========
Earnings (loss) per common share:
Basic................................... $ (2.16)
Diluted................................. $ (2.16)
Weighted average shares outstanding (thou-
sands):
Basic................................... 36,647
========
Diluted................................. 47,006
========
</TABLE>
See accompanying notes to Unaudited Pro Forma Statement of Operations.
S-20
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(IN MILLIONS UNLESS OTHERWISE NOTED)
RELATING TO THE DIVESTITURE OF THE T&N BEARINGS BUSINESS:
(a) To eliminate the historical statement of operations of the T&N Bearings
Business.
RELATING TO THE PURCHASE OF T&N:
(b) To eliminate intercompany sales between Federal-Mogul and T&N.
(c) To reflect the net effect of the following adjustments:
<TABLE>
<S> <C>
Increase in depreciation expense relating to the adjustment of
property, plant and equipment acquired to estimated fair value (to
be depreciated over an average period of 14 years)................ $ 5.4
Elimination of intercompany cost of products sold between Federal-
Mogul and T&N..................................................... (15.3)
Elimination of profit in ending inventory on intercompany sales
between Federal-Mogul and T&N..................................... 0.8
Increase in pension expense--elimination of amortization of de-
ferred gain..................................................... 8.7
Decrease in postretirement benefits expense--elimination of
amortization of deferred loss..................................... (0.5)
-----
$(0.9)
=====
</TABLE>
(d) To reflect the net effect of the following adjustments:
<TABLE>
<S> <C>
Amortization of additional goodwill resulting from the purchase
of T&N (to be amortized over a period of 40 years).............. $43.0
Amortization of other identifiable intangible assets acquired to
estimated fair value (to be amortized over periods from 10 to 24
years).......................................................... 15.9
-----
$58.9
=====
</TABLE>
(e) To reflect the net effect of the following adjustments:
<TABLE>
<S> <C>
Increase in interest expense relating to the net debt incurred
for the net purchase of T&N (see unaudited pro forma balance
sheet footnote 1)............................................... $148.2
Reduction in historical interest expense of T&N relating to the
elimination of historical outstanding debt...................... (23.4)
Amortization of debt issuance costs (to be amortized over a
period of 12 to 96 months)...................................... 23.7
------
$148.5
======
</TABLE>
(f) To reflect the net effect of the following adjustments:
<TABLE>
<S> <C>
Reduction in interest income as a result of the use of existing
cash balances of Federal-Mogul to finance a portion of the T&N
transaction....................................................... $ 2.2
Reduction in interest income as a result of the use of existing
cash balances of T&N.............................................. 11.5
-----
$13.7
=====
</TABLE>
(g) To record an additional eleven months of minority interest-preferred
securities of affiliates expense.
(h) To record the income tax effects of the statement of operations
adjustments.
S-21
<PAGE>
RELATING TO THE PURCHASE OF FEL-PRO:
(i) To eliminate intercompany sales between Federal-Mogul and Fel-Pro
(j) To reflect the net effect of the following adjustments:
<TABLE>
<S> <C>
Increase in depreciation expense relating to the adjustment of
property, plant and equipment acquired to estimated fair value
(to be depreciated over an average period of 10 years).......... $ 3.0
Elimination of intercompany cost of products sold between
Federal-Mogul and Fel-Pro....................................... (11.9)
Elimi nation of profit in ending inventory on intercompany sales
between Federal-Mogul and Fel-Pro............................... 0.6
Increase in postretirement benefits expense--elimination of
amortization of deferred loss................................... 1.4
------
$ (6.9)
======
</TABLE>
(k) To record the amortization of goodwill resulting from the purchase of Fel-
Pro (to be amortized over a period of 40 years)
(l) To record interest expense relating to the debt incurred for the purchase
of Fel-Pro
(m) To record the income tax effects of the statement of operations
adjustments
The unaudited pro forma statement of operations discloses the income (loss)
from continuing operations before nonrecurring charges directly attributable
to the transactions. The following nonrecurring charges were not considered in
the unaudited pro forma statement of operations:
<TABLE>
<S> <C>
Penalty for early retirement of private placement debt of T&N....... $25.0
Estimated purchased research and development costs.................. 18.6
Adjustment of inventory to estimated fair value..................... 11.0
-----
$54.6
=====
</TABLE>
Loss per share as calculated for the pro forma combined entity:
<TABLE>
<S> <C>
Net earnings before extraordinary item and non-recurring
charges........................................................ $ (61.3)
Less: Series C preferred dividend requirement................... (2.4)
Less: Series D preferred dividend requirement................... (3.1)
Less: Series E preferred dividend requirement................... (12.3)
-------
Net earnings available to common shareholders before extraordinary
item and non-recurring charges................................... $ (79.1)
=======
Weighted average common shares outstanding........................ 36,647
=======
Loss per share--basic and diluted................................. $ (2.16)
=======
</TABLE>
S-22
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET
DECEMBER 31, 1997
<TABLE>
<CAPTION>
FEDERAL- T&N
MOGUL T&N FEL-PRO PRO FORMA
HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Cash and equivalents........... $ 541.4 $ 319.2 $ -- $ (765.3)(1)
Accounts receivable............ 158.9 458.8 83.4 (2.6)(2)
Investment in accounts
receivable securitization..... 48.7 -- -- --
Inventories.................... 277.0 365.1 61.0 10.2 (3)
Prepaid expenses and income tax
benefits...................... 113.2 58.2 4.7 10.7 (4)
-------- -------- ------ --------
Total current assets....... 1,139.2 1,201.3 149.1 (747.0)
Property, plant and equipment.. 313.9 1,089.5 80.6 75.4 (5)
Goodwill....................... 143.8 342.2 -- 1,715.0 (6)
Other intangible assets........ 48.4 17.9 16.7 297.8 (7)
Business investments and other
assets........................ 156.8 469.2 23.7 161.5 (8)
-------- -------- ------ --------
Total Assets............... $1,802.1 $3,120.1 $270.1 $1,502.7
======== ======== ====== ========
Short-term debt................ $ 28.6 $ 125.4 $ -- $ --
Accounts payable............... 102.3 326.3 22.7 (2.6)(2)
Accrued compensation........... 36.8 57.6 24.1 --
Accrued customer incentives.... 22.4 -- 10.5 --
Restructuring reserves......... 31.5 -- -- 150.0 (9)
Current portion of asbestos
liability..................... -- 101.3 -- --
Other accrued liabilities...... 108.0 305.3 19.4 --
-------- -------- ------ --------
Total current liabilities.. 329.6 915.9 76.7 147.4
Long-term debt................. 273.1 469.5 -- 1,220.4 (1)
Postemployment benefits........ 190.9 223.7 46.8 6.4 (10)
Noncurrent portion of asbestos
liability..................... -- 948.7 329.0 (11)
Other accrued liabilities...... 64.2 53.8 6.6 53.7 (12)
-------- -------- ------ --------
Total liabilities.......... 857.8 2,611.6 130.1 1,756.9
Minority interest-preferred
securities of affiliates...... 575.0 -- -- --
Minority interest, other....... -- 42.0 -- --
Series C ESOP preferred stock.. 49.0 -- -- --
Series E preferred stock....... -- --
Common stock................... 201.0 361.1 -- (361.1)(13)
Additional paid-in capital..... 332.6 4.4 -- (4.4)(13)
Retained earnings (Accumulated
deficit), currency translation
and other..................... (191.5) 101.0 140.0 111.3 (14)
Unearned ESOP compensation..... (21.8) -- -- --
-------- -------- ------ --------
Total equity............... 369.3 466.5 140.0 (254.2)
-------- -------- ------ --------
$1,802.1 $3,120.1 $270.1 $1,502.7
======== ======== ====== ========
</TABLE>
See accompanying notes to Unaudited Pro Forma Balance Sheet.
S-23
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET--(CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
DISPOSITION
FEL-PRO OF
PRO FORMA T&N BEARINGS PRO FORMA
ADJUSTMENTS BUSINESS COMBINED
----------- ------------ ---------
<S> <C> <C> <C>
Cash and equivalents................... $ (0.9)(15) $ (38.0)(28) $ 56.4
Accounts receivable.................... (4.2)(16) (49.4)(28) 645.0
Investment in accounts receivable
securitization........................ -- -- 48.7
Inventories............................ 23.4 (17) (42.3)(28) 694.4
Prepaid expenses and income tax
benefits.............................. 2.2 (18) (5.8)(28) 183.1
------ -------- --------
Total current assets............... 20.5 (135.5) 1,627.6
Property, plant and equipment.......... 29.6 (19) (109.4)(28) 1,479.6
Goodwill............................... 519.4 (20) (66.8)(28) 2,653.6
Other intangible assets................ -- -- 380.8
Business investments and other assets.. 7.7 (21) (74.9)(28) 744.0
------ -------- --------
Total Assets....................... $577.2 $ (386.6) $6,885.6
====== ======== ========
Short-term debt........................ $ -- $ (0.5)(28) $ 153.5
Accounts payable....................... (2.0)(22) (38.5)(28) 408.2
Accrued compensation................... -- (10.9)(28) 107.6
Accrued customer incentives............ -- -- 32.9
Restructuring reserves................. 15.0 (23) -- 196.5
Current portion of asbestos liability.. -- -- 101.3
Other accrued liabilities.............. -- (22.0)(28) 410.7
------ -------- --------
Total current liabilities.......... 13.0 (71.9) 1,410.7
Long-term debt......................... 491.8 (15) (2.1)(28) 2,452.7
Postemployment benefits................ (18.0)(24) (12.3)(28) 437.5
Noncurrent portion of asbestos
liability............................. -- -- 1,277.7
Other accrued liabilities.............. 6.0 (25) (43.5)(28) 140.8
------ -------- --------
Total liabilities.................. 492.8 (129.8) 5,719.4
Minority interest-preferred securities
of affiliates......................... -- -- 575.0
Minority interest, other............... -- -- 42.0
Series C ESOP preferred stock.......... -- -- 49.0
Series E preferred stock............... 225.0 (26) -- 225.0
Common stock........................... -- -- 201.0
Additional paid-in capital............. -- -- 332.6
Retained earnings (Accumulated
deficit), currency translation and
other................................. (140.6)(27) (256.8)(28) (236.6)
Unearned ESOP compensation............. -- -- (21.8)
------ -------- --------
Total equity....................... 84.4 (256.8) 549.2
------ -------- --------
$577.2 $ (386.6) $6,885.6
====== ======== ========
</TABLE>
See accompanying notes to Unaudited Pro Forma Balance Sheet.
S-24
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA BALANCE SHEET
(IN MILLIONS UNLESS OTHERWISE NOTED)
RELATING TO THE PURCHASE OF T&N:
(1) To reflect the net effect of the following adjustments:
<TABLE>
<CAPTION>
CASH DEBT
-------- --------
<S> <C> <C>
Proceeds from the issuance of debt................... $2,300.0 $2,300.0
Acquisition of T&N shares............................ (2,434.2) --
Payoff of existing T&N debt.......................... (469.5) (469.5)
Cash used from T&N asbestos fund to pay down debt.... (130.0) (130.0)
Proceeds from the exercise of T&N stock options at
close............................................... 52.6 --
Estimated proceeds from sale of the T&N Bearings
Business............................................ 560.9 --
Pay down debt and other liabilities using proceeds
from sale of the T&N Bearings Business.............. (560.9) (436.6)
Proceeds from sale of KolbenSchmidt AG share purchase
options............................................. 43.5 --
Pay down debt using proceeds from sale of
KolbenSchmidt AG share purchase options............. (43.5) (43.5)
Debt issuance costs.................................. (32.2)
Other fees........................................... (27.0)
Penalty for early retirement of private placement
debt of T&N......................................... (25.0)
-------- --------
$ (765.3) $1,220.4
======== ========
</TABLE>
(2) To eliminate intercompany accounts receivable and accounts payable
between Federal-Mogul and T&N
(3) To reflect the net effect of the following adjustments:
<TABLE>
<S> <C>
Adjustment of inventories acquired to estimated fair value......... $11.0
Elimination of intercompany profit in ending inventory............. (0.8)
-----
$10.2
=====
</TABLE>
(4) To record the current deferred income tax effects of the balance sheet
adjustments
(5) To adjust property, plant and equipment acquired to estimated fair value
(6) To record estimated acquired goodwill as the excess of the preliminary
purchase price paid and estimated costs incurred relating to the
acquisition over the estimated fair value of identifiable net assets
acquired
(7) To adjust other identifiable intangible assets acquired to estimated fair
value
(8) To reflect the net effect of the following adjustments:
<TABLE>
<S> <C>
Adjustment of pension assets acquired to estimated fair value.... $131.6
Debt issuance costs.............................................. 32.2
Other............................................................ (2.3)
------
$161.5
======
</TABLE>
(9) To provide for estimated severance and exit costs relating to T&N
(10) To adjust postemployment benefit liabilities acquired to estimated fair
value
(11) To record estimated fair value of the acquired asbestos liability
S-25
<PAGE>
(12) To reflect the net effect of the following adjustments:
<TABLE>
<S> <C>
Estimated fair value of reserves for returns, allowances and
environmental..................................................... $41.3
Adjustment of the noncurrent deferred income tax asset for pro
forma balance sheet adjustments................................... 12.4
-----
$53.7
=====
</TABLE>
(13) To eliminate the historical common stock and additional paid in capital
of T&N
(14) To reflect the net effect of the following adjustments:
<TABLE>
<S> <C>
Elimination of historical retained earnings of T&N, net of the
T&N Bearings Business........................................... $155.6
Penalty for early retirement of private placement debt of T&N.... (25.0)
Estimated purchased research and development costs............... (18.6)
Elimination of the profit in ending inventory on intercompany
sales between Federal-Mogul and T&N............................. (0.7)
------
$111.3
======
</TABLE>
RELATING TO THE PURCHASE OF FEL-PRO:
(15) To reflect the net effect of the following adjustments:
<TABLE>
<CAPTION>
CASH DEBT
------ ------
<S> <C> <C>
Proceeds from the issuance of debt........................ $491.8 $491.8
Acquisition of Fel-Pro.................................... (491.8) --
Other fees................................................ (.9) --
------ ------
$ (.9) $491.8
====== ======
</TABLE>
(16) To reflect the net effect of the following adjustments:
<TABLE>
<S> <C>
Elimination of intercompany accounts receivable.................... $(2.0)
Increase in allowance for doubtful accounts........................ (2.2)
-----
$(4.2)
=====
</TABLE>
(17) To reflect the net effect of the following adjustments:
<TABLE>
<S> <C>
Adjustment of inventories acquired to estimated fair value......... $24.0
Elimination of intercompany profit in ending inventory............. (0.6)
-----
$23.4
=====
</TABLE>
(18) To record the current deferred income tax effects of the balance sheet
adjustments
(19) To adjust property, plant and equipment acquired to estimated fair value
(20) To record estimated acquired goodwill as the excess of the preliminary
purchase price paid and estimated costs incurred relating to the
acquisition over the estimated fair value of identifiable net assets
acquired
(21) To record the noncurrent deferred income tax effects of the balance sheet
adjustments
(22) To eliminate intercompany accounts payable between Federal-Mogul and Fel-
Pro
(23) To provide for estimated severance and exit costs relating to Fel-Pro
(24) To adjust postemployment benefits acquired to estimated fair value
(25) To record the estimated fair value reserves for returns, allowances and
environmental
S-26
<PAGE>
(26) To record the issuance of Series E Mandatory Exchangeable Preferred Stock,
exchangeable into common stock, to the former owners of Fel-Pro
(27) To reflect the net effect of the following adjustments:
<TABLE>
<S> <C>
Elimination of the historical equity of Fel-Pro................. $(140.0)
Elimination of intercompany profit in ending inventory.......... (.6)
-------
$(140.6)
=======
</TABLE>
RELATING TO THE DIVESTITURE OF THE T&N BEARINGS BUSINESS:
(28) To eliminate the historical balance sheet of the T&N Bearings Business.
The estimated effects of the sale of the T&N Bearings Business are located
in the T&N pro forma adjustments.
S-27
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA--FEDERAL-MOGUL
The following selected historical consolidated financial information of
Federal-Mogul with respect to each year in the three-year period ended
December 31, 1997 is derived from the consolidated financial statements of
Federal-Mogul. Such consolidated financial statements have been audited by
Ernst & Young LLP, independent certified public accountants. The unaudited
financial information for the three-month periods ended March 31, 1998 and
1997 have been derived from the Federal-Mogul Unaudited Financial Statements.
The financial information of Federal-Mogul for the three-month periods ended
March 31, 1998 and 1997 is unaudited, but in the opinion of management,
reflects all adjustments necessary for a fair presentation of such
information. The selected consolidated financial information provided below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements of Federal-Mogul and the notes thereto included elsewhere or
incorporated by reference in this Prospectus.
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
MARCH
31,
YEAR ENDED DECEMBER 31, (UNAUDITED)
---------------------------- -----------------
1997 1996 1995 1998(1) 1997
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Net sales............... $1,806.6 $2,032.7 $1,999.8
Costs of products sold.. 1,381.8 1,660.5 1,602.2
-------- -------- --------
Gross margin............ 424.8 372.2 397.6
Selling, general and
administrative
expenses............... (286.2) (333.8) (299.3)
Gain on sales of
businesses............. -- -- 24.0
Restructuring (charges)
credits................ 1.1 (57.6) (26.9)
Reengineering and other
related (charges)
credits................ 1.6 (11.4) (13.9)
Adjustment of assets
held for sale to fair
value and other long
lived assets........... (2.4) (151.3) (51.8)
Interest expense........ (32.0) (42.6) (37.3)
Interest income......... 7.1 2.9 9.6
International currency
exchange losses........ (0.6) (3.7) (2.9)
British pound currency
option cost, net....... (10.5) -- --
Other expense, net...... (3.4) (3.4) (2.4)
-------- -------- --------
Earnings (loss)
before income taxes
and extraordinary
item................ 99.5 (228.7) (3.3)
Income tax expense
(benefit).............. 27.5 (22.4) 2.5
-------- -------- --------
Net Earnings (Loss)
before Extraordinary
item................ 72.0 (206.3) (5.8)
======== ======== ========
Extraordinary item--loss
on early retirement of
debt, net of applicable
income tax benefit..... (2.6) -- --
-------- -------- --------
Net Earnings (Loss).. 69.4 (206.3) (5.8)
Preferred dividends..... 5.5 8.7 8.9
-------- -------- --------
Net Earnings (Loss)
Available to Common
Shareholders........ $ 63.9 $ (215.0) $ (14.7)
======== ======== ========
COMMON SHARE SUMMARY
(DILUTED):
Income (loss) before
extraordinary item..... $ 1.67 $ (6.20) $ (.42)
Extraordinary item...... (0.6) -- --
-------- -------- --------
Net Earnings (Loss)
Per Common Share
Assuming Dilution... $ 1.61 $ (6.20) $ (.42)
======== ======== ========
CONSOLIDATED BALANCE
SHEET DATA:
Total assets............ $1,802.1 $1,455.2 $1,701.1
Short-term debt (2)..... 28.6 280.1 111.9
Long-term debt.......... 273.1 209.6 481.5
Shareholders' equity.... 369.3 318.5 550.3
OTHER FINANCIAL
INFORMATION:
Net cash provided from
(used by) operating
activities............. $ 215.7 $ 149.0 $ (34.7)
Expenditures for
property, plant,
equipment and other
long-term assets....... 49.7 54.2 78.5
Depreciation and
amortization expense... 52.8 63.7 61.0
</TABLE>
- --------
(1) Reflects first time consolidation of T&N and Fel-Pro as of March 6, 1998
and February 24, 1998, respectively.
(2) Includes current maturities of long-term debt.
S-28
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA--T&N
The following selected historical consolidated financial information of T&N
with respect to each year in the two-year period ended December 31, 1997 is
derived from the consolidated financial statements of T&N. Such consolidated
financial statements have been audited by KPMG Audit plc, independent
certified public accountants, and are stated in accordance with U.K. GAAP. The
selected consolidated financial information provided below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements of T&N
and the notes thereto included elsewhere or incorporated by reference in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996
T&N HISTORICAL IN U.K. GAAP --------------- ---------------
(POUNDS STERLING IN MILLIONS)
<S> <C> <C>
CONSOLIDATED PROFIT AND LOSS ACCOUNTS
DATA:
Total turnover excluding associated
undertakings............................. (Pounds)1,799.1 (Pounds)1,956.0
Cost of sales............................. (1,293.5) (1,418.3)
Other operating expenses.................. (331.6) (370.3)
Other, net................................ 11.2 (560.2)(1)
Tax on profit (loss) on ordinary
activities............................... (62.8) (8.0)
--------------- ---------------
Profit/(loss) attributable to
shareholders............................. (Pounds) 122.4 (Pounds) (400.8)
=============== ===============
CONSOLIDATED BALANCE SHEET DATA:
Total assets.............................. (Pounds)1,576.2 (Pounds)1,558.3
Borrowings due within one year............ 103.7 77.2
Borrowings due after more than one year... 285.4 260.2
Equity shareholders' funds at end of year. 191.4 118.3
OTHER FINANCIAL INFORMATION:
Net cash inflow from operating activities. (Pounds) 111.4 (Pounds) 215.7
The following T&N unaudited pro forma amounts are stated in accordance with
U.S. GAAP.
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996
T&N PRO FORMA IN U.S. GAAP(2) --------------- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................. $ 3,004.5 $ 3,267.0
Costs and expenses........................ (2,750.1) (4,340.2)(1)
Income tax (expense) benefit.............. (162.3) 298.3
--------------- ---------------
Net earnings (loss)....................... $ 92.0 $ (774.9)
=============== ===============
CONSOLIDATED BALANCE SHEET DATA:
Total assets.............................. $ 3,179.8 $ 3,233.2
Short-term debt........................... 127.8 66.7
Long-term debt............................ 478.5 436.3
Shareholders' equity...................... 475.5 447.2
OTHER FINANCIAL INFORMATION:
Net cash provided from operating
activities............................... $ 274.0 $ 123.6
</TABLE>
- --------
(1) Includes charge for asbestos related costs of (Pounds)515 million under
U.K. GAAP and $1.244 billion under U.S. GAAP.
S-29
<PAGE>
(2) The T&N historical financial statements were prepared in accordance with
U.K. GAAP, which differs in certain significant respects from U.S. GAAP
(see Note 29 to the T&N Financial Statements). The following table
reconciles the T&N profit/loss attributable to shareholders as reported
under U.K. GAAP to net earnings/loss as stated under U.S. GAAP:
<TABLE>
<CAPTION>
1997 1996
------------- --------------
(IN MILLIONS)
<S> <C> <C>
Profit/(loss) attributable to shareholders
as reported under U.K. GAAP--stated in
pound sterling............................. (Pounds)122.4 (Pounds)(400.8)
Converted to U.S. dollars at 1.6766 U.S.
dollars to 1 pound sterling................ $ 205.2 $ (672.0)
U.S. GAAP adjustments (in U.S. dollars):
Amortization of goodwill................... (11.4) (5.7)
Amortization--of patents................... (2.7) (2.7)
Deferred taxation--full provision.......... (68.4) 169.7
Tax effect of other U.S. GAAP reconciling
items..................................... 3.0 130.3
Pension costs.............................. (11.7) (25.3)
Asbestos provision discount................ (0.8) (380.6)
Depreciation on fixed asset revaluations... 9.7 10.4
Carrying value of investments.............. (32.2) --
Other...................................... 2.2 2.2
Minority interests......................... (0.8) (1.2)
------------- --------------
Net earnings (loss) under U.S. GAAP......... $ 92.0 $ (774.9)
============= ==============
</TABLE>
SELECTED CONSOLIDATED FINANCIAL DATA--FEL-PRO
The following selected historical consolidated financial information of Fel-
Pro with respect to each year in the two-year period ended December 28, 1997
is derived from the consolidated financial statements of Fel-Pro. Such
consolidated financial statements have been audited by Ernst & Young LLP,
independent certified public accountants. The selected consolidated financial
information provided below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements of Fel-Pro and the notes thereto
included elsewhere or incorporated by reference in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 28, DECEMBER 29,
1997 1996
------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................................ $ 489.3 $ 448.0
Costs and expenses................................... (442.3) (408.7)
Income tax (expense) benefit......................... (25.5) (6.9)
------- -------
Net earnings......................................... $ 21.5 $ 32.4
======= =======
CONSOLIDATED BALANCE SHEET DATA:
Total assets......................................... $ 270.1 $ 261.8
Short-term debt...................................... -- --
Long-term debt....................................... -- --
Shareholder's equity................................. 139.9 151.8
OTHER FINANCIAL INFORMATION:
Net cash provided from operating activities.......... $ 51.7 $ 31.1
Expenditures for property, plant, equipment and other
long term assets.................................... 18.3 14.1
Depreciation and amortization expense................ 11.5 11.3
</TABLE>
S-30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Federal-Mogul is a global manufacturer and distributor of a broad range of
vehicular components primarily for automobiles and light trucks, heavy duty
trucks, farm and construction vehicles and industrial products. The Company's
principal customers include many of the world's major original equipment
manufacturers of such vehicles and industrial products. The Company also
manufactures and supplies its products and related parts to the aftermarket
(the market for replacement parts) relating to each of its categories of
equipment.
The Company, which had traditionally focused on the manufacture and
distribution of engine bearings and sealing systems, in 1990 began to add auto
parts retail and wholesale store operations in various domestic and
international locations. These geographically-dispersed retail/wholesale
stores proved burdensome to manage and resulted in substantial operating
losses. In the fourth quarter of 1996, Federal-Mogul underwent a change of
management, following which the Company commenced a significant restructuring
program designed to refocus Federal-Mogul on its core competencies of
manufacturing and distribution. As part of such restructuring, Federal-Mogul
took the following actions: (i) closed international aftermarket distribution
centers in Malaysia and Singapore; (ii) divested 72 international retail
aftermarket operations and sold or restructured 25 wholesale aftermarket
operations; (iii) closed its Leiters Ford, Indiana manufacturing facility and
consolidated its lighting products operations in Juarez, Mexico; (iv)
consolidated certain of its North American warehouse facilities; (v)
consolidated its customer support functions previously housed in Phoenix,
Arizona into the Company's Southfield headquarters; (vi) consolidated its
European aftermarket management functions in Geneva, Switzerland into the
Wiesbaden, Germany manufacturing headquarters; and (vii) streamlined certain
of its administrative and operational staff functions worldwide. In addition,
by the end of the first quarter of 1998, the Company expects to have
successfully exited all of its retail businesses, except for Puerto Rico where
the Company continues to seek a buyer.
In connection with the restructuring, Federal-Mogul also began to pursue a
growth strategy of acquiring complementary manufacturing companies that
enhance Federal-Mogul's product base, expand its global manufacturing
operations and provide opportunities to capitalize on Federal-Mogul's
aftermarket distribution network and technological resources.
On March 6, 1998, Federal-Mogul completed its cash offer to acquire all
outstanding common stock of T&N for 260 pence per share. On February 24, 1998,
Federal-Mogul acquired all the equity interests of Fel-Pro. See "T&N and Fel-
Pro Acquisition."
The Company expects to incur additional restructuring charges in the future
to implement its corporate strategy, specifically related to the planned
acquisition of T&N and the acquisition of Fel-Pro, although the specific
actions have not been determined and the precise amounts have not been
established. While the charges relating to these restructuring actions will
decrease net income in the year incurred, these restructuring actions are
projected to decrease operating costs, thereby enhancing the profitability of
the Company in future years. The restructuring charges expected to be incurred
in 1998 are anticipated to be in excess of $100 million for T&N and in excess
of $15 million for Fel-Pro.
FEDERAL-MOGUL
THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH
THREE MONTHS ENDED MARCH 31, 1997
[TO COME.]
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996 AND
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
S-31
<PAGE>
RESULTS OF OPERATIONS
Net Sales
Consolidated net sales decreased 11.1% in 1997, primarily due to the
divestiture of certain international retail and wholesale operations, the sale
of the heavy wall bearings operations in Brazil and Germany, the sale of the
United States ball bearing business and continued softness in the North
American aftermarket business. These decreases were partially offset by
certain volume increases primarily in the original equipment business.
Original equipment and aftermarket sales were:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Original Equipment:
Americas........................................... $ 451.4 $ 449.1 $ 465.4
International...................................... 170.3 219.5 222.7
Aftermarket:
United States and Canada........................... 699.1 759.8 780.8
International...................................... 485.8 604.3 530.9
-------- -------- --------
Total sales...................................... $1,806.6 $2,032.7 $1,999.8
======== ======== ========
</TABLE>
Original equipment business sales in the Americas were flat in 1997 as
compared to 1996. However, excluding the effect of the Company's divestitures
of its electrical products business in September 1996 and its United States
ball bearing operations in November 1996, net sales increased 15.7% in 1997
compared to 1996. Management attributes this increase primarily to strong 1997
sales in its sealing products division. Sales decreased in 1996 as compared to
1995 due to the sale of the Precision Forged Products Division in April 1995
and the 1996 sales of the electrical products business and the United States
ball bearings manufacturing operations, offset slightly by the acquisition of
Seal Technology Systems Limited in September 1995. Excluding the effect of
these acquisitions and divestitures, sales increased 2.7% in 1996.
International original equipment business sales decreased in 1997 as
compared to 1996 due to the effects of exchange rate fluctuations and the
divestiture of the heavy wall bearing operations in Germany and Brazil
completed on January 2, 1997. Excluding the effects of exchange rate
fluctuations and the divestiture, sales increased 11.7%. Management attributes
this increase to strong customer demand for sputter bearings and Glycodur
material products. In 1996, sales decreased as compared to 1995 due to the
Company's decision to exit some conventional engine bearing business that did
not meet appropriate profitability levels.
North American aftermarket sales decreased in 1997 as compared to 1996 due
to continued weak sales in engine products. Sales decreased in 1996 as
compared to 1995 primarily due to the elimination of special extended payment
terms.
International aftermarket business sales in 1997 as compared to 1996
decreased primarily due to the effects of foreign exchange fluctuations and
the 1997 divestitures of Turkey, Australia, South Africa and Chile. Excluding
the effects of exchange and 1997 divestitures, sales were essentially flat. In
1996, sales increased as compared to 1995 due to the full year impact of the
acquisitions of Bertolotti in June 1995 and Centropiezas in September 1995,
and to a lesser extent, volume and pricing increases in Mexico, increased
sales volume in Australia and new local operations in Brazil. These increases
were partially offset by $21 million resulting from the devaluation of the
South African rand and a decrease in Venezuela due to a recession.
Original equipment sales as a percentage of total sales of the Company
increased to 34.4% in 1997 from 32.8% in 1996, with a corresponding decrease
in aftermarket sales. This shift in 1997 reflects the Company's pursuit and
implementation of its strategy to focus on manufacturing and distribution, as
demonstrated by the previously discussed 1997 divestitures and planned
acquisitions. Previously, as the Company was implementing its retail growth
strategy, original equipment sales as a percentage of total sales of the
Company decreased to 32.8% in 1996 from 34.4% in 1995, with a corresponding
increase in aftermarket sales.
S-32
<PAGE>
Cost of Products Sold
Cost of products sold as a percent of net sales decreased to 76.5% in 1997
compared to 81.7% for 1996. The decrease is primarily due to the 1997
divestitures of less profitable operations and productivity improvements in
the North American aftermarket and the Americas original equipment business.
In addition, a portion of the 1997 decrease is attributable to 1996 third and
fourth quarter charges incurred of $8 million for customer incentive programs
and $13 million for excess and obsolete inventory. See "--Changes in
Accounting Estimates."
Cost of products sold as a percent of net sales increased to 81.7% in 1996
compared to 80.2% in 1995. The increase is primarily attributable to 1996
third and fourth quarter charges incurred of $8 million for customer incentive
programs and $13 million for excess and obsolete inventory. See "--Changes in
Accounting Estimates."
Selling, General and Administrative Expenses
Selling, general and administration ("SG&A") expenses as a percent of net
sales decreased to 15.8% for 1997 compared to 16.4% for 1996. In contrast,
SG&A expenses as a percent of net sales increased to 16.4% for 1996 compared
to 15.0% for 1995. The 1997 decrease and 1996 increase in SG&A as a percent of
net sales is primarily attributable to bad debt expense, customer incentive
programs and environmental and legal matters (see "--Changes In Accounting
Estimates" of $3 million for bad debt expense, $8 million for customer
incentive programs and $9 million for environmental and legal matters)
incurred in the third and fourth quarters of 1996. In addition, the 1996
increase was partially due to higher SG&A costs in the international
aftermarket business.
Changes in Accounting Estimates
In 1996, the Company made certain changes in accounting estimates totaling
$51 million in the third and fourth quarters attributable to 1996 events and
new information becoming available. The changes in accounting estimates
included the following:
Customer Incentive Programs: The increase in the provision for customer
incentive programs of $18 million resulted from contractual changes
implemented primarily in the third and fourth quarters of 1996 with certain
customers, new sales programs, additional customer participation in these
programs and current experience with these programs.
Excess and Obsolete Inventory: Business volume growth remained below
expectations in 1996, principally in the third and fourth quarters, causing a
build up of certain inventories beyond anticipated demand. In addition, the
Company's strategic initiative to focus on its manufacturing business and
divest its retail and certain aftermarket businesses and the sale of the U.S.
ball bearings operations in the fourth quarter adversely affected the utility
of the North American aftermarket business inventory. As a result, the Company
recorded an additional $13 million provision for excess and obsolete
inventory.
Bad Debts: The increase in the bad debt provision of $3 million was
principally attributable to the deterioration of account balances of numerous
low volume customers and termination of business with certain North American
aftermarket customers during 1996.
Environmental and Legal Matters: The environmental and legal provision was
increased by $9 million due to the completion of environmental studies and
related analyses, new issues arising and changes in the status of other legal
matters.
Other: The remaining $8 million of changes in accounting estimates is
comprised of $1 million for changes in the workers' compensation reserve based
on worsening experience in outstanding claims in certain older policy years,
$3 million for interest capitalization, $2 million to adjust estimates of
inventoriable costs and $2 million for other items.
S-33
<PAGE>
Sales of Businesses
During 1997, the Company received $73.6 million in net cash proceeds from
the sale of its aftermarket operations in South Africa, Australia, and Chile,
and its heavy wall bearing operations in Germany and Brazil.
During 1996, the Company received $42.0 million in net cash proceeds from
the sale of its United States ball bearings and electrical products
manufacturing operations.
Except for the sale of the electrical products manufacturing operations,
sales of businesses in 1997 and 1996 relate to assets previously adjusted to
fair value. See "Adjustment of Assets Held for Sale to Fair Value and Other
Long Lived Assets." Accordingly, no gain or loss was recognized on the date of
sale related to these transactions. In addition, no gain or loss was
recognized related to the sale of the electrical products manufacturing
operations.
During 1995, the Company sold its equity interest in Westwind Air Bearings,
Limited, recognizing a pretax gain of $16.2 million and its Precision Forged
Products Division for a pretax gain of $7.8 million.
Restructuring Charges
Primarily as a result of the amendments to the 1996 restructuring plan,
described previously in this section, the Company's 1997 operating results
were increased by $23.1 million for the reversal of previously recognized 1996
and 1995 restructuring charges. Offsetting this reversal is a $22.0 million
charge for new 1997 restructuring programs. The net impact on 1997 operations,
as a result of the restructuring activities, was a credit of $1.1 million. The
1997 charge includes $3.1 million for exiting certain European aftermarket
product lines and the related employment reductions, $6.8 million for
termination of certain European administrative and support personnel, $7.5
million for additional exit and severance costs related to the Puerto Rican
retail operations, $2.6 million for consolidation and reconfiguration of the
North American aftermarket service branch network and $2.0 million for other
actions. The Company anticipates that the actions related to the 1997
restructuring plan will be complete by the end of 1998, and that most of the
severance and exit costs will be paid in 1998.
In the fourth quarter of 1996, the Company recognized a restructuring charge
of $57.6 million for costs associated with employee severance, exit and
consolidation costs for 132 international retail operations and 30 wholesale
aftermarket operations, rationalization of European manufacturing operations,
consolidation of lighting products, consolidation or closure of certain North
American warehouse facilities, consolidation of customer support functions in
the United States and streamlining of administrative and operational staff
functions worldwide. The charge consists of $22.7 million for the sale of 132
international retail aftermarket and 30 wholesale aftermarket operations,
$14.7 million for corporate employee severance costs, $7.7 million for the
rationalization of European manufacturing operations, $5.3 million for
consolidation or closure of certain North American warehouse facilities, $2.8
million for consolidation of customer support functions in the United States,
$2.5 million for closure of the Leiters Ford facility and $1.9 million for
other miscellaneous actions, including the consolidation of the European after
market management function into the European manufacturing headquarters. The
Company's 1997 progress and actual implementation of the 1996 restructuring
plan resulted in 1997 operating results being increased by $20.8 million for
severance and $1.4 million of exit and consolidation costs being reversed. The
Company expects to pay out most of the remaining 1996 severance and exit costs
in 1998.
Results of operations in the second and fourth quarters of 1995 include
restructuring charges of $6.1 million and $20.8 million, respectively. These
charges were comprised of $20.1 million for employee severance and $6.8
million for exit costs and consolidation of certain facilities. The workforce
reductions and consolidation of facilities were completed as of December 31,
1996. Operating results for 1997 were increased by $0.9 million relating to
1995 exit costs being reversed. The Company expects to pay out the remaining
1995 exit costs in 1998.
S-34
<PAGE>
Reengineering and Other Related Charges
Operating results for 1997 include a credit of $1.6 million relating to 1996
reengineering and other related charges being reversed.
In 1996, the Company initiated an extensive effort to strategically review
its businesses and focus on its competencies manufacturing, engineering and
distribution. As a result of this process, the Company recognized a charge of
$11.4 million for professional fees and personnel costs related to the
strategic review of the Company and changes in management and related costs.
In 1995, the Company recognized a charge of $13.9 million for reengineering
and other costs. These costs included $7.0 million for professional fees and
personnel costs, and $6.9 million primarily for certain other non-recurring
costs relating to brand consolidation at the customer level of the Company's
Federal-Mogul(R), TRW(R) and Sealed Power(R) branded engine parts.
Adjustment of Assets Held for Sale to Fair Value and Other Long Lived Assets
The Company continually reviews all components of its businesses for
possible improvement of future profitability through acquisition, divestiture,
reengineering or restructuring. The Company also continually reviews and
updates its impairment reserves related to the divestiture of its remaining
international retail aftermarket operations and adjusts the reserve components
to approximate their net fair value.
In the fourth quarter of 1997, the Company recognized a charge of $2.4
million to write-down certain long lived assets to fair value. As of December
31, 1997, assets held for sale primarily include retail aftermarket operations
in Puerto Rico, Ecuador, Venezuela and Panama. By the end of the first quarter
of 1998, the Company expects to have successfully exited all of its retail
aftermarket businesses, except for Puerto Rico where the Company continues to
seek a buyer.
During 1996, management designed a restructuring plan to aggressively
improve the Company's cost structure, streamline operations and divest the
Company of underperforming assets. As part of this plan, the Company decided
to sell 132 international retail aftermarket operations, sell or restructure
30 wholesale aftermarket operations and consolidate a North American
manufacturing operation. The carrying value of assets held for sale was
reduced to fair value based on estimates of selling values less costs to sell.
Selling values used to determine the fair value of assets held for sale were
determined using market prices (i.e. valuation multiples) of comparable
companies from other 1996 transactions. The resulting adjustment of $148.5
million to reduce assets held for sale to fair value was recorded in the
fourth quarter of 1996. As previously described in this section, the Company
made significant progress related to the implementation of the 1996
restructuring plan. Also in 1996, based upon the final sale, the Company
recognized an additional writedown of $2.8 million to the net asset value of
the United States ball bearings operations. In 1995, the Company decided to
sell the ball bearings operations and reduced the carrying value by $17.0
million to record assets held for sale at fair value.
In 1995, the Company also decided to sell its heavy wall bearing operations
in Germany and Brazil. The Company estimated the fair value of the businesses
held for sale based on discussions with prospective buyers, adjusted for
selling costs. The Company reduced its carrying value by $17 million to record
assets held for sale at fair value. The heavy wall bearing operations were
sold in January 1997 for net proceeds of $8.9 million, which approximated the
carrying value of the assets at December 31, 1996.
In addition, in 1995, the Company reduced the carrying value of certain
other impaired long-lived assets by $17.8 million to record them at fair
value. No further fair value adjustments were recorded for these assets in
1996 or 1997.
Net sales for all assets held for sale and adjusted to fair value
approximated $114 million, $335 million, and $322 million in 1997, 1996 and
1995, respectively. Net sales for the remaining retail aftermarket operations
held for sale at December 31, 1997 approximated $44 million, $48 million and
$22 million in 1997, 1996 and 1995, respectively.
S-35
<PAGE>
Interest Expense
Interest expense decreased $10.6 million in 1997 to $32.0 million. The
decrease was primarily due to a $188 million reduction of debt which resulted
from improvements in working capital and the sale of the South African and
Australian businesses. Although the Company decreased its debt by $104 million
from 1995 to 1996, interest expense increased $5.3 million in 1996 primarily
due to a higher average debt level than in 1995. Excluding the U.S. and
European revolving credit facilities, which were classified as short-term debt
during 1996 and as long-term debt during 1995, the weighted average interest
rate for short-term debt increased to 10.9% for 1996 from 9.5% for 1995. The
interest rate on the U.S. and European revolving credit facilities at December
31, 1996 and 1995 was 6.1% and 6.2%, respectively.
Income Taxes
At December 31, 1997, the Company had deferred tax assets, net of a $44.4
million valuation allowance, of $140.5 million and deferred tax liabilities of
$75.9 million.
The net deferred tax asset of $64.6 million included the tax benefits of
$58.2 million related to the Company's postretirement benefit obligation at
December 31, 1997. The Company expects to realize the benefits associated with
this obligation over a period of 35 to 40 years.
The difference between the 1997 effective income tax rate and the statutory
tax rate is principally due to utilization of losses on foreign investment and
an income tax benefit related to the sales of the South African and Australian
businesses (refer also to Note 16 of the Consolidated Financial Statements).
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations of $215.7 million in 1997 increased significantly
during 1997 primarily due to increased earnings. The Company also reduced
inventory from operations by $59.9 million in 1997. Inventory reductions in
the North American aftermarket business were primarily responsible for the
decrease. The decrease in North America aftermarket inventory is attributable
to reduced lead times while still maintaining availability of products and
modifying safety stock levels.
Cash flow used by investing activities of $5.5 million in 1997 include $28.1
million for the British pound currency option, described later in this
section, and $2.4 million for other professional fees paid in anticipation of
the T&N acquisition. In addition, cash flows used by investing activities
include the receipt of $73.6 million in net proceeds from the 1997
divestitures. Capital expenditures, excluding the T&N and Fel-Pro
transactions, are anticipated to be approximately $65 million in 1998,
primarily for enhanced manufacturing capabilities and process improvements.
Cash flow from 1997 financing activities were $298.1 million, an increase of
$420.9 million from 1996. The following events were primarily responsible for
the net increase for 1997:
Issuance of Preferred Securities of Affiliate: In December 1997, the
Company's financing trust completed a $575 million private issuance of
11,500,000 shares of 7% Trust Convertible Preferred Securities. The
convertible preferred securities are redeemable at the Company's option, in
whole or in part, on or after December 6, 2000. All outstanding convertible
securities are required to be redeemed no later than December 1, 2027. The
Company intends to use the proceeds, net of $17.2 million in related fees, to
finance a portion of the proposed T&N transaction.
Issuance of Senior Notes: In April 1997, the Company issued a fully
subscribed $125 million debt offering of ten year 8.8% senior notes. Proceeds
from the offering were used to reduce the Company's short-term debt and the
early extinguishment of the private placement debt.
S-36
<PAGE>
Extinguishment of Private Placement Debt: In the second quarter of 1997, the
Company retired $64.7 million in private placement debt. The early retirement
of this debt eliminated high coupon debt and potentially restrictive covenants
giving the Company greater financial flexibility in the future. In addition,
the early retirement of this debt involved a make whole payment that resulted
in a $4.1 million pretax ($2.6 million after tax) extraordinary loss.
Accounts Receivable Securitization: During 1997, the Company replaced an
existing accounts receivable securitization program with a new program which
provides up to $100 million of financing. On an ongoing basis, the Company
sells certain accounts receivable to a subsidiary of the Company, which then
sells such receivables, without recourse, to a master trust. Amounts sold
under this arrangement were $63.2 million as of December 31, 1997, and have
been excluded from the balance sheet. During 1997, cash payments totaling
$31.8 million were made to the master trust related to the Company's accounts
receivable securitization. These cash payments effectively increased the
Company's investment in the accounts receivable securitization.
Multicurrency Revolver: In June 1997, the Company entered into a new $350
million multicurrency revolving credit facility with a consortium of
international banks which matures in June 2002. The multicurrency revolving
credit facility replaced the existing U.S. and European revolving credit
facilities. The multicurrency revolving credit facility contains restrictive
covenants that, among other matters, require the Company to maintain certain
financial ratios. As of December 31, 1997, there were no borrowings
outstanding against the multicurrency revolving credit facility.
In December 1997, the Company entered into a $3.25 billion committed bank
facility with a reputable financial institution related to the proposed T&N
acquisition. The facility provides for up to $2.75 billion of senior debt and
up to $500 million of subordinated debt. This facility is contingent upon the
acquisition of T&N, and accordingly no amounts are outstanding as of December
31, 1997. Certain fees relating to this facility have been incurred and paid
as of December 31, 1997. Subsequent to the planned T&N acquisition, the
Company intends to put in place a permanent capital structure with an
appropriate combination of equity and debt.
The Company believes that cash flow from operations will continue to be
sufficient to meet its ongoing working capital requirements.
ENVIRONMENTAL MATTERS
The Company is a party to lawsuits filed in various jurisdictions alleging
claims pursuant to the Comprehensive Environmental Response Compensation and
Liability Act of 1980 ("CERCLA") or other state or federal environmental laws.
In addition, the Company has been notified by the Environmental Protection
Agency and various state agencies that it may be a potentially responsible
party ("PRP") for the cost of cleaning up certain other hazardous waste
storage or disposal facilities pursuant to CERCLA and other federal and state
environmental laws. PRP designation requires the funding of site
investigations and subsequent remedial activities. Although these laws could
impose joint and several liability upon each party at any site, the potential
exposure is expected to be limited because at all sites other companies,
generally including many large, solvent public companies, have been named as
PRPs. In addition, the Company has identified certain present and former
properties at which it may be responsible for cleaning up environmental
contamination.
The Company is actively seeking to resolve these matters. Although difficult
to quantify based on the complexity of the issues, the Company has accrued the
estimated cost associated with such matters based upon current available
information from site investigations and consultants. The environmental and
legal reserve was approximately $11 million at December 31, 1997 and $12
million at December 31, 1996. Management believes that such accruals will be
adequate to cover the Company's estimated liability for its exposure in
respect of such matters.
FOREIGN CURRENCY AND COMMODITY CONTRACTS
In connection with the proposed T&N acquisition, the Company purchased for
$28.1 million a foreign currency option with a notional amount of $2.5 billion
to cap the effect of potential unfavorable fluctuations in
S-37
<PAGE>
the British pound/U.S. dollar exchange rate. The cost of the option and its
change in fair value has been reflected in the results of operations in the
fourth quarter of 1997. At December 31, 1997 the Company has recognized a net
loss on this transaction of $10.5 million.
The Company is subject to exposure to market risks from changes in foreign
exchange rates and raw material price fluctuations, derivative financial
instruments are utilized by the Company to reduce those risks. Except for the
British pound currency option discussed above, the Company does not hold or
issue derivative financial instruments for trading purposes.
Other than the British pound currency option discussed above, the Company
does not have foreign exchange forward or currency option contracts
outstanding at December 31, 1997.
In the first quarter of 1998, the Company settled the British pound currency
option, resulting in a pretax loss of $17.3 million. Also in the first quarter
of 1998, the Company entered into a forward contract to purchase 1.5 billion
British pounds for a notional amount approximating $2.45 billion. The forward
contract expires in the first quarter of 1998.
OTHER MATTERS
Conversion of Series D Convertible Exchangeable Preferred Stock
In August 1997, the Company announced a call for the redemption of all its
outstanding $3.875 Series D Convertible Exchangeable Preferred Stock. These
preferred shareholders elected to convert each preferred share into 2.778
shares of Common Stock. The Company issued 4.4 million shares of Common Stock
in exchange for all of the outstanding Series D convertible exchangeable
preferred stock.
Year 2000 Costs
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. The Company has
established a team that has completed an awareness program and assessment
project to address the Year 2000 issue. In addition, the Board of Directors
has received status reports related to the Company's progress in addressing
the Year 2000 issue. The Company has determined that it will be required to
modify or replace portions of its software so that its computer systems will
properly utilize dates beyond December 31, 1999. The Company has initiated
remediation, and is implementing the action plan to address the Year 2000
issue. The Company presently believes that with modifications to existing
software and conversions to new software, the Year 2000 issue can be
mitigated. However, if such modifications and conversions are not made, or are
not completed timely, the Year 2000 issue could have a material impact on the
operations of the Company.
The Company has initiated formal communications with a substantial majority
of its significant suppliers and large customers to determine their plans to
address the Year 2000 issue. While the Company expects a successful resolution
of all issues, there can be no guarantee that the systems of other companies
on which the Company's systems rely will be converted in a timely manner, or
that a failure to convert by a supplier or customer, or a conversion that is
incompatible with the Company's systems, would not have a material adverse
effect on the Company. The Company has determined it has no exposure to
contingencies related to the Year 2000 issue for the products it has sold.
The Company has contracts in place with external resources and has allocated
internal resources to reprogram or replace, and test the software for Year
2000 modifications. The Company plans to complete the Year 2000 project within
one year. The total cost of the Year 2000 project is estimated to be $17
million and is being funded through operating cash flows. Of the total project
cost, approximately $11 million is attributable to the purchase of new
software which will be capitalized. The remaining $6 million represents
maintenance and repair of existing systems and will be expensed as incurred.
The Company expects a substantial majority of the
S-38
<PAGE>
costs will be incurred in 1998, and any remaining costs incurred in 1999 are
expected to be immaterial. As of December 31, 1997, the Company had incurred
and expensed approximately $0.7 million related to the completed awareness
program and assessment project and the implementation of their remediation
plan.
The costs of the project and the date which the Company plans to complete
the Year 2000 modifications are based on management's best estimates, which
were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates
will be achieved and actual results could differ materially from those plans.
Specific factors that might cause such material differences include, but are
not limited to, the availability and cost of personnel trained in this area,
the ability to locate and correct all relevant computer codes and similar
uncertainties.
As a result of the Company's due diligence related to the proposed T&N
acquisition and the Fel-Pro acquisition, the Company expects costs to address
the Year 2000 issue for Fel-Pro to be immaterial, and T&N costs for repair and
maintenance of existing systems are expected to approximate $8 million.
Divestiture of Minority Interest
In February 1998, the Company announced the divestiture of its minority
interest in G. Bruss GmBH & Co. KG, a German manufacturer of seals and
gaskets. As part of the divestiture agreement, the Company increased their
ownership to 100% in the Summerton, South Carolina gasket business. The
Company also received cash and recognized a gain as a result of these
transactions. The gain recognized is not expected to be significant to 1998
first quarter operating results.
Customer Reorganization
On February 2, 1998, APS Holding Corporation ("APS"), filed for
reorganization protection under Chapter 11 of the United States Bankruptcy
Code. As of the date of the Chapter 11 filing, the Company's total receivables
with APS approximated $10 million. APS has received a capital line of credit
from a reputable financial institution and is continuing business operations.
The Company continues to do business with APS on a cash in advance basis.
Although difficult to quantify based upon the uncertainty of the financial
condition of APS, the Company believes that net uncollectible receivables, if
any, from APS will be immaterial.
In addition, APS is a customer of Fel-Pro. The Company believes that the
allowance established by Fel-Pro prior to the acquisition of Fel-Pro related
to receivables from APS is adequate to cover any uncollectible amounts.
Effect of Accounting Pronouncements
In 1997, the Financial Accounting Standards Board issued Statement No. 130,
Reporting Comprehensive Income. This Statement establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. Statement 130 is effective for fiscal
years beginning after December 15, 1997. Beginning in 1998, the Company will
provide the information relating to comprehensive income to conform to the
Statement 130 requirements.
Also in 1997, the Financial Accounting Standards Board issued Statement No.
131, Disclosures about Segments of an Enterprise and Related Information. The
statement supersedes Financial Accounting Standards Board Statement No. 14 and
establishes standards for the way public business enterprises report selected
information about operating segments in annual reports and interim financial
reports issued to shareholders. Statement 131 is effective for fiscal years
beginning after December 15, 1997. For the year ended 1998, the Company will
provide financial and descriptive information about its reportable operating
segments to conform to the Statement 131 requirements. Management plans to
report the requirements of Statement 131 for the following operating segments:
Sealing Systems, Powertrain Systems and General Products.
S-39
<PAGE>
T&N
On March 6, 1998, Federal-Mogul completed its cash offer to acquire all
outstanding common stock of T&N for 260 pence per share. Total consideration
paid was (Pounds)1.5 billion ($2.4 billion). In connection with securing
regulatory approvals for the acquisition of T&N, Federal Mogul agreed
subsequently to divest certain assets, consisting principally of T&N's
thinwall and dry bearings (polymer bearings) operations. See "Business--
Reorganization." These assets are a subset of the operations T&N included in
its bearings product group and the discussion below of such product group does
not, therefore, directly correspond to the assets to be divested (which are
referred to elsewhere in this Prospectus Supplement as the "T&N Bearings
Business").
The following discussion is based upon the T&N Financial Statements included
elsewhere in this Prospectus Supplement, which have been prepared in
conformance with U.K. GAAP. U.K. GAAP differ in certain significant respects
from U.S. GAAP. The significant differences between U.S. GAAP and U.K. GAAP as
they relate to T&N are summarized in Note 29 to the T&N Financial Statements.
RESULTS OF OPERATIONS
Turnover (Net Sales)
T&N's consolidated turnover excluding associated undertakings (hereinafter
referred to as net sales) decreased by 8.0% in 1997. The 1997 decrease was
primarily due to the effects of adverse foreign exchange fluctuations, 1997
divestitures and the full year impact of 1996 divestitures. These decreases
were partially offset by the 1997 acquisition of Metal Leve Inc., which
expanded T&N's product offerings in piston-related products, and certain
volume improvements for continuing businesses. Excluding 1997 acquisitions
(which added (Pounds)30 million to 1997 net sales) and the impact of
divestitures, 1997 net sales decreased 4.4% as compared to 1996.
The primary source of the foreign exchange fluctuation impact on T&N in 1997
was the continued appreciation of the pound sterling in relation to other
European currencies (and, to a lesser extent, the U.S. dollar) through the
year. This appreciation resulted in an adverse currency translation effect
upon overseas earnings and erosion of margins on exports billed in foreign
currency. These effects were partially offset by reduced expense for materials
imported into the U.K. Excluding the effects of (Pounds)153 million in adverse
foreign currency fluctuations and acquisitions, net sales from continuing
operations increased by approximately 4.0%.
Net sales by market were:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
(POUNDS STERLING IN MILLIONS)
<S> <C> <C> <C>
Light vehicle original
equipment............... (Pounds) 731.2 (Pounds) 772.9 (Pounds) 756.6
Automotive aftermarket... 497.1 529.4 480.1
Industrial and heavy duty
original equipment...... 570.8 653.7 854.8
--------------- --------------- ---------------
(Pounds)1,799.1 (Pounds)1,956.0 (Pounds)2,091.5
=============== =============== ===============
</TABLE>
Net sales by product group (as these were configured prior to Federal-
Mogul's acquisition of T&N) were:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
(POUNDS STERLING IN MILLIONS)
<S> <C> <C> <C>
Bearings................. (Pounds) 329.6 (Pounds) 333.1 (Pounds) 342.5
Sealing products......... 195.1 216.0 227.0
Friction products........ 293.9 309.5 319.0
Piston products.......... 572.8 574.7 559.6
Composites and camshafts. 372.9 381.1 328.9
--------------- --------------- ---------------
Continuing operations.... 1,764.3 1,814.4 1,777.0
Discontinued operations.. 34.8 141.6 314.5
--------------- --------------- ---------------
(Pounds)1,799.1 (Pounds)1,956.0 (Pounds)2,091.5
=============== =============== ===============
</TABLE>
S-40
<PAGE>
Decreases in sealing products net sales were primarily attributable to
German and French businesses. Piston products net sales, which declined by
0.3% in 1997 as compared with 1996, were affected by the acquisition of Metal
Leve, Inc. (excluding that acquisition, piston products net sales from
continuing operations decreased 5.2%).
During 1997, 1996 and 1995, T&N divested certain non-core businesses with
net sales of (Pounds)34.8 million, (Pounds)141.6 million and (Pounds)314.5
million. These divestitures included the disposition of T&N's entire
construction materials and engineering products business.
Net sales for businesses divested by product group were:
<TABLE>
<CAPTION>
DISCONTINUED OPERATIONS
----------------------------------------
1997 1996 1995
------------ ------------- -------------
(POUNDS STERLING IN MILLIONS)
<S> <C> <C> <C>
Sealing products................ (Pounds)12.1 (Pounds) 49.8 (Pounds) 49.6
Friction products............... 12.5 18.6 10.9
Composites and camshafts........ 10.2 18.9 103.5
Construction materials and
engineering.................... -- 54.3 150.5
------------ ------------- -------------
(Pounds)34.8 (Pounds)141.6 (Pounds)314.5
============ ============= =============
</TABLE>
Cost of Sales
Cost of sales as a percentage of net sales was 71.8%, 72.5% and 72.1% for
1997, 1996 and 1995, respectively. The 1997 acquisition and 1997 and 1996
divestitures had an immaterial impact on cost of sales as a percentage of net
sales. Excluding the impact of 1995 divestitures, cost of sales as a
percentage of net sales was 71.3% in 1995.
Federal-Mogul Bid Related Costs
T&N incurred (Pounds)10 million of costs in 1997 related to the acquisition
bid by Federal-Mogul. These fees were primarily for professional services
provided with respect to the offer to purchase the entire outstanding share
capital of T&N.
Other Operating Expenses
Significant components of other operating expenses were:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
(POUNDS STERLING IN MILLIONS)
<S> <C> <C> <C>
Selling and distribution
costs........................ (Pounds)148.8 (Pounds)168.6 (Pounds)173.5
Administrative expenses....... 130.7 148.7 144.0
Research & development........ 52.1 53.0 52.2
------------- ------------- -------------
(Pounds)331.6 (Pounds)370.3 (Pounds)369.7
============= ============= =============
</TABLE>
Selling and distribution costs as a percentage of net sales were 8.3%, 8.6%
and 8.3% for 1997, 1996 and 1995, respectively. Administrative expenses as a
percentage of net sales were 7.3%, 7.6% and 6.9% for 1997, 1996 and 1995,
respectively. The 1997 acquisition and 1997, 1996 and 1995 divestitures impact
on selling and distribution costs as a percentage of net sales and
administrative expenses as a percentage of net sales were immaterial.
Research and development costs as a percentage of net sales were 2.9%, 2.7%
and 2.5% for 1997, 1996 and 1995, respectively, and reflect T&N's continuing
commitment to investment in innovation and technology.
S-41
<PAGE>
ASBESTOS
In the U.S., T&N plc and two of its U.S. subsidiaries (the "T&N Companies")
are among many defendants named in numerous court actions alleging personal
injury resulting from exposure to asbestos or asbestos-containing products.
T&N plc is also, to a lesser extent, subject to asbestos-disease litigation in
the U.K. and to property damage litigation in the U.S. Because of the slow
onset of asbestos-related diseases, management anticipates that similar claims
will be made in the future. It is not known how many such claims may be made
nor the expenditure which may arise therefrom. See "Risk Factors--T&N's
Asbestos Liability."
In 1996, T&N secured a (Pounds)500 million layer of insurance which will be
triggered should the aggregate cost to resolve claims notified after June 30,
1996, where the exposure occurred prior to that date (incurred but not
reported, or "IBNR," claims), exceed (Pounds)690 million. For additional
information regarding asbestos-related liabilities and reserves, see the Pro
Forma Financial Statements and Notes 19 and 28 to the T&N Financial
Statements.
Asbestos Charges Recognized in 1996 and 1997
T&N recognized two charges to establish provisions for IBNR claims for the
year ended December 31, 1996, one in the amount of (Pounds)323 million
((Pounds)550 million on an undiscounted basis) and a second in the amount of
(Pounds)50 million. The latter charge was related to the risk that U.S. courts
would reject a class action settlement to which the T&N Companies were party
(in Georgine et al v. Amchem et al). This settlement was ultimately rejected
by the U.S. Supreme Court in 1997 and some increase in new IBNR claims filed
has resulted. T&N also recognized a (Pounds)50 million charge in 1996 for
claims notified and outstanding as of June 30, 1996. In addition, T&N recorded
the (Pounds)92 million cost of the (Pounds)500 million layer of insurance in
1996, and the premium was paid in 1997. T&N recognized no additional
provisions relating to asbestos in 1997.
Asbestos-Related Payments in 1996 and 1997
T&N paid (Pounds)149.4 million for asbestos-related claims, including the
(Pounds)92 million insurance premium, during 1997 and (Pounds)64.8 million in
1996.
Release of Provision/(Provision Against) Fixed Asset Investments:
Kolbenschmidt Costs
In March 1995, T&N entered into option arrangements for 1,345,452 shares of
Kolbenschmidt AG ("KS"), which represented approximately 49% of the
outstanding share capital of KS. In 1995, T&N recognized a charge of
(Pounds)19.5 million related to the creation of provisions relating to the
reduction of the value of fixed asset investments (the Kolbenschmidt options).
In 1996, KS issued nine shares for each share already outstanding such that
the option arrangements increased to 13,454,520 shares. In December 1996,
options over 6,727,260 shares expired and T&N recognized a (Pounds)23.4
million related charge.
In 1997, Commerzbank subsequently sold the KS shares and, subject to the
option arrangement, T&N received part of the proceeds and recognized a gain of
(Pounds)13.2 million, accordingly. In addition, T&N received an offer to
purchase its remaining interest in KS, and, as a result, T&N recognized in
1997 an additional (Pounds)19.2 million gain (the sale of such remaining
interest occurred in March 1998). (See Note 4 to the T&N Financial
Statements.)
Net Interest Payable and Similar Charges - Group
Net interest payable and similar charges - group (hereinafter referred to as
interest expense or interest income) was (Pounds)28.4 million in 1997 as
compared to (Pounds)26.8 million in 1996.
S-42
<PAGE>
Gross interest expense was (Pounds)39.3 million in 1997 as compared to
(Pounds)32.5 million in 1996. The 1997 increase of (Pounds)6.8 million in
gross interest expense is primarily attributable to higher interest rates,
partially offset by lower average borrowings arising from continued
improvements in working capital. In addition, 1997 gross interest expense
includes (Pounds)2.5 million for the amortization of T&N's discounted asbestos
provision.
Gross interest income was (Pounds)10.9 million in 1997 as compared to
(Pounds)5.7 million in 1996. The 1997 increase was primarily attributable to
earnings on funds reserved for asbestos liabilities.
Net interest expense in 1996 decreased (Pounds)9.0 million as compared to
1995. The 1996 decrease was primarily due to lower debt levels and interest
rates as compared with 1995.
Tax on Profit/(Loss) on Ordinary Activities (Income Taxes)
Income tax expense was (Pounds)62.8 million in 1997 resulting in an
effective tax rate of 33.0% compared with the statutory U.K. corporation tax
of 31.5%. The difference between the effective tax rate and U.K. corporation
rate is attributable to a number of factors, none of which are material.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows from operating activities (including asbestos) were (Pounds)111.4
million in 1997 as compared to (Pounds)215.7 million in 1996. The 1997
decrease is primarily attributable to the strong sales performance and the
increase in orders for 1998 shipment in the fourth quarter of 1997 which
limited T&N's ability to reduce debtors (accounts receivable) and stocks
(inventory) as compared to the 1996 reductions.
Capital expenditures in 1997 were (Pounds)103.9 million compared to
(Pounds)114.3 million in 1996. The 1997 decrease is primarily attributable to
the disposal of certain businesses and foreign currency fluctuations.
Proceeds from business disposals were (Pounds)75.7 million in 1997 compared
to (Pounds)74.8 million in 1996.
T&N paid (Pounds)32.6 million in 1997 for the acquisition of businesses. The
most significant acquisition in 1997 was that of Metal Leve, a manufacturer of
articulated pistons based in the United States.
LEGAL MATTERS
In addition to the asbestos litigation, T&N is engaged in various actions
arising in the ordinary course of its business. Management is of the opinion
that the outcome of these matters will not have a material adverse effect on
T&N's financial condition.
FOREIGN CURRENCY AND COMMODITY CONTRACTS
T&N is subject to exposure to market risks from changes in foreign exchange
rates and raw material price fluctuations. Derivative financial instruments
are utilized by T&N to reduce those risks. T&N does not hold or issue
derivative financial instruments for trading purposes.
OTHER MATTERS - YEAR 2000 COSTS
T&N has established a Year 2000 steering group to coordinate and address the
Year 2000 issue. Awareness and assessment stages have been completed. T&N is
currently implementing its action plan with a target completion date of
September 1998. Total costs for repair and maintenance of existing systems are
expected to approximate (Pounds)5 million ($8 million).
S-43
<PAGE>
FEL-PRO
On January 9, 1998, Fel-Pro's owners signed an agreement to sell the Fel-Pro
group, consisting of Fel-Pro Inc., certain operating businesses and holding
companies affiliated with Fel-Pro Inc. and certain real estate owned by Fel-
Pro Inc. or its affiliates to Federal-Mogul. The transaction closed on
February 24, 1998, at which time Federal-Mogul acquired all equity interests
in the specified Fel-Pro entities for approximately $717 million, which
included 1,030,325.6 shares of Series E Stock (as hereinafter defined) with an
imputed value of $225 million and approximately $492 million in cash. Federal-
Mogul is in the process of reselling the chemical manufacturing operations
acquired with Fel-Pro (representing approximately $32.8 million of Fel-Pro's
1997 net sales and $2.6 million of Fel-Pro's 1997 net income).
RESULTS OF OPERATIONS
Net Sales
Fel-Pro's consolidated net sales increased 9.2% in 1997 as compared to 1996,
primarily due to volume increases from new and existing customers in the
aftermarket business. Consolidated net sales increased 15.5% in 1996 as
compared to 1995 primarily due to volume increases from new and existing
customers in the aftermarket business, as well as the acquisition of TCI, a
high performance transmission and torque converter manufacturer in December of
1995 and the acquisition of Korody-Colyer ("KC") in October of 1995 for $12.3
million and $7.1 million, respectively. Excluding the effect of the
acquisitions of TCI and KC, Fel-Pro's net sales increased 6.4% in 1995.
Original equipment and aftermarket sales of Fel-Pro were:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(DOLLARS IN
MILLIONS)
<S> <C> <C> <C>
Original Equipment:
Americas................................................. $ 94.6 $ 88.4 $ 85.8
Aftermarket:
United States and Canada................................. 299.8 282.9 246.4
International............................................ 94.9 76.6 55.5
------ ------ ------
Total sales............................................ $489.3 $447.9 $387.7
====== ====== ======
</TABLE>
Original equipment sales increased 7.0% in 1997 as compared to 1996 due to
volume increases of gaskets for the heavy duty market partially offset by
volume decreases in the automotive market related to the end of certain
products' life cycles. Fel-Pro's original equipment sales increased 3.0% in
1996 as compared to 1995.
Aftermarket sales in the United States and Canada increased 6.0% in 1997 as
compared to 1996 primarily due to new customer business. Sales increased 14.8%
in 1996 as compared to 1995 due to the following: (i) volume increases from
new and existing customers; (ii) the December 1995 acquisition of TCI; and
(iii) the full year impact of the October 1995 acquisition of KC.
Excluding the effect of the 1995 acquisitions, Fel-Pro's aftermarket sales
in the United States and Canada increased 7.8% in 1996.
International aftermarket sales increased 23.9% in 1997 as compared to 1996
primarily due to volume increases in heavy duty diesel engine parts.
International aftermarket sales increased 38.0% in 1996 as compared to 1995
primarily due to volume increases in heavy duty engine parts which included
the full year impact of the October 1995 KC acquisition. Excluding the effect
of the acquisition, international aftermarket sales increased 22.7% in 1996.
S-44
<PAGE>
Cost of Goods Sold
Cost of goods sold as a percent of net sales was flat in 1997 at 54.8% as
compared to 1996. Cost of goods sold as a percent of net sales decreased to
54.8% in 1996 compared to 56.0% in 1995. The decrease is primarily attributable
to cost reductions and productivity improvement efforts.
Operating Expenses
Operating expenses as a percentage of net sales decreased to 35.5% in 1997
compared to 36.4% in 1996. The 1997 decrease is primarily attributable to Fel-
Pro's increases in sales volume exceeding the corresponding increase in
variable operating expenses. Operating expenses as a percentage of net sales
were relatively flat in 1996 as compared to 1995.
Income Taxes
Fel-Pro's $15.7 million deferred tax assets at December 29, 1996 were written
off in 1997 due to the conversion from C corporation status to Subchapter S
corporation status of its principal operating company effective 1997.
The difference between Fel-Pro's effective income tax rate and the statutory
tax rate is also due to the conversion of Fel-Pro's principal operating company
from C corporation status to Subchapter S corporation status in 1997. In 1997,
upon conversion of the principal operating company (Felt Products Mfg. Co. and
subsidiaries) to Subchapter S corporation status and in addition to writing off
the deferred tax assets, Fel-Pro recognized $7.4 million of expense associated
with LIFO recapture taxes.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations of $51.7 million in 1997 increased significantly
during 1997 primarily due to the write-off of $16.8 million in deferred taxes
and an $11.3 million improvement in accounts receivable over the prior year.
Cash flow used by investing activities of $18.5 million in 1997 include $3.5
million for the September purchase of certain operating assets of Biwax
Corporation. Capital expenditures were $18.3 million in 1997, primarily for
enhanced manufacturing capabilities and process improvements. Partially
offsetting these outflows were $3.9 million related to proceeds from available
for sale marketable securities.
Cash flows used by 1997 financing activities were $33.2 million, a decrease
of $32.7 million from 1996. The 1997 decrease was primarily due to lower
amounts provided to fund Fel-Pro's affiliates.
LEGAL MATTERS
Fel-Pro is engaged in various legal actions arising in the ordinary course of
its business. Management, after taking into consideration legal counsel's
evaluation of such actions, is of the opinion that it has adequate legal
defenses or insurance coverage and that the outcome of these matters will not
have a material adverse effect on Fel-Pro's financial position.
OTHER MATTERS
Year 2000 Costs
Fel-Pro is presently implementing an enterprise resource planning system
using Oracle software. This system is expected to be Year 2000 compliant. This
project was undertaken in late 1996 recognizing that information will be a key
driver for growth in the 21st century and that business needs are changing. The
system solution provides the ability to handle multiple product lines,
currencies, businesses, and locations. The existing
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mainframe systems lack functionality and flexibility in addition to being
incompatible with the Year 2000. The total project is expected to be completed
by February 1999. The expected cost related to Fel-Pro's Year 2000 project is
immaterial.
Customer Bankruptcy Reorganization
On February 2, 1998, APS filed for reorganization protection under Chapter 11
of the United States Bankruptcy Code.
Fel-Pro believes that the allowance established related to receivables from
APS is adequate to cover any uncollectible amounts.
DESCRIPTION OF CERTAIN INDEBTEDNESS
In connection with the acquisitions of T&N and Fel-Pro, Federal-Mogul entered
into the $2.75 billion floating rate Senior Credit Agreement (consisting of a
$2.35 billion term loan facility, which was reduced to $2.275 billion effective
as of March 11, 1998 and a $400 million revolving loan facility) and the $500
million floating rate Senior Subordinated Credit Agreement, each with Chase as
agent and Chase as lender. The entire amount of the senior term loan facility,
as well as the entire amount of senior subordinated credit facility have been
drawn down. It is anticipated that the net proceeds to Federal-Mogul from the
Offerings will be used to prepay the entire outstanding principal amount of the
Senior Subordinated Loans, with the balance of the net proceeds used to repay a
portion of the Interim Loans. The Credit Agreements have been syndicated to
other lenders. These credit facilities have replaced a revolving credit
facility that provided for loans in an amount of up to $350 million outstanding
at any time and refinanced the outstanding balance under such facility ($350
million, which was used to finance the acquisition of Fel-Pro) and other
indebtedness incurred in the acquisition of Fel-Pro in the amount of $150
million. See "T&N and Fel-Pro Acquisitions--Financing of the Acquisitions." The
Company intends to put into place a permanent capital structure with an
appropriate combination of debt and equity which will partially replace the
Senior Credit Agreement and Senior Subordinated Credit Agreement debt.
The Senior Credit Facility
Under the Senior Credit Agreement, Federal-Mogul (i) has borrowed $2.275
billion in term loans (the "Term Loans") to (a) finance the acquisition of T&N,
(b) refinance existing indebtedness of T&N, (c) pay fees and expenses incurred
in connection with the acquisition of T&N and the Credit Agreements and (d)
refinance indebtedness incurred in the acquisition of Fel-Pro and (ii) may
borrow up to $400 million outstanding at any time in revolving credit loans
(the "Revolving Credit Loans") to be used (a) to pay fees and expenses incurred
under the Senior Credit Agreement and (b) for working capital and other general
corporate purposes.
The Term Loans are divided into three tranches: (i) interim loans (the
"Interim Loans") in the aggregate amount of $1 billion maturing September 12,
1999, (ii) Tranche A loans (the "Tranche A Loans") in the aggregate amount of
$600 million maturing on December 31, 2003, which are to be repaid in 20
quarterly installments commencing March 31, 1999, the amount of each quarterly
installment being $19 million in 1999 and 2000, $30 million in 2001 and $41
million in 2002 and 2003; and (iii) Tranche B loans (the "Tranche B Loans") in
the aggregate amount of $750 million maturing on December 31, 2005, which are
to be repaid in 28 quarterly installments commencing March 31, 1999, the amount
of each quarterly installment being $1.25 million during the period from 1999
to 2003, inclusive, $75 million in 2004 and $106.25 million in 2005.
Revolving Credit Loans are to be available for a period of six years
commencing on March 12, 1998 (the "Closing Date"). Up to $120 million of
Revolving Credit Loans may be borrowed in currencies other than U.S. dollars.
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Indebtedness under the Senior Credit Agreement bears interest at a floating
rate based upon, at Federal-Mogul's option, either (i) the higher of the prime
rate of Chase and 0.5% in excess of the overnight federal funds rate ("Base
Rate"), plus (in each case) a margin of 0.5% for Revolving Credit Loans, 1.0%
for the Interim Loans and Tranche A Loans and 1.25% for Tranche B Loans, or
(ii) the average of the offering rates of banks in the London interbank
eurodollar market for U.S. dollar deposits ("Eurodollar Rate") plus a margin of
1.5% for Revolving Credit Loans, 2.0% for the Interim Loans and Tranche A Loans
and 2.25% for Tranche B Loans. After repayment of the Interim Loans the
applicable margins will depend upon Federal-Mogul's consolidated leverage
ratio: (i) in the case of Base Rate loans the applicable margin will vary
between 0% and 0.5% for Revolving Credit Loans, 0.0% and 1.0% for Tranche A
Loans and 0.5% and 1.25% for Tranche B Loans, and (ii) in the case of
Eurodollar Rate loans the applicable margin will vary between 0.75% and 1.5%
for Revolving Credit Loans, 1.0% and 2% for Tranche A Loans and 1.5% and 2.25%
for Tranche B Loans.
Federal-Mogul's obligations under the Senior Credit Agreement are secured by
a lien on all inventory and accounts receivable of Federal-Mogul and its U.S.
subsidiaries, other than certain accounts receivable subject to an existing
securitization program. Federal-Mogul, its U.S. subsidiaries and certain of its
foreign subsidiaries have also pledged 100% (or, in the case of the stock of
certain foreign subsidiaries, 65%) of the capital stock of their subsidiaries
and certain intercompany loans to secure Term Loans and Revolving Credit Loans.
Part of such collateral also secures certain existing public debt of Federal-
Mogul, and all such collateral will be released when Federal-Mogul has obtained
investment grade ratings for its debt or met a certain leverage ratio. In
addition, Federal-Mogul, its U.S. subsidiaries and certain of its foreign
subsidiaries have guaranteed the Term Loans and Revolving Credit Loans.
The Senior Subordinated Credit Facility
Under the Senior Subordinated Credit Agreement, Federal-Mogul has borrowed
$500 million (the "Senior Subordinated Loans") (i) to finance the acquisition
of T&N, (ii) to pay fees and expenses in connection with the acquisition of T&N
and the financing thereof and (iii) to refinance indebtedness incurred in the
acquisition of Fel-Pro. The Senior Subordinated Loans were disbursed on the
Closing Date and are subordinated to the loans under the Senior Credit
Agreement and other senior indebtedness of Federal-Mogul.
The Senior Subordinated Loans will mature on March 12, 1999, the first
anniversary of the Closing Date (the "Initial Maturity Date"). If such loans
have not been repaid on the Initial Maturity Date, they will be converted into
term loans maturing on the tenth anniversary of the Closing Date. After the
Initial Maturity Date, the lenders under the Senior Subordinated Credit
Agreement, at their option, may elect to receive Exchange Notes (as defined in
the Senior Subordinated Credit Agreement) equal to 100% of the aggregate
principal amount of the loans for which they are exchanged. The Exchange Notes
will be issued pursuant to an indenture and will grant the holders of the
exchange notes certain limited additional rights to be set forth in the
indenture.
Indebtedness under the Senior Subordinated Credit Agreement bears interest at
a floating rate which is the offering rate of Chase in the London interbank
eurodollar market for U.S. dollar deposits plus an initial margin of 4.5%. This
margin is to increase to 5.5% six months after the Closing Date and to 6% nine
months after the Closing Date. If the loans have not been repaid on or prior to
the Initial Maturity Date, the applicable interest rate thereafter is to be the
highest of (i) .5% in excess of the interest rate borne by the loans
immediately prior to the Initial Maturity Date, (ii) 6.5% in excess of the
treasury rate (the rate borne by direct obligations of the United States
maturing on the tenth anniversary of the Closing Date) or (iii) 3% in excess of
the CSI high yield index rate (as published in the Chase Securities
Incorporated High Yield Research Weekly Update Report), plus (in each case) an
additional margin of 0% for the first three months commencing on the Initial
Maturity Date and increasing by 5% at the beginning of each subsequent three
month period. In no event may the interest rate exceed 16% per annum and to the
extent the interest rate exceeds 14% per annum, Federal-Mogul may, at its
option, pay such excess interest by adding such excess interest to the
principal amount of loans outstanding.
The Senior Subordinated Loans have the benefit of guarantees, on a
subordinated basis, by the guarantors of the loans under the Senior Credit
Agreement.
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Certain Covenants
The Credit Agreements contain certain covenants that restrict or limit
Federal-Mogul from taking various actions, including, subject to specified
exceptions, (i) the granting of additional liens, (ii) the incurrence of
additional indebtedness, (iii) the granting of additional guarantees, (iv)
mergers, acquisitions and other fundamental corporate changes, (v) the sale of
assets, (vi) the payment of dividends and other restricted payments, (vii) the
making of investments, (viii) optional prepayments of certain debt and the
modification of debt instruments, (ix) entering into sale and leaseback
transactions, (x) the imposition of restrictions on any subsidiary's ability to
make payments, loans or advances to Federal-Mogul, (xi) entering into a new
debt agreement with more restrictive covenants and (xii) transactions with
affiliates. The Senior Credit Agreement also contains certain financial
covenants that require Federal-Mogul to meet and maintain certain financial
tests and minimum ratios, including a minimum cash flow coverage ratio, a
minimum consolidated leverage ratio and a minimum consolidated net worth test.
After payment of the Interim Loans Federal-Mogul may elect to have a different
set of covenants apply to the Senior Credit Agreement, which will require lower
leverage but otherwise will be less restrictive. The Subordinated Credit
Agreement restricts in certain circumstances and, prior to payment of the
Interim Loans and the election by Federal-Mogul of alternative covenants, the
Senior Credit Agreement prohibits, payment of dividends on Federal-Mogul Common
Stock in excess of the current rate of $0.12 per quarter.
Repayments and Refinancing
The Credit Agreements require mandatory repayments with some or all of the
net proceeds received upon the occurrence of certain events, including
issuances by Federal-Mogul of capital stock, the incurrence by Federal-Mogul of
certain debt and certain sales of assets. The Senior Credit Agreement also
requires mandatory prepayment from "excess cash flow." The "asset sale" and
"excess cash flow" (each as defined in the Credit Agreements) prepayment
requirements in the Senior Credit Agreement cease to be applicable when certain
leverage tests are met.
Pursuant to these requirements it is anticipated that the net proceeds of the
Offerings will be used to prepay the entire outstanding principal amount of the
Senior Subordinated Loans ($500 million), with the balance of the net proceeds
used to repay a portion of the Interim Loans (the outstanding principal balance
of which is $1 billion), though if the proceeds to Federal-Mogul of the
Offerings are less than $500 million, the proceeds will be applied solely to
prepay the Interim Loans. Thereafter (subject to certain exceptions) the net
proceeds of any equity offering or incurrence of indebtedness by Federal-Mogul
shall be used to prepay Term Loans, provided that (i) if the Senior
Subordinated Loans are not prepaid by the Offerings, proceeds of any subsequent
equity offering completed by July 12, 1998, which, together with the proceeds
of the Offerings and the proceeds of other equity offerings, if any, completed
by July 12, 1998 exceed $500 million, may be used to prepay the Senior
Subordinated Loans, with any balance being applied to prepay the Term Loans,
(ii) proceeds of certain subordinated debt offerings may be used to prepay the
Senior Subordinated Loans, if not prepaid by the Offerings, and (iii) after
payment of the Interim Loans and the Senior Subordinated Loans, the proceeds of
further issuances of equity or subordinated debt need not be applied to prepay
the Term Loans.
Federal-Mogul has the option to prepay without premium at any time the Term
Loans and the Revolving Credit Loans and (subject to certain requirements
involving prior repayment of the Term Loans and Revolving Credit Loans) the
Senior Subordinated Loans. In the event that the Senior Subordinated Loans are
exchanged for Exchange Notes which are then sold, it is contemplated that the
holders of such Exchange Notes will have the option to fix the interest rates
thereon at the rate in effect at the time of such sale and, if such option is
exercised, that the Exchange Notes will be non-callable for a period of time
and will be callable thereafter at a premium.
Federal-Mogul anticipates prepaying a portion of the balance of the Interim
Loans remaining after the Offerings with asset sales proceeds and refinancing
the Senior Subordinated Loans, if outstanding after the Offerings, and the
balance of the Interim Loans through further equity or debt offerings.
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Events of Default
The Credit Agreements contain customary events of default, including
nonpayment of principal, interest or fees, violation of covenants, inaccuracy
of representations or warranties in any material respect, cross acceleration
and cross default to certain other indebtedness, bankruptcy, noncompliance with
certain provisions of ERISA, material judgments, failure of the collateral
documents or subordination provisions, and change of control. The occurrence of
any of such events could result in acceleration of Federal-Mogul's obligations
under the Credit Agreements and foreclosure on collateral securing the Term
Loans and Revolving Credit Loans.
Fees
Federal-Mogul has paid a facility fee on the used and unused portion of each
lender's commitment to make Revolving Credit Loans at the rate of 0.5% per
annum prior to repayment of the Interim Loans and at the rate of 0.25% to 0.5%
per annum thereafter, depending on Federal-Mogul's leverage ratio. In addition,
Federal-Mogul has paid customary fees to Chase on the Closing Date and
reimbursed customary expenses in connection with the Senior Credit Agreement
and the Senior Subordinated Credit Agreement.
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BUSINESS
For purposes of this section of the Prospectus ("Business"), references to
Federal-Mogul include operations acquired in the acquisitions of T&N and Fel-
Pro and statistics have been prepared on a pro forma basis, giving effect to
the acquisitions of T&N and Fel-Pro and the disposition of the T&N Bearings
Business as if they had occurred on January 1, 1997, unless otherwise noted.
See "Unaudited Pro Forma Financial Statements."
OVERVIEW
Federal-Mogul, founded in 1899, is a global manufacturer and distributor of
a broad range of vehicular components for automobiles and light trucks, heavy
duty trucks, farm and construction vehicles and industrial products. Such
parts include powertrain systems components (primarily bearings and piston
products), sealing systems components (dynamic seals and gaskets) and general
products (primarily camshafts, friction products, sintered products and
systems protection products). Federal-Mogul's principal customers include many
of the world's major OE manufacturers of automobiles, light trucks, heavy duty
trucks, farm and construction vehicles and industrial products. Federal-Mogul
also manufactures and supplies its products and related parts to the
aftermarket (the market for replacement parts) for to each of these categories
of equipment.
Federal-Mogul, which had traditionally focused on the manufacture and
distribution of engine bearings and sealing systems, in 1990 began to add auto
parts retail and wholesale store operations in various domestic and
international locations. These geographically-dispersed retail/wholesale
stores proved burdensome to manage and resulted in substantial operating
losses. In the fourth quarter of 1996, Federal-Mogul underwent a change of
management, following which the Company commenced a significant restructuring
program designed to refocus Federal-Mogul on its core competencies of
manufacturing, engineering and distribution. As part of such restructuring,
Federal-Mogul took the following actions: (i) closed international aftermarket
distribution centers in Malaysia and Singapore; (ii) divested 72 international
retail aftermarket operations and sold or restructured 25 wholesale
aftermarket operations; (iii) closed its Leiters Ford, Indiana manufacturing
facility and consolidated its lighting products operations in Juarez, Mexico;
(iv) consolidated certain of its North American warehouse facilities; (v)
consolidated its customer support functions previously housed in Phoenix,
Arizona into the Company's Southfield headquarters; (vi) consolidated its
European aftermarket management functions in Geneva, Switzerland into the
Wiesbaden, Germany manufacturing headquarters; and (vii) streamlined certain
of its administrative and operational staff functions worldwide. In addition,
by the end of the first quarter of 1998, the Company expects to have
successfully exited all of its retail businesses, except for Puerto Rico where
the Company continues to seek a buyer.
In connection with the restructuring, Federal-Mogul also began to pursue a
growth strategy of acquiring complementary manufacturing companies. On
February 24, 1998, Federal-Mogul acquired Fel-Pro, a group of privately-owned
automotive parts manufacturers for total consideration of $717 million. Fel-
Pro is a premier gasket manufacturer for the North American aftermarket and OE
heavy duty market. On March 6, 1998, Federal-Mogul acquired the share capital
of T&N, a U.K. based supplier of engine and transmission products, for total
consideration of approximately (Pounds)1.5 billion ($2.4 billion). T&N
manufactures and supplies high technology engineered automotive components and
industrial materials including pistons, friction products, bearings, systems
protection, camshafts and sealing products. See "T&N and Fel-Pro
Acquisitions."
Federal-Mogul operated facilities at over 240 locations in 24 countries. On
a pro forma basis (giving effect to the acquisitions of T&N and Fel-Pro and
the disposition of the T&N Bearings Business as if they had occurred on
January 1, 1997), Federal-Mogul's total sales for 1997 were $4.8 billion.
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The following charts set forth Federal-Mogul's net sales by manufacturing
division, geographic region and customer group as a percentage of total net
sales for the year ended December 31, 1997, on a pro forma basis.
[Pie Chart setting forth Federal-Mogul's 1997 pro forma net sales
by manufacturing division, geographic region and customer group]
Among Federal-Mogul's largest customers are Caterpillar, Chrysler, Cummins,
Ford, General Motors, Mercedes-Benz, NAPA, Peugeot and Volkswagen/Audi (in
alphabetical order).
STRATEGY
Federal-Mogul's recently completed restructuring program was aimed at
focusing it on its core competencies of manufacturing and distribution. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." With this restructuring behind it, Federal-Mogul is redirecting
its efforts and resources to expand these core competencies by growing the
manufacturing base globally while capitalizing on its aftermarket distribution
network and technological resources. Federal-Mogul has pursued its growth
strategy by focusing efforts and resources on complimentary acquisitions of
manufacturing companies that will enhance its product base and expand its
global reach, such as the recently completed acquisitions of T&N and Fel-Pro.
Management believes that the trend in OE automotive parts manufacture is
towards long-term relationships with a limited number of suppliers, as OE
manufacturers seek to reduce costs and benefit from synergies resulting from
design, development, and implementation of entire integrated systems and
modules by individual suppliers. Federal-Mogul has made a commitment to expand
its manufactured products to offer OE customers systems and modules, and the
T&N and Fel-Pro acquisitions are major steps toward Federal-Mogul's strategic
goal of developing global engine and sealing systems for its OE customers.
Federal-Mogul also intends to expand the global reach of its manufacturing
operations to follow the expansion of OE manufacturers into Latin America,
Eastern Europe and the Asian markets. Federal-Mogul intends to couple its
expansion of OE business in new geographic markets with growth in global
aftermarket sales. With the T&N acquisition, Federal-Mogul also acquired a
friction products line of business, which it views as another platform for
product expansion.
REORGANIZATION
Following the acquisitions of T&N and Fel-Pro, Federal-Mogul's integrated
operations are being reorganized to realize synergies and effectively
coordinate operations. Operations will be conducted through three
manufacturing operating units corresponding to major product areas: Powertrain
Systems, Sealing Systems and General Products. The major product categories in
Powertrain Systems include engine bearings and piston products. Sealing
Systems includes dynamic seals and gaskets. General Products include
camshafts, friction products, sintered products, systems protection products
and a number of smaller product lines. The Worldwide Aftermarket organization
is responsible for Federal-Mogul's global aftermarket sales, marketing and
distribution.
In connection with securing regulatory approvals for the acquisition of T&N,
Federal-Mogul executed an Agreement Containing Consent Order with the FTC on
February 27, 1998 (the "Consent Order"). Pursuant to this agreement Federal-
Mogul must divest the T&N Bearings Business, consisting principally of T&N's
thinwall
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and dry bearings (polymer bearings) operations, within six months after the
FTC makes the consent order final and must provide for independent management
of those assets pending such divestiture. The agreement stipulates that the
T&N Bearings Business is to be maintained as a viable, independent competitor
of Federal-Mogul and that Federal-Mogul shall not attempt to direct the
activities of, or exercise control over, the T&N Bearings Business or have
contact with the T&N Bearings Business outside of normal business activities.
The T&N Bearings Business accounted for approximately $393.1 million of T&N's
1997 revenues. Certain pro forma information related to the disposition of the
T&N Bearings Business is set forth in the Pro Forma Financial Statements. In
addition, T&N's North American aftermarket business is being held separately
(on an interim basis) as an independent business pursuant to the Consent
Order.
MANUFACTURING DIVISIONS
POWERTRAIN SYSTEMS
Federal-Mogul's Powertrain Systems products are used in automotive, light
truck, heavy duty, industrial, marine, agricultural, power generation and
small air-cooled engine applications. On a pro forma basis, Powertrain Systems
(not including the T&N Bearings Business to be divested) accounted for $1.9
billion of Federal-Mogul's 1997 consolidated sales, of which 41% were in North
America, 52% were in Europe and 7% were in the rest of the world. In 1997,
Powertrain Systems unit's five largest customers by sales volume were
Caterpillar, Cummins, Ford, General Motors and Volkswagen/Audi (in
alphabetical order). Approximately 68% of the sales in 1997 for the Powertrain
Systems division were to OE customers while 32% were to aftermarket customers.
Federal-Mogul's Powertrain Systems operations combine large bearings and
piston products operations acquired in the T&N acquisition with pre-existing
powertrain assets of Federal-Mogul, primarily bearings operations. The
addition of T&N greatly expanded Federal-Mogul's presence in cast aluminum
pistons and large bearings as well as adding four additional product lines,
articulated pistons, piston rings, cylinder liners and piston pins. (T&N's
other Powertrain Systems operations--thinwall bearings and dry bearings--are
to be divested for regulatory reasons and are held separately, in the interim,
see "--Reorganization.")
Engine Bearings, Bushings, Washers and Large Bearings. Engine bearings,
bushings, washers and large bearings accounted for approximately 40% of the
sales for Powertrain Systems. Federal-Mogul manufactures thin wall engine
bearings, bushings and washers for original equipment and aftermarket sales.
These products include bimetallic and trimetallic journal bearings (main,
connecting rod, thrust and tilting pad), bimetallic and trimetallic bushings
and washers, valve plates, labyrinth seals, Glycodur(R) dry bearings and
sputter bearings. Federal-Mogul's large bearings products--heavy wall
bearings, rotating plant bearings and structural products--are sold only to OE
customers. Engine bearings, bushings, washers and large bearings are
manufactured under the brand names Federal-Mogul(R) and Glyco(R).
Pistons and Piston Pins. Pistons and piston pins accounted for approximately
33% of the sales for Powertrain Systems. Federal-Mogul designs and
manufactures cast aluminum pistons for all gasoline and diesel engine
applications, articulated aluminum body/steel crown pistons for heavy duty
diesel applications, piston rings for all classes of internal combustion
engines, cylinder liners in cast iron for new generation aluminum block
engines and piston pins from steel. The addition of T&N has significantly
expanded the technology, scope and range of pistons offered by Federal-Mogul,
most notably in the OE market. The T&N acquisition has also added piston rings
and a wide range of high strength steel piston pins (also known as wrist pins
or gudgeon pins) to the Federal-Mogul product line. Pistons and piston rings
are sold under the brand names AE Goetze(R) and Sterling(R).
Rings and Liners. Rings and liners accounted for approximately 27% of the
sales for Powertrain Systems. Federal-Mogul manufactures cast iron or steel
rings, plasma, chrome and CKS coatings and wet/dry liners. Federal-Mogul now
designs and manufactures a wide range of cast iron and steel piston rings.
With the addition of T&N and Fel-Pro, Federal-Mogul added cylinder liners to
its product line. Federal-Mogul now manufactures a wide variety of wet, dry
and cast liners. In addition, powder metal cylinder liners are available to
small engine and light vehicle customers through a strategic alliance with
TecSyn PMP. Rings and liners are marketed under the brand name AE Goetze(R).
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SEALING SYSTEMS
Federal-Mogul's Sealing Systems products are used in automotive, light
truck, heavy duty truck, agricultural, off-highway, marine, railroad, high
performance and industrial applications. Sealing Systems accounted for $1.1
billion of Federal-Mogul's 1997 consolidated sales, of which 66% were in North
America, 23% were in Europe and 11% were in the rest of the world. In 1997,
this division's five largest customers by sales volume were Chrysler, Cummins,
Fiat, Ford and General Motors (in alphabetical order). Approximately 47% of
the sales in 1997 for Sealing Systems division were to OE customers while 53%
were to aftermarket customers.
While Federal-Mogul has operated in the dynamic seals business, the gasket
operations were acquired in the Fel-Pro and T&N acquisitions. With the
acquisitions of T&N and Fel-Pro, Federal-Mogul became one of a select number
of manufacturers with the ability to seal entire engines and transmission
systems.
Dynamic Seals. Dynamic seals accounted for approximately 30% of the sales
for Sealing Systems division. Federal-Mogul manufactures a line of dynamic
seals consisting of oil seals, valve stem seals, air conditioning compressor
seals, crank shaft seal carrier assemblies and unipistons. These products are
marketed under the brand names National(R), Mather(R), Seal Technology
Systems(R) (STS), Redi-Seal(R), Redi-Sleeve(R), Unipiston(R), 5 Star(R) and 5
Star Gold(R).
Gaskets. Gaskets accounted for approximately 70% of the sales for Sealing
Systems. Federal-Mogul utilizes a wide range of material technologies to
manufacture a full range of gasket types, including cylinder head gaskets in
multi-layer steel, graphite, edge molded metal plate and other composites,
valve and rocker cover gaskets, intake and exhaust manifold gaskets and
miscellaneous gaskets in steel, composite, elastomeric and spiral wound.
Federal-Mogul also offers a complete line of repair kits for professional
installers under the brand names of Fel-Pro(R) (with well-known products such
as Permatorque Blue(R), Fel-Coprene(R), Print-O-Seal(R), Engine$aver(R) and
PermaDry Plus(R)), EngineSeal(R), Goetze(R), Payen(R) and McCord(R). Federal-
Mogul established a strong presence in the heavy duty OE market for gaskets
(including, primarily, gaskets for light and heavy duty diesel engines)
through its acquisition of Fel-Pro. While Fel-Pro's market share of automotive
OE gaskets was more limited, T&N's Sealing Products division has a stronger
presence in the automotive OE market, adding balance to Federal-Mogul's
overall OE gasket activities.
GENERAL PRODUCTS
Federal-Mogul's General Products includes four primary product lines, which
were in large measure acquired with T&N: camshafts, friction products,
sintered products and systems protection products. In addition, General
Products includes a number of smaller product lines, some of which (fuel
systems components and lighting products) pre-date the acquisition of T&N and
others of which (heat transfer products and textiles) were acquired with T&N.
Products Federal-Mogul sources from other manufacturers, which are not related
to Powertrain Systems and Sealing Systems, are included in General Products
and distributed by Worldwide Aftermarkets.
Products manufactured by Federal-Mogul's General Products accounted for $1.2
billion of Federal-Mogul's 1997 consolidated sales (excluding $600 million of
sourced aftermarket product). Approximately 34% of the unit's manufactured
sales were in North America, 57% were in Europe and 9% were in the rest of the
world. In 1997, the General Products division's five largest customers by
sales volume were Ford, General Motors, Lucas, Peugeot and Renault (in
alphabetical order). Approximately 64% of the sales in 1997 for General
Products of products it manufactures were to OE customers while 36% were to
aftermarket customers.
Camshafts. Camshafts accounted for approximately 13% of Federal-Mogul
manufactured products sales for General Products. Federal-Mogul casts,
machines and assembles camshafts primarily for the automotive market. These
products are marketed under the brand names Weyburn-Bartel(R) and Weyburn-
Lydmet(R).
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Friction Products. Friction products accounted for approximately 42% of
Federal-Mogul manufactured products sales for General Products. Federal-Mogul
manufactures disc brake pads, drum brakes and brake linings for the automotive
and commercial vehicle sector. These products are marketed under the brand
name Ferodo(R) and are sold primarily in Europe.
Sintered Products. Sintered products accounted for approximately 17% of
Federal-Mogul manufactured products sales for General Products. Federal-Mogul
utilizes advanced powder metallurgy techniques for the manufacture of a wide
range of automotive components including valve guides, valve seat inserts, ABS
sensor rings and other transmission components, together with engine
components, principally pulleys, gears and sprockets. These products are
marketed under the brand names Brico(R), Brico Metals(R), Sintertech(R) and
Comtech(R), solely to OE customers.
Systems Protection Products. Systems protection products accounted for
approximately 9% of Federal-Mogul manufactured products sales for General
Products. Federal-Mogul manufactures a wide variety of products used for
automotive under body and under hood protection from heat, noise, abrasion and
stone impingement, including Flexguard(R), Thermflex(R) and Reflectsleeve
1450(R). Most of these products are based on braided, knitted and non-woven
fabrics. Products based on the same technologies are sold in the electrical,
white goods and aerospace industries. These products are marketed under the
brand name Bentley-Harris(R), solely to OE customers, and are sold primarily
in North America.
Other General Products. Other general products--primarily consisting of heat
transfer products, fuel system components and lighting products--accounted for
approximately 19% of Federal-Mogul manufactured products sales for General
Products. Federal-Mogul is in the process of reselling the chemical
manufacturing operations acquired with Fel-Pro (representing approximately
$32.8 million of Fel-Pro's 1997 net sales and $2.6 million of Fel-Pro's 1997
net income). The primary components of other general products are:
. heat transfer products (engine cooling radiators in both aluminum and
copper brass construction and heater, ventilator and air conditioning
units for automotive in-cab use) manufactured in South Africa for sale
in the South African market and for global export (primarily outside of
the United States and Europe) under the brand names Silverton
Engineering(R), Silverton Radiators(R), FHE(R) and Connoisseur Auto Air
Conditioning(R);
. fuel system components (a full line of fuel pumps including mechanical
fuel pumps, diesel lift pumps, electric fuel pumps, electric fuel
modules and hanger assemblies) marketed in North America, under the
brand name Carter(R); and
. lighting products (clearance marker lamps, front, side and rear signal
lamps, stop, tail and turn lights, emergency lighting, turn signal
switches and back-up lamps) marketed under the brand name Signal-
Stat(R).
AFTERMARKET DISTRIBUTION
Federal-Mogul's North American distribution centers in Jacksonville,
Alabama, LaGrange, Indiana, and Maysville, Kentucky (the "Distribution
Centers"), serve as the core of Federal-Mogul's domestic aftermarket
distribution network pre-existing the acquisitions of T&N and Fel-Pro.
Products are shipped from these Distribution Centers to service centers in the
United States and Canada. For Latin American sales, products are shipped
through a facility in Weston, Florida to two international regional
distribution centers and 15 Latin American branches. For European sales,
products are shipped through Federal-Mogul's facility in Kontich, Belgium.
T&N and Fel-Pro each brought with them developed aftermarket operations
duplicating, in part, Federal-Mogul's existing capabilities. T&N was, at the
time of its acquisition, the world's largest supplier of engine parts to the
independent aftermarket, as measured by revenues (with approximately 80% of
the parts distributed having been produced by T&N). Fel-Pro also brought
significant aftermarket penetration with it, built on the substantial
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<PAGE>
brand loyalty its gasket lines have acquired through a history of
technological innovations, merchandising and marketing, which have
differentiated them in the market, particularly among professional installers.
Management thus believes that aftermarket distribution provides significant
opportunities for realization of synergies.
T&N's aftermarket distribution system at the time of the acquisition
included 36 major distribution centers and sales offices utilizing over 1,600
employees worldwide to distribute over 200,000 component parts of 5,000 engine
models via its AE and Goetze marketing networks.
Fel-Pro's domestic aftermarket business, focused primarily on gaskets,
primarily distributed from a state-of- the-art facility inside its Skokie,
Illinois plant, using a highly automated, completely paperless process.
CUSTOMERS
Among Federal-Mogul's largest customers are Caterpillar, Chrysler, Cummins,
Ford, General Motors, Mercedes-Benz, NAPA, Peugeot and Volkswagen/Audi (in
alphabetical order).
Original Equipment. Federal-Mogul's OE customers consist primarily of
automotive and heavy duty vehicle customers, as well as farm and industrial
equipment manufacturers, agricultural, off-highway, marine, railroad, high
performance and industrial applications. Federal-Mogul has well-established
relationships with substantially all major North American and European
automotive OE manufacturers, some pre-existing and others resulting from the
acquisitions of T&N and Fel-Pro. Management believes there are additional
system opportunities with OE manufacturers in the Asia-Pacific and Latin
American regions. In addition, management believes that the acquisitions of
T&N and Fel-Pro have positioned Federal-Mogul to take advantage of developing
OE customer demand for single supplier systems and modules in the future,
particularly in light of Federal-Mogul's global reach and capabilities. See
"--Strategy."
Aftermarket. Federal-Mogul's domestic and international customers include
independent warehouse distributors who redistribute products to local parts
suppliers called "jobbers," industrial bearing distributors, distributors of
heavy duty vehicular parts, engine rebuilders and retail parts stores. The
breadth of Federal-Mogul's product lines, together with the strength of its
brand names and sales force, are central to Federal-Mogul's aftermarket
operations.
RESEARCH AND DEVELOPMENT
Federal-Mogul maintains technical centers in Europe and North America to
develop and provide advanced materials, products and manufacturing processes
for all of its manufacturing units, including facilities acquired with T&N and
Fel-Pro. Federal-Mogul's expertise in engineering, research and development
ensures that the latest technologies, processes and materials are considered
in solving problems for customers and bringing new product to market. Federal-
Mogul provides its customers with real-time engineering capabilities and
design development in their home countries. In recognition of the importance
of technology throughout its operations, following the acquisitions, Federal-
Mogul created the post of Vice President--Technology to coordinate
technological activities throughout its operations.
The acquisitions of T&N and Fel-Pro provided Federal-Mogul with substantial
additional technological expertise. In particular, the newly acquired
technical centers in the United Kingdom and the United States bring a new
depth of capability in materials development, surface engineering,
computational analysis, engine testing and systems engineering. Recent
achievements of these centers include development of advanced piston alloys,
novel bearing coatings, brake pads for motor sport applications, engine
structure modelling to predict gasket performance and test techniques for
measurement of bore distortion in running engines.
The Fel-Pro acquisition brought substantial research operations focusing on
gaskets and their manufacture, including complete material, application design
and process development capabilities and a dedicated
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<PAGE>
design/engineering staff of over 100 employees. Recent technology innovations
pioneered by Fel-Pro include PermaDry Plus(R), multi-layered steel head
gaskets, noise and vibration dampening devices and rubber edge molded gaskets.
In the past, Fel-Pro has introduced several product innovations including Fel-
Coprene(R), Print-O-Seal(R) and Perma-Torque Blue(R), which have become market
standards in the gasket aftermarket.
Technological activities are conducted at facilities Federal-Mogul acquired
from T&N including, in particular, its central technical center at Cawston,
England, its facility at Burscheid, Germany and its technical center at
Plymouth, Michigan, and at Fel-Pro's facilities in Skokie, Illinois, as well as
at Federal-Mogul's major pre-existing technological centers, in Ann Arbor,
Michigan, Logansport, Indiana, Malden, Missouri, and Wiesbaden, Germany. Each
of Federal-Mogul's operating units is engaged in various engineering, research
and development efforts working side by side with customers to develop custom
solutions unique to their needs.
Total expenditures for research and development activities, on a pro forma
basis, were approximately $102.8 million in 1997, $101.6 million in 1996 and
$99.8 million in 1995.
SUPPLIERS
Federal-Mogul sells its manufactured parts as well as parts manufactured by
other manufacturers to the aftermarket. In 1997, no outside supplier of
Federal-Mogul provided products that accounted for more than 5% of Federal-
Mogul's net sales.
Federal-Mogul does not normally experience supply shortages of raw materials.
Certain of Federal-Mogul's relationships with its long-term suppliers are
contractual.
In connection with the acquisition of the automotive aftermarket business of
TRW, Inc. ("TRW") in 1992, Federal-Mogul and TRW entered into a Supply
Agreement for an initial term of 15 years (the "Supply Period"), pursuant to
which TRW agreed to supply Federal-Mogul with parts manufactured by TRW and
distributed by Federal-Mogul. During the first five years of the Supply Period
(the "Exclusive Period"), Federal-Mogul is an exclusive distributor of such TRW
parts and thereafter will be a nonexclusive distributor for the remaining term
of the Supply Agreement, subject to certain exceptions. Thereafter, both the
Exclusive Period and the Supply Period are automatically renewable for one-year
periods and are terminable upon one year's notice by either party.
EMPLOYEE RELATIONS
On March 31, 1998, Federal-Mogul had approximately 45,000 full-time employees
(including the T&N Bearings Business), of whom approximately 17,500 were
employed in the United States. Approximately 13,700 of these employees work for
operations predating the acquisitions of T&N and Fel-Pro, approximately 28,600
work for operations acquired with T&N and approximately 2,700 work for
operations acquired with Fel-Pro.
Approximately 45% of Federal-Mogul's United States employees are represented
by six unions. Approximately 50% of Federal-Mogul's foreign employees are
represented by various unions. Each of Federal-Mogul's unionized manufacturing
facilities has its own contract with its own expiration date and, as a result,
no contract expiration date affects more than one facility. Federal-Mogul
believes its labor relations to be good.
ENVIRONMENTAL REGULATIONS
Federal-Mogul's operations, in common with those of industry generally, are
subject to numerous existing and proposed laws and governmental regulations
designed to protect the environment, particularly regarding plant wastes and
emissions and solid waste disposal. Capital expenditures for property, plant
and equipment for environment control activities did not have a material impact
on Federal-Mogul's financial position or results of operations in 1997 and are
not expected to have a material impact on Federal-Mogul's financial position or
results of operations in 1998 or 1999.
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<PAGE>
BACKLOG
The majority of Federal-Mogul's products are not on a backlog status. They
are produced from readily available materials and have a relatively short
manufacturing cycle. For products supplied by outside suppliers, Federal-Mogul
generally purchases products from more than one source. Federal-Mogul expects
to be capable of handling the anticipated 1998 sales volumes.
PATENTS AND LICENSES
Federal-Mogul is committed to protecting its technology investments and
market share through an active and growing international patent portfolio. The
international patent portfolio is composed of a large number of foreign (non
U.S.) patents and pending patent applications which relate to a wide variety of
products and processes. In the aggregate, Federal-Mogul's international patent
portfolio is of material importance to its business; however, Federal-Mogul
does not consider any international patent or group of international patents
relating to a particular product or process to be of material importance when
judged from the standpoint of the business as a whole.
COMPETITION
The global vehicular parts business is highly competitive. Federal-Mogul
competes with many of its customers that produce their own components as well
as with independent manufacturers and distributors of component parts in the
United States and abroad. In general, competition for such sales is based on
price, product quality, customer service and the breadth of products offered by
a given supplier. Federal-Mogul has attempted to meet these competitive
challenges through more efficiently integrating its manufacturing and
distribution operations, expanding its product coverage within its core
businesses, and expanding its worldwide distribution network.
PROPERTIES
Federal-Mogul conducts its business from its World Headquarters complex in
Southfield, Michigan, which is leased pursuant to a sale/leaseback arrangement.
At March 31, 1998, Federal-Mogul had over 120 manufacturing facilities with in
excess of 16 million square feet (approximately 80% of which were owned and 20%
were leased) and over 100 aftermarket facilities with in excess of 3.5 million
square feet (approximately 10% of which were owned and 90% were leased). Over
half of the manufacturing facilities (by square footage) were in Europe and
approximately one third were in North America. Over 85% of aftermarket
facilities (by square footage) were in North America, with a strong majority of
the remainder in Europe. Federal-Mogul also had other facilities (primarily
research and office only sites) accounting for approximately 800,000 square
feet.
All owned and leased properties are well maintained and equipped for the
purposes for which they are used. Federal-Mogul believes that its facilities
are suitable and adequate for the operations involved. In the case of leased
properties, Federal-Mogul believes that the leases could be renewed or
comparable facilities could be obtained without materially affecting
operations.
LEGAL PROCEEDINGS
T&N Asbestos
In the United States, Federal-Mogul's subsidiary T&N plc and two of its U.S.
subsidiaries ("the T&N Companies") are among many defendants named in numerous
court actions alleging personal injury resulting from exposure to asbestos or
asbestos-containing products. T&N plc is also subject to asbestos-disease
litigation, to a lesser extent, in the UK and to property damage litigation
based upon asbestos in the United States. Because of the slow onset of
asbestos-related diseases, management anticipates that similar claims will be
made in the future. It is not known how many such claims may be made nor the
expenditure which may arise therefrom. T&N has appointed the Center for Claims
Resolution ("CCR") as its exclusive representative in relation to all asbestos-
related personal injury claims made against the T&N Companies in the United
States.
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<PAGE>
Prior to its acquisition by Federal-Mogul, T&N secured, by payment of a
premium of (Pounds)92 million, a (Pounds)500 million layer of insurance cover
which will be triggered should the aggregate number of claims notified after
June 30, 1996, where the exposure occurred prior to that date ("IBNR claims"),
exceed (Pounds)690 million. T&N has reserves for IBNR claims of (Pounds)690
million on an undiscounted basis. Thus, IBNR claims up to (Pounds)1.19 billion
are either reserved or insured. T&N also has reserves for claims reported
prior to June 30, 1996. For discussion of asbestos-related liabilities and
reserves, see Notes 19 and 28 to the T&N Financial Statements and
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--T&N--Asbestos."
While management believes that existing reserves, coupled with T&N's
asbestos-related claims insurance policy, are appropriate for anticipated
losses arising from T&N's asbestos related claims, no assurance can be given
that T&N will not be subject to material additional liabilities and
significant additional litigation relating to asbestos. Any such liabilities
or litigation could have a material adverse effect on Federal-Mogul's results
of operation, business, liquidity and financial condition. See "Risk Factors--
T&N's Asbestos Liability."
Federal-Mogul and Fel-Pro Asbestos
Federal-Mogul also is one of a large number of defendants in a number of
lawsuits brought by claimants alleging injury due to exposure to asbestos. In
addition, Fel-Pro has been named as a defendant in approximately 18,000
product liability cases involving asbestos, primarily involving gasket or
packing products sold to ship owners. Federal-Mogul is defending all such
claims vigorously and believes that it and Fel-Pro have substantial defenses
to liability and adequate insurance coverage for defense costs (though Fel-Pro
has agreed with its insurers to pay approximately 20% of defense costs, in
exchange for the right to a significant role in decisions regarding the
litigation). While the outcome of litigation cannot be predicted with
certainty, after consulting with the office of Federal-Mogul's general
counsel, management believes that asbestos claims pending against Federal-
Mogul and Fel-Pro as of March 31, 1998 will not have a material effect on
Federal-Mogul's financial position.
Other
Federal-Mogul is involved in various other legal actions and claims,
directly and through its subsidiaries (including T&N and Fel-Pro). After
taking into consideration legal counsel's evaluation of such actions,
management is of the opinion that their outcomes are not reasonably likely to
have a material adverse effect on Federal-Mogul's financial position.
For information respecting lawsuits concerning environmental matters to
which Federal-Mogul is a party, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Federal-Mogul--Environmental
Matters."
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<PAGE>
MANAGEMENT
The following tables set forth the name, age and position of the executive
officers and the directors, respectively of Federal-Mogul.
<TABLE>
<CAPTION>
EXECUTIVE OFFICER AGE POSITION
----------------- --- --------
<S> <C> <C>
Richard A. Snell........... 56 Chairman, Chief Executive Officer and
President
Alan C. Johnson............ 49 Executive Vice President--Powertrain
Systems
Paul R. Lederer............ 58 Executive Vice President--Worldwide
Aftermarket
Thomas W. Ryan............. 50 Executive Vice President and Chief
Financial Officer
Wilhelm A. Schmelzer....... 57 Executive Vice President--Sealing Systems
Frank Tomes................ 55 Executive Vice President--General Products
Edward W. Gray, Jr......... 51 Senior Vice President, General Counsel and
Secretary
Alan R. Begg............... 43 Vice President--Technology
David A. Bozynski.......... 43 Vice President and Treasurer
Charles B. Grant........... 53 Vice President--Corporate Development
Richard P. Randazzo........ 54 Vice President--Human Resources
Kenneth P. Slaby........... 46 Vice President and Controller
<CAPTION>
DIRECTOR AGE
-------- ---
<S> <C> <C>
Richard A. Snell........... 56
John J. Fannon............. 64
Roderick M. Hills.......... 67
Antonio Madero............. 60
Robert S. Miller........... 56
John C. Pope............... 49
H. Michael Sekyra.......... 56
</TABLE>
Mr. Snell has served as Chairman of the Board, Chief Executive Officer and
President and a director of Federal-Mogul since November 1996. He also serves
as Chairman of the Executive and Finance Committee and as a member of the
Pension Committee. Mr. Snell was previously employed by Tenneco, Inc., from
November 1987 to November 1996, most recently having served as President and
Chief Executive Officer of Tenneco Automotive from September 1993 until he was
employed by Federal-Mogul. Mr. Snell is also a member of the Board of
Directors of Schneider National, Inc.
Mr. Begg has served as Vice President--Technology since February 1998. Prior
to this position, Mr. Begg served as Managing Director of T&N Technology and
was a member of the T&N Management Committee from 1993 to February 1998,
General Manager, Sales Director and Business Manager at BP Metal Composites
from 1991 to 1993, and Senior Research Scientist and Project Leader for
advance engineering materials development at BP Research Center from 1983 to
1988.
Mr. Bozynski has served as Vice President and Treasurer since May 1996.
Prior thereto, Mr. Bozynski was employed by Unisys Corporation as Vice
President and Assistant Treasurer from October 1994 to April 1996, Vice
President--Line of Business Finance from April 1993 to September 1993, and
Vice President--Corporate Business Analysis from March 1992 to April 1993.
Mr. Fannon has served as a director of Federal-Mogul since 1986. He is
Chairman of the Compensation Committee and a member of the Pension and the
Nominating Committees. Mr. Fannon retired in 1997 as Vice Chairman of Simpson
Paper Company, a privately held global forest products company with annual
sales exceeding $1 billion, a position that he held since 1993. From 1980
until 1993, Mr. Fannon served as President
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<PAGE>
of Simpson Paper. Previously, he was Vice President of Marketing for Simpson
Paper. He also serves as a director of Simpson Paper and Seton Medical Center.
Mr. Grant has served as Vice President--Corporate Development since December
1992. Prior to this position, Mr. Grant served as Vice President and
Controller of Federal-Mogul from May 1988 to December 1992, Vice President of
Finance, Vice President--Controller and Controller of the Fastening Systems
Group of Huck Manufacturing, and Audit Manager at Ernst & Young.
Mr. Gray has served as Senior Vice President, General Counsel and Secretary
since March 1998. Prior to this position, Mr. Gray was the managing partner
for the Washington D.C. office of Fitch, Even, Tabin, and Flannery from April
1994 to 1998, a founding partner of Gray, Blount & Associates, LLP from 1993
to 1998 and at R.R. Donnelley & Sons Company from 1986 to May 1993, where his
most recent position was Vice President--Information Services.
Mr. Hills has served as director of Federal-Mogul since 1977. He is Chairman
of the Nominating Committee and a member of the Audit, Executive and Finance,
and Pension Committees. In January 1987, Mr. Hills was named Managing
Director-Chairman of The Manchester Group Ltd., and has continued to manage
that business, which is now conducted under the name of Hills Enterprises,
Ltd. From May 1989 until June 1995, he also served successively as a partner
of and/or a consultant to the law firms of Donovan Leisure Rogovin Huge &
Schiller, Shea & Gould, and Mudge Rose Guthrie Alexander & Ferndon. Mr. Hills
is a member of the Board of Directors of Waste Management, Inc. and Oak
Industries, Inc.
Mr. Johnson has served as Executive Vice President--Powertrain Systems since
February 1998. Mr. Johnson has been with Federal-Mogul since 1970, serving as
Executive Vice President responsible for Federal-Mogul's Worldwide
manufacturing and international aftermarket operations from January 1997 to
February 1998, President--Operations from January 1995 to January 1997, Vice
President and President--Powertrain Operations--Americas from 1993 to January
1995 and Vice President and General Manager--Oil Seal Operations from 1992.
Mr. Lederer has served as Executive Vice President--Worldwide Aftermarket
since February 1998. Prior to this position, Mr. Lederer was President and
Chief Operating Officer of Fel-Pro, Incorporated. Prior to joining Fel-Pro, he
was a consultant to several automotive parts companies while serving on the
Board of Directors of Ozark/O'Reilly Automotive, Fullerton Metals and Trans-
Pro Corporation. Mr. Lederer has also served as Executive Vice President of
Stant, Chairman and Chief Executive of Epicor Industries, Incorporated,
President--Automotive Group, Group Vice President--Operations and General
Manager-Edelmann Durson at Parker Hanifin, and Executive Vice President of E.
Edelmann & Company.
Mr. Madero has served as director of Federal-Mogul since February 1994. He
is a member of the Audit, Nominating and Compensation Committees. Mr. Madero
founded SANLUIS Corporacion S.A. de C.V. ("Sanluis") and has served as its
Chairman of the Board and Chief Executive Officer since 1979. Sanluis is a
Mexican holding company with interests in gold, silver, mining and auto parts.
Mr. Madero is also a member of the Boards of Directors of Cydsa S.A., of
Cydsa, S.A. de C.V., Grupo Embotelladoras Unidas, S.A. de C.V., Alfa, S.A. de
C.V., Grupo Industrial Saltillo, S.A. de C.V., Fondo Opcion, S.A. de C.V.,
Grupo Industrial Durango, S.A. de C.V., G. Accion S.A., Grupo Financier
Banamex Accival S.A., Seguros Comercial America, S.A., Grupo Posadas, S.A. de
C.V., Banca Quadrum, S.A. de C.V., Banca Chase (Mexico) S.A., Deere and
Company and a member of the International Advisory Committee of The Chase
Manhattan Bank.
Mr. Miller has served as a Director of Federal-Mogul since 1993. He is the
Chairman of the Pension Committee and a member of the Audit and Nominating
Committees. From September until November 1996 he served as Acting Chief
Executive Officer of Federal-Mogul. Mr. Miller is Chairman of the Board and
Chief Executive Officer of Waste Management, Inc. Since 1993, Mr. Miller has
served as Vice President and Treasurer,
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<PAGE>
and as a director, of Moore Mill and Lumber Company, a privately held timber
business in Oregon. In April 1995, he was named Chairman of the Board of
Directors of Morrison Knudsen Corporation, a position he held until September
1996, when he became its Vice Chairman of the Board. In addition to Waste
Management and Morrison Knudsen, Mr. Miller also serves as a member of the
Board of Directors of Fluke Corporation, Pope & Talbot, Inc. and Symantec
Corp.
Mr. Pope has served as a director of Federal-Mogul since 1987. He is
Chairman of the Audit Committee and a member of the Compensation, Executive
and Finance, and Nominating Committees. Mr. Pope was President, Chief
Operating Officer and Director of UAL Corporation and United Air Lines from
May 1992 until July 1994. Mr. Pope was named Chairman of the Board of
MotivePower Industries, Inc. in 1995. Mr. Pope is a member of the Board of
Directors of Dollar Thrifty Automotive Group, Inc., Lamalie Associates, Inc.,
Medaphis Corporation, MotivePower Industries, Inc., Wallace Computer Services,
Inc. and Waste Management, Inc.
Mr. Randazzo has served as Vice President--Human Resources since January
1997. Prior thereto, Mr. Randazzo served as Senior Vice President--Human
Resources of Nextel Communications, Inc. from December 1994 to December 1996,
Senior Vice President--Human Resources--Americas Region of Asea Brown Boveri,
Inc. from December 1990 to December 1994, and various positions at Xerox
Corporation, including Vice President of Human Resources and the U.S.
Marketing Group.
Mr. Ryan has served as Executive Vice President since March 1998 and as
Chief Financial Officer since February 1997. Mr. Ryan joined Federal-Mogul in
February 1997 as Senior Vice President and Chief Financial Officer. Mr. Ryan
was Chief Financial Officer of Tenneco Automotive, a division of Tenneco, Inc.
from January 1995 to February 1997, and Vice President, Treasurer and
Controller of A.O. Smith Corporation from March 1985 to January 1995.
Mr. Schmelzer has served as Executive Vice President--Sealing Systems since
February 1998. Since joining Federal-Mogul in 1969, Mr. Schmelzer has served
as Vice President and Group Executive--Engine and Transmission Products from
April 1995 to February 1998, Vice President and Group Executive--Engine and
Transmission Products Europe from January 1992 to April 1995, General
Manager--Engine and Transmission Products--Americas from 1989 to 1991 and
General Manager of Manufacturing Operations in Spain and Mexico from 1987 to
1989. Mr. Schmelzer represents Federal-Mogul as Chairman of Supervisory Boards
at Federal-Mogul S.A., France and Federal-Mogul S.p.A., Italy. He has been an
Advisory Board member of Arkwright International Ltd. since May 1995.
Dr. Sekyra has served as a director of Federal-Mogul since 1991. He is a
member of the Compensation, Nominating, and Pension Committees. Dr. Sekyra, a
native of Austria, is Chairman and Chief Executive Officer of C.H. CHEM, a.s.,
the largest chemical company in the Czech Republic. He is also Chairman of
Bohler Uddeholm, one of the world's leading companies in tool and speed steel.
Dr. Sekyra holds a number of board positions in banking and industrial
enterprises.
Mr. Slaby has served as Vice President and Controller since April 1996.
Prior thereto, Mr. Slaby held various positions at General Electric Company
for 23 years, including Manager--Financial Operation for the global silicones
business from November 1990 to April 1996, Manager--Financial Operation with
GE Aircraft Electronics from March 1987 to November 1990, and Manager Finance
Section at GE Aircraft Electronics Systems Department from July 1985 to March
1987.
Mr. Tomes has served as Executive Vice President--General Products since
February 1998. Prior to this position, Mr. Tomes served as Chief Executive--
Composites and Camshafts Group of T&N plc from January 1996 to February 1998.
Prior to that he was Chief Executive of T&N's Industrial Products and
Materials Group.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information concerning the beneficial
ownership of Common Stock held by shareholders known by the Company (based on
filings with the Securities and Exchange Commission) to beneficially own in
excess of five percent of the outstanding Common Stock as of . , 1998. In
accordance with regulations promulgated by the Securities and Exchange
Commission, the table reflects for each beneficial owner the conversion of
convertible securities (convertible within 60 days after . , 1998) owned by
such beneficial owners, but, in determining the percentage ownership of such
person, does not assume the conversion of convertible securities owned by any
other person.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY OWNED SHARES BENEFICIALLY
PRIOR TO THE OWNED
OFFERINGS AFTER THE OFFERINGS
------------------ --------------------
NUMBER
NAME AND ADDRESS OF NUMBER OF
OF BENEFICIAL HOLDER SHARES PERCENT(1) SHARES PERCENT(1)
-------------------- ------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Janus Capital Corporation
100 Fillmore Street
Denver, CO 80206
The Capital Group Companies, Inc.
333 South Hope Street
Los Angeles, CA 90071
Merrill Lynch Asset Management
800 Scudders Mill Road
Plainsboro, NJ 08536
</TABLE>
- --------
(1) Percentages are calculated based on outstanding shares of Common Stock as
of . , 1998, of . shares and assume conversion of Federal-Mogul's
Series C Stock and Series E Stock.
S-62
<PAGE>
SELLING SHAREHOLDERS
The following table sets forth certain information concerning the beneficial
ownership of Common Stock held by the Selling Shareholders, as of . , 1998,
after giving effect to the Offerings and as adjusted to reflect the sale in
the Offerings of an aggregate of . shares of Common Stock.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SHARES BENEFICIALLY NUMBER SHARES BENEFICIALLY
OWNED PRIOR TO SHARES BEING OWNED AFTER
NAME THE OFFERINGS OFFERED THE OFFERINGS
---- ------------------- ------------ -------------------
<S> <C> <C> <C>
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</TABLE>
- --------
*Less than one percent
The Selling Shareholders may from time to time offer and sell pursuant to
this Prospectus and a Prospectus Supplement providing therefor, shares of
Common Stock held by such Selling Shareholder.
The . shares of Common Stock that may be offered and sold by the Selling
Shareholders were acquired by such Selling Shareholders through conversion of
Series E Stock received as part of the consideration received by them in the
Federal-Mogul acquisition of Fel-Pro. Pursuant to the Registration Rights
Agreement among Federal-Mogul and the Selling Shareholders. Federal-Mogul
shall bear all expenses incident to Federal-Mogul's performance of or
compliance with the Registration Rights Agreement, except that the Selling
Shareholders will pay all underwriting discounts and commissions relating to
their shares of Common Stock, brokerage fees, transfer taxes, and the fees and
expenses of any counsel, accountants or other representatives retained by the
Selling Shareholders, if any. The Selling Shareholders will be indemnified by
Federal-Mogul against certain liabilities, including certain liabilities under
the Securities Act, or will be entitled to contribution in connection
therewith.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following statements are summaries of certain provisions of Federal-
Mogul's Restated Articles of Incorporation (the "Articles of Incorporation")
and Bylaws and of the Rights Agreement, dated as of November 3, 1988, as
amended, between Federal-Mogul and The Bank of New York, as Rights Agent (the
"Rights Agreement"). Such summaries do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, all of the
provisions of the Restated Articles of Incorporation, the Bylaws and the
Rights Agreement, including definitions therein of certain terms.
AUTHORIZED CAPITAL STOCK
Federal-Mogul's authorized capital stock consists of 5,000,000 shares of
preferred stock, which is issuable in series, and 260,000,000 shares of Common
Stock. At . , 1998, Federal-Mogul had outstanding . shares of Series C ESOP
Convertible Preferred Stock and . shares of Common Stock. At . , 1998, of
1,500,000 shares of Common Stock authorized in 1984 under Federal-Mogul's
incentive stock plans, an aggregate of . shares remained issuable: of
2,300,000 shares authorized in 1989, an aggregate of . shares remained
issuable, and of 1,300,000 shares authorized in 1997, an aggregate of .
shares remained issuable. See "--Incentive Stock Plans."
COMMON STOCK
The holders of Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. The holders of Common Stock are entitled to one vote per
share on all matters submitted to a vote of shareholders and do not have
cumulative voting rights. Holders of Common Stock are entitled to receive,
upon any liquidation of Federal-Mogul, all remaining assets available for
distribution to shareholders after satisfaction of Federal-Mogul's liabilities
and the preferential rights of any preferred stock that may then be issued and
outstanding. The outstanding shares of Common Stock are, and the Shares
offered hereby will be, fully paid and nonassessable. The Common Stock is
listed on the NYSE. The holders of Common Stock have no preemptive, conversion
or redemption rights. The registrar and transfer agent for the Common Stock is
The Bank of New York.
PREFERRED SHARE PURCHASE RIGHTS
In 1988, Federal-Mogul's Board of Directors authorized the distribution of
one Preferred Share Purchase Right (a "Right") for each outstanding share of
Common Stock. Each Right entitles the holder thereof to buy one-half of one
one-hundredth of a share of Series B Junior Participating Preferred Stock at a
price of $70.00. The Rights are governed by the Rights Agreement.
As distributed, the Rights trade together with the Common Stock. They may be
exercised or traded separately only after the earlier to occur of: (i) 10 days
following a public announcement that a person or group of persons has obtained
the right to acquire 10% or more of the outstanding Common Stock (20% in the
case of certain institutional investors), or (ii) 10 business days (or such
later date as may be determined by action of the Board of Directors) following
the commencement or announcement of an intent to make a tender offer or
exchange offer which would result in beneficial ownership by a person or group
of persons of 10% or more of the outstanding Common Stock. If the acquiring
person or group of persons acquires 10% or more of the Common Stock, each
Right (other than those held by the acquirer) will entitle its holder to
purchase, at the Right's exercise price, shares of Common Stock having a
market value of twice the Right's exercise price. Additionally, if Federal-
Mogul is acquired in a merger or other business combination, each Right (other
than those held by the surviving or acquiring company) will entitle its holder
to purchase, at the Right's exercise price, shares of the acquiring company's
stock (or Common Stock of Federal-Mogul if it is the surviving corporation)
having a market value of twice the Right's exercise price.
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<PAGE>
Rights may be redeemed at the option of the Board of Directors for $0.005
per Right at any time before a person or group or persons acquires 10% or more
of Federal-Mogul's Common Stock. The Board may amend the Rights at any time
without shareholder approval. The Rights will expire by their terms on
November 14, 1998.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire Federal-
Mogul in a manner that causes the Rights to become exercisable. Federal-Mogul
believes, however, that the Rights would neither affect any prospective
offeror willing to negotiate with the Board of Directors of Federal-Mogul nor
interfere with any merger or other business combination approved by the Board
of Directors.
SERIES C ESOP CONVERTIBLE PREFERRED STOCK
In February, 1989, Federal-Mogul established an Employee Stock Ownership
Plan (the "ESOP") and issued 1,000,000 shares of Series C ESOP Convertible
Preferred Stock ("Series C Stock") to the ESOP, of which . shares were
outstanding at . , 1998. Such shares bear a dividend of $4.78125 per share
per annum, subject to certain adjustments. The share of Series C ESOP
Convertible Preferred Stock are convertible into shares of Common Stock at a
rate of two shares of Common Stock per share, subject to adjustment. The
Series C Stock may be issued only to a trustee acting on behalf of an employee
stock ownership plan or other employee benefit plan of Federal-Mogul and will
be automatically converted into shares of Common Stock in the event of any
transfer to a person other than such trustee. Such Series C Stock shares
provide for a liquidation preference of $63.75 per share plus accrued and
unpaid dividends. The Series C Stock is redeemable, in whole or in part, at
the option of Federal-Mogul at a redemption price per share currently equal to
100.75% of the liquidation preference, declining to 100% of the liquidation
preference on and after January 1, 1999, plus, in each case, accrued and
unpaid dividends. Holders of the Series C Stock have full voting rights and
generally vote together with the Common Stock as one class, each share of the
Series C Stock having such number of votes as equals the number of shares of
Common Stock into which such share could be converted on the record date for
determining the shareholders entitled to vote, or currently two votes per
share; the shares of the Series C Stock are entitled to vote separately on
certain matters. The shares of the Series C Stock are not subject to any
sinking fund provisions and have no preemptive rights. The shares of the
Series C Stock rank senior to Common Stock as to the payment of dividends and
distribution of assets on liquidation, dissolution and winding up of Federal-
Mogul.
In the event that Federal-Mogul is unable to pay dividends on the Series C
Stock, Federal-Mogul is required, pursuant to the terms of the ESOP, to make a
contribution to the ESOP to satisfy the then current debt service requirements
of the ESOP Note (which obligation is fully reflected in long-term debt on
Federal-Mogul's balance sheet). See "Capitalization."
SERIES E MANDATORY EXCHANGEABLE PREFERRED STOCK
On February 24, 1998, Federal-Mogul issued 1,030,325.6 shares of Series E
Mandatory Exchangeable Preferred Stock ("Series E Stock") to holders of equity
interests in the Fel-Pro entities as partial compensation for the acquisition
thereof. All of the shares of Series E Stock were outstanding as of . ,
1998. Federal-Mogul and the holders thereof have contractually agreed that .
shares of Series E Stock will be converted at the time of the offering and the
resulting Common Stock will be included in the Offerings, resulting in a
reduction in the number of Series E Stock outstanding to . shares. See
"Underwriting."
The shares of Series E Stock are mandatorily exchangeable into shares of
Common Stock at a rate of five shares of Common Stock for each share of Series
E Stock (representing an aggregate of 5,151,628 shares of Common Stock),
subject to adjustment, upon the earlier of (i) the fifteenth day after holders
of two-thirds of the outstanding Series E Stock have requested such exchange,
(ii) the effective date of a registration statement filed at the request of
holders of a majority of the Series E Stock pursuant to the registration
rights agreement Federal-Mogul executed for the benefit of holders of Series E
Stock and (iii) February 24, 1999.
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<PAGE>
Shares of Series E Stock bear a fully cumulative dividend of $2.40 per share
per annum, payable quarterly in arrears, subject to increase to $14.35 per
share per annum if shares of Series E Stock remain outstanding after February
24, 1999, increasing by $2.05 each month thereafter to $26.65 per share per
annum as of August 24, 1999, subject to certain adjustments. The first
scheduled quarterly dividend, due March 31, 1998, was paid to the holders of
Series E Stock. Holders of the Series E Stock have no voting rights through
February 24, 1999, after which they have full voting rights and generally vote
together with the Common Stock as one class, each share of the Series E Stock
having such number of votes as equals the number of shares of Common Stock
into which such share could be converted on the record date for determining
the shareholders entitled to vote, currently five votes per share. The shares
of the Series E Stock are not subject to any sinking fund or redemptive
provisions and have no preemptive rights. The shares of the Series E Stock
rank senior to Common Stock as to the payment of dividends and in parity to
Common Stock as to distribution of assets on liquidation, dissolution and
winding up of Federal-Mogul.
The holders of a majority of the Common Shares into which the Series E Stock
is convertible or has been converted may, upon no more than three occasions,
request registration of all or part of such shares of Common Stock at any time
after January 1, 1999, provided that the Restated Articles of Incorporation
have been amended to authorize additional shares of Common Stock for issuance.
Such rights terminate at any point at which there are fewer than 3,000,000
shares of Common Stock eligible for such registration and such shares may be
sold without restriction pursuant to Rule 144(k) under the Securities Act of
1933. The holders initiating the demand registration may elect whether the
offering of the relevant shares upon registration shall be in the form of a
firm commitment underwritten offering or otherwise (subject to certain
restrictions, such as a determination by the underwriter of an offering that
inclusion of the requested shares would adversely affect the marketability of
the Common Stock).
CERTAIN PROVISIONS
The Articles of Incorporation and Bylaws of Federal-Mogul and the Rights
Agreement contain provisions, summarized below, that could have the effect of
delaying, deterring or preventing a change of control of Federal-Mogul. This
summary does not purport to be complete and is subject to, and qualified in
its entirety by, the provisions of the Restated Articles of Incorporation and
Bylaws and the Rights Agreement.
FEDERAL-MOGUL'S ARTICLES OF INCORPORATION
Federal-Mogul's Articles of Incorporation provide that the approval of a
business combination (as defined below) requires (in addition to any other
vote that may be required) the affirmative vote of at least a majority of the
outstanding shares of preferred stock entitled to vote thereon and Common
Stock, voting as a single class. In addition, (a) where the Articles of
Incorporation require the approval of the holder of the preferred stock or one
or more series thereof considered as a separate class, such business
combination shall also require the affirmative vote of at least a majority of
the outstanding shares of the preferred stock of such series thereof
considered as a separate class that are not owned by an Interested Shareholder
(as defined below) and (b) where applicable law requires that a transaction be
approved by any class or series of Federal-Mogul's stock or any combination
thereof considered as a single class, such transaction shall also require the
affirmative vote of at least a majority of the shares of each such class or
series or combination considered as a single class that are not owned by the
Interested Shareholder.
The voting requirements set forth in the previous paragraph shall not apply
to any business combination if (a) Federal-Mogul's Board of Directors includes
at least one member who was a duly elected and acting member of the Board of
Directors (each being a "Disinterested Director") prior to the time when the
Interested Shareholder (as hereinafter defined) involved became an Interested
Shareholder and such business combination has been approved by a majority of
the Disinterested Directors and by a majority of the entire Board of
Directors, (b) the aggregate amount of the cash and the fair market value of
consideration other than cash to be received
S-66
<PAGE>
per share by holders of Common Stock in such business combination shall be at
least equal to the Specified Price (as defined below) or (c) such business
combination has been unanimously approved by the Board of Directors and the
Board has, in the faithful exercise of its fiduciary duties to the holders of
Common Stock, unanimously and expressly determined that the aggregate amount
of the cash and the fair market value of the consideration other than cash to
be received per share by holders of Common Stock in such business combination,
although less than the Specified Price, is nonetheless fair to all holders of
Common Stock.
As used above:
"business combination" means (a) any merger or consolidation of Federal-
Mogul and any subsidiary with or into any Interested Shareholder or any
corporation which after such merger or consolidation would be an affiliate
of an Interested Shareholder, (b) any sale lease exchange, mortgage,
pledge, transfer or other disposition to any Interested Shareholder or its
affiliate of assets of Federal-Mogul or any subsidiary having a fair market
value of $1 million or more (except in the ordinary course of business and
on an arm's-length basis), (c) the issuance or transfer by Federal-Mogul or
any subsidiary (in one transaction or a series of related transactions) of
any securities of Federal-Mogul or a subsidiary to any Interested
Shareholder or its affiliate for cash, securities or property having a fair
market value of $1 million or more, (d) the adoption of any plan or
proposal for the liquidation or dissolution of Federal-Mogul as a result of
which any Interested Shareholder or its affiliate would receive any assets
of Federal-Mogul other than cash or (e) any reclassification of securities
(including any reverse stock split) or recapitalization of Federal-Mogul or
merger or consolidation of Federal-Mogul with any subsidiary or any similar
transaction (whether or not with an Interested Shareholder) which has the
effect, directly or indirectly, of increasing the proportion of outstanding
shares of any equity security of Federal-Mogul or a subsidiary directly
owned by an Interested Shareholder or its affiliate.
"Interested Shareholder" means a person who on the record date for
determining the shareholders entitled to vote on a business combination is
(a) the beneficial owner of 10% or more of the outstanding shares of Common
Stock, (b) an affiliate of Federal-Mogul and within two years prior to such
record date beneficially owned 10% or more of the then outstanding shares
of Common Stock or (c) an assignee or other successor to any shares of
capital stock of Federal-Mogul which were within two years prior thereto
beneficially owned by an Interested Shareholder and such assignment or
succession shall have occurred in one or more transactions not involving a
public offering.
"Specified Price" means the highest of (a) the highest per share price
paid or agreed to be paid by such Interested Shareholder to acquire
beneficial ownership of any shares of Common Stock within the two-year
period prior to the consummation of the business combination; (b) the per
share book value of the Common Stock at the end of the fiscal month
immediately preceding the consummation of such business combination; and
(c) if the Common Stock of the Interested Shareholder is publicly traded,
the price per share equal to the earnings per share of Common Stock for the
four full consecutive fiscal quarters immediately preceding the record date
for solicitation of votes on such business combination (or, if votes are
not solicited on such business combination, immediately preceding the
consummation of such business combination) multiplied by the ratio (if any)
of the highest published sale price of the Interested Shareholder's Common
Stock during its four fiscal quarters immediately preceding such date, to
the earnings per share of Common Stock of the Interested Shareholder for
such four fiscal quarters.
FEDERAL-MOGUL'S BYLAWS
Federal-Mogul's Bylaws contain provisions that govern nominations of
directors by shareholders and presentation of business by shareholders for
consideration at the annual meeting of shareholders. Generally, a shareholder
must give notice of such nomination or business within 60 to 90 days prior to
such meeting, giving specified information as to the shareholder and as to the
person nominated and the business proposed to be brought before the meeting.
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<PAGE>
INCENTIVE STOCK PLANS
Federal-Mogul's shareholders adopted Stock Option Plans in 1976 and 1984 and
a Performance Incentive Stock Plan in 1989, and the holders of Common Stock
and Series C Stock adopted a Long Term Incentive Plan in 1997. These plans
provide generally for granting options to purchase shares of the Common Stock.
Restricted shares may be awarded under the 1989 Plan and entitle employees to
all the rights of Common Stock shareholders, subject to certain transfer
restrictions or forfeitures. Options entitle employees to purchase shares at
an exercise price not less than 100% of the fair market value of the shares on
the grant date.
The 1989 Performance Incentive Stock Plan and the 1997 Long Term Incentive
Plan additionally provide for the granting of performance unit awards
("PUA's") to eligible employees. These awards may be granted in the form of
Common Stock or units, the value of which are based on the market value of the
Common Stock. PUA's must relate to certain performance criteria established by
the Compensation Committee of the Board of Directors and are awarded on terms
and conditions fixed by the Committee on the date of grant. At . ,
1998 . PUA's had been granted.
TRUST PREFERRED SECURITIES
In December 1997, Federal-Mogul's wholly-owned financing trust ("Affiliate")
completed a $575 million private issue of 11.5 million shares of 7.0% Trust
Convertible Preferred Securities ("TCP Securities") with a liquidation value
of $50 per convertible security. The net proceeds from the TCP Securities were
used to purchase an equal amount of 7.0% Convertible Junior Subordinate
Debentures ("Debentures") of Federal-Mogul. The TCP Securities represent an
undivided interest in the Affiliate's assets, with a liquidation preference of
$50 per security. Distribution on the TCP Securities are cumulative and will
be paid quarterly in arrears at an annual rate of 7.0%, and are included in
the consolidated statement of operations as a component of Other Expense, Net.
The Company has the option to defer payment of the distributions for an
extension period of up to 20 consecutive quarters if Federal-Mogul is in
compliance with the terms of the TCP Securities.
The TCP Securities are convertible, at the option of the holder, into
Federal-Mogul Common Stock at an initial conversion rate of .9709 shares of
Common Stock per TCP Security (an aggregate of 11,165,049 shares of Common
Stock), subject to adjustment in certain circumstances. The TCP Securities and
the Debentures will be redeemable, at the option of Federal-Mogul, on or after
December 6, 2000 at a Redemption Price, expressed as a percentage of principal
which is added to accrued and unpaid interest. The Redemption Price range is
from 104.2% on December 6, 2000 to 100.0% after December 1, 2007. All
outstanding TCP Securities and Debentures are required to be redeemed by
December 1, 2027. At . , 1998, . Convertible Preferred Securities were
outstanding.
CERTAIN UNITED STATES TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Common
Stock by a person that, for United States federal income tax purposes, is a
nonresident alien individual or foreign corporation (a "non-U.S. holder"). The
discussion does not consider specific facts and circumstances that may be
relevant to a particular non-U.S. holder's tax position. Accordingly, each
non-U.S. holder is urged to consult its own tax advisor with respect to the
United States tax consequences of the ownership and disposition of Common
Stock, as well as any tax consequences that may arise under the laws of any
state, municipality, foreign country or other taxing jurisdiction.
DIVIDENDS
Dividends paid to a non-U.S. holder of Common Stock ordinarily will be
subject to withholding of United States federal income tax at a 30 percent
rate, or at a lower rate under an applicable income tax treaty that provides
for a reduced rate of withholding. However, if the dividends are effectively
connected with the conduct
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by the holder of a trade or business within the United States, then the
dividends will be exempt from the withholding tax described above and instead
will be subject to United States federal income tax on a net income basis.
GAIN ON DISPOSITION OF COMMON STOCK
A non-U.S. holder generally will not be subject to United States federal
income tax in respect of gain realized on a disposition of Common Stock,
provided that (a) the gain is not effectively connected with a trade or
business conducted by the non-U.S. holder in the United States and (b) in the
case of a non-U.S. holder who is an individual and who holds the Common Stock
as a capital asset, such holder is present in the United States for less than
183 days in the taxable year of the sale and other conditions are met.
FEDERAL ESTATE TAXES
Common Stock owned or treated as being owned by a non-U.S. holder at the
time of death will be included in such holder's gross estate for United States
federal estate tax purposes, unless an applicable estate tax treaty provides
otherwise.
U.S. INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
U.S. information reporting requirements and backup withholding tax will not
apply to dividends paid on Common Stock to a non-U.S. holder at an address
outside the United States, except that with respect to payments made after
December 31, 1999, a non-U.S. holder will be entitled to such an exemption
only if it provides a Form W-8 (or satisfies certain documentary evidence
requirements for establishing that it is a non-United States person) or
otherwise establishes an exemption. As a general matter, information reporting
and backup withholding also will not apply to a payment of the proceeds of a
sale of Common Stock effected outside the United States by a foreign office of
a foreign broker. However, information reporting requirements (but not backup
withholding) will apply to a payment of the proceeds of a sale of Common Stock
effected outside the United States by a foreign office of a broker if the
broker (i) is a U.S. person, (ii) derives 50 percent or more of its gross
income for certain periods from the conduct of a trade or business in the
United States, (iii) is a "controlled foreign corporation" as to the United
States or (iv) with respect to payments made after December 31, 1999, a
foreign partnership that, at any time during its taxable year is 50% or more
(by income or capital interest) owned by U.S. persons or is engaged in the
conduct of a U.S. trade or business, unless the broker has documentary
evidence in its records that the holder is a non-U.S. holder and certain
conditions are met, or the holder otherwise establishes an exemption. Payment
by a United States office of a broker of the proceeds of a sale of Common
Stock will be subject to both backup withholding and information reporting
unless the holder certifies its non-United States status under penalties of
perjury or otherwise establishes an exemption.
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<PAGE>
[U.S. AND CANADA]
UNDERWRITING
Subject to the terms and conditions set forth in the United States Purchase
Agreement (the "U.S. Purchase Agreement") among Federal-Mogul, the Selling
Shareholders and each of the Underwriters named below (the "U.S.
Underwriters"), and concurrently with the sale of . shares of Common Stock
to the International Managers (as defined below), Federal-Mogul and the
Selling Shareholders severally have agreed to sell to each of the U.S.
Underwriters, and each of the U.S. Underwriters severally has agreed to
purchase, the aggregate number of shares of Common Stock set forth opposite
its name below:
<TABLE>
<CAPTION>
NUMBER
U.S. UNDERWRITERS OF SHARES
----------------- ---------
<S> <C>
[ ].................................................
[ ].................................................
[ ].................................................
-------
Total.......................................................
=======
</TABLE>
Federal-Mogul and the Selling Shareholders have also entered into an
International Purchase Agreement (the "International Purchase Agreement" and,
together with the U.S. Purchase Agreement, the "Purchase Agreements") with
certain underwriters outside the United States and Canada (the "International
Managers" and, together with the U.S. Underwriters, the "Underwriters").
Subject to the terms and conditions set forth in the International Purchase
Agreement, and concurrently with the sale of . shares of Common Stock to the
U.S. Underwriters pursuant to the U.S. Purchase Agreement, Federal-Mogul and
the Selling Shareholders severally have agreed to sell to the International
Managers, and the International Managers severally have agreed to purchase, an
aggregate of . shares of Common Stock. The offering price per share and the
total underwriting discount per share are identical under the U.S. Purchase
Agreement and the International Purchase Agreement.
In each Purchase Agreement, the several U.S. Underwriters and the several
International Managers, respectively, have agreed, subject to the terms and
conditions set forth in such Purchase Agreement, to purchase all of the shares
of Common Stock being sold pursuant to such Purchase Agreement if any of such
shares of Common Stock being sold pursuant to such Purchase Agreement are
purchased. Under certain circumstances, the commitments of non-defaulting U.S.
Underwriters or International Managers (as the case may be) may be increased.
The sale of Common Stock to the U.S. Underwriters is conditioned upon the sale
of shares of Common Stock to the International Managers, and vice versa.
The U.S. Underwriters and the International Managers have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for
the coordination of their activities. Pursuant to the Intersyndicate
Agreement, the Underwriters are permitted to sell shares of Common Stock to
each other for purposes of resale at the public offering price set forth on
the cover page of this Prospectus Supplement, less an amount not greater than
the selling concession. Under the terms of the Intersyndicate Agreement, the
U.S. Underwriters and any dealer to whom they sell shares of Common Stock will
not offer to sell or sell shares of Common Stock to persons who are non-U.S.
or non-Canadian persons or to persons they believe intend to resell to persons
who are non-U.S. or non-Canadian persons, and the International Managers and
any dealer to whom they sell shares of Common Stock will not offer to sell or
sell shares of Common Stock to U.S. persons or Canadian persons or to persons
they believe intend to resell to U.S. persons or Canadian persons, except, in
each case, for transactions pursuant to the Intersyndicate Agreement.
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The U.S. Underwriters have advised Federal-Mogul and the Selling
Shareholders that the U.S. Underwriters propose initially to offer the shares
of Common Stock to the public at the public offering price set forth on the
cover page of this Prospectus Supplement and to certain dealers at such price
less a concession not in excess of $ . per share of Common Stock. The U.S.
Underwriters may allow, and such dealers may reallow, a discount not in excess
of $ . per share of Common Stock on sales to certain other dealers. After the
public offering, the public offering price, concession and discount may be
changed.
Federal-Mogul has granted an option to the U.S. Underwriters, exercisable
during the 30-day period after the date of this Prospectus Supplement, to
purchase up to an additional . shares of Common Stock at the public offering
price set forth on the cover page hereof, less the underwriting discount. The
U.S. Underwriters may exercise this option only to cover over-allotments, if
any, made on the sale of shares of Common Stock offered hereby. To the extent
that the U.S. Underwriters exercise this option, each U.S. Underwriter will be
obligated, subject to certain conditions, to purchase approximately the number
of additional shares of Common Stock proportionate to such U.S. Underwriters'
initial amount reflected in the foregoing table. Federal-Mogul has also
granted an option to the International Managers, exercisable during the 30-day
period after the date of this Prospectus Supplement, to purchase up to an
additional . shares of Common Stock to cover over-allotments, if any, on terms
similar to those granted to the U.S. Underwriters.
Federal-Mogul and the Selling Shareholders have agreed that, except under
certain circumstances, they will not, directly or indirectly, for a period of
. days following the date of the Prospectus Supplement, except with the
prior consent of . , on behalf of the Underwriters, sell, offer to sell,
grant any option for the sale of, or otherwise dispose of, any Common Stock,
except that Federal-Mogul may issue Common Stock or options for shares of
Common Stock issued pursuant to or sold in connection with any employee
benefit plan.
Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the U.S. Underwriters and certain selling
group members to bid for and purchase the Common Stock. As an exception to
these rules, the U.S. Underwriters are permitted to engage in certain
transactions that stabilize the price of the Common Stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Common Stock.
If the U.S. Underwriters create a short position in the Common Stock in
connection with the Offerings (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus Supplement), the U.S.
Underwriters may reduce that short position by purchasing Common Stock in the
open market. The U.S. Underwriters may also elect to reduce any short position
through the exercise of all or part of the over-allotment option described
above. In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases.
Neither Federal-Mogul nor the U.S. Underwriters make any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither Federal-Mogul nor the Underwriters make any representation
that the Underwriters will engage in such transactions or that such
transactions, once commenced, will not be discontinued without notice.
Federal-Mogul and the Selling Shareholders have agreed to indemnify the U.S.
Underwriters and the International Managers, Federal-Mogul has agreed to
indemnify certain Selling Shareholders, and such Selling Shareholders have
agreed to indemnify Federal-Mogul, in each case against certain liabilities,
including liabilities under the Securities Act.
S-71
<PAGE>
LEGAL MATTERS
The validity of the Common Stock being offered hereby will be passed upon
for Federal-Mogul by David M. Sherbin, Esq., Associate General Counsel of
Federal-Mogul. Mr. Sherbin owns and holds options to purchase approximately
. shares of Common Stock of Federal-Mogul. Certain legal matters in
connection with the Offerings will be passed upon for Federal-Mogul by Cleary,
Gottlieb, Steen & Hamilton, New York, New York, and for the Underwriters by
Sidley & Austin, Chicago, Illinois and Sachnoff & Weaver Ltd., Chicago,
Illinois.
EXPERTS
The Federal-Mogul Audited Financial Statements contained herein have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon included therein and contained herein. Such consolidated
financial statements and schedules audited by Ernst & Young LLP are contained
herein in reliance on such reports given upon the authority of such firm as
experts in accounting and auditing.
The T&N Financial Statements contained herein have been audited by KPMG
Audit Plc, independent auditors, as set forth in their reports thereon
included herein. Such consolidated financial statements and schedules audited
by KPMG Audit Plc are included herein in reliance on their report given on
their authority as experts in accounting and auditing.
The Fel-Pro Financial Statements contained herein have been audited by Ernst
& Young LLP, independent auditors, as set forth in their report thereon
included therein and contained herein. Such financial statements audited by
Ernst & Young LLP are contained herein in reliance on such report given upon
the authority of such firm as experts in accounting and auditing.
S-72
<PAGE>
PROSPECTUS
$ .
FEDERAL MOGUL CORPORATION
DEBT SECURITIES, PREFERRED STOCK AND COMMON STOCK
Federal-Mogul Corporation, a Michigan corporation ("Federal-Mogul" or the
"Company"), may offer and sell from time to time, in one or more series, (i)
its debt securities, consisting of debentures, notes and/or other evidences of
indebtedness representing unsecured obligations of Federal-Mogul (the "Debt
Securities"), (ii) shares of its preferred stock, no par value per share
("Preferred Stock"), and (iii) shares of its common stock, no par value per
share ("Common Stock"). The Selling Shareholders (as defined herein) may offer
and sell up to an aggregate of shares of . Common Stock. See "Plan of
Distribution." Debt Securities, Preferred Stock and Common Stock are herein
collectively referred to as the "Securities."
Certain specific terms of the particular Securities in respect of which this
Prospectus is being delivered will be set forth in an accompanying supplement
to this Prospectus (the "Prospectus Supplement"), which will describe, without
limitation and where applicable, the following: (i) in the case of Debt
Securities, the specific designation, aggregate principal amount, ranking as
senior or subordinated Debt Securities, denomination, maturity, premium, if
any, interest rate (which may be fixed or variable), time and method of
calculating interest, if any, place or places where principal of, premium, if
any, and interest, if any, on such Debt Securities will be payable, the
currencies or currency units in which principal of, premium, if any, and
interest, if any, on such Debt Securities will be payable, any terms of
redemption or conversion, any sinking fund provisions, the purchase price, any
listing on a securities exchange, any right of Federal-Mogul to defer payment
of interest on the Debt Securities and the maximum length of such deferral
period and other special terms; (ii) in the case of Preferred Stock, the
specific designation, stated value and liquidation preference per share and
number of shares offered, the purchase price, dividend rate (which may be
fixed or variable), method of calculating payment of dividends, place or
places where dividends on such Preferred Stock will be payable, any terms of
redemption, dates on which dividends shall be payable and dates from which
dividends shall accrue, any listing on a securities exchange, voting and other
rights, including conversion or exchange rights, if any, and other special
terms; and (iii) in the case of Common Stock, the number of shares offered,
the initial offering price, market price and dividend information.
The offering price to the public of the Securities will be limited to U.S.
$ . in the aggregate (or its equivalent (based on the applicable exchange
rate at the time of issue), if Securities are offered for consideration
denominated in one or more foreign currencies or currency units as shall be
designated by Federal-Mogul). The Debt Securities may be denominated in United
States dollars or, at the option of Federal-Mogul if so specified in the
applicable Prospectus Supplement, in one or more foreign currencies or
currency units. The Debt Securities may be issued in registered form or bearer
form, or both. If so specified in the applicable Prospectus Supplement,
Securities of one or more classes or series may be issued in whole or in part
in the form of one or more temporary or permanent global securities.
The Common Stock is listed on the New York Stock Exchange under the trading
symbol "FMO."
The Securities may be sold to or through underwriters, through dealers or
agents or directly to purchasers. See "Plan of Distribution." The names of any
underwriters, dealers or agents involved in the sale of the Securities in
respect of which this Prospectus is being delivered and any applicable fee,
commission or discount arrangements with them will be set forth in a
Prospectus Supplement. See "Plan of Distribution" for possible indemnification
arrangements for dealers, underwriters and agents.
The Selling Shareholders will receive the net proceeds from the sale of
shares of Common Stock by the Selling Shareholders and will pay all
underwriting discounts, selling commissions and transfer taxes, if any,
applicable to any such sale. Federal-Mogul is responsible for payment of all
other expenses incident to the registration of the shares of Common Stock. The
Selling Shareholders and any broker-dealers, agents or underwriters that
participate in the distribution of the Common Stock sold by the Selling
Shareholders may be deemed "underwriters" within the meaning of the Securities
Act, and any commission received by them and any profit on the resale of the
shares of Common Stock purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. See "Plan of Distribution"
for a description of certain indemnification arrangements.
This Prospectus may not be used to consummate sales of Securities unless
accompanied by a Prospectus Supplement.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is . , 1998.
<PAGE>
AVAILABLE INFORMATION
Federal-Mogul is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The Registration
Statement on Form S-3 (together with all amendments and exhibits thereto, the
"Registration Statement") under the Securities Act of which this Prospectus
forms a part, as well as such reports, proxy statements and other information
filed by Federal-Mogul with the Commission, can be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices in Chicago, Citicorp Center, Suite 1400, 500
West Madison Street, Chicago, Illinois 60661-2511, and in New York, 7 World
Trade Center, 13th Floor, New York, New York 10048. Copies of such material
can be obtained by mail from the Public Reference Section of the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates and such material is contained on the worldwide web site
maintained by the Commission at http://www.sec.gov. Reports, proxy statements
and other information concerning Federal-Mogul can be inspected at the offices
of the New York Stock Exchange, Inc. (the "NYSE"), 20 Broad Street, New York,
New York 10005.
Federal-Mogul has filed the Registration Statement with the Commission in
Washington, D.C. with respect to the Securities offered hereby. This
Prospectus constitutes a part of the Registration Statement and does not
contain all the information set forth therein, certain portions of which have
been omitted as permitted by the rules and regulations of the Commission. Any
statements contained herein concerning the provisions of any contract or other
document are not necessarily complete and, in each instance, reference is made
to the copy of such contract or other document filed as an exhibit to the
Registration Statement or otherwise filed with the Commission. Each such
statement is qualified in its entirety by such reference. For further
information regarding Federal-Mogul and the securities offered hereby,
reference is made to the Registration Statement and to the exhibits thereto.
2
<PAGE>
THE COMPANY
Federal-Mogul, founded in 1899, is a global manufacturer and distributor of
a broad range of vehicular components for automobiles and light trucks, heavy
duty trucks, farm and construction vehicles and industrial products. Such
parts include powertrain systems components (primarily bearings and piston
products), sealing system components (dynamic seals and gaskets) and general
products (primarily friction products, sintered products, camshafts and
systems protection products). Federal-Mogul's principal customers include many
of the world's major original equipment ("OE") manufacturers of automobiles,
light trucks, heavy duty trucks, farm and construction vehicles and industrial
products. Federal-Mogul also manufactures and supplies its products and
related parts to the aftermarket (the market for replacement parts) relating
to each of these categories of equipment.
On February 24, 1998, Federal-Mogul acquired Fel-Pro, Incorporated and
certain affiliated entities ("Fel-Pro"), a group of privately-owned automotive
parts manufacturers for total consideration of $717 million. Fel-Pro is a
premier gasket manufacturer for the North American aftermarket and OE heavy
duty market. On March 6, 1998, Federal-Mogul acquired the share capital of T&N
plc ("T&N"), a U.K. based supplier of engine and transmission products, for
total consideration of approximately (Pounds)1.5 billion ($2.4 billion). T&N
manufactures and supplies high technology engineered automotive components and
industrial materials including pistons, friction products, bearings, systems
protection, camshafts and sealing products.
Federal-Mogul operated facilities at over 240 manufacturing locations in 24
countries. On a pro forma basis (giving effect to the acquisitions of T&N and
Fel-Pro and the disposition of the T&N Bearings Business as if they had
occurred on January 1, 1997), Federal-Mogul's total sales for 1997 were $4.8
billion.
Federal-Mogul is a Michigan corporation with its principal executive offices
located at 26555 Northwestern Highway, Southfield, Michigan 48034. The
telephone number of those offices is (248) 354-7700.
RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDENDS
The following table sets forth Federal-Mogul's ratios of earnings to fixed
charges and earnings to fixed charges and preferred stock dividends for each
year in the five-year period ended December 31, 1997.
RATIO OF EARNINGS TO FIXED CHARGES(1):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
THREE MONTHS --------------------------------
ENDED MARCH 31, 1998 1997 1996 1995 1994 1993
-------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Actual....................... 3.3x N/A(4) N/A(5) 4.3x 2.7x
Pro forma(2).................
Supplemental pro forma(3)....
</TABLE>
RATIO OF EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS(1):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
THREE MONTHS --------------------------------
ENDED MARCH 31, 1998 1997 1996 1995 1994 1993
-------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Actual....................... 2.9x N/A(4) N/A(5) 3.1x 2.2x
Pro forma(2).................
Supplemental pro forma(3)....
</TABLE>
- --------
(1) Federal-Mogul guarantees the debt of the Federal-Mogul Employee Stock
Ownership Plan ("ESOP"); the fixed charges of the ESOP are not included in
the above calculations.
(2) To give effect to the reduction in interest expense due to the
refinancing.
(3) To give effect to the reduction in interest expense due to the refinancing
and the net effect of the T&N and Fel-Pro acquisitions as reflected in the
pro forma statement of operations included in the prospectus.
(4) Not applicable as 1996 earnings were inadequate to cover fixed charges by
$173.0 million.
(5) Not applicable as 1995 earnings were inadequate to cover fixed charges by
$53.4 million.
3
<PAGE>
The ratio of earnings to fixed charges has been computed by dividing
earnings by fixed charges. The ratio of earnings to combined fixed charges and
preferred stock dividends has been computed by dividing earnings by the sum of
fixed charges and preferred stock dividend requirements. Earnings consist of
income before income taxes plus fixed charges excluding capitalized interest.
Fixed charges consist of interest on all indebtedness, amortization of debt
issuance costs and the portion of rental expense representative of interest.
USE OF PROCEEDS
Unless otherwise indicated in the accompanying Prospectus Supplement, the
net proceeds received by Federal-Mogul from the sale of the Securities offered
hereby are expected to be used for general corporate purposes. Any specific
allocation of the proceeds to a particular purpose that has been made at the
date of any Prospectus Supplement will be described therein. Federal-Mogul
will not receive any proceeds from the sale of shares of Common Stock by any
Selling Shareholder.
DESCRIPTION OF DEBT SECURITIES
The Debt Securities offered hereby, consisting of notes, debentures and
other evidences of indebtedness, are to be issued in one or more series
constituting either senior Debt Securities ("Senior Debt Securities") or
subordinated Debt Securities ("Subordinated Debt Securities"). Unless
otherwise specified in the applicable Prospectus Supplement, the Debt
Securities will be issued pursuant to indentures described below (as
applicable, the "Senior Indenture" or the "Subordinated Indenture," each, an
"Indenture" and, together, the "Indentures"), in each case between Federal-
Mogul and the trustee identified therein (the "Trustee"), the forms of which
have been filed as exhibits to the Registration Statement of which this
Prospectus forms a part. Except for the subordination provisions of the
Subordinated Indenture, for which there are no counterparts in the Senior
Indenture, the provisions of the Subordinated Indenture are substantially
identical in substance to the provisions of the Senior Indenture that bear the
same section numbers.
The statements herein relating to the Debt Securities and the following
summaries of certain general provisions of the Indentures do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all the provisions of the Indentures (as they may be amended or
supplemented from time to time), including the definitions therein of certain
terms capitalized in this Prospectus. All article and section references
appearing herein are to articles and sections of the applicable Indenture and
whenever particular Sections or defined terms of the Indentures (as they may
be amended or supplemented from time to time) are referred to herein or in a
Prospectus Supplement, such Sections or defined terms are incorporated herein
or therein by reference.
GENERAL
The Debt Securities will be unsecured obligations of Federal-Mogul. The
Indentures do not limit the aggregate amount of Debt Securities which may be
issued thereunder, nor do they limit the incurrence or issuance of other
secured or unsecured debt of Federal-Mogul. The Debt Securities issued under
the Senior Indenture will be unsecured and will rank pari passu with all other
unsecured and unsubordinated obligations of Federal-Mogul. The Debt Securities
issued under the Subordinated Indenture will be subordinate and junior in
right of payment, to the extent and in the manner set forth in the
Subordinated Indenture, to all Senior Indebtedness of Federal-Mogul. See "--
Subordination under the Subordinated Indenture."
Reference is made to the applicable Prospectus Supplement which will
accompany this Prospectus for a description of the specific series of Debt
Securities being offered thereby, including, but not limited to, the
4
<PAGE>
following: (1) the title, designation and purchase price, of such Debt
Securities, including whether the Debt Securities are Senior Debt Securities or
Subordinated Debt Securities and whether such Debt Securities will be issued
under the Senior Indenture, the Subordinated Indenture or other indenture set
forth in the Prospectus Supplement; (2) any limit upon the aggregate principal
amount of such Debt Securities; (3) the date or dates on which the principal of
and premium, if any, on such Debt Securities will mature or the method of
determining such date or dates; (4) the rate or rates (which may be fixed or
variable) at which such Debt Securities will bear interest, if any, or the
method of calculating such rate or rates; (5) the date or dates from which
interest, if any, will accrue or the method by which such date or dates will be
determined; (6) the date or dates on which interest, if any, will be payable
and the record date or dates therefor; (7) the place or places where principal
of, premium, if any, and interest, if any, on such Debt Securities will be
payable; (8) the right, if any, of Federal-Mogul to defer payment of interest
on Debt Securities and the maximum length of any such deferral period; (9) the
period or periods within which, the price or prices at which, the currency or
currencies (including currency unit or units) in which, and the terms and
conditions upon which, such Debt Securities may be redeemed, in whole or in
part, at the option of Federal-Mogul; (10) the obligation, if any, of Federal-
Mogul to redeem or purchase such Debt Securities pursuant to any sinking fund
or analogous provisions or upon the happening of a specified event and the
period or periods within which, the price or prices at which and the other
terms and conditions upon which, such Debt Securities shall be redeemed or
purchased, in whole or in part, pursuant to such obligations; (11) the
denominations in which such Debt Securities are authorized to be issued; (12)
the currency or currency unit for which Debt Securities may be purchased or in
which Debt Securities may be denominated and/or the currency or currencies
(including currency unit or units) in which principal of, premium, if any, and
interest, if any, on such Debt Securities will be payable and whether Federal-
Mogul or the holders of any such Debt Securities may elect to receive payments
in respect of such Debt Securities in a currency or currency unit other than
that in which such Debt Securities are stated to be payable; (13) if other than
the principal amount thereof, the portion of the principal amount of such Debt
Securities which will be payable upon declaration of the acceleration of the
maturity thereof or the method by which such portion shall be determined; (14)
the person to whom any interest on any such Debt Security shall be payable if
other than the person in whose name such Debt Security is registered on the
applicable record date; (15) any addition to, or modification or deletion of,
any Event of Default or any covenant of Federal-Mogul specified in the
Indenture with respect to such Debt Securities; (16) the application, if any,
of such means of defeasance or covenant defeasance as may be specified for such
Debt Securities; (17) whether such Debt Securities are to be issued in whole or
in part in the form of one or more temporary or permanent global securities
and, if so, the identity of the depositary for such global security or
securities; (18) any United States Federal income tax considerations applicable
to holders of the Debt Securities; and (19) any other special terms pertaining
to such Debt Securities. Unless otherwise specified in the applicable
Prospectus Supplement, the Debt Securities will not be listed on any securities
exchange. (Section 3.1.)
Unless otherwise specified in the applicable Prospectus Supplement, Debt
Securities will be issued in fully-registered form without coupons. Where Debt
Securities of any series are issued in bearer form, the special restrictions
and considerations, including special offering restrictions and special United
States Federal income tax considerations, applicable to any such Debt
Securities and to payment on and transfer and exchange of such Debt Securities
will be described in the applicable Prospectus Supplement. Bearer Debt
Securities will be transferable by delivery. (Section 3.5.)
Debt Securities may be sold at a substantial discount below their stated
principal amount, bearing no interest or interest at a rate which at the time
of issuance is below market rates. Certain United States Federal income tax
consequences and special considerations applicable to any such Debt Securities,
or to Debt Securities issued at par that are treated as having been issued at a
discount, will be described in the applicable Prospectus Supplement.
If the purchase price of any of the Debt Securities is payable in one or more
foreign currencies or currency units or if any Debt Securities are denominated
in one or more foreign currencies or currency units or if the principal of,
premium, if any, or interest, if any, on any Debt Securities is payable in one
or more foreign currencies or currency units, or by reference to commodity
prices, equity indices or other factors, the restrictions,
5
<PAGE>
elections, certain United States Federal income tax considerations, specific
terms and other information with respect to such issue of Debt Securities and
such foreign currency or currency units or commodity prices, equity indices or
other factors will be set forth in the applicable Prospectus Supplement. In
general, holders of such series of Debt Securities may receive a principal
amount on any principal payment date, or a payment of premium, if any, on any
premium payment date or a payment of interest on any interest payment date,
that is greater than or less than the amount of principal, premium, if any, or
interest otherwise payable on such dates, depending on the value on such dates
of the applicable currency, commodity, equity index or other factor.
PAYMENT, REGISTRATION, TRANSFER AND EXCHANGE
Unless otherwise provided in the applicable Prospectus Supplement, payments
in respect of the Debt Securities will be made in the designated currency at
the office or agency of Federal-Mogul maintained for that purpose as Federal-
Mogul may designate from time to time, except that, at the option of Federal-
Mogul, interest payments, if any, on Debt Securities in registered form may be
made (i) by checks mailed to the holders of Debt Securities entitled thereto at
their registered addresses or (ii) by wire transfer to an account maintained by
the person entitled thereto as specified in the Register. (Sections 3.7(a) and
9.2.) Unless otherwise indicated in the applicable Prospectus Supplement,
payment of any installment of interest on Debt Securities in registered form
will be made to the person in whose name such Debt Security is registered at
the close of business on the regular record date for such interest. (Section
3.7(a).)
Payment in respect of Debt Securities in bearer form will be made in the
currency and in the manner designated in the Prospectus Supplement, subject to
any applicable laws and regulations, at such paying agencies outside the United
States as Federal-Mogul may appoint from time to time. The paying agents
outside the United States initially appointed by Federal-Mogul for a series of
Debt Securities will be named in the Prospectus Supplement. Federal-Mogul may
at any time designate additional paying agents or rescind the designation of
any paying agents, except that, if Debt Securities of a series are issuable as
Registered Securities, Federal-Mogul will be required to maintain at least one
paying agent in each Place of Payment for such series and, if Debt Securities
of a series are issuable as Bearer Securities, Federal-Mogul will be required
to maintain a paying agent in a Place of Payment outside the United States
where Debt Securities of such series and any coupons appertaining thereto may
be presented and surrendered for payment. (Section 9.2.)
Unless otherwise provided in the applicable Prospectus Supplement, Debt
Securities in registered form will be transferable or exchangeable at the
agency of Federal-Mogul maintained for such purpose as designated by Federal-
Mogul from time to time. (Sections 3.5 and 9.2.) Debt Securities may be
transferred or exchanged without service charge, other than any tax or other
governmental charge imposed in connection therewith. (Section 3.5.)
GLOBAL DEBT SECURITIES
Unless otherwise specified in the applicable Prospectus Supplement, the Debt
Securities of a series may be issued in whole or in part in the form of one or
more fully registered global securities (a "Registered Global Security") that
will be deposited with a depository (the "Depository") or with a nominee for
the Depository identified in the applicable Prospectus Supplement. In such a
case, one or more Registered Global Securities will be issued in a denomination
or aggregate denominations equal to the portion of the aggregate principal
amount of outstanding Debt Securities of the series to be represented by such
Registered Global Security or Securities. (Section 3.3.) Unless and until it is
exchanged in whole or in part for Debt Securities in definitive certificated
form, a Registered Global Security may not be registered for transfer or
exchange except as a whole by the Depository for such Registered Global
Security to a nominee of such Depository or by a nominee of such Depository to
such Depository or another nominee of such Depository or by such Depository or
any such nominee to a successor Depository for such series or a nominee of such
successor Depository and except in the circumstances described in the
applicable Prospectus Supplement. (Section 3.5.)
6
<PAGE>
The specific terms of the depository arrangement with respect to any portion
of a series of Debt Securities to be represented by a Registered Global
Security will be described in the applicable Prospectus Supplement. Unless
otherwise specified in the applicable Prospectus Supplement, Federal-Mogul
expects that the following provisions will apply to such depository
arrangements.
Ownership of beneficial interests in a Registered Global Security will be
limited to participants or persons that may hold interests through participants
(as such term is defined below). Upon the issuance of any Registered Global
Security, and the deposit of such Registered Global Security with or on behalf
of the Depository for such Registered Global Security, the Depository will
credit, on its book-entry registration and transfer system, the respective
principal amounts of the Debt Securities represented by such Registered Global
Security to the accounts of institutions ("participants") that have accounts
with the Depository or its nominee. The accounts to be credited will be
designated by the underwriters or agents engaging in the distribution of such
Debt Securities or by Federal-Mogul, if such Debt Securities are offered and
sold directly by Federal-Mogul. Ownership of beneficial interests by
participants in such Registered Global Security will be shown on, and the
transfer of such beneficial interests will be effected only through, records
maintained by the Depository for such Registered Global Security or by its
nominee. Ownership of beneficial interests in such Registered Global Security
by persons that hold through participants will be shown on, and the transfer of
such beneficial interests within such participants will be effected only
through, records maintained by such participants. The laws of some
jurisdictions require that certain purchasers of securities take physical
delivery of such securities in certificated form. The foregoing limitations and
such laws may impair the ability to transfer beneficial interests in such
Registered Global Security.
So long as the Depository for a Registered Global Security, or its nominee,
is the registered owner of such Registered Global Security, such Depository or
such nominee, as the case may be, will be considered the sole owner or holder
of the Debt Securities represented by such Registered Global Security for all
purposes under the applicable Indenture. Unless otherwise specified in the
applicable Prospectus Supplement and except as specified below, owners of
beneficial interests in such Registered Global Security will not be entitled to
have Debt Securities of the series represented by such Registered Global
Security registered in their names, will not receive or be entitled to receive
physical delivery of Debt Securities of such series in certificated form and
will not be considered the holders thereof for any purposes under the relevant
Indenture. (Section 3.8.) Accordingly, each person owning a beneficial interest
in such Registered Global Security must rely on the procedures of the
Depository and, if such person is not a participant, on the procedures of the
participant through which such person owns its interest, to exercise any rights
of a holder under the relevant Indenture. The Depository may grant proxies and
otherwise authorize participants to give or take any request, demand,
authorization, direction, notice, consent, waiver or other action which a
holder is entitled to give or take under the relevant Indenture. Federal-Mogul
understands that, under existing industry practices, if Federal-Mogul requests
any action of holders or if any owner of a beneficial interest in such
Registered Global Security desires to give any notice or take any action which
a holder is entitled to give or take under the relevant Indenture, the
Depository would authorize the participants to give such notice or take such
action, and such participants would authorize beneficial owners owning through
such participants to give such notice or take such action or would otherwise
act upon the instructions of beneficial owners owning through them.
Unless otherwise specified in the applicable Prospectus Supplement, payments
with respect to principal, premium, if any, and interest, if any, on Debt
Securities represented by a Registered Global Security registered in the name
of a Depository or its nominee will be made to such Depository or its nominee,
as the case may be, as the registered owner of such Registered Global Security.
Federal-Mogul expects that the Depository for any Debt Securities represented
by a Registered Global Security, upon receipt of any payment of principal,
premium or interest, will immediately credit participants' accounts with
payments in amounts proportionate to their respective beneficial interests in
the principal amount of such Registered Global Security as shown on the records
of such Depository. Federal-Mogul also expects that payments by participants to
owners of beneficial interests in such Registered Global Security held through
such participants will be governed by standing instructions and customary
practices, as is now the case with the
7
<PAGE>
securities held for the accounts of customers registered in "street names," and
will be the responsibility of such participants. None of Federal-Mogul, the
respective Trustees or any agent of Federal-Mogul or the respective Trustees
shall have any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial interests of a Registered
Global Security, or for maintaining, supervising or reviewing any records
relating to such beneficial interests. (Section 3.8.)
Unless otherwise specified in the applicable Prospectus Supplement, if the
Depository for any Debt Securities represented by a Registered Global Security
is at any time unwilling or unable to continue as Depository or ceases to be a
clearing agency registered under the Exchange Act and a duly registered
successor Depository is not appointed by Federal-Mogul within 90 days, Federal-
Mogul will issue such Debt Securities in definitive certificated form in
exchange for such Registered Global Security. In addition, Federal-Mogul may at
any time and in its sole discretion determine not to have any of the Debt
Securities of a series represented by one or more Registered Global Securities
and, in such event, will issue Debt Securities of such series in definitive
certificated form in exchange for all of the Registered Global Security or
Securities representing such Debt Securities. (Section 3.5.)
The Debt Securities of a series may also be issued in whole or in part in the
form of one or more bearer global securities (a "Bearer Global Security") that
will be deposited with a depository, or with a nominee for such depository,
identified in the applicable Prospectus Supplement. Any such Bearer Global
Security may be issued in temporary or permanent form. (Section 3.4.) The
specific terms and procedures, including the specific terms of the depository
arrangement, with respect to any portion of a series of Debt Securities to be
represented by one or more Bearer Global Securities will be described in the
applicable Prospectus Supplement.
CONSOLIDATION, MERGER OR SALE BY FEDERAL-MOGUL
Unless otherwise specified in the applicable Prospectus Supplement, Federal-
Mogul shall not consolidate with or merge into any other corporation or sell
its assets substantially as an entirety, unless: (i) the corporation formed by
such consolidation or into which Federal-Mogul is merged or the corporation
which acquires its assets is organized in the United States; (ii) the
corporation formed by such consolidation or into which Federal-Mogul is merged
or which acquires Federal-Mogul's assets substantially as an entirety expressly
assumes all of the obligations of Federal-Mogul under each Indenture; (iii)
immediately after giving effect to such transaction, no Default (as hereinafter
defined) or Event of Default shall have happened and be continuing; and (iv)
if, as a result of such transaction, properties or assets of Federal-Mogul
would become subject to an encumbrance which would not be permitted by the
terms of any series of Debt Securities, Federal-Mogul or the successor
corporation, as the case may be, shall take such steps as are necessary to
secure such Debt Securities equally and ratably with all indebtedness secured
thereunder. Upon any such consolidation, merger or sale, the successor
corporation formed by such consolidation, or into which Federal-Mogul is merged
or to which such sale is made, shall succeed to, and be substituted for
Federal-Mogul under each Indenture. (Section 7.1.)
EVENTS OF DEFAULT, NOTICE AND CERTAIN RIGHTS ON DEFAULT
Each Indenture provides that, if an Event of Default specified therein occurs
with respect to the Debt Securities of any series and is continuing, the
Trustee for such series or the holders of 25% in aggregate principal amount of
all of the outstanding Debt Securities of that series, by written notice to
Federal-Mogul (and to the Trustee for such series, if notice is given by such
holders of Debt Securities), may declare the principal of (or, if the Debt
Securities of that series are Original Issue Discount Securities or Indexed
Securities, such portion of the principal amount specified in the Prospectus
Supplement) and accrued interest on all the Debt Securities of that series to
be due and payable (provided, with respect to any Debt Securities issued under
the Subordinated Indenture, that the payment of principal and interest on such
Debt Securities shall remain subordinated to the extent provided in Article 12
of the Subordinated Indenture). (Section 5.2.)
Unless otherwise specified in the applicable Prospectus Supplement, Events of
Default with respect to Debt Securities of any series are defined in each
Indenture as being: (a) default for 30 days in payment of any interest
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on any Debt Security of that series or any coupon appertaining thereto or any
additional amount payable with respect to Debt Securities of such series as
specified in the applicable Prospectus Supplement when due; (b) default in
payment of principal, or premium, if any, at maturity or on redemption or
otherwise, or in the making of a mandatory sinking fund payment of any Debt
Securities of that series when due; (c) default for 60 days after notice to
Federal-Mogul by the Trustee for such series, or by the holders of 25% in
aggregate principal amount of the Debt Securities of such series then
outstanding, in the performance of any other agreement in the Debt Securities
of that series, in the Indenture or in any supplemental indenture or board
resolution referred to therein under which the Debt Securities of that series
may have been issued; (d) default resulting in acceleration of other
indebtedness of Federal-Mogul for borrowed money where the aggregate principal
amount so accelerated exceeds $25 million and such acceleration is not
rescinded or annulled within 30 days after the written notice thereof to
Federal-Mogul by the Trustee or to Federal-Mogul and the Trustee by the holders
of 25% in aggregate principal amount of the Debt Securities of such series then
outstanding, provided that such Event of Default will be remedied, cured or
waived if the default that resulted in the acceleration of such other
indebtedness is remedied, cured or waived; and (e) certain events of
bankruptcy, insolvency or reorganization of Federal-Mogul. (Section 5.1.) The
definition of "Event of Default" in each Indenture specifically excludes a
default under a secured debt under which the obligee has recourse (exclusive of
recourse for ancillary matters such as environmental indemnities,
misapplication of funds, costs of enforcement, etc.) only to the collateral
pledged for repayment, and where the fair market value of such collateral does
not exceed two percent of Total Assets (as defined in the Indenture) at the
time of the default. Events of Default with respect to a specified series of
Debt Securities may be added to the Indenture and, if so added, will be
described in the applicable Prospectus Supplement. (Sections 3.1 and 5.1(7).)
Each Indenture provides that the Trustee will, within 90 days after the
occurrence of a Default with respect to the Debt Securities of any series, give
to the holders of the Debt Securities of that series notice of all Defaults
known to it unless such Default shall have been cured or waived; provided, that
except in the case of a Default in payment on the Debt Securities of that
series, the Trustee may withhold the notice if and so long as a committee of
its Responsible Officers in good faith determines that withholding such notice
is in the interests of the holders of the Debt Securities of that series.
(Section 6.6.) "Default" means any event which is, or after notice or passage
of time or both, would be, an Event of Default. (Section 1.1.)
Each Indenture provides that the holders of a majority in aggregate principal
amount of the Debt Securities of each series affected (with each such series
voting as a class) may, subject to certain limited conditions, direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee for such series, or exercising any trust or power conferred on such
Trustee. (Section 5.8.)
Each Indenture includes a covenant that Federal-Mogul will file annually with
the Trustee a certificate as to Federal-Mogul's compliance with all conditions
and covenants of such Indenture. (Section 9.5.)
The holders of a majority in aggregate principal amount of any series of Debt
Securities by notice to the Trustee for such series may waive, on behalf of the
holders of all Debt Securities of such series, any past Default or Event of
Default with respect to that series and its consequences except a Default or
Event of Default in the payment of the principal of, premium, if any, or
interest, if any, on any Debt Security, and except in respect of an Event of
Default resulting from the breach of a covenant or provision of either
Indenture which, pursuant to the applicable Indenture, cannot be amended or
modified without the consent of the holders of each outstanding Debt Security
of such series affected. (Section 5.7.)
OPTION TO DEFER INTEREST PAYMENTS
If provided in the applicable Prospectus Supplement, Federal-Mogul shall have
the right at any time and from time to time during the term of the series of
Debt Securities to defer the payment of interest for such number of consecutive
interest payment periods as may be specified in the applicable Prospectus
Supplement (each, an "Extension Period"), subject to the terms, conditions and
covenants, if any, specified in such Prospectus Supplement, provided that such
Extension Period may not extend beyond the stated maturity of the Debt
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Securities. Certain material United States Federal income tax consequences and
special considerations applicable to any such Debt Securities will be described
in the applicable Prospectus Supplement.
Unless otherwise specified in the applicable Prospectus Supplement, at the
end of such Extension Period, Federal-Mogul shall pay all interest then accrued
and unpaid together with interest thereon compounded semiannually at the rate
specified for the Debt Securities to the extent permitted by applicable law
("Compound Interest"); provided, that during any such Extension Period, (a)
Federal-Mogul shall not declare or pay dividends on, make distributions with
respect to, or redeem, purchase, acquire or make a liquidation payment with
respect to, any of its capital stock (other than (i) purchases or acquisitions
of capital stock of Federal-Mogul in connection with the satisfaction by
Federal-Mogul of its obligations under any employee or agent benefit plans or
the satisfaction by Federal-Mogul of its obligations pursuant to any contract
or security outstanding on the date of such event requiring Federal-Mogul to
purchase capital stock of Federal-Mogul, (ii) as a result of a reclassification
of Federal-Mogul's capital stock or the exchange or conversion of one class or
series of Federal-Mogul's capital stock for another class or series of Federal-
Mogul's capital stock, (iii) the purchase of fractional interests in shares of
Federal-Mogul's capital stock pursuant to the conversion of exchange provisions
of such capital stock or the security being conversed or exchanged, (iv)
dividends or distributions in capital stock of Federal-Mogul (or rights to
acquire capital stock) or repurchases or redemptions of capital stock solely
from the issuance or exchange of capital stock or (v) redemptions or
repurchases of any rights outstanding under a shareholder rights plan), (b)
Federal-Mogul shall not make any payment of interest, principal or premium, if
any, on or repay, repurchase or redeem any debt securities issued by Federal-
Mogul that rank junior to the Debt Securities, and (c) Federal-Mogul shall not
make any guarantee payments with respect to the foregoing. Prior to the
termination of any such Extension Period, Federal-Mogul may further defer
payments of interest by extending the interest payment period; provided,
however, that, such Extension Period, including all such previous and further
extensions, may not extend beyond the maturity of the Debt Securities. Upon the
termination of any Extension Period and the payment of all amounts then due,
Federal-Mogul may commence a new Extension Period, subject to the terms set
forth in this section. No interest during an Extension Period, except at the
end thereof, shall be due and payable, but Federal-Mogul may prepay at any time
all or any portion of the interest accrued during an Extension Period. Federal-
Mogul has no present intention of exercising its right to defer payments of
interest by extending the interest payment period on the Debt Securities.
Federal-Mogul shall give the holders of the Debt Securities notice of its
selection of such Extension Period ten Business Days prior to the earlier of
(i) the Interest Payment Date or (ii) the date upon which Federal-Mogul is
required to give notice to the New York Stock Exchange (or other applicable
self-regulatory organization) or to holders of the Debt Securities of the
record or payment date of such related interest payment.
MODIFICATION OF THE INDENTURES
Unless otherwise specified in the applicable Prospectus Supplement, each
Indenture contains provisions permitting Federal-Mogul and the Trustee to enter
into one or more supplemental indentures without the consent of the holders of
any of the Debt Securities in order (i) to evidence the succession of another
corporation to Federal-Mogul and the assumption of the covenants of Federal-
Mogul by a successor to Federal-Mogul; (ii) to add to the covenants of Federal-
Mogul or surrender any right or power of Federal-Mogul; (iii) to add additional
Events of Default with respect to any series of Debt Securities; (iv) to add or
change any provisions to such extent as necessary to permit or facilitate the
issuance of Debt Securities in bearer form; (v) to change or eliminate any
provision affecting only Debt Securities not yet issued; (vi) to secure the
Debt Securities; (vii) to establish the form or terms of Debt Securities;
(viii) to evidence and provide for successor Trustees; (ix) if allowed without
penalty under applicable laws and regulations, to permit payment in respect of
Debt Securities in bearer form in the United States; (x) to correct any defect
or supplement any inconsistent provisions or to make any other provisions with
respect to matters or questions arising under such Indenture, provided that
such action does not adversely affect the interests of any holder of Debt
Securities of any series; or (xi) to cure any ambiguity or correct any mistake.
The Subordinated Indenture also permits Federal-Mogul and the Trustee
thereunder to enter into such supplemental indentures to modify the
subordination provisions contained in the Subordinated Debenture except in a
manner adverse to any outstanding Debt Securities. (Section 8.1.)
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Unless otherwise specified in the applicable Prospectus Supplement, each
Indenture also contains provisions permitting Federal-Mogul and the Trustee,
with the consent of the holders of a majority in aggregate principal amount of
the outstanding Debt Securities affected by such supplemental indenture (with
the Debt Securities of each series voting as a class), to execute supplemental
indentures adding any provisions to or changing or eliminating any of the
provisions of such Indenture or any supplemental indenture or modifying the
rights of the holders of Debt Securities of such series, except that, without
the consent of the holder of each Debt Security so affected, no such
supplemental indenture may: (i) change the time for payment of principal or
premium, if any, or interest on any Debt Security; (ii) reduce the principal
of, or any installment of principal of, or premium, if any, or interest on any
Debt Security, or change the manner in which the amount of any of the foregoing
is determined; (iii) reduce the amount of premium, if any, payable upon the
redemption of any Debt Security; (iv) reduce the amount of principal payable
upon acceleration of the maturity of any Original Issue Discount or Index
Security; (v) change the currency or currency unit in which any Debt Security
or any premium or interest thereon is payable; (vi) impair the right to
institute suit for the enforcement of any payment on or with respect to any
Debt Security; (vii) reduce the percentage in principal amount of the
outstanding Debt Securities affected thereby the consent of whose holders is
required for modification or amendment of such Indenture or for waiver of
compliance with certain provisions of the Indenture or for waiver of certain
defaults; (viii) change the obligation of Federal-Mogul to maintain an office
or agency in the places and for the purposes specified in such Indenture; (ix)
modify the provisions relating to the subordination of outstanding Debt
Securities of any series in a manner adverse to the holders thereof; or (x)
modify the provisions relating to waiver of certain defaults or any of the
foregoing provisions. (Section 8.2.)
SUBORDINATION UNDER THE SUBORDINATED INDENTURE
The Subordinated Indenture provides that any Subordinated Debt Securities
issued thereunder are subordinate and junior in right of payment to all Senior
Indebtedness to the extent provided in the Subordinated Indenture. (Section
12.1 of the Subordinated Indenture.) The Subordinated Indenture defines the
term "Senior Indebtedness" as: (i) all indebtedness of Federal-Mogul, whether
outstanding on the date of the Subordinated Indenture or thereafter created,
incurred or assumed, which is for money borrowed, or evidenced by a note or
similar instrument given in connection with the acquisition of any business,
properties or assets, including securities; (ii) any indebtedness of others of
the kinds described in the preceding clause (i) for the payment of which
Federal-Mogul is responsible or liable as guarantor or otherwise; and (iii)
amendments, renewals, extensions and refundings of any such indebtedness. The
Senior Indebtedness shall continue to be Senior Indebtedness and entitled to
the benefits of the subordination provisions irrespective of any amendment,
modification or waiver of any term of the Senior Indebtedness or extension or
renewal of the Senior Indebtedness. Senior Indebtedness does not include (A)
any indebtedness of Federal-Mogul to any of its subsidiaries, (B) indebtedness
incurred for the purchase of goods or materials or for services obtained in the
ordinary course of business, and (C) any indebtedness which by its terms is
expressly made pari passu with or subordinated to the Subordinated Debt
Securities. (Section 12.2 of the Subordinated Indenture.)
If (i) Federal-Mogul defaults in the payment of any principal, or premium, if
any, or interest on any Senior Indebtedness when the same becomes due and
payable, whether at maturity or at a date fixed for prepayment or declaration
or otherwise or (ii) an event of default occurs with respect to any Senior
Indebtedness permitting the holders thereof to accelerate the maturity thereof
and written notice of such event of default (requesting that payments on
Subordinated Debt Securities cease) is given to Federal-Mogul by the holders of
Senior Indebtedness, then unless and until such default in payment or event of
default shall have been cured or waived or shall have ceased to exist, no
direct or indirect payment (in cash, property or securities, by set-off or
otherwise) shall be made or agreed to be made on account of the Subordinated
Debt Securities or interest thereon or in respect of any repayment, redemption,
retirement, purchase or other acquisition of Subordinated Debt Securities.
(Section 12.4 of the Subordinated Indenture.)
In the event of (i) any insolvency, bankruptcy, receivership, liquidation,
reorganization, readjustment, composition or other similar proceeding relating
to Federal-Mogul, its creditors or its property, (ii) any
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proceeding for the liquidation, dissolution or other winding-up of Federal-
Mogul, voluntary or involuntary, whether or not involving insolvency or
bankruptcy proceedings, (iii) any assignment by Federal-Mogul for the benefit
of creditors, or (iv) any other marshalling of the assets of Federal-Mogul, all
Senior Indebtedness (including, without limitation, interest accruing after the
commencement of any such proceeding, assignment or marshalling of assets) shall
first be paid in full before any payment or distribution, whether in cash,
securities or other property, shall be made by Federal-Mogul on account of
Subordinated Debt Securities. In any such event, any payment or distribution,
whether in cash, securities or other property (other than securities of
Federal-Mogul or any other corporation provided for by a plan of reorganization
or readjustment, the payment of which is subordinate, at least to the extent
provided in the subordination provisions of the Subordinated Indenture with
respect to the indebtedness evidenced by Subordinated Debt Securities, to the
payment of all Senior Indebtedness at the time outstanding and to any
securities issued in respect thereof under any such plan of reorganization or
readjustment), which would otherwise (but for the subordination provisions) be
payable or deliverable in respect of Subordinated Debt Securities (including
any such payment or distribution which may be payable or deliverable by reason
of the payment of any other indebtedness of Federal-Mogul being subordinated to
the payment of Subordinated Debt Securities) shall be paid or delivered
directly to the holders of Senior Indebtedness, or to their representative or
trustee, in accordance with the priorities then existing among such holders
until all Senior Indebtedness shall have been paid in full. (Section 12.3 of
the Subordinated Indenture.) No present or future holder of any Senior
Indebtedness shall be prejudiced in the right to enforce subordination of the
indebtedness evidenced by Subordinated Debt Securities by any act or failure to
act on the part of Federal-Mogul. (Section 12.9 of the Subordinated Indenture.)
Senior Indebtedness shall not be deemed to have been paid in full unless the
holders thereof shall have received cash, securities or other property equal to
the amount of such Senior Indebtedness then outstanding. After all Senior
Indebtedness has been paid in full and until the Subordinated Debt Securities
are paid in full, the holders of Subordinated Debt Securities shall be
subrogated to the rights of the holders of Senior Indebtedness to receive any
further payments or distributions applicable to the Senior Indebtedness to the
extent that payments or distributions otherwise payable to the holders of
Subordinated Debt Securities have been applied to the payment of Senior
Indebtedness, and such payments or distributions received by any holder of
Subordinated Debt Securities, by reason of such subrogation, of cash,
securities or other property which otherwise would be paid or distributed to
the holders of Senior Indebtedness, shall, as between Federal-Mogul and its
creditors other than the holders of Senior Indebtedness, on the one hand, and
the holders of Subordinated Debt Securities, on the other, be deemed to be a
payment by Federal-Mogul on account of Senior Indebtedness, and not on account
of Subordinated Debt Securities. (Section 12.7 of the Subordinated Indenture.)
The Subordinated Indenture provides that the foregoing subordination
provisions, insofar as they relate to any particular issue of Subordinated Debt
Securities, may be changed prior to such issuance. Any such change would be
described in the applicable Prospectus Supplement relating to such Subordinated
Debt Securities.
DEFEASANCE AND COVENANT DEFEASANCE
If indicated in the applicable Prospectus Supplement, Federal-Mogul may elect
either (i) to defease and be discharged from any and all obligations with
respect to the Debt Securities of or within any series (except as otherwise
provided in the relevant Indenture) ("defeasance") or (ii) to be released from
its obligations with respect to certain covenants applicable to the Debt
Securities of or within any series ("covenant defeasance"), upon the deposit
with the relevant Trustee (or other qualifying trustee), in trust for such
purpose, of money and/or Government Obligations which through the payment of
principal and interest in accordance with their terms will provide money in an
amount sufficient, without reinvestment, to pay the principal of and any
premium or interest on such Debt Securities to Maturity or redemption, as the
case may be, and any mandatory sinking fund or analogous payments thereon. As a
condition to defeasance or covenant defeasance, Federal-Mogul must deliver to
the Trustee an Opinion of Counsel to the effect that the Holders of such Debt
Securities will not recognize income, gain or loss for United States Federal
income tax purposes as a result of such defeasance or covenant defeasance and
will be subject to United States Federal income tax on the same amounts and in
the same manner
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and at the same times as would have been the case if such defeasance or
covenant defeasance had not occurred. Such Opinion of Counsel, in the case of
defeasance under clause (i) above, must refer to and be based upon a ruling of
the Internal Revenue Service or a change in applicable Federal income tax law
occurring after the date of the relevant Indenture. (Article 4.) If indicated
in the applicable Prospectus Supplement, in addition to obligations of the
United States or an agency or instrumentality thereof, Government Obligations
may include obligations of the government or an agency or instrumentality of
the government issuing the currency or currency unit in which Debt Securities
of such series are payable. (Section 3.1.)
In addition, with respect to the Subordinated Indenture, in order to be
discharged, no event or condition shall exist that, pursuant to certain
provisions described under "--Subordination under the Subordinated Indenture"
above, would prevent Federal-Mogul from making payments of principal of (and
premium, if any) and interest on Subordinated Debt Securities at the date of
the irrevocable deposit referred to above. (Section 4.6(j) of the Subordinated
Indenture.)
Federal-Mogul may exercise its defeasance option with respect to such Debt
Securities notwithstanding its prior exercise of its covenant defeasance
option. If Federal-Mogul exercises its defeasance option, payment of such Debt
Securities may not be accelerated because of a Default or an Event of Default.
(Section 4.4.) If Federal-Mogul exercises its covenant defeasance option,
payment of such Debt Securities may not be accelerated by reason of a Default
or an Event of Default with respect to the covenants to which such covenant
defeasance is applicable. However, if such acceleration were to occur by
reason of another Event of Default, the realizable value at the acceleration
date of the money and Government Obligations in the defeasance trust could be
less than the principal and interest then due on such Debt Securities, in that
the required deposit in the defeasance trust is based upon scheduled cash flow
rather than market value, which will vary depending upon interest rates and
other factors.
THE TRUSTEES
Unless otherwise specified in the applicable Prospectus Supplement, The Bank
of New York will be the Trustee under the Senior Indenture and under the
Subordinated Indenture. Federal-Mogul may also maintain banking and other
commercial relationships with each of the Trustees and their affiliates in the
ordinary course of business.
DESCRIPTION OF PREFERRED STOCK AND COMMON STOCK
In general, the classes of authorized capital stock are afforded preferences
with respect to dividends and liquidation rights in the order listed above.
The Board of Directors of Federal-Mogul is empowered, without approval of the
shareholders, to cause the Preferred Stock to be issued in one or more series,
with the numbers of shares of each series and the rights, preferences and
limitations of each series to be determined by it including, without
limitation, the dividend rights, conversion rights, redemption rights and
liquidation preferences, if any, of any wholly unissued series of Preferred
Stock (or of the entire class of Preferred Stock if none of such shares have
been issued), the number of shares constituting each such series and the terms
and conditions of the issue thereof. The descriptions set forth below do not
purport to be complete and are qualified in their entirety by reference to the
Restated Articles of Incorporation.
The Prospectus Supplement relating to an offering of Common Stock will
describe terms relevant thereto, including the number of shares offered, the
initial offering price, market price and dividend information.
PREFERRED STOCK
The applicable Prospectus Supplement will describe the following terms of
any Preferred Stock in respect of which this Prospectus is being delivered (to
the extent applicable to such Preferred Stock): (i) the specific designation,
number of shares, seniority and purchase price; (ii) any liquidation
preference per share; (iii) any
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date of maturity; (iv) any redemption, repayment or sinking fund provisions;
(v) any dividend rate or rates and the dates on which any such dividends will
be payable (or the method by which such rates or dates will be determined);
(vi) any voting rights; (vii) if other than the currency of the United States
of America, the currency or currencies, including composite currencies, in
which such Preferred Stock is denominated and/or in which payments will or may
be payable; (viii) the method by which amounts in respect of such Preferred
Stock may be calculated and any commodities, currencies or indices, or value,
rate or price, relevant to such calculation; (ix) whether the Preferred Stock
is convertible or exchangeable and, if so, the securities or rights into which
such Preferred Stock is convertible or exchangeable (which may include other
Preferred Stock, Debt Securities, Common Stock or other securities or rights
of Federal-Mogul (including rights to receive payment in cash or securities
based on the value, rate or price of one or more specified commodities,
currencies or indices) or a combination of the foregoing), and the terms and
conditions upon which such conversions or exchanges will be effected,
including the initial conversion or exchange prices or rates, the conversion
or exchange period and any other related provisions; (x) the place or places
where dividends and other payments on the Preferred Stock will be payable; and
(xi) any additional voting, dividend, liquidation, redemption and other
rights, preferences, privileges, limitations and restrictions.
All shares of Preferred Stock offered hereby, or issuable upon conversion,
exchange or exercise of Securities, will, when issued, be fully paid and non-
assessable.
COMMON STOCK
The holders of Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. The holders of Common Stock are entitled to one vote per
share on all matters submitted to a vote of shareholders and do not have
cumulative voting rights. Holders of Common Stock are entitled to receive,
upon any liquidation of Federal-Mogul, all remaining assets available for
distribution to shareholders after satisfaction of Federal-Mogul's liabilities
and the preferential rights of any preferred stock that may then be issued and
outstanding. All shares of Common Stock offered hereby, or issuable upon
conversion, exchange or exercise of Securities, will, when issued, be fully
paid and non-assessable. The Common Stock is traded on the New York Stock
Exchange under the symbol "FMO." The holders of Common Stock have no
preemptive, conversion or redemption rights. The registrar and transfer agent
for the Common Stock is The Bank of New York.
CERTAIN PROVISIONS
The Restated Articles of Incorporation and Bylaws of Federal-Mogul and the
Rights Agreement contain provisions, summarized below, that could have the
effect of delaying, deterring or preventing a change of control of Federal-
Mogul. This summary does not purport to be complete and is subject to, and
qualified in its entirety by, the provisions of the Restated Articles of
Incorporation and Bylaws and the Rights Agreement.
Federal-Mogul's Articles of Incorporation
Federal-Mogul's Restated Articles of Incorporation provide that the approval
of a business combination (as defined below) requires (in addition to any
other vote that may be required) the affirmative vote of at least a majority
of the outstanding shares of preferred stock entitled to vote thereon and
Common Stock, voting as a single class. In addition, (a) where the Restated
Articles of Incorporation require the approval of the holder of the preferred
stock or one or more series thereof considered as a separate class, such
business combination shall also require the affirmative vote of at least a
majority of the outstanding shares of the preferred stock of such series
thereof considered as a separate class that are not owned by an Interested
Shareholder (as defined below) and (b) where applicable law requires that a
transaction be approved by any class or series of Federal-Mogul's stock or any
combination thereof considered as a single class, such transaction shall also
require the affirmative vote of at least a majority of the shares of each such
class or series or combination considered as a single class that are not owned
by the Interested Shareholder.
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The voting requirements set forth in the previous paragraph shall not apply
to any business combination if (a) Federal-Mogul's Board of Directors includes
at least one member who was a duly elected and acting member of the Board of
Directors (each being a "Disinterested Director") prior to the time when the
Interested Shareholder (as hereinafter defined) involved became an Interested
Shareholder and such business combination has been approved by a majority of
the Disinterested Directors and by a majority of the entire Board of
Directors, (b) the aggregate amount of the cash and the fair market value of
consideration other than cash to be received per share by holders of Common
Stock in such business combination shall be at least equal to the Specified
Price (as defined below) or (c) such business combination has been unanimously
approved by the Board of Directors and the Board has, in the faithful exercise
of its fiduciary duties to the holders of Common Stock, unanimously and
expressly determined that the aggregate amount of the cash and the fair market
value of the consideration other than cash to be received per share by holders
of Common Stock in such business combination, although less than the Specified
Price, is nonetheless fair to all holders of Common Stock.
As used above:
"business combination" means (a) any merger or consolidation of Federal-
Mogul and any subsidiary with or into any Interested Shareholder or any
corporation which after such merger or consolidation would be an affiliate
of an Interested Shareholder, (b) any sale lease exchange, mortgage,
pledge, transfer or other disposition to any Interested Shareholder or its
affiliate of assets of Federal-Mogul or any subsidiary having a fair market
value of $1 million or more (except in the ordinary course of business and
on an arm's-length basis), (c) the issuance or transfer by Federal-Mogul or
any subsidiary (in one transaction or a series of related transactions) of
any securities of Federal-Mogul or a subsidiary to any Interested
Shareholder or its affiliate for cash, securities or property having a fair
market value of $1 million or more, (d) the adoption of any plan or
proposal for the liquidation or dissolution of Federal-Mogul as a result of
which any Interested Shareholder or its affiliate would receive any assets
of Federal-Mogul other than cash or (e) any reclassification of securities
(including any reverse stock split) or recapitalization of Federal-Mogul or
merger or consolidation of Federal-Mogul with any subsidiary or any similar
transaction (whether or not with an Interested Shareholder) which has the
effect, directly or indirectly, of increasing the proportion of outstanding
shares of any equity security of Federal-Mogul or a subsidiary directly
owned by an Interested Shareholder or its affiliate.
"Interested Shareholder" means a person who on the record date for
determining the shareholders entitled to vote on a business combination is
(a) the beneficial owner of 10% or more of the outstanding shares of Common
Stock, (b) an affiliate of Federal-Mogul and within two years prior to such
record date beneficially owned 10% or more of the then outstanding shares
of Common Stock or (c) an assignee or other successor to any shares of
capital stock of Federal-Mogul which were within two years prior thereto
beneficially owned by an Interested Shareholder and such assignment or
succession shall have occurred in one or more transactions not involving a
public offering.
"Specified Price" means the highest of (a) the highest per share price
paid or agreed to be paid by such Interested Shareholder to acquire
beneficial ownership of any shares of Common Stock within the two-year
period prior to the consummation of the business combination; (b) the per
share book value of the Common Stock at the end of the fiscal month
immediately preceding the consummation of such business combination; and
(c) if the Common Stock of the Interested Shareholder is publicly traded,
the price per share equal to the earnings per share of Common Stock for the
four full consecutive fiscal quarters immediately preceding the record date
for solicitation of votes on such business combination (or, if votes are
not solicited on such business combination, immediately preceding the
consummation of such business combination) multiplied by the ratio (if any)
of the highest published sale price of the Interested Shareholder's Common
Stock during its four fiscal quarters immediately preceding such date, to
the earnings per share of Common Stock of the Interested Shareholder for
such four fiscal quarters.
Federal-Mogul's Bylaws
Federal-Mogul's Bylaws contain provisions that govern nominations of
directors by shareholders and presentation of business by shareholders for
consideration at the annual meeting of shareholders. Generally, a
15
<PAGE>
shareholder must give notice of such nomination or business within 60 to 90
days prior to such meeting, giving specified information as to the shareholder
and as to the person nominated and the business proposed to be brought before
the meeting.
Preferred Share Purchase Rights
In 1988, Federal-Mogul's Board of Directors authorized the distribution of
one Preferred Share Purchase Right (a "Right") for each outstanding share of
Common Stock. Each Right entitles the holder thereof to buy one-half of one
one-hundredth of a share of Series B Junior Participating Preferred Stock at a
price of $70.00. The Rights are governed by the Rights Agreement.
As distributed, the Rights trade together with the Common Stock. They may be
exercised or traded separately only after the earlier to occur of: (i) 10 days
following a public announcement that a person or group of persons has obtained
the right to acquire 10% or more of the outstanding Common Stock (20% in the
case of certain institutional investors), or (ii) 10 business days (or such
later date as may be determined by action of the Board of Directors) following
the commencement or announcement of an intent to make a tender offer or
exchange offer which would result in beneficial ownership by a person or group
of persons of 10% or more of the outstanding Common Stock. If the acquiring
person or group of persons acquires 10% or more of the Common Stock, each
Right (other than those held by the acquirer) will entitle its holder to
purchase, at the Right's exercise price, shares of Common Stock having a
market value of twice the Right's exercise price. Additionally, if Federal-
Mogul is acquired in a merger or other business combination, each Right (other
than those held by the surviving or acquiring company) will entitle its holder
to purchase, at the Right's exercise price, shares of the acquiring company's
stock (or Common Stock of Federal-Mogul if it is the surviving corporation)
having a market value of twice the Right's exercise price.
Rights may be redeemed at the option of the Board of Directors for $0.005
per Right at any time before a person or group or persons acquires 10% or more
of Federal-Mogul's Common Stock. The Board may amend the Rights at any time
without shareholder approval. The Rights will expire by their terms on
November 14, 1998.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire Federal-
Mogul in a manner that causes the Rights to become exercisable. Federal-Mogul
believes, however, that the Rights would neither affect any prospective
offeror willing to negotiate with the Board of Directors of Federal-Mogul nor
interfere with any merger or other business combination approved by the Board
of Directors.
16
<PAGE>
SELLING SHAREHOLDERS
The following table sets forth certain information concerning the beneficial
ownership of Common Stock held by the Selling Shareholders, as of . , 1998,
after giving effect to the Offerings and as adjusted to reflect the sale in
the Offerings of an aggregate of . shares of Common Stock.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SHARES BENEFICIALLY NUMBER OF SHARES BENEFICIALLY
OWNED PRIOR TO SHARES BEING OWNED AFTER
NAME THE OFFERINGS OFFERED THE OFFERINGS
---- ------------------- ------------ -------------------
<S> <C> <C> <C>
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
...........................
</TABLE>
- --------
*Less than one percent
The Selling Shareholders may from time to time offer and sell pursuant to
this Prospectus and a Prospectus Supplement providing therefor, shares of
Common Stock held by such Selling Shareholders.
The . shares of Common Stock that may be offered and sold by the Selling
Shareholders were acquired by such Selling Shareholders through conversion of
Series E Stock received as part of the consideration received by them in the
Federal-Mogul acquisition of Fel-Pro. Pursuant to the Registration Rights
Agreement among Federal-Mogul and the Selling Shareholders. Federal-Mogul
shall bear all expenses incident to Federal-Mogul's performance of or
compliance with the Registration Rights Agreement, except that the Selling
Shareholders will pay all underwriting discounts and commissions relating to
their shares of Common Stock, brokerage fees, transfer taxes, and the fees and
expenses of any counsel, accountants or other representatives retained by the
Selling Shareholders, if any. The Selling Shareholders will be indemnified by
Federal-Mogul against certain liabilities, including certain liabilities under
the Securities Act, or will be entitled to contribution in connection
therewith.
17
<PAGE>
PLAN OF DISTRIBUTION
Federal-Mogul may sell any of the Securities being offered hereby in any one
or more of the following ways from time to time: (i) through agents; (ii) to
or through underwriters; (iii) through dealers; or (iv) directly to
purchasers.
The Prospectus Supplement with respect to the Securities will set forth the
terms of the offering of the Securities, including the name or names of any
underwriters, dealers or agents; the purchase price of the Securities and the
proceeds to Federal-Mogul from such sale; any underwriting discounts and
commissions or agency fees and other items constituting underwriters' or
agents' compensation; any initial public offering price and any discounts or
concessions allowed or reallowed or paid to dealers and any securities
exchange on which such Securities may be listed. Any initial public offering
price, discounts or concessions allowed or reallowed or paid to dealers may be
changed from time to time.
The distribution of the Securities may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices.
Offers to purchase Securities may be solicited by agents designated by
Federal-Mogul from time to time. Any such agent involved in the offer or sale
of the Securities in respect of which this Prospectus is delivered will be
named, and any commissions payable by Federal-Mogul to such agent will be set
forth, in the applicable Prospectus Supplement. Unless otherwise indicated in
such Prospectus Supplement, any such agent will be acting on a reasonable best
efforts basis for the period of its appointment. Any such agent may be deemed
to be an underwriter, as that term is defined in the Securities Act, of the
Securities so offered and sold.
If Securities are sold by means of an underwritten offering, Federal-Mogul
will execute an underwriting agreement with an underwriter or underwriters at
the time an agreement for such sale is reached, and the names of the specific
managing underwriter or underwriters, as well as any other underwriters, and
the terms of the transaction, including commissions, discounts and any other
compensation of the underwriters and dealers, if any, will be set forth in the
Prospectus Supplement which will be used by the underwriters to make resales
of the Securities in respect of which this Prospectus is delivered to the
public. If underwriters are utilized in the sale of the Securities in respect
of which this Prospectus is delivered, the Securities will be acquired by the
underwriters for their own account and may be resold from time to time in one
or more transactions, including negotiated transactions, at fixed public
offering prices or at varying prices determined by the underwriter at the time
of sale. Securities may be offered to the public either through underwriting
syndicates represented by managing underwriters or directly by the managing
underwriters. If any underwriter or underwriters are utilized in the sale of
the Securities, unless otherwise indicated in the Prospectus Supplement, the
underwriting agreement will provide that the obligations of the underwriters
are subject to certain conditions precedent and that the underwriters with
respect to a sale of Securities will be obligated to purchase all such
Securities of a series if any are purchased.
If a dealer is utilized in the sales of the Securities in respect of which
this Prospectus is delivered, Federal-Mogul will sell such Securities to the
dealer as principal. The dealer may then resell such Securities to the public
at varying prices to be determined by such dealer at the time of resale. Any
such dealer may be deemed to be an underwriter, as such term is defined in the
Securities Act, of the Securities so offered and sold. The name of the dealer
and the terms of the transaction will be set forth in the Prospectus
Supplement relating thereto.
Offers to purchase Securities may be solicited directly by Federal-Mogul and
the sale thereof may be made by Federal-Mogul directly to institutional
investors or others, who may be deemed to be underwriters within the meaning
of the Securities Act with respect to any resale thereof. The terms of any
such sales will be described in the Prospectus Supplement relating thereto.
Agents, underwriters and dealers may be entitled under relevant agreements
to indemnification or contribution by Federal-Mogul against certain
liabilities, including liabilities under the Securities Act.
18
<PAGE>
Agents, underwriters and dealers may be customers of, engage in transactions
with, or perform services for, Federal-Mogul and its subsidiaries in the
ordinary course of business.
Securities may also be offered and sold, if so indicated in the applicable
Prospectus Supplement, in connection with a remarketing upon their purchase,
in accordance with a redemption or repayment pursuant to their terms, or
otherwise, by one or more firms ("remarketing firms"), acting as principals
for their own accounts or as agents for Federal-Mogul. Any remarketing firm
will be identified and the terms of its agreement, if any, with its
compensation will be described in the applicable Prospectus Supplement.
Remarketing firms may be deemed to be underwriters, as such term is defined in
the Securities Act, in connection with the Securities remarketed thereby.
Remarketing firms may be entitled under agreements which may be entered into
with Federal-Mogul to indemnification or contribution by Federal-Mogul against
certain civil liabilities, including liabilities under the Securities Act, and
may be customers of, engage in transactions with or perform services for
Federal-Mogul and its subsidiaries in the ordinary course of business.
If so indicated in the applicable Prospectus Supplement, Federal-Mogul may
authorize agents, underwriters or dealers to solicit offers by certain types
of institutions to purchase Securities from Federal-Mogul at the public
offering prices set forth in the applicable Prospectus Supplement pursuant to
delayed delivery contracts ("Contracts") providing for payment and delivery on
a specified date or dates in the future. A commission indicated in the
applicable Prospectus Supplement will be paid to underwriters, dealers and
agents soliciting purchases of Securities pursuant to Contracts accepted by
Federal-Mogul.
The Selling Shareholders have informed the Company that, unless otherwise
specified in a Prospectus Supplement, they intend to dispose of their shares
of Common Stock offered hereby (the "Shares") through underwriters and that
they will execute an underwriting agreement with an underwriter or
underwriters at the time an agreement for such sale is reached. The names of
the specific managing underwriter or underwriters, as well as any other
underwriters, and the terms of the transaction, including commissions,
discounts and any other compensation of the underwriters and dealers, if any,
will be set forth in the Prospectus Supplement which will be used by the
underwriters to make resales of the Shares in respect of which this Prospectus
is delivered to the public. The Shares will be acquired by the underwriters
for their own account and may be resold from time to time in one or more
transactions, including negotiated transactions, at fixed public offering
prices or at varying prices determined by the underwriter at the time of sale.
Shares may be offered to the public either through underwriting syndicates
represented by managing underwriters or directly by the managing underwriters.
Unless otherwise indicated in the Prospectus Supplement, the underwriting
agreement will provide that the obligations of the underwriters are subject to
certain conditions precedent and that the underwriters with respect to a sale
of Shares will be obligated to purchase all such Shares if any are purchased.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
Federal-Mogul has filed with the Commission, pursuant to Section 13 of the
Exchange Act:
1. Federal-Mogul's Annual Report on Form 10-K for the year ended December
31, 1997;
2. Federal-Mogul's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998;
3. Federal-Mogul's Current Reports on Form 8-K filed on January 13, 1998,
March 11, 1998, March 23, 1998, April 7, 1998 and April 17, 1998; and
4. Federal-Mogul's Proxy Statement for the 1998 annual meeting of
shareholders, filed on . , 1998.
All documents filed by Federal-Mogul with the Commission pursuant to
Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of the offering made hereby shall be
deemed to be incorporated by reference into this Prospectus and made a part
hereof from the date of filing of such documents, except that the information
required by Item 402 (i), (k) and (l) of Regulation S-K under the Securities
Act and included in any such document is not incorporated herein. Any
statement contained in this Prospectus or in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained
19
<PAGE>
herein or therein or in a subsequently filed document, that also is or is
deemed to be incorporated by reference herein or therein, modifies or
supersedes such statement. Any statement so modified or superseded shall not
be deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (NOT INCLUDING EXHIBITS TO SUCH
DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE IN
SUCH DOCUMENTS) ARE AVAILABLE WITHOUT CHARGE UPON WRITTEN OR ORAL REQUEST
DIRECTED TO: EDWARD W. GRAY, JR., ESQ., SENIOR VICE PRESIDENT, GENERAL COUNSEL
AND SECRETARY, FEDERAL-MOGUL CORPORATION, 26555 NORTHWESTERN HIGHWAY,
SOUTHFIELD, MICHIGAN 48034 (TELEPHONE: (248) 354-7700).
LEGAL MATTERS
Unless otherwise indicated in the applicable Prospectus Supplement, the
validity of Securities being offered hereby will be passed upon for Federal-
Mogul by David M. Sherbin, Esq., Associate General Counsel of Federal-Mogul.
Mr. Sherbin owns and holds options to purchase approximately . shares of
Common Stock of Federal-Mogul.
EXPERTS
The consolidated financial statements and schedule of Federal-Mogul as of
December 31, 1997 and for each of the three years in the period ended December
31, 1997 incorporated by reference herein have been audited by Ernst & Young
LLP, independent auditors, as set forth in their reports thereon included
therein and incorporated herein by reference. Such consolidated financial
statements and schedules audited by Ernst & Young LLP are incorporated herein
by reference in reliance on such reports given upon the authority of such firm
as experts in accounting and auditing.
The consolidated financial statements of T&N as of December 31, 1997 and for
each of the three years in the period ended December 31, 1997 incorporated by
reference herein have been audited by KPMG Audit Plc, independent auditors, as
set forth in their reports thereon included herein. Such consolidated
financial statements audited by KPMG Audit Plc are incorporated herein by
reference in reliance on their report given on their authority as experts in
accounting and auditing.
The financial statements of Fel-Pro as of December 28, 1997 and December 29,
1996 for each of the three years in the period ended December 28, 1997
incorporated by reference herein have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports thereon included therein
and incorporated by reference herein. Such financial statements audited by
Ernst & Young LLP are incorporated herein by reference in reliance on such
report given upon the authority of such firm as experts in accounting and
auditing.
20
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Federal-Mogul Financial Statements:
Report of Independent Auditors.......................................... F-2
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1996 and 1995.................................................... F-3
Consolidated Balance Sheets at December 31, 1997 and 1996............... F-4
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995.................................................... F-5
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1997,
1996 and 1995.......................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
T&N Financial Statements:
Independent Auditor's Report............................................ F-30
Consolidated Profit and Loss Accounts for the Years Ended December 31,
1997, 1996 and 1995.................................................... F-31
Consolidated Balance Sheets at December 31, 1997 and 1996............... F-32
Consolidated Cash Flow Statements for the Years Ended December 31, 1997,
1996 and 1995.......................................................... F-33
Reconciliations of Movements in Shareholders' Funds for the Years Ended
December 31, 1997,
1996 and 1995.......................................................... F-37
Notes to Consolidated Financial Statements.............................. F-38
Fel-Pro Financial Statements:
Report of Independent Auditors.......................................... F-74
Consolidated Statements of Operations for the Years Ended December 28,
1997, December 29, 1996 and December 31, 1995.......................... F-75
Consolidated Balance Sheets at December 28, 1997 and December 29, 1996.. F-76
Consolidated Statements of Cash Flows for the Years Ended December 28,
1997, December 29, 1996 and December 31, 1995.......................... F-77
Notes to Consolidated Financial Statements.............................. F-78
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors, Federal-Mogul Corporation:
We have audited the accompanying consolidated balance sheets of Federal-
Mogul Corporation and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. Our
audit also included the financial statement schedule listed in Item 14(a).
These financial statements are the responsibility of the company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Federal-Mogul Corporation and subsidiaries at December 31, 1997 and 1996,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.
/s/ Ernst & Young LLP
Detroit, Michigan
January 30, 1998 except for Note 20, as
to which the date is February 24, 1998
F-2
<PAGE>
FEDERAL-MOGUL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------
1997 1996 1995
-------- -------- --------
(MILLIONS OF DOLLARS,
EXCEPT PER SHARE AMOUNT)
<S> <C> <C> <C>
Net sales........................................ $1,806.6 $2,032.7 $1,999.8
Cost of products sold............................ 1,381.8 1,660.5 1,602.2
-------- -------- --------
Gross margin..................................... 424.8 372.2 397.6
Selling, general and administrative expenses..... (286.2) (333.8) (299.3)
Gain on sales of businesses...................... -- -- 24.0
Restructuring (charges) credits.................. 1.1 (57.6) (26.9)
Reengineering and other related (charges)
credits......................................... 1.6 (11.4) (13.9)
Adjustment of assets held for sale to fair value
and other long lived assets..................... (2.4) (151.3) (51.8)
Interest expense................................. (32.0) (42.6) (37.3)
Interest income.................................. 7.1 2.9 9.6
International currency exchange losses........... (0.6) (3.7) (2.9)
British pound currency option cost, net.......... (10.5) -- --
Other expense, net............................... (3.4) (3.4) (2.4)
-------- -------- --------
Earnings (loss) before income taxes and
extraordinary item.......................... 99.5 (228.7) (3.3)
Income tax expense (benefit)..................... 27.5 (22.4) 2.5
-------- -------- --------
Net Earnings (Loss) before Extraordinary
Item........................................ 72.0 (206.3) (5.8)
======== ======== ========
Extraordinary item--loss on early retirement of
debt, net of applicable income tax benefit...... (2.6) -- --
-------- -------- --------
Net Earnings (Loss).......................... 69.4 (206.3) (5.8)
Preferred dividends.............................. 5.5 8.7 8.9
-------- -------- --------
Net Earnings (Loss) Available to Common
Shareholders................................ $ 63.9 $ (215.0) $ (14.7)
======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary item........ $ 1.81 $ (6.20) $ (.42)
Extraordinary item............................. (.07) -- --
-------- -------- --------
Net Earnings (Loss) Per Common Share......... $ 1.74 $ (6.20) $ (.42)
======== ======== ========
EARNINGS (LOSS) PER COMMON SHARE ASSUMING
DILUTION:
Income (loss) before extraordinary item........ $ 1.67 $ (6.20) $ (.42)
Extraordinary item............................. (.06) -- --
-------- -------- --------
Net Earnings (Loss) Per Common Share Assuming
Dilution.................................... $ 1.61 $ (6.20) $ (.42)
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
FEDERAL-MOGUL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
------------------
ASSETS 1997 1996
------ -------- --------
(MILLIONS OF
DOLLARS)
<S> <C> <C>
Cash and equivalents........................................ $ 541.4 $ 33.1
Accounts receivable......................................... 158.9 204.3
Investment in accounts receivable securitization............ 48.7 27.0
Inventories................................................. 277.0 417.0
Prepaid expenses and income tax benefits.................... 113.2 81.5
-------- --------
Total current assets.................................... 1,139.2 762.9
Property, plant and equipment............................... 313.9 350.3
Goodwill.................................................... 143.8 154.0
Other intangible assets..................................... 48.4 63.1
Business investments and other assets....................... 156.8 124.9
-------- --------
Total Assets............................................ $1,802.1 $1,455.2
======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Short-term debt............................................. $ 28.6 $ 280.1
Accounts payable............................................ 102.3 142.7
Accrued compensation........................................ 36.8 37.6
Accrued customer incentives................................. 22.4 20.3
Restructuring reserves...................................... 31.5 55.2
Other accrued liabilities................................... 108.0 127.9
-------- --------
Total current liabilities............................... 329.6 663.8
Long-term debt.............................................. 273.1 209.6
Postemployment benefits..................................... 190.9 207.1
Other accrued liabilities................................... 64.2 56.2
-------- --------
Total liabilities....................................... 857.8 1,136.7
Minority interest--preferred securities of affiliate........ 575.0 --
<CAPTION>
SHAREHOLDERS' EQUITY
--------------------
<S> <C> <C>
Series D preferred stock.................................... -- 76.6
Series C ESOP preferred stock............................... 49.0 53.1
Common stock................................................ 201.0 175.7
Additional paid-in capital.................................. 332.6 283.5
Accumulated deficit......................................... (123.6) (193.0)
Unearned ESOP compensation.................................. (21.8) (28.4)
Currency translation and other.............................. (67.9) (49.0)
-------- --------
Total Shareholders' Equity.............................. 369.3 318.5
-------- --------
Total Liabilities and Shareholders' Equity.............. $1,802.1 $1,455.2
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
FEDERAL-MOGUL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1997 1996 1995
------- ------- -------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
CASH PROVIDED FROM (USED BY) OPERATING ACTIVITIES
Net earnings (loss)............................... $ 69.4 $(206.3) $ (5.8)
Adjustments to reconcile net earnings (loss) to
net cash provided from (used by) operating
activities:
Depreciation and amortization................... 52.8 63.7 61.0
Gain on sales of businesses..................... -- -- (24.0)
Restructuring charges (credits)................. (1.1) 57.6 26.9
Reengineering and other related charges
(credits)...................................... (1.6) 11.4 13.9
Adjustment of assets held for sale to fair value
and other long lived assets.................... 2.4 151.3 51.8
Vesting of restricted stock..................... 9.0 0.4 0.1
Loss on early retirement of debt................ 4.1 -- --
British pound currency option cost, net......... 10.5 -- --
Deferred income taxes........................... 13.0 (27.8) (16.2)
Postemployment benefits......................... (7.7) (2.0) 1.8
Decrease (increase) in accounts receivable...... 7.6 46.5 (5.0)
Decrease (increase) in inventories.............. 59.9 54.5 (103.9)
Increase (decrease) in accounts payable......... (19.5) (25.5) 7.2
Payments against restructuring and reengineering
reserves....................................... (26.2) (17.6) (19.4)
Increase (decrease) in current liabilities and
other.......................................... 43.1 42.8 (23.1)
------- ------- -------
Net Cash Provided From (Used By) Operating
Activities................................... $ 215.7 $ 149.0 $ (34.7)
======= ======= =======
CASH PROVIDED FROM (USED BY) INVESTING ACTIVITIES
Expenditures for property, plant and equipment and
other long-term assets........................... $ (49.7) $ (54.2) $ (78.5)
Acquisitions of businesses........................ -- (.3) (72.1)
Payments for rationalization of acquired
businesses....................................... -- -- (7.3)
Proceeds from sales of business investments....... 73.6 42.0 48.5
Fees paid in anticipation of business acquisition. (30.5) -- --
Other............................................. 1.1 -- --
------- ------- -------
Net Cash Used By Investing Activities......... $ (5.5) $ (12.5) $(109.4)
======= ======= =======
CASH PROVIDED FROM (USED BY) FINANCING ACTIVITIES
Issuance of common stock.......................... $ 14.2 $ .6 $ .2
Repurchase of common stock........................ -- -- (9.0)
Proceeds from issuance of long-term debt.......... 179.6 -- 166.2
Principal payments on long-term debt.............. (127.4) (29.4) (24.9)
Increase (decrease) in short-term debt............ (235.8) (61.4) 33.7
Fees for early retirement of debt................. (4.1) -- --
Fees paid for debt issuance....................... (25.6) -- --
Investment in accounts receivable securitization.. (31.8) -- --
Issuance of preferred securities of affiliate..... 575.0 -- --
Fees paid for issuance of preferred securities of
affiliate........................................ (17.2) -- --
Dividends......................................... (24.8) (26.9) (27.3)
Other............................................. (4.0) (5.7) (.4)
------- ------- -------
Net Cash Provided From (Used By) Financing
Activities................................... 298.1 (122.8) 138.5
------- ------- -------
Increase (Decrease) In Cash And Equivalents... 508.3 13.7 (5.6)
Cash and equivalents at beginning of year........... 33.1 19.4 25.0
------- ------- -------
Cash and Equivalents at End of Year........... $ 541.4 $ 33.1 $ 19.4
======= ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-5
<PAGE>
FEDERAL-MOGUL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES C RETAINED
SERIES C ESOP ADDITIONAL EARNINGS UNEARNED CURRENCY
PREFERRED PREFERRED COMMON PAID-IN (ACCUMULATED ESOP TRANSLATION
STOCK STOCK STOCK CAPITAL DEFICIT) COMPENSATION AND OTHER TOTAL
--------- --------- ------ ---------- ------------ ------------ ----------- ------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1994................... $76.6 $59.1 $174.9 $277.8 $ 73.3 $(39.8) $ (33.4) $588.5
Net loss................ (5.8) (5.8)
Net issuance of
restricted stock....... 2.2 6.5 (7.7) 1.0
Exercise of stock
options................ .2 .2
Repurchase of common
stock.................. (1.9) (5.3) (7.2)
Retirement of Series C
ESOP preferred stock... (2.3) (2.3)
Amortization of unearned
ESOP compensation...... 5.5 5.5
Dividends............... (27.3) (27.3)
Preferred dividend tax
benefits............... 1.6 1.6
Currency translation.... (1.5) (1.5)
Pension adjustment...... (2.4) (2.4)
----- ----- ------ ------ ------- ------ ------- ------
BALANCE AT DECEMBER 31,
1995................... $76.6 $56.8 $175.2 $280.8 $ 40.2 $(34.3) $(45.0) $550.3
===== ===== ====== ====== ======= ====== ======= ======
Net loss................ (206.3) (206.3)
Net issuance of
restricted stock....... .3 .9 (1.2) --
Exercise of stock
options................ .2 .4 .6
Retirement of Series C
ESOP preferred stock... (3.7) (3.7)
Amortization of unearned
ESOP compensation...... 5.9 5.9
Dividends............... (26.9) (26.9)
Preferred dividend tax
benefits............... 1.4 1.4
Currency translation
effect on assets held
for sale............... 20.1 20.1
Currency translation.... (24.4) (24.4)
Pension adjustment...... 1.5 1.5
----- ----- ------ ------ ------- ------ ------- ------
BALANCE AT DECEMBER 31,
1996................... $76.6 $53.1 $175.7 $283.5 $(193.0) $(28.4) $(49.0) $318.5
===== ===== ====== ====== ======= ====== ======= ======
Net earnings............ 69.4 69.4
Conversion of Series D
preferred stock........ (76.6) 22.3 54.3 --
Net repurchase of
restricted stock....... (.4) (1.1) 1.5 --
Vesting of restricted
stock.................. 5.0 5.2 10.2
Exercise of stock
options................ 3.4 10.8 14.2
Retirement of Series C
ESOP preferred stock... (4.1) (4.1)
Amortization of unearned
ESOP compensation...... 6.6 6.6
Dividends............... (24.8) (24.8)
Preferred dividend tax
benefits............... 4.9 4.9
Currency translation.... (27.4) (27.4)
Pension adjustment...... 1.8 1.8
----- ----- ------ ------ ------- ------ ------- ------
BALANCE AT DECEMBER
31,1997................ $ -- $49.0 $201.0 $332.6 $(123.6) $(21.8) $ (67.9) $369.3
===== ===== ====== ====== ======= ====== ======= ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
FEDERAL-MOGUL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
Organization--Federal-Mogul Corporation (the Company) is a global
manufacturer and distributor of a broad range of non-discretionary parts
primarily for automobiles, light trucks, heavy trucks, farm and construction
vehicles. The Company was founded in 1899.
Principles of Consolidation--The consolidated financial statements include
the accounts of the Company and its majority-owned subsidiaries. Intercompany
accounts and transactions have been eliminated in consolidation.
Cash and Equivalents--The Company considers all highly liquid investments
with maturities of 90 days or less from the date of purchase to be cash
equivalents.
Inventories--Inventories are stated at the lower of cost or market. Cost
determined by the last-in, first-out (LIFO) method was used for 55% and 48% of
the inventory at December 31, 1997 and 1996, respectively. The remaining
inventories are costed using the first-in, first-out (FIFO) method. If
inventories had been valued at current cost, amounts reported at December 31
would have been increased by $44.5 million in 1997 and $49.4 million in 1996.
Inventory quantity reductions resulting in liquidations of certain LIFO
inventory layers increased net earnings by $3.2 million and $3.1 million ($.08
and $.09 per diluted share) in 1997 and 1996, respectively. There was no
effect on operations for 1995.
At December 31, inventories consisted of the following:
<TABLE>
<CAPTION>
1997 1996
------ ------
(MILLIONS OF
DOLLARS)
<S> <C> <C>
Finished products......................................... $254.6 $417.0
Work-in-process........................................... 21.8 28.0
Raw materials............................................. 15.7 20.0
------ ------
292.1 465.0
Reserve for inventory valuation........................... (15.1) (48.0)
------ ------
$277.0 $417.0
====== ======
</TABLE>
The $32.9 million decrease in the reserve for inventory valuation resulted
primarily from the Company's initiative to dispose of fully reserved slow
moving and obsolete inventory, and the sales of certain international retail
and wholesale businesses.
Goodwill and Other Intangible Assets--Intangible assets, which result
principally from acquisitions, consist of goodwill, trademarks, non-compete
agreements, patents and other intangibles. Intangible assets are periodically
reviewed for impairment based on an assessment of future cash flows, or fair
value for assets held for sale, to ensure that they are appropriately valued.
Intangible assets are amortized on a straight-line basis over their estimated
useful lives, generally ranging from three to fifteen years for other
intangible assets and generally forty years for goodwill. Goodwill and other
intangible assets reflected in the consolidated balance sheets are net of
accumulated amortization of $20.0 million and $18.7 million for goodwill and
$28.9 million and $22.1 million for other intangible assets at December 31,
1997 and 1996, respectively. Impairment charges recorded in 1997, 1996 and
1995 related primarily to assets held for sale. Management believes that the
remaining intangible assets, which relate only to the core manufacturing and
distribution businesses, are not impaired, and their remaining amortization
periods are appropriate.
F-7
<PAGE>
FEDERAL-MOGUL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition--The Company recognizes revenue and returns from product
sales and the related customer incentive and warranty expense when goods are
shipped to the customer.
Research and Development and Advertising Costs--The Company expenses
research and development costs as incurred. Research and development expense
was $13.1 million, $14.4 million and $15.1 million for 1997, 1996 and 1995,
respectively.
Costs associated with advertising and promotion are expensed as incurred.
Advertising and promotion expense was $31.8 million, $34.0 million and $19.1
million for 1997, 1996 and 1995, respectively.
Currency Translation--Exchange adjustments related to international currency
transactions and translation adjustments for subsidiaries whose functional
currency is the United States dollar (principally those located in highly
inflationary economies) are reflected in the consolidated statements of
operations. Translation adjustments of international subsidiaries for which
the local currency is the functional currency are reflected in the
consolidated financial statements as a separate component of shareholders'
equity.
Earnings Per Share--In 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share. Statement 128 replaced the calculation
of primary and fully-diluted earnings per share with basic and diluted
earnings per share. Unlike primary earnings per share, basic earnings per
share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is similar to the previously reported
fully diluted earnings per share. All earnings per share amounts for all
periods have been presented, and where appropriate, restated to conform to the
Statement 128 requirements (refer to Note 13).
Effect of Accounting Pronouncement--In 1997, the Financial Accounting
Standards Board issued Statement No. 130, Reporting Comprehensive Income. This
Statement establishes standards for the reporting and display of comprehensive
income and its components in a full set of general purpose financial
statements. Statement 130 is effective for fiscal years beginning after
December 15, 1997. Beginning in 1998, the Company will provide the information
relating to comprehensive income to conform to the requirements.
Environmental Liabilities--The Company recognizes estimated environmental
liabilities when a loss is probable. Such liabilities are generally not
subject to insurance coverage.
Each environmental obligation is estimated by engineering and legal
specialists within the Company based on current law and existing technologies.
Such estimates are based primarily upon the estimated cost of investigation
and remediation required and the likelihood that other potentially responsible
parties will be able to fulfill their commitments at the sites where the
Company may be jointly and severally liable with such parties (refer to Note
18).
The Company regularly evaluates and revises its estimates for environmental
obligations based on expenditures against established reserves and the
availability of additional information.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Reclassifications--Certain items in the prior year financial statements have
been reclassified to conform with the presentation used in 1997.
F-8
<PAGE>
FEDERAL-MOGUL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. RESTRUCTURING CHARGES
The following is a summary of restructuring charges and related activity for
1995, 1996 and 1997 (in millions of dollars):
<TABLE>
<CAPTION>
1995 1996 1997
RESTRUCTURING RESTRUCTURING RESTRUCTURING
PROVISION PROVISION PROVISION
--------------- --------------- --------------
SEVERANCE EXIT SEVERANCE EXIT SEVERANCE EXIT TOTAL
--------- ----- --------- ----- --------- ---- ------
<S> <C> <C> <C> <C> <C> <C> <C>
1995 restructuring
charge................. $ 20.1 $ 6.8 $ -- $ -- $ -- $-- $ 26.9
Payments against
restructuring reserves. (16.2) -- -- -- -- -- (16.2)
------ ----- ------ ----- ----- ---- ------
Balance of restructuring
reserves at December
31, 1995............... 3.9 6.8 -- -- -- -- 10.7
1996 restructuring
charge................. -- -- 42.8 14.8 -- -- 57.6
Payments against
restructuring reserves. (3.9) (3.4) (4.8) (1.0) -- -- (13.1)
------ ----- ------ ----- ----- ---- ------
Balance of restructuring
reserves at December
31, 1996............... -- 3.4 38.0 13.8 -- -- 55.2
1997 restructuring
charge................. -- -- -- -- 16.7 5.3 22.0
Adjustment to
restructuring reserves. -- (.9) (20.8) (1.4) -- -- (23.1)
------ ----- ------ ----- ----- ---- ------
1997 restructuring
charges (net).......... -- (.9) (20.8) (1.4) 16.7 5.3 (1.1)
Payments against
restructuring reserves. -- (1.7) (14.0) (3.7) (.1) -- (19.5)
------ ----- ------ ----- ----- ---- ------
Balance of restructuring
reserves at December
31, 1997............... $ -- $ 0.8 $ 3.2 $ 8.7 $16.6 $5.3 $ 34.6
====== ===== ====== ===== ===== ==== ======
</TABLE>
1997
The Company's total restructuring reserves at December 31, 1997 of $34.6
million include $3.1 million of severance which will be paid over the next two
years and has been classified as noncurrent other accrued liabilities in the
balance sheet.
Results of operations in the fourth quarter of 1997 include a $22.0 million
charge for 1997 severance and exit costs. The restructuring actions are
designed to improve the Company's cost structure, streamline operations and
divest the Company of underperforming assets. The majority of the 1997 charge
is expected to be paid out during 1998.
Employee severance costs for 1997 result from the planned termination of
approximately 500 employees, in various business operations of the Company.
The severance costs were based on the minimum levels that will be paid to the
affected employees pursuant to the Company's workforce reduction policies and
certain foreign governmental regulations.
Exit costs for 1997 principally include lease termination costs for certain
North American distribution service branches and retail aftermarket operations
in Puerto Rico, and the consolidation of certain European distribution, and
North American and European manufacturing operations.
1996
Primarily due to the T&N and Fel-Pro transactions (refer to Note 20), the
Company elected not to fully implement the following actions under the 1996
restructuring plan:
. Reductions to the operational and administrative staff were not made to
the extent that was originally planned.
F-9
<PAGE>
FEDERAL-MOGUL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
. Reconfiguration of the North American distribution network was altered to
accommodate the planned integration of T&N and Fel-Pro aftermarket
operations;
. Relocation of certain European manufacturing product lines to lower cost
areas within Europe and related workforce reductions did not take place.
Management of the Company decided not to pursue this action primarily in
anticipation of the integration of future acquisitions.
Primarily as a result of actions not fully implemented under the 1996
restructuring plan, the Company's 1997 operating results were increased by
$23.1 million for the reversal of previously recognized 1996 and 1995
restructuring charges.
Results of operations in the fourth quarter of 1996 include a restructuring
charge of $57.6 million for severance and exit costs for certain facilities.
As of December 31, 1997, employee severance costs related to the 1996 charge
have resulted in the termination of approximately 600 employees, primarily in
the international retail aftermarket and wholesale aftermarket operations, the
North American distribution business and a closed manufacturing operation. The
Company expects to pay out most of the remaining 1996 severance charge in
1998.
Exit costs for 1996 principally include lease termination costs of
international retail aftermarket stores and certain international wholesale
aftermarket operations, the consolidation of certain North American
distribution facilities and the closing of a North American manufacturing
operation. The Company expects to pay out most of the remaining 1996 exit
costs in 1998.
1995
Results of operations in the second and fourth quarters of 1995 include
restructuring charges of $6.1 million and $20.8 million, respectively, for
employee severance and exit costs for certain facilities.
Employee severance costs for 1995 resulted from the termination of
approximately 750 employees, primarily in Argentina, the United States and
Europe. Exit costs for 1995 include efforts to consolidate and restructure
selected operations primarily in the United States including costs for certain
aftermarket and related facilities consolidated after the acquisition of SPX
Corporation's Sealed Power Replacement aftermarket business. Operating results
for 1997 were increased by $0.9 million relating to 1995 exit costs being
reversed.
3. ADJUSTMENT OF ASSETS HELD FOR SALE TO FAIR VALUE AND OTHER LONG LIVED
ASSETS
The Company continually reviews all components of its businesses for
possible improvement of future profitability through acquisition, divestiture,
reengineering or restructuring.
The Company also continually reviews and updates its impairment reserves
related to the divestiture of its remaining international retail/wholesale
aftermarket operations and other long lived assets and adjusts the reserve
components to approximate their net fair value.
In the fourth quarter of 1997, the Company recognized a charge of $2.4
million to write-down certain long lived assets to fair value. As of December
31, 1997, assets held for sale primarily include retail aftermarket operations
in Puerto Rico, Ecuador, Venezuela and Panama. The Company expects to complete
the actions related to those assets to be disposed of in 1998.
During 1996, management designed and implemented a restructuring plan to
aggressively improve the Company's cost structure, streamline operations and
divest the Company of underperforming assets. As part of this plan, the
Company decided to sell 132 international retail aftermarket operations, sell
or restructure 30
F-10
<PAGE>
FEDERAL-MOGUL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
wholesale aftermarket operations and consolidate a North American
manufacturing operation. The carrying value of the assets held for sale was
reduced to fair value based on estimates of selling values less costs to sell.
Selling values used to determine the fair value of assets held for sale were
determined using market prices (i.e. valuation multiples) of comparable
companies from other 1996 transactions. The resulting adjustment of $148.5
million to reduce assets held for sale to fair value was recorded in the
fourth quarter of 1996. During 1997, the Company completed the following
actions related to the 1996 restructuring plan; 1) divested 72 international
retail aftermarket operations, 2) sold or restructured 25 wholesale
aftermarket operations, and 3) consolidated a North American manufacturing
operation (refer to Note 7). In 1996, the Company also recorded an additional
writedown of $2.8 million to the net asset value of the United States ball
bearings manufacturing operations. In 1995, the Company decided to sell the
ball bearings operations and reduced the carrying value by $17.0 million to
record assets held for sale at fair value.
In 1995, the Company decided to sell its heavy wall bearing operations in
Germany and Brazil and certain other non-strategic assets. The Company
estimated the fair value of the businesses held for sale based on discussions
with prospective buyers, adjusted for selling costs. The Company reduced its
carrying value by $17.0 million to record assets held for sale at fair value.
In addition, in 1995, the Company reduced the carrying value of certain
other impaired long-lived assets by $17.8 million to record them at fair
value. No further significant fair value adjustments were recorded for these
assets in 1996 or 1997.
The carrying value of net assets held for sale as of December 31, 1997 and
1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
(MILLIONS OF DOLLARS)
<S> <C> <C>
Accounts receivable............................. $ 5 $ 38
Inventory....................................... 27 88
Noncurrent assets............................... 3 11
Accounts payable................................ (4) (29)
Other net current liabilities................... (2) (1)
---------- -----------
Total....................................... $ 29 $ 107
========== ===========
</TABLE>
Net sales for all assets held for sale and adjusted to fair value
approximated $114 million, $335 million and $322 million in 1997, 1996 and
1995, respectively. Net sales for the remaining retail aftermarket operations
held for sale at December 31, 1997 approximated $44 million, $48 million and
$22 million in 1997, 1996 and 1995, respectively.
4. REENGINEERING AND OTHER RELATED CHARGES
Operating results for 1997 include a credit of $1.6 million relating to the
reversal of certain 1996 reengineering and other related charges.
In 1996, the Company initiated an extensive effort to strategically review
its businesses and focus on its competencies of manufacturing, engineering and
distribution. As a result of this process, the Company incurred $11.4 million
for professional fees and personnel costs related to the strategic review of
the Company and changes in management and related costs.
In 1995, the Company recognized $13.9 million for reengineering and other
costs. These costs included $7.0 million in professional fees and personnel
costs to reengineer the business on a Company-wide basis and $6.9 million
primarily for certain other non-recurring costs relating to brand
consolidation at the customer level of the Company's Federal-Mogul(R), TRW(R)
and Sealed Power(R) branded engine parts.
F-11
<PAGE>
FEDERAL-MOGUL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. CHANGES IN ACCOUNTING ESTIMATES
During the third and fourth quarters of 1996, the Company made certain
changes in accounting estimates totaling $51 million ($34 million after tax,
$.98 per share) attributable to 1996 events and new information becoming
available. The changes in accounting estimates included increasing the
provision for customer incentive programs and related sales initiatives by $18
million, increasing the provision for excess and obsolete inventory by $13
million, increasing the provision for bad debts by $3 million, increasing the
provision for environmental and legal matters by $9 million and increasing
various other provisions by approximately $8 million.
6. ACQUISITIONS OF BUSINESSES
The Company accounted for the following acquisitions as purchases, and
accordingly, the purchase prices have been allocated to the acquired assets
and assumed liabilities based on their estimated fair values as of the
acquisition date. The consolidated statements of operations include the
operating results of the acquired businesses from the acquisition dates.
In September 1995, the Company completed its acquisition of the Centropiezas
group, a chain of retail stores in Puerto Rico.
Also in September 1995, the Company purchased United Kingdom-based Seal
Technology Systems Ltd., a leading designer and manufacturer of a specialized
range of seals and gaskets for the automotive sector and other industrial
markets.
In June 1995, the Company acquired Bertolotti Pietro e Figli, S.r.1.
(Bertolotti), a distributor of premium brand European auto and truck parts
throughout Italy.
7. SALES OF BUSINESSES
Results of operations have been included through the applicable date of sale
for the following transactions:
During 1997, the Company received $73.6 million in net cash proceeds for
sales of their aftermarket operations in South Africa, Australia, and Chile
and their heavy wall bearing operations in Germany and Brazil.
During 1996, the Company received $42 million in net cash proceeds for sales
of their United States ball bearings and electrical products manufacturing
operations.
Except for the sale of the electrical products manufacturing operations,
sales of businesses in 1997 and 1996 relate to assets previously adjusted to
fair value (refer to Note 3). Accordingly, no gain or loss was recognized on
the date of sale related to these transactions. In addition, no gain or loss
was recognized related to the sale of the electrical products manufacturing
operations.
In December 1995, the Company sold its equity interest in Westwind Air
Bearings, Ltd. in the United Kingdom and its affiliated operations in the
United States and Japan for $20.5 million. The Company recognized a pretax
gain on the sale of $16.2 million.
In April 1995, the Company completed the sale of the operations and
substantially all of the assets of its Precision Forged Products Division to
Borg-Warner Automotive, Inc. The Company received $28.0 million in cash and
retained customer receivables while Borg-Warner assumed certain liabilities.
The Company recognized a pretax gain on the sale of $7.8 million.
F-12
<PAGE>
FEDERAL-MOGUL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. FINANCIAL INSTRUMENTS
Foreign Exchange Risk and Commodity Price Management
In connection with the proposed T&N plc acquisition (refer to Note 20) the
Company purchased a British pound currency option for $28.1 million with a
notional amount of $2.5 billion to cap the effect of potential unfavorable
fluctuations in the British pound/U.S. dollar exchange rate. The cost of the
option and its change in fair value has been reflected in the results of
operations in the fourth quarter of 1997. At December 31, 1997, the Company
recognized a net loss on this transaction of $10.5 million. The option was
settled in the first quarter of 1998 resulting in a loss of $17.3 million
(refer to Note 20).
The Company is subject to exposure to market risks from changes in foreign
exchange rates and raw material price fluctuations. Derivative financial
instruments are utilized by the Company to reduce those risks. Except for the
British pound currency option discussed above, the Company does not hold or
issue derivative financial instruments for trading purposes.
Other than the British pound currency option discussed above, the Company
does not have foreign exchange forward or currency option contracts
outstanding at December 31, 1997. As of December 31, 1996, the Company had
foreign exchange forward contracts principally for Japanese yen and South
African rand totaling a notional amount of $6.6 million. At December 31, 1996,
there was no deferred gain or loss related to foreign exchange forward
contracts.
The Company has entered into copper contracts to hedge against the risk of
price increases. These contracts are expected to offset the effects of price
changes on the firm purchase commitments for copper and expire in 1998. Under
the agreements, the Company is committed to purchase 7.3 million pounds of
copper. The net unrealized loss on these firm purchase commitments at December
31, 1997 is $0.7 million.
Deferred gains and losses are included in other assets and liabilities and
recognized in operations when the future purchase or sale occurs, or at the
point in time when the purchase or sale is no longer expected to occur.
Accounts Receivable Securitization
During 1997, the Company replaced an existing accounts receivable
securitization program with a new program which provides up to $100 million of
financing. On an ongoing basis, the Company sells certain accounts receivable
to Federal-Mogul Funding Corporation (FMFC), a wholly-owned subsidiary of the
Company, which then sells such receivables, without recourse, to a master
trust. Amounts sold under these arrangements were $63.2 million and $95
million at December 31, 1997 and 1996 respectively, and have been excluded
from the balance sheets. The Company's retained interest in the accounts
receivable sold to FMFC is included in the balance sheet caption Investment in
Accounts Receivable Securitization.
Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of accounts receivable and
cash investments. The Company's customer base includes virtually every
significant global automotive manufacturer and a large number of distributors
and installers of automotive aftermarket parts. The Company's credit
evaluation process, reasonably short collection terms and the geographical
dispersion of sales transactions help to mitigate any concentration of credit
risk. The Company requires placement of investments in financial institutions
evaluated as highly creditworthy.
The Company does not generally require collateral for its trade accounts
receivable or those assets included in the investment in accounts receivable
securitization. The allowance for doubtful accounts of $18.7 million and $16.3
million at December 31, 1997 and 1996 is based upon the expected
collectibility of trade accounts receivable.
F-13
<PAGE>
FEDERAL-MOGUL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Fair Value of Financial Instruments
The carrying amounts of certain financial instruments such as cash and
equivalents, accounts receivable, accounts payable, British pound currency
option, and short-term debt approximate their fair values. The carrying
amounts and estimated fair values of the Company's long term debt were $273.1
million and $286.1 million at December 31, 1997. The fair value of the long-
term debt is estimated using discounted cash flow analysis and the Company's
current incremental borrowing rates for similar types of arrangements.
9. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and include expenditures
which materially extend the useful lives of existing buildings, machinery and
equipment.
Depreciation is computed principally by the straight-line method for
financial reporting purposes and by accelerated methods for income tax
purposes. Depreciation expense for the years ended December 31, 1997, 1996 and
1995, was $42.6 million, $49.8 million and $48.3 million, respectively.
At December 31, property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIFE 1997 1996
----------- ------ ------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Land.......................................... -- $ 29.1 $ 32.1
Buildings and building improvements........... 40 yrs. 124.0 144.1
Machinery and equipment....................... 3-12 yrs. 363.4 378.8
------ ------
516.5 555.0
Accumulated depreciation...................... (202.6) (204.7)
------ ------
$313.9 $350.3
====== ======
</TABLE>
The Company leases various facilities and equipment under both capital and
operating leases. Net assets subject to capital leases were not significant at
December 31, 1997 and 1996.
The balance of the deferred gain resulting from the 1988 sale and leaseback
of a portion of the corporate headquarters complex was $7.1 million at
December 31, 1997. The deferred gain is being amortized over the term of the
lease as a reduction of rent expense. Future minimum payments under
noncancelable operating leases with initial or remaining terms of more than 1
year are, in millions: 1998--$20.3; 1999--$16.8; 2000 $13.8; 2001--$11.8;
2002--$10.6 and thereafter $42.0. Future minimum lease payments have been
reduced by approximately $26.2 million for amounts to be received under
sublease agreements.
Total rental expense under operating leases was $29.1 million in 1997, $33.8
million in 1996 and $34.0 million in 1995, exclusive of property taxes,
insurance and other occupancy costs generally payable by the Company.
10. DEBT
In December 1997, the Company entered into a $3.25 billion committed bank
facility with a reputable financial institution related to the proposed T&N
plc acquisition (refer to Note 20). The facility provides for up to $2.75
billion of senior debt and up to $500 million of subordinated debt. This
facility is contingent upon the acquisition of T&N plc. Accordingly no amounts
are outstanding as of December 31, 1997.
F-14
<PAGE>
FEDERAL-MOGUL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In June 1997, the Company entered into a new $350 million multicurrency
revolving credit facility with a consortium of international banks which
matures in June 2002. The multicurrency revolving credit facility replaced the
existing U.S. and European revolving credit facilities. The multicurrency
revolving credit facility contains restrictive covenants that, among other
matters, require the Company to maintain certain financial ratios. As of
December 31, 1997, there were no borrowings outstanding against the
multicurrency revolving credit facility. As of December 31, 1996, the Company
had $185 million borrowed against the U.S. revolver and $9 million borrowed
against the European revolver, both of which were included in short-term debt.
Short-term debt also includes international subsidiaries local credit
arrangements that have terms in accordance with local customary practice. The
weighted average interest rate for the Company's short-term debt was 9.9% and
7.9% as of December 31, 1997 and 1996, respectively.
Long-term debt at December 31 consists of the following:
<TABLE>
<CAPTION>
1997 1996
------ ------
(MILLIONS OF
DOLLARS)
<S> <C> <C>
Medium-term notes.......................................... $125.0 $125.0
Senior notes............................................... 124.6 --
Private placement debt..................................... -- 64.7
ESOP obligation............................................ 21.9 28.0
Other...................................................... 11.8 17.8
------ ------
283.3 235.5
Less current maturities included in short-term debt........ 10.2 25.9
------ ------
$273.1 $209.6
====== ======
</TABLE>
In April 1997, the Company issued $125.0 million of ten-year 8.8% senior
notes.
During the second quarter of 1997, the Company retired $64.7 million in
private placement debt. The early retirement of the debt required a make-whole
payment of $4.1 million, which was recognized as an extraordinary item of $2.6
million, net of the related tax benefit.
In August 1994, the Company initiated a medium-term note program for up to
$200 million. Notes were issued in maturities ranging from five to ten years.
The average interest rate was approximately 8.4%.
The ESOP obligation represents the unpaid principal balance on an 11 year
loan entered into by the Company's ESOP in 1989. Proceeds of the loan were
used by the ESOP to purchase the Company's Series C ESOP preferred stock.
Payment of principal and interest on the notes is unconditionally guaranteed
by the Company, and therefore, the unpaid principal balance of the borrowing
is classified as long-term debt. Company contributions and dividends on the
preferred shares held by the ESOP are used to meet semi-annual principal and
interest obligations.
The original ESOP obligation bore an annual interest rate of 11.5%. The
obligation was refinanced on June 30, 1995 at a fixed interest rate of 7.2%.
The ESOP obligation matures in December 2000.
Aggregate maturities of long-term debt for each of the years following 1998
are, in millions: 1999--$29.2; 2000--$31.8; 2001--$45.0; 2002--$6.0 and
thereafter $161.1.
Interest paid in 1997, 1996 and 1995 was $30.7 million, $43.5 million and
$37.1 million, respectively.
F-15
<PAGE>
FEDERAL-MOGUL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. CAPITAL STOCK AND PREFERRED SHARE PURCHASE RIGHTS
The Company's articles of incorporation authorize the issuance of 60,000,000
shares of common stock, of which 40,196,603 shares, 35,130,359 shares and
35,044,859 shares were outstanding at December 31, 1997, 1996 and 1995,
respectively.
In August 1997, the Company announced a call for the redemption of all its
outstanding $3.875 Series D Convertible Exchangeable Preferred Stock. These
preferred stockholders elected to convert each preferred share into 2.778
shares of common stock. The Company issued 4.4 million shares of common stock
in exchange for all of the outstanding Series convertible exchangeable
preferred stock.
The Company's ESOP covers substantially all domestic salaried employees and
allocates Series ESOP Convertible Preferred Stock to eligible employees based
on their contributions to the Salaried Employees' Investment Program and their
eligible compensation. There were 773,351, 835,898 and 892,620 shares of
Series C ESOP preferred stock outstanding at December 31, 1997, 1996 and 1995,
respectively. The Series C ESOP preferred shares are nonvoting and pay
dividends at a rate of 7.5%. The Company repurchased and retired 62,547 Series
C ESOP preferred shares valued at $4.0 million during 1997 and 56,722 Series C
ESOP preferred shares valued at $3.6 million during 1996, all of which were
forfeited by participants upon early withdrawal from the plan.
The Series C ESOP preferred stock is convertible into shares of the
Company's common stock at a rate of two shares of common stock for each share
of preferred stock. The Series C ESOP preferred stock may be issued only to a
trustee acting on behalf of an employee stock ownership plan or other employee
benefit plan of the Company. These shares are automatically converted into
shares of common stock in the event of any transfer to any person other than
the plan trustee. The Series C ESOP preferred stock is redeemable, in whole or
in part, at the option of the Company.
The charge to operations for the cost of the ESOP was $5.2 million in 1997,
$4.2 million in 1996 and $4.4 million in 1995. The Company made cash
contributions to the plan of $8.1 million in 1997 and 1996, and $8.5 million
in 1995, including preferred stock dividends of $3.8 million in 1997, $4.1
million in 1996 and $4.3 million in 1995. ESOP shares are released as
principal and interest on the debt is paid. The ESOP Trust uses the preferred
dividends not allocated to employees to make principal and interest payments
on the debt. Compensation expense is measured based on the fair value of
shares committed to be released to employees. Dividends on ESOP shares are
treated as a reduction of retained earnings in the period declared. The number
of allocated shares and suspense shares held by the ESOP were 532,817 and
240,534 at December 31, 1997, and 504,435 and 331,463 at December 31, 1996,
respectively. There were no committed-to-be-released shares at December 31,
1997 and December 31, 1996. Any repurchase of the ESOP shares is strictly at
the option of the Company.
In 1988, the Company's Board of Directors authorized the distribution of one
Preferred Share Purchase Right (Right) for each outstanding share of common
stock of the Company. Each Right entitles shareholders to buy one-half of one-
hundredth of a share of a new Series of preferred stock at a price of $70.
As distributed, the Rights trade together with the common stock of the
Company. They may be exercised or traded separately only after the earlier to
occur of: (i) ten days following a public announcement that a person or group
of persons has obtained the right to acquire 10% or more of the outstanding
common stock of the Company (20% in the case of certain institutional
investors), or (ii) ten business days (or such later date as may be determined
by action of the Board of Directors) following the commencement or
announcement of an intent to make a tender offer or exchange offer which would
result in beneficial ownership by a person or group of persons
F-16
<PAGE>
FEDERAL-MOGUL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of 10% or more of the Company's outstanding common stock. Additionally, if the
Company is acquired in a merger or other business combination, each Right will
entitle its holder to purchase, at the Right's exercise price, shares of the
acquiring Company's common stock (or stock of the Company if it is the
surviving corporation) having a market value of twice the Right's exercise
price.
The Rights may be redeemed at the option of the Board of Directors for $.005
per Right at any time before a person or group of persons acquires 10% or more
of the Company's common stock. The Board may amend the Rights at any time
without shareholder approval. The Rights will expire by their terms on
November 14, 1998.
12. MINORITY INTEREST--PREFERRED SECURITIES OF AFFILIATE
In December 1997, the Company's wholly-owned financing trust ("Affiliated")
completed a $575 million private issue of 11.5 million shares of 7.0% Trust
Convertible Preferred Securities ("TCP Securities") with a liquidation value
of $50 per convertible security. The net proceeds from the TCP Securities were
used to purchase an equal amount of 7.0% Convertible Junior Subordinate
Debentures ("Debentures") of the Company. The TCP Securities represent an
undivided interest in the Affiliate's assets, with a liquidation preference of
$50 per security.
Distribution on the TCP Securities are cumulative and will be paid quarterly
in arrears at an annual rate of 7.0%, and are included in the consolidated
statement of operations as a component of Other Expense, Net. The Company has
the option to defer payment of the distributions for an extension period of up
to 20 consecutive quarters if the Company is in compliance with the terms of
the TCP Securities.
The shares of the TCP Securities are convertible, at the option of the
holder, into the Company's common stock at an equivalent conversion price of
approximately $51.50 per share, subject to adjustment in certain events. The
TCP Securities and the Debentures will be redeemable, at the option of the
Company, on or after December 6, 2000 at a Redemption Price, expressed as a
percentage of principal which is added to accrued and unpaid interest. The
Redemption Price range is from 104.2% on December 6, 2000 to 100.0% after
December 1, 2007. All outstanding TCP Securities and Debentures are required
to be redeemed by December 1, 2027.
F-17
<PAGE>
FEDERAL-MOGUL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share (in millions, except per share data):
<TABLE>
<CAPTION>
1997 1996 1995
----- ------- ------
<S> <C> <C> <C>
Numerator:
Net earnings (loss) after extraordinary item...... $69.4 $(206.3) $ (5.8)
Extraordinary item--loss on early retirement of
debt net of applicable tax benefit............... (2.6) -- --
----- ------- ------
Net earnings (loss) before extraordinary item..... 72.0 (206.3) (5.8)
Series C preferred dividend requirement........... (2.4) (2.5) (2.7)
Series D preferred dividend requirement........... (3.1) (6.2) (6.2)
----- ------- ------
Numerator for basic earnings per share--income
(loss) available to common shareholders before
extraordinary item............................... $66.5 $(215.0) $(14.7)
Effect of dilutive securities:
Series C preferred dividend requirement......... 2.4 -- --
Series D preferred dividend requirement......... 3.1 -- --
Additional required ESOP contribution........... (1.9) -- --
----- ------- ------
Numerator for diluted earnings per share--income
(loss) available to common shareholders after
assumed conversions, before extraordinary item... $70.1 $(215.0) $(14.7)
----- ------- ------
Numerator for basic earnings per share--income
(loss) available to common shareholders after
extraordinary item................................. $63.9 $(215.0) $(14.7)
Numerator for diluted earnings per share--income
(loss) available to common shareholders after
extraordinary item................................. $67.5 $(215.0) $(14.7)
Denominator:
Denominator for basic earnings per share--weighted
average shares 36.6 34.7 34.6
Effect of dilutive securities:
Dilutive stock options outstanding.............. 0.4 -- --
Nonvested stock................................. 0.3 -- --
Conversion of Series C preferred stock.......... 1.6 -- --
Conversion of Series D preferred stock.......... 3.0 -- --
----- ------- ------
Dilutive potential common shares.................. 5.3 -- --
Denominator for dilutive earnings per share--
adjusted weighted average shares and assumed
conversions.................................... 41.9 34.7 34.6
===== ======= ======
Basic earnings (loss) per share before extraordinary
item............................................... $1.81 $ (6.20) $(0.42)
===== ======= ======
Basic earnings (loss) per share after extraordinary
item............................................... $1.74 $ (6.20) $(0.42)
===== ======= ======
Diluted earnings (loss) per share before
extraordinary item................................. $1.67 $ (6.20) $(0.42)
===== ======= ======
Diluted earnings (loss) per share after
extraordinary item................................. $1.61 $ (6.20) $(0.42)
===== ======= ======
</TABLE>
For additional disclosures regarding the Series C and Series D preferred
stock, the employee stock options and nonvested stock shares, refer to Notes
11 and 14.
Convertible preferred securities (refer to Note 12) redeemable for 11.5
million shares of common stock were outstanding for a portion of 1997 but were
not included in the computation of diluted earnings per share because the
effect would be antidilutive.
F-18
<PAGE>
FEDERAL-MOGUL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. INCENTIVE STOCK PLANS
The Company's shareholders adopted stock option plans in 1976 and 1984 and
performance incentive stock plans in 1989 and 1997. These plans provide
generally for awarding restricted shares or granting options to purchase
shares of the Company's common stock. Restricted shares entitle employees to
all the rights of common stock shareholders, subject to certain transfer
restrictions and to forfeiture in the event that the conditions for their
vesting are not met. Options entitle employees to purchase shares at an
exercise price not less than 100% of the fair market value on the grant date
and expire after a five or ten year period as determined by the Board of
Directors.
Under the plans, awards vest from 6 months to 5 years after their date of
grant, as determined by the Board of Directors at the time of grant. At
December 31, 1997, there were 934,245 shares available for future grants under
the plans.
In October 1997, the Company met certain share price performance criteria
under the 1989 Long-Term Incentive Plan which resulted in the recognition of
$5.4 million in compensation expense relating to the vesting of restricted
stock awards. The total compensation cost that has been charged to operations
for vesting of restricted stock awards was $9.0 million, $0.4 million and $0.1
million in 1997, 1996 and 1995, respectively.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock awards. Accordingly, no
compensation cost has been recognized for its stock option grants, as the
exercise price of the Company's employee stock options equals the underlying
stock price on the date of grant. Had compensation cost for the Company's
stock-based compensation plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of
Financial Accounting Standards Board Statement No. 123 "Accounting for Stock
Based Compensation," the Company's net earnings (loss), in millions, and
earnings (loss) per share would have been adjusted to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
----- ------- -----
<S> <C> <C> <C>
Net earnings (loss) as reported.................... $69.4 $(206.3) $(5.8)
Pro forma.......................................... $70.7 $(207.1) $(6.0)
Basic earnings (loss) per share as reported........ $1.74 $ (6.20) $(.42)
Pro forma.......................................... $1.78 $ (6.22) $(.43)
Diluted earnings (loss) per share as reported...... $1.61 $ (6.20) $(.42)
Pro forma.......................................... $1.64 $ (6.22) $(.43)
</TABLE>
Pro forma information regarding net income and earnings per share is
required by Statement 123 as if the Company had accounted for its employee
stock options under the fair value method. The fair value for options is
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted-average assumptions for 1997, 1996 and 1995,
respectively: risk-free interest rates of 6.5%; dividend yields of 1.5%, 2.3%
and 2.4%; volatility factors of the expected market price of the Company's
common stock of 27.2%, 11.2% and 8.1% and a weighted average expected life of
the option of five years. The fair value of nonvested stock awards is equal to
the market price of the stock on the date of the grant.
Since the above pro forma disclosures of results are only required to
consider grants awarded in 1995 and thereafter, the pro forma effects during
this initial phase-in period may not be representative of the effects on the
reported results for future years.
The weighted average fair value and the total number (in millions) of
options granted was $9.99, $3.34 and $3.09, and 0.9, 0.3 and 0.1 for 1997,
1996 and 1995, respectively. The weighted average fair value and total
F-19
<PAGE>
FEDERAL-MOGUL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
number of nonvested stock awards granted was $24.47, $18.90 and $18.38 and
0.1, 0.2 and 0.4 for 1997, 1996 and 1995, respectively. All options and stock
awards that are not vested at December 31, 1997, vest solely on employees'
rendering additional service.
The following table summarizes the activity relating to the Company's
incentive stock plans:
<TABLE>
<CAPTION>
NUMBER OF SHARES WEIGHTED-AVERAGE
(IN MILLIONS) PRICE
---------------- ----------------
<S> <C> <C>
Outstanding at January 1, 1995......... 2.4 $22.98
Options/stock granted................ .5 18.72
Options/stock lapsed or canceled..... (.3) 23.69
---- ------
Outstanding at December 31, 1995....... 2.6 22.02
Options/stock granted................ .5 22.08
Options exercised.................... -- --
Options/stock lapsed or canceled..... (.6) 22.32
---- ------
Outstanding at December 31, 1996....... 2.5 22.03
Options/stock granted................ 1.0 31.74
Options exercised/stock vested....... (1.0) 21.94
Options/stock lapsed or canceled..... (0.3) 22.29
---- ------
Outstanding at December 31, 1997....... 2.2 $26.46
==== ======
Options exercisable at December 31,
1997................................ 0.9 $23.07
==== ======
Options exercisable at December 31,
1996................................ 1.3 $22.50
==== ======
Options exercisable at December 31,
1995................................ 1.5 $21.50
==== ======
</TABLE>
The following is a summary of the range of exercise prices for stock options
that are outstanding and the amount of nonvested stock awards at December 31,
1997:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
OUTSTANDING ----------------
AWARDS REMAINING
RANGE (IN MILLIONS) PRICE LIFE
----- ------------- ------ ---------
<S> <C> <C> <C>
Options:
$15.69 to $23.50......................... 0.8 $21.63 4 years
$23.50 to $41.28......................... 1.2 $31.26 5 years
Nonvested stock.......................... 0.2 -- --
---
Total.................................. 2.2
===
</TABLE>
15. POSTEMPLOYMENT BENEFITS
The Company maintains several defined benefit pension plans which cover
substantially all domestic employees and certain employees in other countries.
Benefits for domestic salaried employees are based on compensation, age and
years of service, while hourly employees' benefits are primarily based on
negotiated rates and years of service. International plans maintained by the
Company provide benefits based on years of service and compensation.
The Company's funding policy is consistent with funding requirements of
federal and international laws and regulations. Plan assets consist primarily
of listed equity securities and fixed income instruments.
F-20
<PAGE>
FEDERAL-MOGUL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net periodic pension cost for the Company's defined benefit plans in 1997,
1996 and 1995 consists of the following:
UNITED STATES PLANS
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
(MILLIONS OF
DOLLARS)
(INCOME)/EXPENSE
<S> <C> <C> <C>
Service cost--benefits earned during the period. $ 7.8 $ 9.0 $ 7.3
Interest cost on projected benefit obligation... 14.0 15.0 15.0
Actual return on plan assets.................... (61.8) (30.8) (51.6)
Net amortization and deferral................... 33.4 3.3 28.6
Curtailment loss................................ -- 3.7 .5
------ ------ ------
Net periodic pension (income) cost.............. $ (6.6) $ .2 $ (.2)
====== ====== ======
INTERNATIONAL PLANS
<CAPTION>
1997 1996 1995
------ ------ ------
(MILLIONS OF
DOLLARS)
(INCOME)/EXPENSE
<S> <C> <C> <C>
Service cost--benefits earned during the period. $ .3 $ .4 $ .4
Interest cost on projected benefit obligation... 1.9 2.5 2.7
------ ------ ------
Net periodic pension cost....................... $ 2.2 $ 2.9 $ 3.1
====== ====== ======
</TABLE>
The following table sets forth the funded status for the Company's defined
benefit plans at December 31:
UNITED STATES PLANS
<TABLE>
<CAPTION>
PLANS WITH ASSETS PLANS WITH
IN EXCESS OF ACCUMULATED
ACCUMULATED BENEFITS IN
BENEFITS EXCESS OF ASSETS
------------------- ------------------
1997 1996 1997 1996
--------- -------- -------- --------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C> <C>
Actuarial present value of
benefit obligations:
Vested benefit obligation....... $ 129.9 $ 96.2 $ 45.8 $ 88.8
========= ======== ======== ========
Accumulated benefit obligation.. 139.1 102.1 55.5 106.4
========= ======== ======== ========
Projected benefit obligation.... 140.8 104.0 56.4 107.1
--------- -------- -------- --------
Plan assets at fair value....... 243.8 177.8 49.9 84.8
--------- -------- -------- --------
Plan assets in excess of (less
than) projected benefit
obligation..................... 103.0 73.8 (6.5) (22.3)
Unrecognized net (asset)
liability at transition........ (2.7) (5.8) .7 .5
Unrecognized prior service cost. 3.7 .5 6.0 10.0
Unrecognized net (gain) loss.... (54.7) (23.2) (5.6) 3.2
--------- -------- -------- --------
Accrued pension asset
(liability) included in the
consolidated balance sheets.... $ 49.3 $ 45.3 $ (5.4) $ (8.6)
========= ======== ======== ========
</TABLE>
F-21
<PAGE>
FEDERAL-MOGUL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
INTERNATIONAL PLANS
<TABLE>
<CAPTION>
ACCUMULATED
BENEFITS
EXCEED ASSETS
--------------
1997 1996
------ ------
(MILLIONS OF
DOLLARS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation.............................. $ 25.3 $ 32.9
------ ------
Accumulated benefit obligation......................... 26.6 34.5
------ ------
Projected benefit obligation........................... 26.6 34.5
------ ------
Plan assets less than projected benefit obligation....... (26.6) (34.5)
Unrecognized net loss.................................... 2.8 4.0
------ ------
Accrued pension liability included in the consolidated
balance sheet........................................... $(23.8) $(30.5)
====== ======
</TABLE>
The assumptions used in computing the above information are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Discount rates....................................... 7 1/2% 7 1/2% 7 1/2%
Rates of increase in compensation levels............. 4 1/2% 4 1/2% 4 1/2%
Expected long-term rates of return on assets......... 10% 10% 10%
</TABLE>
The Company's minimum liability adjustment was $1.3 million and $13.4
million for United States plans at December 31, 1997 and 1996, respectively,
and $2.7 million and $3.5 million for international plans at December 31, 1997
and 1996, respectively.
The Company also provides health care and life insurance benefits for
certain domestic retirees covered under company-sponsored benefit plans.
Participants in these plans may become eligible for these benefits if they
reach normal retirement age while working for the Company. The Company's
policy is to fund benefit costs as they are provided, with retirees paying a
portion of the costs.
The components of net periodic postretirement benefit costs are as follows
as of December 31:
<TABLE>
<CAPTION>
1997 1996 1995
----- ---- -----
(MILLIONS OF
DOLLARS)
<S> <C> <C> <C>
Service cost.......................................... $ 2.5 $2.8 $ 2.3
Interest cost......................................... 10.5 10.8 10.4
Curtailment gain...................................... -- (7.5) (1.0)
Amortized gains....................................... (.5) (.5) (1.1)
----- ---- -----
Net periodic postretirement benefits cost............. $12.5 $5.6 $10.6
===== ==== =====
</TABLE>
The following schedule reconciles the funded status of the Company's
postretirement benefit plans to the amounts recorded in the Company's balance
sheets as of December 31:
<TABLE>
<CAPTION>
1997 1996
------ ------
(MILLIONS OF
DOLLARS)
<S> <C> <C>
Accumulated postretirement benefit obligation (APBO):
Retirees................................................... $107.6 $103.9
Active plan participants................................... 42.8 46.9
------ ------
150.4 150.8
Unrecognized net gain (loss)............................... 3.8 (1.4)
Unrecognized prior service cost............................ 3.5 4.1
------ ------
Accrued postretirement benefits liability.................. $157.7 $153.5
====== ======
</TABLE>
F-22
<PAGE>
FEDERAL-MOGUL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The discount rate used in determining the APBO was 7.5% at December 31, 1997
and 1996.
At December 31, 1997, the assumed annual health care cost trend used in
measuring the APBO approximated 7.5% in 1997 declining to 7.1% in 1998 and to
an ultimate rate of 5.5% estimated to be achieved in 2009.
At December 31, 1996, the assumed annual health care cost trend used in
measuring the APBO approximated 7.5% in 1996, declining to 7.1% in 1997 and to
an ultimate annual rate of 5.5% estimated to be achieved in 2008.
Increasing the assumed cost trend rate by 1% each year would have increased
the APBO by approximately 8.3% and 8.4% at December 31, 1997 and 1996,
respectively. Aggregate service and interest costs would have increased by
approximately 9.4% for 1997 and 1996, and 12.9% for 1995.
In 1991, the Company established a retiree health benefits account (as
defined in Section 401(h) of the Internal Revenue Code) within its domestic
salaried employees' pension plan. Annually, the Company may elect to transfer
excess pension plan assets (subject to defined limitations) to the 401(h)
account for purposes of funding current salaried retiree health care costs.
The Company transferred excess pension plan assets of $4.4 million in 1997,
$4.2 million in 1996 and $4.2 million in 1995 to the 401(h) account to fund
salaried retiree health care benefits.
The Company sponsors two defined contribution retirement saving plans
covering substantially all domestic employees. Matching Company contributions
for the Salaried Employees' Investment Program are provided through the ESOP
(refer to Note 11). In addition, the Company provided matching contributions
to eligible employees based upon their contributions to the Employee
Investment Program of approximately $1.5 million, $1.6 million, and $1.2
million for 1997, 1996, and 1995, respectively.
16. INCOME TAXES
Under the liability method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. The
components of earnings (loss) before income taxes and extraordinary item
consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
----- ------- -----
(MILLIONS OF
DOLLARS)
<S> <C> <C> <C>
Domestic............................................ $50.1 $ (88.3) $ 7.9
International....................................... 49.4 (140.4) (11.2)
----- ------- -----
$99.5 $(228.7) $(3.3)
===== ======= =====
Significant components of the provision for income taxes (tax benefit) are as
follows:
<CAPTION>
1997 1996 1995
----- ------- -----
(MILLIONS OF
DOLLARS)
<S> <C> <C> <C>
Current:
Federal........................................... $ 9.6 $ (4.0) $12.7
State and local................................... 0.2 2.3 1.2
International..................................... 6.6 6.3 9.3
----- ------- -----
Total current................................... 16.4 4.6 23.2
Deferred:
Federal........................................... 6.1 (25.2) (9.0)
State and local................................... 0.7 (1.8) (.9)
International..................................... 4.3 -- (10.8)
----- ------- -----
Total deferred.................................. 11.1 (27.0) (20.7)
----- ------- -----
$27.5 $ (22.4) $ 2.5
===== ======= =====
</TABLE>
F-23
<PAGE>
FEDERAL-MOGUL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The reconciliation of income taxes (tax benefits) computed at the United
States federal statutory tax rate to income tax expense (benefit) is:
<TABLE>
<CAPTION>
1997 1996 1995
----- ------ -----
(MILLIONS OF
DOLLARS)
<S> <C> <C> <C>
Income taxes (tax benefits) at United States
statutory rate.................................... $34.9 $(80.1) $(1.1)
Tax effect from:
Tax credits, state income taxes and other........ 2.1 1.8 (2.3)
Tax benefit related to the sale of South African
and Australian businesses....................... (6.8) -- --
Losses on international operations without tax
benefits and foreign tax rate differences....... (2.7) 55.9 5.9
----- ------ -----
$27.5 $(22.4) $ 2.5
===== ====== =====
The following table summarizes the Company's total provision for income
taxes/(tax benefits):
<CAPTION>
1997 1996 1995
----- ------ -----
(MILLIONS OF
DOLLARS)
<S> <C> <C> <C>
Income tax expense (benefit)....................... $27.5 $(22.4) $ 2.5
Allocated to equity:
Currency translation............................. (3.6) (4.9) 5.3
Preferred dividends.............................. (1.3) (1.5) (1.6)
Investment securities............................ (0.6) .8 --
Other............................................ 1.2 .7 .8
----- ------ -----
$23.2 $(27.3) $ 7.0
===== ====== =====
</TABLE>
Significant components of the Company's deferred tax assets and liabilities
as of December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
------ ------
(MILLIONS OF
DOLLARS)
<S> <C> <C>
Deferred tax assets:
Postretirement benefits................................ $ 58.2 $ 57.2
Net operating loss carryforwards of international
subsidiaries.......................................... 45.0 68.1
Loss on foreign investment............................. 23.2 49.0
Restructuring costs.................................... -- 8.3
Inventory basis........................................ 10.3 12.0
Allowance for doubtful accounts........................ 11.3 7.0
Other temporary differences............................ 36.9 27.6
------ ------
Total deferred tax assets............................ 184.9 229.2
Valuation allowance for deferred tax assets.............. (44.4) (89.4)
------ ------
Net deferred tax assets.............................. 140.5 139.8
------ ------
Deferred tax liabilities:
Fixed asset basis differences.......................... (50.5) (55.0)
Pension................................................ (17.3) (12.4)
Restructuring costs.................................... (8.1) --
------ ------
Total deferred tax liabilities....................... (75.9) (67.4)
------ ------
$64.6 $ 72.4
====== ======
</TABLE>
F-24
<PAGE>
FEDERAL-MOGUL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred tax assets and liabilities are recorded in the consolidated balance
sheets as follows:
<TABLE>
<CAPTION>
1997 1996
----- -----
(MILLIONS
OF DOLLARS)
<S> <C> <C>
Assets:
Prepaid expenses and income tax benefits.................. $46.6 $54.6
Business investments and other assets..................... 26.7 21.9
Liabilities:
Other current accrued liabilities......................... (4.2) (3.6)
Other long-term accrued liabilities....................... (4.5) (.5)
----- -----
$64.6 $72.4
===== =====
</TABLE>
Income taxes paid in 1997, 1996 and 1995 were $2.6 million, $6.7 million and
$19.4 million, respectively.
Undistributed earnings of the Company's international subsidiaries amounted
to approximately $39 million at December 31, 1997. No taxes have been provided
on approximately $30 million of these earnings, which are considered by the
Company to be permanently reinvested.
F-25
<PAGE>
FEDERAL-MOGUL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Upon distribution of these earnings, the Company would be subject to United
States income taxes and foreign withholding taxes. Determining the
unrecognized deferred tax liability on the distribution of these earnings is
not practicable as such liability, if any, is dependent on circumstances
existing when remittance occurs.
The Company has a $67 million German net operating loss carryforward at
December 31, 1997 that has no expiration date. The Company has $50 million of
additional foreign operating losses with various expiration dates through
2003.
17. OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA
The Company is a global manufacturer and distributor of a broad range of
non-discretionary parts, primarily vehicular components for automobiles, light
trucks, heavy duty trucks, farm and construction vehicles. The Company sells
parts to original equipment manufacturers, principally the major automotive
manufacturers in the United States and Europe. Through its worldwide
distribution network, the Company also sells replacement parts in the
vehicular replacement market. All of these activities constitute a single
business segment. Canadian operations are aggregated with the U.S. operations
as they are not significant under the materiality thresholds of Financial
Accounting Standards Board Statement No. 14.
Financial information, summarized by geographic area, is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(MILLIONS OF DOLLARS)
<S> <C> <C> <C>
Net sales:
United States and Canada.................. $1,132.2 $1,224.7 $1,280.6
Europe.................................... 372.3 436.0 382.8
Other international....................... 302.1 372.0 336.4
-------- -------- --------
$1,806.6 $2,032.7 $1,999.8
======== ======== ========
Operating earnings (loss):
United States and Canada.................. $ 114.3 $ (53.2) $ 57.5
Europe.................................... 20.6 11.8 (13.2)
Other international....................... 31.9 (112.8) 13.2
-------- -------- --------
166.8 (154.2) 57.5
Corporate expenses and other................ (27.9) (27.7) (27.8)
-------- -------- --------
$ 138.9 $ (181.9) $ 29.7
======== ======== ========
Identifiable assets:
United States and Canada.................. $1,240.4 $ 775.5 $ 893.5
Europe.................................... 467.0 451.0 493.9
Other international....................... 94.7 228.7 322.7
-------- -------- --------
$1,802.1 $1,455.2 $1,710.1
======== ======== ========
</TABLE>
Transfers between geographic areas are not significant, and when made, are
recorded at prices comparable to normal unaffiliated customer sales.
The information presented above was prepared in accordance with Statement
14. In 1997, the Financial Accounting Standards Board issued Statement No.
131, Disclosures about Segments of an Enterprise and Related Information. The
statement supersedes Statement 14 and establishes standards for the way public
business enterprises report selected information about operating segments in
annual reports and interim financial reports issued to shareholders. Statement
131 is effective for fiscal years beginning after December 15, 1997. For the
year ended 1998, the Company will provide financial and descriptive
information about its reportable operating segments to conform to the
requirements.
F-26
<PAGE>
FEDERAL-MOGUL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
18. LITIGATION AND ENVIRONMENTAL MATTERS
The Company is one of a large number of defendants in a number of lawsuits
brought by claimants alleging injury due to exposure to asbestos. The Company
is defending all such claims vigorously and believes it has substantial
defenses to liability and adequate insurance coverage for its defense costs.
The Company is also involved in various other legal actions and claims. While
the outcome of litigation cannot be predicted with certainty, after consulting
with counsel for the Company, management believes that these matters will not
have a material effect on the Company's consolidated financial statements.
The Company is a party to lawsuits filed in various jurisdictions alleging
claims pursuant to the Comprehensive Environmental Response Compensation and
Liability Act of 1980 (CERCLA) or other state or federal environmental laws.
In addition, the Company has been notified by the Environmental Protection
Agency and various state agencies that it may be a potentially responsible
party (PRP) for the cost of cleaning up certain other hazardous waste storage
or disposal facilities pursuant to CERCLA and other federal and state
environmental laws. PRP designation requires the funding of site
investigations and subsequent remedial activities. Although these laws could
impose joint and several liability upon each party at any site, the potential
exposure is expected to be limited because at all sites other companies,
generally including many large, solvent public companies, have been named as
PRPs. In addition, the Company has identified certain present and former
properties at which it may be responsible for cleaning up environmental
contamination. The Company is actively seeking to resolve these matters.
Although difficult to quantify based on the complexity of the issues, the
Company has accrued the estimated cost associated with such matters based upon
current available information from site investigations and consultants. The
environmental and legal reserve was approximately $11 million at December 31,
1997 and $12 million at December 31, 1996 and is included in other long-term
accrued liabilities. Management believes these accruals, which have not been
reduced by any anticipated insurance proceeds, will be adequate to cover the
Company's estimated liability for these exposures.
F-27
<PAGE>
FEDERAL-MOGUL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND(1) THIRD FOURTH(2) YEAR
------ --------- -------- --------- --------
(MILLIONS OF DOLLARS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Net sales...................... $485.6 $481.8 $424.2 $ 415.0 $1,806.6
Gross margin................... 112.1 115.3 102.8 94.6 424.8
Net earnings before
extraordinary item............ 13.9 28.5 17.4 12.2 72.0
Extraordinary item--loss on
early retirement of debt, net
of tax benefit................ -- (2.6) -- -- (2.6)
Net earnings................... 13.9 25.9 17.4 12.2 69.4
Diluted earnings per share(5).. .32 .61 .40 .28 1.61
<CAPTION>
FIRST SECOND THIRD(3) FOURTH(4) YEAR
------ --------- -------- --------- --------
(MILLIONS OF DOLLARS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996:
Net sales...................... $522.9 $536.6 $492.4 $ 480.8 $2,032.7
Gross margin................... 113.2 117.5 83.2 58.3 372.2
Net earnings (loss)............ 11.2 15.9 (12.6) (220.8) (206.3)
Diluted earnings (loss) per
share(5)...................... .25 .36 (.43) (6.43) (6.20)
</TABLE>
- --------
(1) Includes an income tax benefit of $6.8 million related to the sales of the
South African and Australian businesses.
(2) Includes $1.1 million for a net restructuring credit, a $2.4 million
charge for an adjustment of assets held for sale to fair value, a $1.6
million credit for reengineering and other related charges, and a $10.5
million net charge related to the British pound currency option.
(3) Net loss includes a pretax charge of $38.5 million primarily relating to
changes in estimates, adjustment of assets held for sale to fair value and
other related charges.
(4) Net loss includes a pretax charge for restructuring of $57.6 million,
adjustment of assets held for sale to fair value of $144.9 million and
$61.7 million primarily relating to changes in estimates, and other
related charges.
(5) The 1996 and first three quarters of 1997 earnings per share amounts have
been restated to comply with Statement 128, Earnings Per Share.
<TABLE>
<CAPTION>
1997 1996
------------- -------------
QUARTER HIGH LOW HIGH LOW
------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
First......................................... $26.75 $21.63 $20.88 $17.38
Second........................................ 35.38 24.50 19.88 17.88
Third......................................... 39.94 32.75 22.50 16.25
Fourth........................................ 47.63 36.75 24.50 20.38
</TABLE>
Quarterly dividends of $.12 per common share were declared for 1997 and
1996. In February 1998, the Company's Board of Directors declared a quarterly
dividend of $.12 per common share. This was the 248th consecutive quarterly
dividend declared by the Company.
20. SUBSEQUENT EVENTS
T&N PLC Transaction
On October 16, 1997, the Company announced it made a cash offer to acquire
all the outstanding common stock of T&N plc (T&N) for 260 pence per share. The
offer valued T&N's issued share capital at approximately $2.4 billion. T&N,
headquartered in Manchester, England, had 1997 net sales of approximately $2.9
billion. On January 6, 1998, the Company's offer to acquire all of the
outstanding common stock of T&N was declared
F-28
<PAGE>
FEDERAL-MOGUL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
unconditional as to acceptances. By the second closing date under the offer,
January 2, 1998, valid acceptances of the offer had been received for
approximately 95% of the entire issued share capital of T&N. The Company will
finance the acquisition through a committed bank facility from a reputable
financial institution. The Company's intention is to put in place a permanent
capital structure with an appropriate combination of equity and debt
financing.
The offer is subject to various conditions customary in the United Kingdom
and the receipt of all applicable regulatory approvals in the United States
and Europe. As part of the acquisition process, certain financing,
professional and other related fees have been incurred in 1997. These fees
have been capitalized as incurred and will be accounted for as direct
acquisition or financing costs once the transaction closes. Management fully
expects the acquisition to close in the first quarter of 1998, however, in the
event the acquisition is not completed, these fees would be charged to
operations and would materially impact earnings at that time. As of December
31, 1997, the Company had capitalized $28 million of these fees. In addition,
the Company may elect to accelerate payment of certain portions of the bank
facility which would result in an extraordinary charge due to the write-off of
the financing cost associated with the early retirement of debt.
The British pound currency option (refer to Note 8) was settled by the
Company in the first quarter of 1998 resulting in a $17.3 million pretax loss.
Also in the first quarter of 1998, the Company entered into a forward contract
to purchase 1.5 billion British pounds for a notional amount of approximately
$2.45 billion. The forward contract expires in the first quarter of 1998.
Fel-Pro Incorporated Transaction
On February 24, 1998, the Company acquired Fel-Pro Inc., a privately owned
manufacturer, headquartered in Skokie, Illinois, with net sales of
approximately $500 million for total consideration of $720 million which
includes $225 million in equity and $495 million in cash. The $495 million in
cash was primarily provided through available borrowings on the $350 million
multicurrency revolver. The remaining consideration paid was through the
issuance of promissory notes.
Divestiture of Minority Interest
In February 1998, the Company announced the divestiture of its minority
interest in G. Bruss GmbH & Co. KG, a German manufacturer of seals and
gaskets. As part of the divestiture agreement the Company increased their
ownership to 100% in the Summerton, South Carolina gasket business. The
Company also received cash and recognized a gain as a result of these
transactions. The gain recognized is not expected to be significant to 1998
first quarter results.
F-29
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors of T&N plc
We have audited the accompanying consolidated balance sheets of T&N plc and
its subsidiaries at 31 December 1997 and 31 December 1996, and the related
consolidated profit and loss accounts, reconciliations of movements in
shareholders' funds and consolidated cash flow statements for each of the
years in the three year period ended 31 December 1997. These consolidated
financial statements are the responsibility of the management of T&N plc. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United Kingdom, which are substantially consistent with those
of the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of T&N plc
and its subsidiaries at 31 December 1997 and 31 December 1996, and the results
of their operations and their cash flows for each of the years in the three
year period ended 31 December 1997, in conformity with generally accepted
accounting principles in the United Kingdom.
Accounting principles generally accepted in the United Kingdom vary in
certain significant respects from accounting principles generally accepted in
the United States of America. Application of accounting principles generally
accepted in the United States would have affected net income for the two years
ended 31 December 1997 and shareholders' funds at 31 December 1997 and 31
December 1996, to the extent summarised in Note 29 to the consolidated
financial statements.
/s/ KPMG Audit Plc
Chartered Accountants
Registered Auditor
London, England
17 February 1998
F-30
<PAGE>
T&N PLC
CONSOLIDATED PROFIT AND LOSS ACCOUNTS
FOR THE YEARS ENDED 31 DECEMBER
<TABLE>
<CAPTION>
NOTES 1997 1996 1995
---------- ----------------- ----------------- -----------------
(POUND STERLING)M (POUND STERLING)M (POUND STERLING)M
<S> <C> <C> <C> <C>
Turnover
Turnover including
share of associated
undertakings......... 1,883.3 2,037.9 2,164.5
Associated
undertakings......... (84.2) (81.9) (73.0)
-------- -------- --------
Turnover excluding
associated
undertakings......... 1,799.1 1,956.0 2,091.5
Continuing operations. 1,734.7 1,814.4 1,777.0
Acquisitions.......... 29.6 -- --
-------- -------- --------
Total continuing
operations........... 1,764.3 1,814.4 1,777.0
Discontinued
operations........... 34.8 141.6 314.5
-------- -------- --------
Total turnover
excluding associated
undertakings......... 2(a) 1,799.1 1,956.0 2,091.5
Cost of sales......... 2(d) (1,293.5) (1,418.3) (1,507.8)
-------- -------- --------
Gross profit............ 505.6 537.7 583.7
Federal-Mogul bid
related costs........ (10.0) -- --
Other operating
expenses............. 2(d) (331.6) (370.3) (369.7)
-------- -------- --------
Group operating profit
before asbestos-
related costs........ 164.0 167.4 214.0
Share of profits of
associated
undertakings......... 2(d) 13.2 11.8 11.8
-------- -------- --------
Operating profit
before asbestos-
related costs........ 2(b), 2(e) 177.2 179.2 225.8
Asbestos-related
costs................ 2(d) -- (515.0) (51.3)
-------- -------- --------
Operating profit/(loss)
on ordinary activities.
Continuing operations. 171.4 (350.3) 148.0
Acquisitions.......... 3.2 -- --
-------- -------- --------
Total continuing
operations........... 174.6 (350.3) 148.0
Discontinued
operations........... 2.6 14.5 26.5
-------- -------- --------
Total operating
profit/(loss) on
ordinary activities.... 2(d) 177.2 (335.8) 174.5
Profit/(loss) on
disposal of
discontinued
operations........... 3 14.5 (1.0) 1.5
Release/(charge) of
provision against
loss on disposals.... 3 -- 1.4 (1.4)
Provision for
loss/loss on disposal
of properties
(continuing
operations).......... (3.1) (2.0) --
Release of
provision/(provision
against) fixed asset
investments:
Kolbenschmidt costs.. 4 32.4 (23.4) (19.5)
-------- -------- --------
Profit/(loss) on
ordinary activities
before finance charges. 221.0 (360.8) 155.1
Net interest payable
and similar charges--
Group................ 5 (28.4) (26.8) (35.8)
Net interest
(payable)/receivable
and similar charges--
Associates........... (2.5) (0.7) 0.8
-------- -------- --------
Profit/(loss) on
ordinary activities
before taxation........ 190.1 (388.3) 120.1
Tax on profit/(loss)
on ordinary
activities........... 6 (62.8) (8.0) (41.4)
-------- -------- --------
Profit/(loss) on
ordinary activities
after taxation......... 127.3 (396.3) 78.7
Minority interests.... (4.9) (4.5) (8.4)
-------- -------- --------
Profit/(loss)
attributable to
shareholders......... 122.4 (400.8) 70.3
Dividends paid and
proposed............. 7 (49.5) (16.0) (31.9)
-------- -------- --------
Transfer to/(from)
reserves............... 21 72.9 (416.8) 38.4
======== ======== ========
Earnings/(loss) per
share................ 8 22.9p (75.4)p 13.3p
Earnings per share pre
asbestos-related
costs................ 8 20.4p 14.8 p 22.7p
Dividends per share... 7 9.2p 3.0 p 6.0p
</TABLE>
Where applicable, figures for the year ended 31 December 1996 and 31
December 1995 have been restated to disclose separately the results of
business discontinued during 1997. In addition, the 1996 and 1995 figures have
been restated to show the share of interest payable and similar charges of
associated companies below operating profit.
See accompanying notes to consolidated financial statements
F-31
<PAGE>
T&N PLC
CONSOLIDATED BALANCE SHEETS
AS AT 31 DECEMBER
<TABLE>
<CAPTION>
BEFORE ASBESTOS 1997 ASBESTOS
NOTES RELATED ITEMS RELATED ITEMS TOTAL 1997 TOTAL 1996
----- --------------- ------------- ---------- ----------
(POUND (POUND (POUND (POUND
STERLING)M STERLING)M STERLING)M STERLING)M
<S> <C> <C> <C> <C> <C>
Fixed assets
Tangible assets....... 11 676.4 -- 676.4 697.2
Investments........... 12 83.6 -- 83.6 59.5
----- ------ ------- -------
760.0 -- 760.0 756.7
----- ------ ------- -------
Current assets
Stocks................ 13 221.9 -- 221.9 247.6
Debtors falling due
within one year...... 14 318.8 -- 318.8 350.8
Debtors falling due
after more than one
year................. 14 73.5 -- 73.5 66.1
Investments........... 15 8.0 -- 8.0 5.6
Cash at bank and in
hand................. 18 115.8 78.2 194.0 131.5
----- ------ ------- -------
738.0 78.2 816.2 801.6
----- ------ ------- -------
Creditors: due within
one year
Borrowings............ 18 103.7 -- 103.7 77.2
Other creditors....... 16 403.4 19.6 423.0 472.5
----- ------ ------- -------
507.1 19.6 526.7 549.7
----- ------ ------- -------
Net current assets...... 230.9 58.6 289.5 251.9
----- ------ ------- -------
Total assets less
current liabilities.. 990.9 58.6 1,049.5 1,008.6
Creditors: due after
more than one year...
Borrowings............ 18 285.4 -- 285.4 260.2
Other creditors....... 17 12.0 -- 12.0 15.9
----- ------ ------- -------
297.4 -- 297.4 276.1
----- ------ ------- -------
Provisions for
liabilities and
charges.............. 19 147.1 388.2 535.3 589.5
----- ------ ------- -------
Net assets.............. 546.4 (329.6) 216.8 143.0
===== ====== ======= =======
Capital and reserves
Called up share
capital.............. 20 219.5 532.2
Share premium account. 21 2.7 0.2
Shares to be issued... 0.7 --
Special reserve....... 63.2 --
Revaluation reserve... 21 14.2 21.6
Associated
undertakings'
reserve.............. 21 (2.1) 5.0
Goodwill write off
reserve.............. 21 (182.9) (181.1)
Profit and loss
account.............. 21 76.1 (259.6)
------- -------
Equity shareholders'
funds................ 191.4 118.3
Minority equity
interests............ 25.4 24.7
------- -------
216.8 143.0
======= =======
</TABLE>
These financial statements were approved by the board of directors and were
signed on its behalf by Sir Colin Hope (Chairman) and David Harding (Finance
Director) on 17 February 1998.
See accompanying notes to consolidated financial statements
F-32
<PAGE>
T&N PLC
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE YEARS ENDED 31 DECEMBER
<TABLE>
<CAPTION>
BEFORE
ASBESTOS ASBESTOS
RELATED RELATED
NOTES FLOWS FLOWS 1997 TOTAL
----- ---------- ---------- ----------
(POUND (POUND (POUND
STERLING)M STERLING)M STERLING)M
<S> <C> <C> <C> <C>
Cash inflow from operating activities
Before asbestos related payments... 22(a) 260.8 -- 260.8
Asbestos related payments.......... 22(a)
IBNR............................. -- (12.7) (12.7)
Other claims..................... -- (44.7) (44.7)
Insurance........................ -- (92.0) (92.0)
------ ------ ------
Net cash inflow from operating
activities.......................... 22(a) 260.8 (149.4) 111.4
Dividends from associates............ 6.5 -- 6.5
Returns on investments and servicing
of finance.......................... 22(b) (27.6) 2.7 ( 24.9)
Taxation............................. 22(c) (20.1) -- (20.1)
Capital expenditure and financial
investment.......................... 22(d) (101.9) -- (101.9)
------ ------ ------
117.7 (146.7) (29.0)
Acquisitions and disposals........... 22(e) 43.1 -- 43.1
Equity dividends paid................ (17.6) -- (17.6)
------ ------ ------
143.2 (146.7) (3.5)
------ ------ ------
Management of liquid resources....... 22(f) (76.5) -- (76.5)
Financing............................ 22(g) 34.0 -- 34.0
------ ------ ------
Increase/(decrease) in cash.......... 100.7 (146.7) (46.0)
====== ====== ======
Reconciliation of asbestos-related
flows to asbestos fund
Cash outflows (as above)........... (146.7)
Cash transferred to asbestos fund.. 88.2
Non IBNR payments.................. 136.7
------
Asbestos fund at year end.......... 78.2
======
</TABLE>
See accompanying notes to consolidated financial statements
F-33
<PAGE>
T&N PLC
CONSOLIDATED CASH FLOW STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED 31 DECEMBER
<TABLE>
<CAPTION>
BEFORE
ASBESTOS ASBESTOS
RELATED RELATED
NOTES FLOWS FLOWS 1996 TOTAL 1995 TOTAL
----- ---------- ---------- ---------- ----------
(POUND (POUND (POUND (POUND
STERLING)M STERLING)M STERLING)M STERLING)M
<S> <C> <C> <C> <C> <C>
Cash inflow from operating
activities
Before asbestos related
payments............... 22(a) 280.5 -- 280.5 298.6
Asbestos related
payments............... 22(a)
IBNR.................. -- (1.2) (1.2) --
Other claims.......... -- (63.6) (63.6) (55.7)
Insurance............. -- -- -- --
------ ----- ------ ------
Net cash inflow from
operating activities..... 22(a) 280.5 (64.8) 215.7 242.9
Dividends from associates. 6.8 -- 6.8 1.6
Returns on investments and
servicing of finance..... 22(b) ( 31.4) -- (31.4) (37.4)
Taxation.................. 22(c) (28.9) -- (28.9) (13.3)
Capital expenditure and
financial investment..... 22(d) (125.5) -- (125.5) (155.6)
------ ----- ------ ------
101.5 (64.8) 36.7 38.2
Acquisitions and
disposals................ 22(e) 59.3 -- 59.3 5.8
Equity dividends paid..... (31.9) -- (31.9) (33.0)
------ ----- ------ ------
128.9 (64.8) (64.1) 11.0
------ ----- ------ ------
Management of liquid
resources................ 22(f) (6.2) -- (6.2) 6.7
Financing................. 22(g) (27.1) -- (27.1) (0.4)
------ ----- ------ ------
Increase/(decrease) in
cash..................... 95.6 (64.8) (30.8) 17.3
====== ===== ====== ======
Reconciliation of asbestos
related flows to asbestos
fund
Cash outflows (as
above)................. (64.8) (55.7)
Cash transferred to
asbestos fund.......... 1.2 --
Non IBNR payments....... 63.6 55.7
----- ------
Asbestos fund at year
end.................... -- --
===== ======
</TABLE>
See accompanying notes to consolidated financial statements
F-34
<PAGE>
T&N PLC
CONSOLIDATED CASH FLOW STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED 31 DECEMBER
<TABLE>
<CAPTION>
NOTES 1997 1996 1995
----- ---------- ---------- ----------
RECONCILIATION OF NET CASH FLOW TO (POUND (POUND (POUND
MOVEMENT IN NET DEBT STERLING)M STERLING)M STERLING)M
<S> <C> <C> <C> <C>
(Decrease)/increase in cash in the
year.................................. (46.0) 30.8 17.3
Cash (inflow)/outflow from movement in
debt.................................. 22(g)
and lease financing................... (22.8) 30.1 3.2
Cash outflow/(inflow) from movement in
liquid resources...................... 76.5 6.2 (6.7)
Loans acquired with businesses......... (4.8) -- (7.4)
------ ------ ------
Change in net debt resulting from cash
flows................................. 2.9 67.1 6.4
Deduction of costs of raising finance
paid from net debt.................... 1.6 -- --
Amortisation of costs of raising
finance............................... (0.2) -- --
Exchange difference.................... 8.9 42.6 (14.9)
------ ------ ------
Reduction/(increase) in net debt....... 13.2 109.7 (8.5)
Net debt at start of year.............. (200.3) (310.0) (301.5)
------ ------ ------
Net debt at end of year................ (187.1) (200.3) (310.0)
====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements
F-35
<PAGE>
T&N PLC
STATEMENTS OF TOTAL RECOGNISED GAINS AND LOSSES
FOR THE YEARS ENDED 31 DECEMBER
<TABLE>
<CAPTION>
NOTES 1997 1996 1995
----- ---------- ---------- ----------
(POUND (POUND (POUND
STERLING)M STERLING)M STERLING)M
<S> <C> <C> <C> <C>
Profit/(loss) attributable to
shareholders............................ 122.4 (400.8) 70.3
Other recognised gains and losses
Unrealised loss on revaluation of fixed
assets................................ 21 (1.7) -- 1.6
Currency translation differences on
foreign currency net investments...... 21 (17.4) (23.1) (1.6)
Other recognised losses................ -- (0.6) (1.4)
----- ------ -----
Total recognised gains and losses
relating to the year................ 103.3 (424.5) 68.9
===== ====== =====
Historical cost profits/(losses)
Reported profit/(loss) on ordinary
activities before taxation............ 190.1 (388.3) 120.1
Realisation of revaluation surpluses... 4.8 5.6 6.6
Difference between the historical
depreciation charge and the actual
depreciation charge................... 0.5 0.6 0.7
----- ------ -----
Historical cost profit/(loss) on ordinary
activities before taxation.............. 195.4 (382.1) 127.4
----- ------ -----
Historical cost profit/(loss) for the
year after taxation, minority interests
and dividends........................... 78.2 (410.6) 45.7
===== ====== =====
</TABLE>
See accompanying notes to consolidated financial statements
F-36
<PAGE>
T&N PLC
RECONCILIATIONS OF MOVEMENTS IN SHAREHOLDERS' FUNDS
FOR THE YEARS ENDED 31 DECEMBER
<TABLE>
<CAPTION>
NOTES 1997 1996 1995
----- ---------- ---------- ----------
(POUND (POUND (POUND
STERLING)M STERLING)M STERLING)M
<S> <C> <C> <C> <C>
Profit/(loss) attributable to
shareholders........................... 122.4 (400.8) 70.3
Dividends............................... (49.5) (16.0) (31.9)
----- ------ -----
Transfer to/(from) to reserves.......... 72.9 (416.8) 38.4
Other recognised gains and losses (as
above)................................. (19.1) (23.7) (1.4)
New share capital subscribed............ 9.2 1.2 2.2
Scrip dividends......................... 15.4 -- --
Shares to be issued under Executive
Share Option Schemes................... 0.7 -- --
Goodwill................................ 21 (6.0) 9.4 (4.4)
----- ------ -----
Net change.............................. 73.1 (429.9) 34.8
Shareholders' funds at start of year.... 118.3 548.2 513.4
----- ------ -----
Shareholders' funds at end of year...... 191.4 118.3 548.2
===== ====== =====
</TABLE>
See accompanying notes to consolidated financial statements
F-37
<PAGE>
T&N PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES
The Group follows applicable UK Accounting Standards and Practice. The
consolidated financial statements are prepared under the historical cost
convention, as modified by the revaluation of certain fixed assets.
During 1997 the accounting policy for Executive share options has been
amended as set out below, in accordance with UITF Abstract 17, Employee Share
Schemes.
Basis of Consolidation
The consolidated financial statements comprise the audited accounts of the
Company and its subsidiary undertakings, together with the Group's share of
the profits and losses and of the reserves of its associated undertakings. The
accounts of subsidiaries are drawn up to the same date as those of the
Company. Results of subsidiaries acquired or sold during the year are included
from, or up to, their respective dates of acquisition or disposal.
Associated Undertakings
Associated undertakings are companies, other than subsidiaries, in which the
Group has a long-term and substantial investment and over which significant
influence is exercised, normally through board representation. Associated
undertakings are accounted for on the equity basis, that is, the Group's share
of operating profit and items reported below operating profit are included in
the profit and loss account. Its interest in their net assets, other than
goodwill, is included in investments in the Group balance sheet.
Deferred Tax
Deferred tax is attributable to timing differences between results as
computed for tax purposes and as stated in the accounts. These differences
arise from, for example, different rates at which allowances are granted for
capital expenditure for tax purposes and at which depreciation is charged in
the accounts. Provision for deferred tax, including that relating to post
retirement benefits, is made only to the extent that it is probable that an
actual liability or asset will crystallise.
Depreciation
Depreciation is provided on cost or the revalued amount, as applicable, to
write fixed assets down to their estimated residual values on a straight line
basis as follows:
. Freehold buildings, 2.5% per annum;
. Leasehold buildings are assumed to have a life equal to the period of the
lease, but with a maximum of 40 years;
. Plant and machinery, at rates ranging from 7% to 33% per annum.
Foreign Currencies
Overseas companies' results and cash flows are translated into sterling at
average exchange rates and their balance sheets at year end exchange rates. An
adjustment to local currency results is made to reflect current price levels,
where appropriate, before translation into sterling. Exchange differences
arising from the translation of the opening balance sheets and results of
overseas companies are dealt with through reserves. Exchange differences on
transactions in foreign currencies are included in the profit and loss
account.
F-38
<PAGE>
T&N PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Grants
Grants related to expenditure on tangible fixed assets are credited to
profit over a period approximating to the lives of qualifying assets. Grants
receivable to date, less the amounts so far credited to profit, are included
in creditors.
Intangibles
Goodwill, being the excess of the fair value of purchase consideration over
the fair value attributed to the net assets acquired, is charged to reserves.
On disposal of businesses, any goodwill previously eliminated on acquisition
is included in determining the profit or loss on disposal. Other intangibles
are written off when acquired.
Leasing
Finance leases of significant items of plant and machinery are capitalised
and depreciated in accordance with the Group's depreciation policy. The
capital element of future lease payments is included under borrowings.
Interest, calculated on the reducing balance method, is included within net
financing charges. Operating lease rentals are charged to the profit and loss
account on a straight line basis over the life of the lease.
Pensions and Other Post-Retirement Benefits
The cost of providing pensions and other post-employment benefits is charged
against profits on a systematic basis, with pension surpluses and deficits
being amortised over the expected remaining service lives of current
employees. Differences between the amounts charged in the profit and loss
account and payments made to the plans are treated as assets or liabilities in
the consolidated balance sheet. The unfunded post-employment medical benefit
liability is included in provisions in the consolidated balance sheet.
Research and Development
Research and development revenue expenditure, including all expenditure on
patents and trademarks, is written off when incurred.
Share Options
For options which are expected to be exercised under the Executive share
option schemes, the difference between the market value on the date of
granting options and the option price is charged to the profit and loss
account over the period to which the employees' performance relates. No charge
is made in respect of the Save As You Earn option scheme which is open to all
UK employees who satisfy the necessary length of service requirements.
Stocks
Stocks are stated at the lower of original costs and net realisable value on
a first-in-first out basis. Cost comprises material, labour and an allocation
of attributable overhead expenses. Net realisable value is the price at which
stock can be sold in the normal course of business after allowing for the
costs of realisation.
Turnover
Turnover is the value of sales to third parties at net invoice value
excluding value added tax or equivalent overseas sales taxes.
F-39
<PAGE>
T&N PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. ANALYSIS OF RESULTS
The composites and camshafts grouping comprises camshafts, powder metal
products, heat transfer products and industrial products and materials.
Figures for the engine parts aftermarket group are reflected in the product
groupings to which they relate.
(a) Turnover
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- -----------------
(POUND STERLING)M (POUND STERLING)M (POUND STERLING)M
<S> <C> <C> <C>
Market supplied
Light vehicle original
equipment............. 731.2 772.9 756.6
Automotive aftermarket. 497.1 529.4 480.1
Industrial and heavy
duty original
equipment............. 570.8 653.7 854.8
------- ------- -------
1,799.1 1,956.0 2,091.5
======= ======= =======
<CAPTION>
1997 1996 1995
----------------- ----------------- -----------------
(POUND STERLING)M (POUND STERLING)M (POUND STERLING)M
<S> <C> <C> <C>
Product groupings
Bearings............... 329.6 333.1 342.5
Sealing Products....... 195.1 216.0 227.0
Friction Products...... 293.9 309.5 319.0
Piston Products........ 572.8 574.7 559.6
Composites and
Camshafts............. 372.9 381.1 328.9
------- ------- -------
Continuing operations.... 1,764.3 1,814.4 1,777.0
Discontinued operations.. 34.8 141.6 314.5
------- ------- -------
1,799.1 1,956.0 2,091.5
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
ACQUISITIONS DISCONTINUED DISCONTINUED DISCONTINUED
----------------- ----------------- ----------------- -----------------
(POUND STERLING)M (POUND STERLING)M (POUND STERLING)M (POUND STERLING)M
<S> <C> <C> <C> <C>
Business acquired and
discontinued
Sealing Products...... -- 12.1 49.8 49.6
Friction Products..... -- 12.5 18.6 10.9
Piston Products....... 27.7 -- -- --
Composites and
Camshafts............ 1.9 10.2 18.9 170.8
Construction Materials
and Engineering...... -- -- 54.3 83.2
---- ---- ----- -----
29.6 34.8 141.6 314.5
==== ==== ===== =====
</TABLE>
F-40
<PAGE>
T&N PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
BY ORIGIN BY DESTINATION
-------------------------------- --------------------------------
1997 1996 1995 1997 1996 1995
---------- ---------- ---------- ---------- ---------- ----------
(POUND (POUND (POUND (POUND POUND POUND
STERLING)M STERLING)M STERLING)M STERLING)M STERLING)M STERLING)M
<S> <C> <C> <C> <C> <C> <C>
Regional
UK.................... 442.1 431.5 418.6 283.3 280.4 271.8
Mainland Europe....... 640.2 724.4 720.6 715.0 785.3 791.9
North America......... 563.1 527.7 503.2 568.1 540.2 518.7
South Africa.......... 101.7 111.2 115.0 93.1 93.0 99.8
Other countries....... 17.2 19.6 19.6 104.8 115.5 94.8
------- ------- ------- ------- ------- -------
Continuing operations... 1,764.3 1,814.4 1,777.0 1,764.3 1,814.4 1,777.0
Discontinued operations. 34.8 141.6 314.5 34.8 141.6 314.5
------- ------- ------- ------- ------- -------
1,799.1 1,956.0 2,091.5 1,799.1 1,956.0 2,091.5
======= ======= ======= ======= ======= =======
</TABLE>
Inter-group turnover between product groupings and regions is not material.
(b) Operating profit before asbestos-related costs
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(POUND (POUND (POUND
STERLING)M STERLING)M STERLING)M
<S> <C> <C> <C>
Product groupings
Bearings..................................... 47.9 44.1 48.5
Sealing Products............................. 18.8 16.1 25.1
Friction Products............................ 20.4 16.0 28.2
Piston Products.............................. 50.9 43.9 56.5
Composites and Camshafts..................... 46.6 44.6 41.8
----- ----- -----
184.6 164.7 200.1
----- ----- -----
Bid costs...................................... (10.0) -- --
----- ----- -----
Continuing operations.......................... 174.6 164.7 200.1
Discontinued operations........................ 2.6 14.5 26.5
----- ----- -----
177.2 179.2 226.6
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
ACQUISITIONS DISCONTINUED DISCONTINUED DISCONTINUED
------------ ------------ ------------ ------------
(POUND (POUND (POUND (POUND
STERLING)M STERLING)M STERLING)M STERLING)M
<S> <C> <C> <C> <C>
Business acquired and
discontinued
Sealing Products......... -- 1.1 5.2 1.2
Friction Products........ -- (0.1) 0.4 0.6
Piston Products.......... 3.4 -- -- --
Composites and Camshafts. (0.2) 1.6 3.5 7.9
Construction Materials
and Engineering......... -- -- 5.4 16.8
---- ---- ---- ----
3.2 2.6 14.5 26.5
==== ==== ==== ====
</TABLE>
F-41
<PAGE>
T&N PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(POUND (POUND (POUND
STERLING)M STERLING)M STERLING)M
<S> <C> <C> <C>
Regional
UK........................................... 53.6 58.5 59.3
Mainland Europe.............................. 62.7 46.4 73.4
North America................................ 64.0 52.7 52.3
South Africa................................. 7.0 7.6 12.9
Other countries.............................. (2.7) (0.5) 2.2
----- ----- -----
184.6 164.7 200.1
Bid costs...................................... (10.0) -- --
----- ----- -----
Continuing operations.......................... 174.6 164.7 200.1
Discontinued operations........................ 2.6 14.5 26.5
----- ----- -----
177.2 179.2 226.6
===== ===== =====
</TABLE>
Asbestos-related costs, finance charges, losses on disposal of discontinued
operations and the movements in the provision against the Kolbenschmidt
investment are not allocated by product groupings or region.
(c) Capital employed
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
(POUND STERLING) (POUND STERLING)
M M
<S> <C> <C>
Product groupings
Bearings................................... 128.1 121.5
Sealing Products........................... 67.1 65.6
Friction Products.......................... 117.3 124.6
Piston Products............................ 294.0 272.9
Composites and Camshafts................... 148.5 137.0
------ ------
Continuing operations........................ 755.0 721.6
Discontinued operations...................... -- 22.9
------ ------
755.0 744.5
Assets held for disposal and trade
investments................................. 37.0 14.6
Asbestos-related provisions.................. (388.2) (440.6)
Net deferred consideration for acquisitions
and disposals............................... 0.1 24.8
------ ------
Capital employed............................. 403.9 343.3
Net borrowings............................... (187.1) (200.3)
------ ------
Net assets................................... 216.8 143.0
====== ======
</TABLE>
F-42
<PAGE>
T&N PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
(POUND STERLING) (POUND STERLING)
M M
<S> <C> <C>
Regional
UK.......................................... 251.2 230.6
Mainland Europe............................. 181.2 240.4
North America............................... 236.4 190.7
South Africa................................ 43.0 40.4
Other countries............................. 43.2 42.4
----- -----
755.0 744.5
===== =====
</TABLE>
(d) Continuing and discontinued activities
<TABLE>
<CAPTION>
1997
CONTINUING ACQUISITIONS DISCONTINUED TOTAL
---------- ------------ ------------ ---------
(POUND (POUND (POUND (POUND
STERLING) STERLING) STERLING) STERLING)
M M M M
<S> <C> <C> <C> <C>
Turnover........................ 1,734.7 29.6 34.8 1,799.1
Cost of sales................... (1,245.2) (24.3) (24.0) (1,293.5)
-------- ----- ----- --------
Gross profit.................... 489.5 (53) 10.8 505.6
Selling and distribution costs.. (143.5) (0.3) (5.0) (148.8)
Administrative expenses......... (137.0) (1.1) (2.6) (140.7)
Research and development........ (50.7) (0.7) (0.7) (52.1)
Share of profits of associated
undertakings................... 13.1 -- 0.1 13.2
-------- ----- ----- --------
Operating profit before
asbestos-related costs......... 171.4 3.2 2.6 177.2
Asbestos-related costs.......... -- -- -- --
-------- ----- ----- --------
Operating profit................ 171.4 3.2 2.6 177.2
======== ===== ===== ========
</TABLE>
<TABLE>
<CAPTION>
1996
CONTINUING DISCONTINUED TOTAL
---------- ------------ ---------
(POUND (POUND (POUND
STERLING) STERLING) STERLING)
M M M
<S> <C> <C> <C>
Turnover..................................... 1,814.4 141.6 1,956.0
Cost of sales................................ (1,317.2) (101.1) (1,418.3)
-------- ------ --------
Gross profits................................ 497.2 (40.5) 517.7
Selling and distribution costs............... (155.2) (13.2) (168.6)
Administrative expenses...................... (137.4) (11.3) (148.7)
Research and development..................... (51.5) (1.5) (53.0)
Share of profits of associated undertakings.. 11.6 0.2 11.8
-------- ------ --------
Operating profit before asbestos-related
costs....................................... 164.7 14.5 179.2
Asbestos-related costs....................... (515.0) -- (515.0)
-------- ------ --------
Operating profit............................. (350.3) 14.5 (335.8)
======== ====== ========
</TABLE>
F-43
<PAGE>
T&N PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1995
CONTINUING DISCONTINUED TOTAL
---------- ------------ ---------
(POUND (POUND (POUND
STERLING) STERLING) STERLING)
M M M
<S> <C> <C> <C>
Turnover..................................... 1,777.0 314.5 2,091.5
Cost of sales................................ (1,267.8) (240.0) (1,507.8)
-------- ------ --------
Gross profit................................. 509.2 74.5) 583.7
Selling and distribution costs............... (152.0) (21.5) (173.5)
Administrative expenses...................... (120.5) (23.5) (144.0)
Research and development..................... (49.2) (3.0) (52.2)
Share of profits of associated undertakings.. 11.8 -- 11.8
-------- ------ --------
Operating profit before asbestos-related
costs....................................... 199.3 26.5 225.8
Asbestos-related costs....................... (51.3) -- (51.3)
-------- ------ --------
Operating profit............................. 148.0 26.5 174.5
======== ====== ========
</TABLE>
1996 and 1995 amounts have been restated to reflect businesses disposed of in
1997.
(e) Costs of continuing operations charged in arriving at operating profit
before asbestos-related costs include 17.5 pound sterling millions (1996 15.3
pound sterling millions, 1995 11.3 pound sterling million) in respect of
redundancy and rationalisation. 4.5 pound sterling millions of these costs
(1996 8.1 pound sterling millions) have been charged as administrative costs
and the majority of the remainder as cost of sales.
(f) Profit before finance charges is stated after charging
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(POUND (POUND (POUND
STERLING) STERLING) STERLING)
M M M
<S> <C> <C> <C>
Auditors and its associates' remuneration
--as Group auditors (including T&N plc 0.4
pound sterling millions (1996 0.6 pound
sterling millions 1995 pound 0.6m))........... (1.3) (1.8) (1.8)
--fees for other services (includes T&N plc 0.9
pound sterling millions (1996 0.9 pound
sterling millions 1995 0.4 pound sterling
million))..................................... (1.9) (1.4) (0.9)
Depreciation of tangible fixed assets
--owned assets................................. (94.2) (97.3) (100.3)
--finance leased assets........................ (0.7) (1.0) (1.3)
Operating lease rentals
--on plant and machinery....................... (9.1) (8.7) (7.8)
--on land and buildings........................ (6.3) (7.4) (7.0)
</TABLE>
F-44
<PAGE>
T&N PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. SALE OF DISCONTINUED OPERATIONS
<TABLE>
<CAPTION>
1997
----------------
(POUND STERLING)
M
<S> <C>
The profit for the year on disposal of discontinued operations
comprises
Provisions against amounts receivable on disposal of the
Construction Materials business in Zimbabwe................ (7.5)
Profit on disposal in the year.............................. 22.0
----
Net profit................................................ 14.5
====
</TABLE>
<TABLE>
<CAPTION>
BUSINESS DISPOSED EFFECTIVE DATE
- ----------------- ---------------
<S> <C>
Flexitallic..................................................... 10 April 1997
Ferodo Caemarfon................................................ 3 May 1997
Kafue Fisheries................................................. 26 June 1997
Tenmal.......................................................... 4 August 1997
Ferodo US Heavy Parts........................................... 9 December 1997
</TABLE>
Details of assets disposed are set out below:
<TABLE>
<CAPTION>
NET ASSETS AT DATE OF T&N
DISPOSAL FLEXITALLIC TENMAT OTHERS S AFRICA TOTAL
- --------------------- ----------- --------- --------- --------- ---------
(POUND (POUND (POUND (POUND
(POUND STERLING) STERLING) STERLING) STERLING)
STERLING) M M M M M
<S> <C> <C> <C> <C> <C>
Fixed assets............... 10.7 6.5 5.7 -- 22.9
Investments................ 0.5 -- -- -- 0.5
Stocks..................... 4.7 1.8 2.9 -- 9.4
Debtors.................... 7.8 2.9 3.0 -- 13.7
Creditors and provisions... (5.1) (2.3) (1.1) -- (8.5)
Net cash................... -- 0.4 -- -- 0.4
Goodwill on acquisition of
businesses................ 1.6 2.4 -- -- 4.0
Minority interest sold..... -- -- -- 0.4 0.4
---- ---- ---- --- ----
Assets disposed............ 20.2 11.7 10.5 0.4 42.8
Profit/(loss).............. 20.8 5.0 (3.8) -- 22.0
---- ---- ---- --- ----
Cash consideration
realised.................. 41.0 16.7 6.7 0.4 64.8
==== ==== ==== === ====
Cash arising during the
year from the disposal of
operations................
Net cash proceeds.......... 64.8
Prior year disposals....... 9.6
Deferred payments.......... 1.7
Net cash disposed.......... (0.4)
----
Cash flow.................. 75.7
====
Operating profit in 1997 to
date of disposal.......... 1.1 1.6 (0.1) -- 2.6
==== ==== ==== === ====
</TABLE>
During the year the Group's shareholdings in T&N Holdings Ltd in South Africa
was reduced from 52.4% to 50.8% by selling shares which were taken up as scrip
dividends.
F-45
<PAGE>
T&N PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. OPTION OVER SHARES IN KOLBENSCHMIDT AG ("KS")
In December 1996 option arrangements with Commerzbank AG over 6,727,260
shares in KS expired. Commerzbank AG subsequently sold the shares subject to
the arrangement and under the terms of the agreement, the Company received
part of the proceeds. The gain of pound sterling 13.2 million has been
recognised as a profit.
At 31 December 1996 the Company held options to acquire 6,727,260 shares in
KS, representing 24.99% of the issued share capital of KS. The option price is
DM 17 per share and the consideration payable on exercise of the options would
be DM 114.4 pound sterling millions (38.7 pound sterling millions). On 28 May
1997 the Company announced that it had entered into option arrangements to
sell 6,727,260 shares in KS at a price of DM 30 per share. The revenue
receivable on exercise of these options would be DM 201.8 pound sterling
millions (68.2 pound sterling millions). The costs of these options, which are
exercisable in December 1999, was 6.1 pound sterling million. An offer has
been received to purchase both of the above rights for 10.7 pound sterling
million per share resulting in a release of provisions totalling 19.2 pound
sterling million.
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(POUND (POUND (POUND
STERLING) STERLING) STERLING)
M M M
<S> <C> <C> <C>
Received from Commerzbank AG on sale of shares... 13.2 -- --
Release/(creation) of provision made in prior
years........................................... 19.2 -- (12.0)
Transfer of options to Metallbank GmbH........... -- (8.5) --
Payable on lapse of options with Commerzbank AG.. -- (10.0) --
Other holding costs.............................. -- (4.9) (7.5)
---- ----- -----
32.4 (23.4) (19.5)
==== ===== =====
</TABLE>
5. NET INTEREST PAYABLE AND SIMILAR CHARGES
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(POUND (POUND (POUND
STERLING) STERLING) STERLING)
M M M
<S> <C> <C> <C>
Interest payable on bank loans, overdrafts and
other loans
-- repayable within five years, not by
instalments.................................. (28.4) (26.2) (31.5)
-- repayable within five years, by
instalments.................................. (4.0) (4.4) (4.6)
-- repayable wholly or partly in more than
five years................................... (4.1) (1.5) (3.4)
Interest on finance leases repayable within five
years.......................................... (0.3) (0.4) (0.3)
Amortisation of discounted asbestos provisions.. (2.5) -- --
----- ----- -----
(39.3) (32.5) (39.8)
===== ===== =====
Interest receivable
On asbestos fund................................ 2.7 -- --
Other interest receivable....................... 8.2 5.7 4.0
----- ----- -----
10.9 5.7 4.0
===== ===== =====
Net interest payable and similar charges........ (28.4) (26.8) (35.8)
===== ===== =====
</TABLE>
F-46
<PAGE>
T&N PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. TAXATION
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(POUND (POUND (POUND
STERLING) STERLING) STERLING)
M M M
<S> <C> <C> <C>
UK corporation tax at 31.5% (1996 33% 1995 33%)... (13.1) (15.2) (13.9)
Relief for overseas taxation...................... 7.8 8.6 8.8
Advance corporation tax written (off)/back........ (3.2) 0.7 (3.9)
Deferred tax...................................... (0.5) 9.0 (4.4)
Adjustments in respect of prior years............. (2.7) -- 0.4
----- ----- -----
Total UK.......................................... (11.7) 3.1 (13.0)
Overseas.......................................... (30.6) (21.5) (23.3)
Overseas deferred tax............................. (15.3) 16.2 (0.8)
Associated undertakings........................... (5.0) (7.0) (5.6)
Adjustments in respect of prior years............. (0.2) 1.2 1.3
----- ----- -----
(62.8) (8.0) (41.4)
===== ===== =====
</TABLE>
The overseas tax charge has been reduced by pound sterling 10.9 million
(1996 pound sterling 5.0 million, 1995 pound sterling 6.0 million) by
utilising losses brought forward.
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(POUND (POUND (POUND
STERLING) STERLING) STERLING)
M M M
<S> <C> <C> <C>
The tax (charge)/credit arise as follows
On the disposal of operations.................. (5.1) (1.8) (2.4)
On provision for loss/loss on disposal of
properties.................................... -- (0.1) --
On (release of provision)/provision against
fixed asset investments....................... (11.9) 0.6 5.5
On asbestos-related costs...................... 13.1 35.5 1.6
On other profits............................... (58.9) (42.2) (46.1)
----- ----- -----
(62.8) (8.0) (41.4)
===== ===== =====
</TABLE>
The tax credit taken in these accounts in respect of asbestos is calculated
by reference to the payments made rather than the charge in the accounts and
has been reduced by the related movements in the deferred tax debtor. No tax
relief is available on the goodwill of pound sterling 4.0 million (1996: pound
sterling 9.7 million) charged in arriving at the profit on disposal of
operations of pound sterling 14.5 million (1996: pound sterling 0.4 million).
F-47
<PAGE>
T&N PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The group's tax charge differs from the "expected" tax charge that would
result from applying the UK rate of 31.5% (1996 and 1995: 33%) to profit
before tax as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(POUND (POUND (POUND
STERLING) STERLING) STERLING)
M M M
<S> <C> <C> <C>
Tax actually (charged)........................... (62.8) (8.0) (41.4)
Less: "Expected" tax charge at 31.5% (1996: 33%). 59.9 (128.0) 39.6
----- ------ -----
(2.9) (136.0) (1.8)
===== ====== =====
Reconciliation
Differences from UK tax rate..................... (12.2) 2.6 (6.0)
Prior year differences........................... (2.7) -- --
UK tax on inter-company dividends................ (14.3) -- --
Bid costs not deductible for tax................. (3.1) -- --
Other items not deductible for tax (permanent
differences).................................... (6.6) (3.5) (3.6)
Timing differences on asbestos provisions not
provided for.................................... 39.1 (132.7) 11.0
Timing differences not provided for other........ 2.2 (0.3) 8.4
Impact of ACT.................................... (3.2) 0.7 (4.0)
Others........................................... (2.1) (2.8) (7.6)
----- ------ -----
(2.9) (136.0) (1.8)
===== ====== =====
</TABLE>
The UK tax charge for 1997 has increased by pound 2.2 million due to the
reduction in the rate of UK corporation tax as from 1 April 1997 from 33% to
31% the reduced rate means there is a smaller deferred tax asset carried
forward.
7. DIVIDENDS
<TABLE>
<CAPTION>
1997 1997 1996 1996 1995 1995
----- --------- ----- --------- ----- ---------
PENCE (POUND PENCE (POUND PENCE (POUND
PER STERLING) PER STERLING) PER STERLING)
SHARE M SHARE M SHARE M
<S> <C> <C> <C> <C> <C> <C>
First interim paid on 11 July
1997.......................... 3.0 (16.0) -- -- 3.0 (15.9)
Second interim paid on 14
November 1997................. 3.2 (17.0) 3.0 (16.0) -- --
Third interim paid 30 January
1998.......................... 3.0 (16.5) -- -- -- --
Final proposed................. -- -- -- -- 3.0 (16.0)
--- ----- --- ----- --- -----
9.2 (49.5) 3.0 (16.0) 6.0 (31.9)
=== ===== === ===== === =====
</TABLE>
Because of the exceptional asbestos-related charge during 1996, the Company
did not have sufficient distributable reserves to declare a final dividend for
1996. A first interim dividend of 3.0 pence per share was paid to shareholders
on the register on 2 May 1997 in lieu of the final 1996 dividend with the
result that shareholders received dividends totalling 6.0 pence per share in
respect of 1996. A third interim dividend of 3.0 pence per share was declared
on 16 October 1997 and paid on 30 January 1998. No final dividend for 1997 is
proposed. Together with the second interim dividend of 3.2 pence per share,
shareholders have received dividends totalling 6.2 pence per share in respect
of 1997.
Dividends with a value of pound 15.4 million were taken up as scrip
dividends. This comprises pound sterling 0.6 million in respect of the first
interim dividend and pound 14.8 million in respect of the second interim
dividend.
F-48
<PAGE>
T&N PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. EARNINGS/(LOSS) PER SHARE
<TABLE>
<CAPTION>
1997 1997 1996 1996 1995 1995
----- --------- ----- --------- ----- ---------
PENCE (POUND PENCE (POUND PENCE (POUND
PER STERLING) PER STERLING) PER STERLING)
SHARE M SHARE M SHARE M
<S> <C> <C> <C> <C> <C> <C>
Earnings/(loss):
Net basis................... 22.9 122.4 (75.4) (400.8) 13.3 70.3
Nil basis................... 24.4 130.9 (75.6) (401.5) 14.0 74.2
Pre asbestos-related cost
basis...................... 20.4 109.3 14.8 78.7 22.7 22.7
Average number of shares in
issue weighted on a time
basis...................... 534.5m 531.6m 530.2m
</TABLE>
In addition to earnings per share on a net basis as required by SSAP 3, the
earnings per share are also shown after adjustment for asbestos-related costs.
The adjustment made is to add back asbestos-related costs of pound sterling
nil (1996 pound sterling 515.0 million, 1995 pound sterling 51.3 million) and
associated tax credits of pound sterling 13.1 million (1996 pound sterling
35.5 million, 1995 pound sterling 1.6 million). In the opinion of the
directors, this allows shareholders to gain a clearer understanding of the
performance of the Group. There is no material differences between the
earnings per share figures noted above and those calculated on a fully diluted
basis.
Earnings per share calculated on a nil basis has been adjusted for Advance
Corporate Tax payable for the year of pound sterling 8.5 million (1996 write
back of pound sterling 0.7 million, 1995 charge of pound sterling 3.9
million).
9. EMPLOYEES
<TABLE>
<CAPTION>
1997 1996 1995
AVERAGE AVERAGE AVERAGE
NUMBERS NUMBERS NUMBERS
------- ------- -------
<S> <C> <C> <C>
UK...................................................... 8,637 10,036 11,613
Mainland Europe......................................... 9,388 9,765 10,228
North America........................................... 7,398 7,172 7,115
South America........................................... 3,767 4,379 4,221
Zimbabwe................................................ -- 2,069 8,785
Other countries......................................... 444 472 695
------ ------ ------
29,634 33,893 42,657
====== ====== ======
</TABLE>
At the year end the total number of employees was 28,904 (1996 30,473).
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(POUND (POUND (POUND
STERLING) STERLING) STERLING)
M M M
<S> <C> <C> <C>
Employment costs
Wages and salaries................................ 543.0 601.1 635.8
Social security costs............................. 81.4 96.0 96.0
Other pension costs (note 10)....................... 11.3 12.9 12.4
Other post-employment benefits (note 10)............ 3.0 3.0 2.6
Redundancy payments............................... 14.6 13.9 6.5
----- ----- -----
653.3 726.9 753.3
===== ===== =====
</TABLE>
F-49
<PAGE>
T&N PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. POST-EMPLOYMENT BENEFITS
The Company and most of its subsidiaries operate both defined benefit and
defined contribution pension schemes. With the exception of the schemes in
Germany, the assets of the principal schemes are held in separate trustee-
administered funds. The most significant schemes are in the UK, Germany, and
the US. The element of the total pension cost relating to overseas schemes has
been determined in accordance with local best practice and regulations and,
where applicable, on the advice of consultant actuaries.
The major pension costs are:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(POUND (POUND (POUND
STERLING) STERLING) STERLING)
M M M
<S> <C> <C> <C>
UK (credit)....................................... (6.4) (5.7) (4.9)
United States..................................... 5.9 5.9 5.9
Germany........................................... 5.7 6.0 4.4
France............................................ 2.3 3.3 3.5
Others............................................ 3.8 3.4 3.5
---- ---- ----
Total......................................... 11.3 12.9 12.4
==== ==== ====
</TABLE>
The UK scheme is the largest, covering the majority of UK employees. The
pension cost is assessed in accordance with the advice of independent
qualified actuaries in order to secure final salary-related benefits. The most
recent actuarial review, using the projected unit method, was carried out on
31 March 1996 and, as a result of this review, a number of scheme improvements
were made. At 31 March 1996 the market value of the assets of the UK scheme
was 963 pound sterling millions (1993 747 pound sterling millions) and the
actuarial value of these assets represented 121% (1993 129%) of the benefits
that had accrued to members, after allowing for increases in earnings and
scheme improvements.
The assumptions made which have the most significant effect on the results
of this valuation are those relating to the differentials between the rates of
return on investments and the rates of increase in salaries and pensions. It
was assumed that the investment return would be 2% (1993 2%) per annum higher
than the rate of annual salary increases, and 5% (1993 5%) per annum higher
than the rate at which present and future pensions would increase.
The surplus in the UK scheme is being amortised over 13 years, the average
remaining service lives of employees. The credit arising from the amortisation
of this surplus more than offsets ongoing pension costs. The resultant SSAP 24
credit, including interest, was 6.6 pound sterling millions (1996 5.7 pound
sterling millions, 1995 4.9 pound sterling millions).
From January 1995 until 31 March 1996 the Group made payments to the UK
scheme at a rate of 4% of pensionable earnings. Since 1 April 1996 no payments
have been necessary because of the surplus in the scheme.
During the year the prepayment in respect of pensions for the UK scheme
increased by 6.6 pound sterling millions to 51.6 pound sterling millions at
the end of 1997. This amount is included in debtors (note 14).
In the US, the Group operates a number of defined benefits schemes and
defined contribution schemes. These schemes undergo an actuarial analysis
annually.
In Germany, the Group operates a number of defined benefit pension schemes.
These undergo an actuarial valuation annually. Provisions for the liabilities
amounted to 70.0 pound sterling millions at the end of 1997 (1996 76.9 pound
sterling millions, 1995 89.1 pound sterling millions).
In addition, other post-employment benefits in the US are fully provided for
in accordance with UK accounting standards. Provisions amounted to 32.3 pound
sterling millions the end of 1997 (1996 31.1 pound sterling millions, 1995
34.3 pound sterling millions) in respect of these benefits. The cost of post-
employment medical benefits in the US was 2.8 pound sterling millions (1996
2.8 pound sterling millions, 1995 2.9 pound sterling millions).
There are no other significant post-employment benefits.
F-50
<PAGE>
T&N PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. TANGIBLE FIXED ASSETS
<TABLE>
<CAPTION>
PLANT &
LAND & BUILDINGS MACHINERY TOTAL
---------------- ---------------- ----------------
(POUND STERLING) (POUND STERLING) (POUND STERLING)
M M M
<S> <C> <C> <C>
Cost or valuation
At 1 January 1997......... 230.8 1,017.8 1,248.6
Currency translation...... (8.6) (31.8) (40.4)
Acquisition of business... 3.5 14.4 17.6
Capital expenditure....... 10.8 94.6 105.4
Transfers between Group
companies and
reclassifications........ 2.2 (2.2) --
Disposal of operations.... (9.8) (36.9) (46.7)
Other disposals........... (4.4) (22.9) (27.3)
Valuation adjustment...... (1.7) -- (1.7)
----- ------- -------
At 31 December 1997....... 222.8 1,032.6 1,255.4
===== ======= =======
Comprising:
Cost...................... 145.2 937.5 1,082.7
Valuation in
1989.................... 48.0 11.0 59.0
Other years............. 29.6 84.1 113.7
----- ------- -------
222.8 1,032.6 1,255.4
===== ======= =======
</TABLE>
Revaluations are carried out on an existing use basis. The valuation
adjustment of 1.7 pound sterling millions relates to one property. The value of
this property has been estimated by the directors.
<TABLE>
<CAPTION>
PLANT &
LAND & BUILDINGS MACHINERY TOTAL
Depreciation ---------------- ---------------- ----------------
(POUND STERLING) (POUND STERLING) (POUND STERLING)
M M M
<S> <C> <C> <C>
At 1 January 1997........... 30.9 520.5 551.4
Currency translation........ (1.2) (18.5) (19.7)
Transfers between Group
companies and
reclassifications.......... 0.5 (0.5) --
Disposal of operations...... (1.8) (22.0) (23.8)
Other disposals............. (2.4) (20.9) (23.5)
Charge for the year......... 7.4 87.5 94.9
----- ----- -----
At 31 December 1997......... 33.4 545.6 579.0
===== ===== =====
Net book value
At 31 December 1997......... 189.4 487.0 676.4
===== ===== =====
At 31 December 1996......... 199.9 497.3 697.2
===== ===== =====
</TABLE>
F-51
<PAGE>
T&N PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Included in the cost of fixed assets at 31 December 1997 are buildings in
the course of construction of 0.5 pound sterling millions (1996 2.8 pound
sterling millions) and plant and machinery in the course of construction of
29.0 pound sterling millions. (1996 25.9 pound sterling millions).
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
Net book value of land and buildings
Freehold land--not depreciated.......... 44.9 49.5
Freehold buildings...................... 142.4 148.3
Long leasehold (over 50 years
unexpired)............................. 0.2 0.2
Short leasehold......................... 1.9 1.9
----- -----
189.4 199.9
===== =====
<CAPTION>
1997 1996
----------------- -----------------
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
Capitalised leases included in plant and
machinery
Cost.................................... 24.1 28.4
Depreciation............................ (20.9) (23.8)
----- -----
Net book value............................ 3.2 4.6
===== =====
</TABLE>
<TABLE>
<CAPTION>
LAND &
BUILDINGS PLANT & MACHINERY TOTAL
----------------- ----------------- -----------------
(POUND STERLING)M (POUND STERLING)M (POUND STERLING)M
<S> <C> <C> <C>
Historical cost of
tangible fixed assets
Cost (or ascribed
value)................ 196.7 1,031.7 1,228.4
Depreciation........... (32.1) (544.9) (577.0)
----- ------- -------
Net historical cost value
at 31 December 1997..... 164.6 486.8 651.4
----- ------- -------
Net historical cost value
at 31 December 1996..... 161.6 497.1 658.7
===== ======= =======
</TABLE>
F-52
<PAGE>
T&N PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. FIXED ASSET INVESTMENTS
<TABLE>
<CAPTION>
ASSOCIATED OTHER OTHER
UNDERTAKINGS SHARES INVESTMENTS TOTAL
----------------- ----------------- ----------------- -----------------
(POUND STERLING)M (POUND STERLING)M (POUND STERLING)M (POUND STERLING)M
<S> <C> <C> <C> <C>
Cost of valuation
At 1 January 1997..... 51.7 7.9 37.6 97.2
Currency translation.. (4.7) (0.2) (3.8) (8.7)
Additions............. 5.3 0.2 6.1 11.6
Acquisitions of
operations........... -- 0.6 -- 0.6
Disposals and
repayments........... (0.7) -- (12.8) (13.5)
Share of retained
losses............... (0.8) -- -- (0.8)
---- ---- ----- -----
At 31 December 1997... 50.8 8.5 27.1 86.4
==== ==== ===== =====
Provisions
At 1 January 1996..... -- (0.1) (37.6) (37.7)
Currency translation.. -- -- 2.8 2.8
Disposals............. -- -- 12.8 12.8
Release of provision.. -- 0.1 19.2 19.3
---- ---- ----- -----
At 31 December 1997... -- -- (2.8) (2.8)
==== ==== ===== =====
Net book value
At 31 December 1997... 50.8 8.5 24.3 83.6
==== ==== ===== =====
At 31 December 1996... 51.7 7.8 -- 59.5
==== ==== ===== =====
</TABLE>
Listed investments included above in associated undertakings at net book
value are (pound sterling)7.7m (1996 (pound sterling)7.5m)--market value
(pound sterling)4.7m (1996 (pound sterling)5.7m). At 31 December 1997, Group
associated undertakings investments included loans receivable of (pound
sterling)5.1m (1996 (pound sterling)1.8m).
13. STOCKS
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
Raw materials and consumables............... 45.5 41.9
Work in progress............................ 39.3 45.7
Finished goods.............................. 137.1 160.0
----- -----
221.9 247.6
===== =====
</TABLE>
F-53
<PAGE>
T&N PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. DEBTORS
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
Debtors falling due within one year
Trade...................................... 264.4 260.2
Amounts owed by associated undertakings.... 3.9 1.4
Amounts owed in respect of disposals of
operations................................ 7.8 24.8
Assets held for disposal................... 4.2 6.8
Overseas taxation recoverable.............. 2.8 6.1
Deferred tax recoverable (note 25)........... 1.8 13.9
Prepayments and accrued income............. 9.8 13.9
Other...................................... 24.1 23.7
----- -----
318.8 350.8
===== =====
Debtors falling due after more than one year
Amounts owed in respect of disposal of
operations................................ 0.6 3.4
Prepaid pension costs (note 10).............. 51.6 45.0
Deferred tax recoverable (note 25)........... 19.3 16.5
Overseas taxation recoverable.............. 0.4 0.2
Other debtors.............................. 1.6 1.0
----- -----
73.5 66.1
===== =====
Total debtors............................ 392.3 416.9
===== =====
</TABLE>
15. CURRENT ASSET INVESTMENT
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
Listed investments-- market value(pound
sterling)8.1m (1996(pound sterling)5.1m).. 7.7 5.1
Other investments-- market value(pound
sterling)0.4m (1996(pound sterling)0.6m).. 0.3 0.5
--- ---
8.0 5.6
=== ===
</TABLE>
16. CREDITORS--DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
Trade..................................... 165.3 168.9
Amounts owed to associated undertakings... 2.7 2.1
Amounts owed in respect of acquisitions... 2.8 --
Payroll and other taxes, including social
security................................. 48.4 54.1
Taxation--United Kingdom corporation tax.. 8.7 5.9
--Overseas taxation.................... 30.1 13.6
Accruals and deferred income.............. 88.4 69.4
Grants not yet credited to profit......... 1.3 1.7
Proposed dividend (note 7)................ 16.5 --
Asbestos-related insurance premium........ -- 92.0
Other..................................... 58.8 64.8
----- -----
423.0 472.5
===== =====
</TABLE>
F-54
<PAGE>
T&N PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. CREDITORS--DUE AFTER MORE THAN ONE YEAR
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
Amounts owed in respect of acquisitions..... 5.5 3.4
Accruals and deferred income................ -- 1.3
Grants not yet credited to profit........... 3.8 4.4
Other....................................... 2.7 6.8
---- ----
12.0 15.9
==== ====
</TABLE>
18. NET BORROWINGS
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
Borrowings
Repayable after more than five years
--instalments.......................... 7.3 7.7
--otherwise............................ 153.7 0.7
Two to five years
--instalments.......................... 16.9 23.0
--otherwise............................ 100.3 186.0
One to two years
--instalments.......................... 5.8 8.7
--otherwise............................ 1.4 34.1
------ ------
Total due after more than one year......... 285.4 260.2
Total due within one year.................. 103.7 77.2
------ ------
Total borrowings........................... 389.1 337.4
Cash at bank and in hand and current asset
investments............................... (202.0) (137.1)
------ ------
Net borrowings............................. 187.1 200.3
====== ======
Analysis of total borrowings
Finance leases........................... 3.9 5.3
Bank overdrafts and loans secured on
assets of the Group..................... 27.5 37.4
Unsecured bank overdrafts and loans...... 357.7 294.7
------ ------
389.1 337.4
====== ======
Analysis of borrowings by currency
Sterling................................. (28.6) (33.9)
Other European currencies................ 78.0 130.3
United States Dollar..................... 119.0 80.4
South African Rand....................... 8.1 9.3
Other currencies......................... 10.6 14.2
------ ------
187.1 200.3
====== ======
</TABLE>
The majority of the Group's borrowings are at variable rates between 35 and
50 basis points above the applicable base rate for the currency. Interest rate
swaps have been entered into in a mix of currencies whereby the interest
charge on total debt of (pound sterling)154.2m has been swapped from variable
to fixed rates for periods of between two and five years. Included in cash and
current asset investments, at 31 December 1997, amounts totalling (pound
sterling)23.7m (1996 (pound sterling)22.8m) are held by the Group's insurance
company of which (pound sterling)18.0m (1996 (pound sterling)17.6m) is
required to meet insurance regulatory requirements and which, as a result, is
not readily available for the general purposes of the Group.
F-55
<PAGE>
T&N PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
19. PROVISIONS FOR LIABILITIES AND CHARGES
<TABLE>
<CAPTION>
POST-
DEFERRED EMPLOYMENT ASBESTOS OTHER
TAXATION BENEFITS RELATED PROVISIONS TOTAL
---------- ---------- ---------- ---------- ----------
(POUND (POUND (POUND (POUND (POUND
STERLING)M STERLING)M STERLING)M STERLING)M STERLING)M
<S> <C> <C> <C> <C> <C>
At 1 January 1997....... -- 142.1 440.6 6.8 589.5
Reclassified from
creditors.............. -- -- 90.7 -- 90.7
Reclassified from
debtors................ -- -- (0.3) -- (0.3)
Acquisition of
operations............. -- 0.6 -- 0.4 1.0
Currency translation.... (0.2) (9.1) 4.1 (0.2) (5.4)
Charge for the year..... 5.9 13.9 -- 0.6 20.4
Amortisation of
discount............... -- -- 2.5 -- 2.5
Payments................ -- (11.5) (149.4) (2.2) (163.1)
---- ----- ------ ---- ------
At 31 December 1997..... 5.7 136.0 388.2 5.4 535.3
==== ===== ====== ==== ======
</TABLE>
Other provisions include leaving benefits payable to employees in certain
acquired companies and costs of environmental cleaning.
20. CALLED UP SHARE CAPITAL
<TABLE>
<CAPTION>
AUTHORISED ISSUED AND
NO. OF FULLY PAID ISSUED AND
SHARES AUTHORISED NO. OF SHARES FULLY PAID
----------- ---------- ------------- ----------
(POUND (POUND
STERLING)M STERLING)M
<S> <C> <C> <C> <C>
Ordinary Shares
At 1 January 1997............ 725,000,000 725.0 532,203,165 532.2
Options exercised to 30
January 1997................ -- -- 113,269 0.1
----------- ------ ----------- ------
At 30 January 1997........... 725,000,000 725.0 532,316,434 532.3
Capital reduction............ -- (435.0) -- (319.4)
----------- ------ ----------- ------
After capital reduction...... 725,000,000 290.0 532,316,434 212.9
Options issued to 31 December
1997........................ -- -- 6,275,782 2.6
Issued as scrip dividends.... -- -- 10,111,955 4.0
----------- ------ ----------- ------
At 31 December 1997.......... 725,000,000 290.0 548,704,171 219.5
=========== ====== =========== ======
</TABLE>
A capital reduction was approved by the Court on 29 January 1997 and took
effect on 30 January 1997. In accordance with the terms of the capital
reduction, the nominal value of authorised and issued shares was reduced from
(pound sterling) 1.00 to 40p.
<TABLE>
<CAPTION>
SAVINGS-
EXECUTIVE RELATED TOTAL
NO. OF SHARES NO. OF SHARES NO. OF SHARES
------------- ------------- -------------
<S> <C> <C> <C>
Share option schemes
At 1 January 1997................... 12,332,229 12,537,575 24,869,804
Granted............................. 2,965,000 4,100,923 7,065,923
Exercised........................... (4,001,750) (2,387,301) (6,389,051)
Lapsed.............................. (628,255) (2,234,510) (2,862,765)
---------- ---------- ----------
At 31 December 1997................. 10,667,224 12,016,687 22,683,911
========== ========== ==========
</TABLE>
F-56
<PAGE>
T&N PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
SAVINGS-
EXECUTIVE RELATED TOTAL
---------- ---------- ----------
<S> <C> <C> <C>
Share option schemes
Number of holders............................ 236 3,976 4,212
Latest dates exercisable range between....... 1998/2007 1998/2003
Exercisable at the following price per share
101.7p..................................... -- 599,843 599,843
111.4p..................................... 873,136 -- 873,136
119.7p-147.8p.............................. 812,777 6,459,850 7,272,627
151.6p-172.1p.............................. 6,294,224 4,420,819 10,715,043
182.8p-199.8p.............................. 271,162 536,175 807,337
201.6p-226.2p.............................. 2,415,925 -- 2,415,925
---------- ---------- ----------
10,667,224 12,016,687 22,683,911
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
ORDINARY SHARES
-----------------------
31 DECEMBER 31 DECEMBER
1997 1996
----------- -----------
<S> <C> <C>
The interests in the Company, of those who were
directors at 31 December 1997, were as follows:
Sir Colin Hope...................................... 107,774 105,562
R G Beeston......................................... 10,000 --
R H Boissier........................................ 2,595 2,488
D A Harding......................................... 5,104 5,000
Sir Terence Harrison................................ 10,000 5,000
Professor F R Hartley............................... 3,131 3,001
P S Lewis........................................... 1,000 1,000
A C McWilliam....................................... 2,375 2,326
I F R Much.......................................... 34,952 34,168
T A Welsh........................................... 19,445 5,914
Sir Geoffrey Whalen................................. 4,856 4,654
------- -------
201,232 169,113
======= =======
</TABLE>
F-57
<PAGE>
T&N PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
There have been no changes in the interests of directors between 31 December
1997 and 17 February 1998. No director has any beneficial interest in shares of
any subsidiary.
<TABLE>
<CAPTION>
SHARE ASSOCIATED
PREMIUM SHARES TO SPECIAL REVALUATION UNDERTAKINGS
ACCOUNT BE ISSUED RESERVE RESERVES RESERVES
---------- ---------- ---------- ----------- ------------
(POUND (POUND (POUND (POUND (POUND
STERLING)M STERLING)M STERLING)M STERLING)M STERLING)M
<S> <C> <C> <C> <C> <C>
Reserves
At 1 January 1995..... -- -- -- 34.3 7.8
Currency translation
on overseas assets... -- -- -- 0.1 (1.0)
Currency translation
on net debt.......... -- -- -- -- --
Transfer to profit &
loss................. -- -- -- -- 6.1
Realisation of
revaluation surplus.. -- -- -- 1.6 --
Premium on share
issues............... 0.5 -- -- (6.6) --
Goodwill arising on
acquisitions......... -- -- -- -- --
Goodwill arising on
formation of Turkish
joint venture ....... -- -- -- -- --
Goodwill on disposals. -- -- -- -- --
Scrip issues of
shares............... (0.5) -- -- (0.1) --
Other movements....... -- -- -- -- --
---- --- ------ ---- ----
At 31 December 1995... -- -- -- 29.3 12.9
Currency translation
on overseas assets... -- -- -- (1.7) (5.9)
Currency translation
on net debt.......... -- -- -- -- --
Transfer to profit &
loss................. -- -- -- -- (2.7)
Realisation of
revaluation surplus.. -- -- -- (5.6) --
Premium on share
issues............... 0.2 -- -- -- --
Goodwill arising on
acquisitions......... -- -- -- -- --
Goodwill on disposals. -- -- -- -- --
Other movements....... -- -- -- (0.4) 0.7
---- --- ------ ---- ----
At 31 December 1996... 0.2 -- -- 21.6 5.0
Transfer to special
reserve.............. -- -- (262.5) -- --
Transfer capital
reduction to special
reserve.............. -- -- 319.4 -- --
Currency translation
on overseas assets... -- -- -- (0.4) (4.9)
Currency translation
on net debt.......... -- -- -- -- --
Transfer to profit and
loss................. -- -- -- -- (0.8)
Realisation of
revaluation surplus.. -- -- 5.2 (5.3) --
Revaluations.......... -- -- -- (1.7) --
Premium on share
issues............... 6.5 -- -- -- --
Scrip dividend (Note
7)................... (4.0) -- -- -- --
Goodwill arising on
acquisitions......... -- -- -- -- --
Goodwill on disposals. -- -- 1.1 -- --
Realisation of
reserves on disposal. -- -- -- -- (0.3)
Executive share
options.............. -- 0.7 -- -- --
Other movements....... -- -- -- -- (1.1)
---- --- ------ ---- ----
At 31 December 1997... 2.7 0.7 63.2 14.2 (2.1)
==== === ====== ==== ====
</TABLE>
F-58
<PAGE>
T&N PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
GOODWILL PROFIT & LOSS
WRITE OFF RESERVE ACCOUNT
----------------- -----------------
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
At 1 January 1995.......................... (186.1) 127.9
Currency translation on overseas assets.... -- 14.4
Currency translation on net debt........... -- (15.1)
Transfer to profit & loss.................. -- 32.3
Realisation of revaluation surplus......... -- --
Premium on share issues.................... -- 6.6
Goodwill arising on acquisitions........... (7.5) --
Goodwill arising on formation of Turkish
joint venture............................. (3.5) --
Goodwill on disposals...................... 6.6 --
Scrip issues of shares..................... -- 0.6
Other movements............................ -- (1.4)
------ ------
At 31 December 1995........................ (190.5) 165.3
Currency translation on overseas assets.... -- (58.1)
Currency translation on net debt........... -- 42.6
Transfer to profit & loss.................. -- (414.1)
Realisation of revaluation surplus......... -- 5.6
Premium on share issues.................... -- --
Goodwill arising on acquisitions........... (0.3) --
Goodwill on disposals...................... 9.7 --
Other movements............................ -- (0.9)
------ ------
At 31 December 1996........................ (181.1) (259.6)
Transfer to special reserve................ 5.3 257.2
Transfer capital reduction to special
reserve................................... -- --
Currency translation on overseas assets.... -- (21.0)
Currency translation on net debt........... -- 8.9
Transfer to profit and loss................ -- 73.7
Realisation of revaluation surplus......... -- 0.1
Revaluations............................... -- --
Premium on share issues.................... -- --
Scrip dividend (Note 7).................... -- 15.4
Goodwill arising on acquisitions........... (10.0) --
Goodwill on disposals...................... 2.9 --
Realisation of reserves on disposal........ -- 0.3
Executive share options.................... -- --
Other movements............................ -- 1.1
------ ------
At 31 December 1997........................ (182.9) 76.1
====== ======
</TABLE>
A capital reduction, which was approved by the Court on 29 January 1997,
took effect on 30 January 1997 and, in accordance with the Court Order, was
applied to eliminating the deficit on the Company's profit and loss account
(including goodwill previously written off). The accounting entries recorded
in the accounting records of the Company in accordance with the terms approved
by the Court were as follows:
(i) The nominal value of each share in issue at 30 January 1997 was
reduced from (pound sterling)1.00 to 40p. As a consequence, the nominal
value of shares in issue at 30 January 1997 (1996 (pound sterling) 532.2m,
1995 (pound sterling) 531.2m) was reduced by (pound sterling) 319.4m to
(pound sterling) 212.9m. The reduction of (pound sterling) 319.4m was
credited to the special reserve.
F-59
<PAGE>
T&N PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(ii) The balance of (pound sterling) 5.3m on the goodwill reserve of the
Company at 31 December 1996 was transferred to the special reserve.
(iii) The balance of (pound sterling) 257.2m on the profit and loss
account reserve of the Company at 31 December 1996 was transferred to the
special reserve. The special reserve is not distributable except in certain
limited circumstances. Any goodwill or revaluation reserves in existence at
1 January 1997 must be credited to the special reserve when they are
realised.
Cumulative goodwill written off to Group reserves at 31 December 1997 totals
(pound sterling) 254.3m (1996 (pound sterling) 248.3m, 1995 (pound sterling)
257.7m), comprising (pound sterling) 182.9m (1996 (pound sterling) 181.1m,
1995 (pound sterling) 190.5m) shown above, (pound sterling) 67.2m (1996 (pound
sterling) 67.2m, 1995 (pound sterling) 67.2m) written off to a merger reserve
in earlier years and (pound sterling) 4.2m transferred to the special reserve
in 1997.
Retained earnings of overseas subsidiaries and associated undertakings would
be liable to tax if remitted as dividends to the United Kingdom. No provision
has been made for this liability as there are no plans to remit such earnings.
22. NOTES TO THE CASH FLOW STATEMENT
(A) Recognition of Operating Profit to Net Cash Inflow from Operating
Activities
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(POUND (POUND (POUND
STERLING)M STERLING)M STERLING)M
<S> <C> <C> <C>
Operating profit/(loss)....................... 177.2 (335.8) 175.3
Share of profit of associated undertakings.... (13.2) (11.8) (12.6)
Depreciation.................................. 93.5 98.3 101.6
Loss on sale of tangible fixed assets......... 0.8 2.5 2.3
Decrease/(increase) in stocks................. 12.8 22.2 (15.8)
(Increase)/decrease in debtors................ (25.4) 1.0 (1.7)
Increase/(decrease) in creditors.............. 13.7 (2.0) 21.4
Increase/(decrease) in provisions............. 1.6 (7.9) (19.1)
Other non cash movements...................... (0.2) (1.0) (4.1)
Charge for asbestos-related costs............. -- 515.0 51.3
------ ------ -----
Cash inflow from operating activities before
asbestos-related payments.................... 260.8 280.5 298.6
Asbestos-related payments..................... (149.4) (64.8) (55.7)
------ ------ -----
Cash inflow from operating activities after
asbestos-related payments.................... 111.4 215.7 242.9
====== ====== =====
</TABLE>
(B) Returns on Investment and Servicing of Finance
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(POUND (POUND (POUND
STERLING)M STERLING)M STERLING)M
<S> <C> <C> <C>
Interest received.............................. 11.0 5.2 3.8
Interest paid.................................. (35.1) (35.4) (40.1)
Dividends paid to minorities................... (0.8) (1.2) (1.1)
----- ----- -----
(24.9) (31.4) (37.4)
===== ===== =====
</TABLE>
F-60
<PAGE>
T&N PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(C) Taxation
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(POUND (POUND (POUND
STERLING)M STERLING)M STERLING)M
<S> <C> <C> <C>
UK tax paid.................................... (8.5) (9.3) (5.0)
Overseas tax paid.............................. (11.6) (19.6) (8.3)
----- ----- -----
(20.1) (28.9) (13.3)
===== ===== =====
</TABLE>
(D) Capital Expenditure and Financial Investment
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(POUND (POUND (POUND
STERLING)M STERLING)M STERLING)M
<S> <C> <C> <C>
Purchase of tangible fixed assets............. (103.9) (114.3) (151.8)
Grants received............................... 0.2 -- 0.2
Disposal of tangible fixed assets............. 3.3 2.3 2.0
Additions to trade and other investments
(primarily Kolbenschmidt).................... (14.7) (13.6) (6.0)
Disposal of trade investments (Kolbenschmidt). 13.2 0.1 --
------ ------ ------
(101.9) (125.5) (155.6)
====== ====== ======
</TABLE>
(E) Acquisitions and Disposals
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(POUND (POUND (POUND
STERLING)M STERLING)M STERLING)M
<S> <C> <C> <C>
Acquisitions (note 23)......................... (27.3) (8.5) (58.7)
Sale of discontinued operations (note 3)....... 75.7 74.8 69.3
Additions to associated undertakings........... (5.3) (7.0) (1.1)
Impact of Turkish joint venture................ -- -- (3.7)
----- ---- -----
43.1 59.3 5.8
===== ==== =====
</TABLE>
(F) Management of Liquid Resources
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(POUND (POUND (POUND
STERLING)M STERLING)M STERLING)M
<S> <C> <C> <C>
(Additions)/reduction to current asset
investments.................................. (2.4) (4.4) 5.4
(Increase)/reduction in short term
investments.................................. (74.1) (1.8) 1.3
----- ---- ---
(76.5) (6.2) 6.7
===== ==== ===
</TABLE>
F-61
<PAGE>
T&N PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(G) Financing
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
(POUND (POUND (POUND
STERLING)M STERLING)M STERLING)M
<S> <C> <C> <C>
New loans..................................... 139.4 176.7 60.4
Repayment of loans............................ (116.6) (206.8) (63.6)
------ ------ -----
Cash inflow/(outflow) from decrease in debt
and lease financing.......................... 22.8 (30.1) (3.2)
Issue of ordinary share capital............... 9.1 1.2 1.6
Capital input by minorities................... 2.1 1.8 1.2
------ ------ -----
34.0 (27.1) (0.4)
====== ====== =====
</TABLE>
(H) Acquired and Discontinued Operations
In 1997, acquired and discontinued operations had no significant impact on
any of the cash flow categories, other than as disclosed in acquisitions and
disposals (Note 22(e)) above.
23. ACQUISITIONS
On 27 February 1997 the group acquired Michigan Stamping Corporation, which
manufactures heat shields and is based in Michigan, USA. On 16 June 1997 The
group acquired Metal Leve Inc, a manufacturer of articulated pistons also
based in Michigan, USA. This Company was subsequently renamed AE Goetze
Carolina Inc.
In addition, on various dates during the year, the Group acquired the
following minority interests:
<TABLE>
<CAPTION>
% OWNERSHIP AT % OWNERSHIP AT
START OF YEAR END OF YEAR
-------------- --------------
<S> <C> <C>
Ferodo a.s........................................ 55% 100%
Ferodo India Pvt Ltd.............................. 76% 100%
AE Goetze Argentina SA............................ 94% 100%
Nanchang Payen Company Limited.................... 70% 80%
</TABLE>
Details of the acquisitions, including the fair value adjustments made to
the assets and liabilities acquired, are set out below. Substantially all the
assets and goodwill acquired relate to Metal Leve Inc. Substantially all the
minority interest acquired relate to Ferodo a.s.
<TABLE>
<CAPTION>
BOOK VALUE AT ACCOUNTING POLICY
ACQUISITION ALIGNMENT OTHER ADJUSTMENTS FAIR VALUE
----------------- ----------------- ----------------- -----------------
(POUND STERLING)M (POUND STERLING)M (POUND STERLING)M (POUND STERLING)M
<S> <C> <C> <C> <C>
Tangible fixed assets... 15.6 -- 2.3 17.9
Investments............. 0.6 -- -- 0.6
Stocks.................. 3.4 0.3 -- 3.7
Debtors................. 8.6 -- (0.5) 8.1
Creditors............... (8.9) -- -- (8.9)
Provisions.............. (1.5) (0.4) 1.0 (0.9)
Cash.................... 4.2 -- -- 4.2
Loans................... (4.8) -- -- (4.8)
Minority interests...... -- -- -- --
---- ---- ---- ----
Assets acquired......... 17.2 (0.1) 2.8 19.9
Goodwill................ 10.3
----
Cash consideration...... 30.2
====
</TABLE>
F-62
<PAGE>
T&N PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
MINORITY
INTERESTS TOTAL
----------------- -----------------
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
Tangible fixed assets....................... -- 17.9
Investments................................. -- 0.6
Stocks...................................... -- 3.7
Debtors..................................... -- 8.1
Creditors................................... -- (8.9)
Provisions.................................. -- (0.9)
Cash........................................ -- 4.2
Loans....................................... -- (4.8)
Minority interests.......................... 5.1 5.1
---- ----
Assets acquired............................. 5.1 25.0
Goodwill.................................... (0.3) 10.0
---- ----
Cash consideration.......................... 4.8 35.0
==== ====
</TABLE>
All accounting policy alignments and other adjustments relate to Metal Leve
Inc. The accounting policy alignments comprise the recording as stocks of
(pound sterling)0.3m of consumable stores previously written off and a
provision of (pound sterling)0.4m in respect of environmental work required at
the date of acquisition. Other adjustments comprise the revaluation of fixed
assets ((pound sterling)2.3m) and the elimination of deferred tax debtors
((pound sterling)0.5m) and creditors ((pound sterling)1.0m).
In its last statutory year, ended 31 December 1996, Metal Leve Inc earned
profits after taxation of(pound sterling)1.4m; in the period from 1 January
1997 to 15 June 1997 it earned profits after taxation of(pound sterling)1.6m.
<TABLE>
<CAPTION>
(POUND STERLING)M
-----------------
<S> <C>
Cash paid for acquisitions
Cash consideration.......................................... 35.0
Consideration deferred...................................... (4.0)
Prior year deferred consideration paid...................... 0.5
Less cash acquired.......................................... (4.2)
----
Cash outflow on acquisitions................................ 27.3
====
</TABLE>
24. ANALYSIS OF MOVEMENT IN NET DEBT
<TABLE>
<CAPTION>
OTHER NON CASH
AT 1 JANUARY 1997 CASH FLOW MOVEMENTS DEBT ACQUIRED
----------------- ----------------- ----------------- -----------------
(POUND STERLING)M (POUND STERLING)M (POUND STERLING)M (POUND STERLING)M
<S> <C> <C> <C> <C>
Cash at bank and in
hand................... 110.4 (3.2) -- --
Overdrafts.............. (24.0) (42.8) -- --
------ ----- --- ----
86.4 (46.0) -- --
------ ----- --- ----
Debt due within one
year................... (51.7) 12.4 -- (1.5)
Debt due after one year. (256.4) (36.4) 1.4 (3.2)
Finance leases.......... (5.3) 1.2 -- (0.1)
------ ----- --- ----
(313.4) (22.8) 1.4 (4.8)
------ ----- --- ----
Short term deposits..... 21.1 74.1 -- --
Current asset
investments............ 5.6 2.4 -- --
------ ----- --- ----
26.7 76.5 -- --
------ ----- --- ----
Net borrowings.......... (200.3) 7.7 1.4 (4.8)
====== ===== === ====
</TABLE>
F-63
<PAGE>
T&N PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
EXCHANGE MOVEMENT ON AT 31 DECEMBER
OPENING BALANCES MOVEMENT IN YEAR 1997
-------------------- ----------------- -----------------
(POUND STERLING)M (POUND STERLING)M (POUND STERLING)M
<S> <C> <C> <C>
Cash at bank and in
hand................... (5.0) (2.3) 99.9
Overdrafts.............. 1.4 0.3 (65.1)
---- ---- ------
(3.6) (2.0) 34.8
---- ---- ------
Debt due within one
year................... 3.9 (0.6) (37.5)
Debt due after one year. 10.5 1.5 (282.6)
Finance leases.......... 0.3 -- (3.9)
---- ---- ------
14.7 0.9 (324.0)
---- ---- ------
Short term deposits..... (0.2) (0.9) 94.1
Current asset
investments............. -- -- 8.0
---- ---- ------
(0.2) (0.9) 102.1
---- ---- ------
Net borrowings.......... 10.9 (2.0) (187.1)
==== ==== ======
</TABLE>
Included within the closing balance of short term deposits is (pound
sterling) 78.2m in the asbestos fund.
25. DEFERRED TAXATION
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
Asset/(liability) recognised
Asbestos-related costs.................... 21.1 27.4
Losses and other timing differences....... (5.7) 3.0
---- ----
15.4 30.4
==== ====
</TABLE>
No provision has been made for tax which would become payable on the amount
by which assets have been revalued because there is no current intention to
dispose of these assets.
Provision for deferred taxation is only made to the extent that it is
probable that an actual liability or asset will crystallise, as noted below.
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
Deferred tax assets:
Advance corporation tax.................. 61.9 56.5
Operating losses......................... 36.6 41.6
Capital losses........................... 24.8 30.8
Asbestos provision....................... 129.7 179.1
Other.................................... 40.9 78.3
------ ------
293.9 386.3
Less: Deferred tax not recognised under UK
GAAP...................................... (272.8) (355.9)
------ ------
Deferred tax asset recognised under UK
GAAP...................................... 21.1 30.4
====== ======
</TABLE>
F-64
<PAGE>
T&N PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
Deferred tax liability:
Accelerated capital allowances........... (64.5) (60.8)
Other.................................... (26.8) (25.3)
----- -----
(91.3) (86.1)
Less: Deferred tax not recognized under UK
GAAP...................................... (85.6) (86.1)
----- -----
Deferred tax liability provided under UK
GAAP...................................... (5.7) --
===== =====
Net deferred tax asset recognized under UK
GAAP...................................... 15.4 30.4
===== =====
</TABLE>
A deferred tax asset is carried in respect of the provision for asbestos
claims settlements in the UK and US (and at 1996 additionally in respect of
the insurance premium against asbestos liabilities). The amount recognised is
the forecast tax relief to be obtained for asbestos claims settlements over
the next three years.
The analysis of the deferred tax liability provided under UK GAAP between
current and non-current amounts is as follows:
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
Current:
UK........................................ -- --
US........................................ 1.8 10.8
Germany................................... -- 3.1
---- ----
1.8 13.9
==== ====
Non-current:
UK........................................ 9.9 10.3
US........................................ 9.4 6.2
Germany................................... (5.7) --
---- ----
13.6 16.5
==== ====
Total deferred tax asset................ 15.4 30.4
==== ====
</TABLE>
No deferred tax liability has been recognised for temporary differences
related to investments in foreign subsidiaries and associates. Remittance of
retained earnings of overseas subsidiaries and associates as dividends would
be liable to tax in the UK. However, it is likely that no net tax liability
would arise, since credit would be available for foreign taxes suffered on
those earnings, and surplus ACT, of (pound sterling)61.9 million at 31
December 1997 ((pound sterling)56.5 million at 31 December 1996) that has not
been recognised for deferred tax, would be available to offset the liability.
The temporary difference could also become taxable if capital of the foreign
companies were repaid to their UK parent company. However, the taxable gain
would be reduced by the base cost of the shares and an inflation allowance.
Additionally, capital losses, with a value of (pound sterling)24.8 million at
31 December 1997 ((pound sterling)30.8 million at 31 December 1996) that have
not been recognised for deferred tax, would be available to offset the net
taxable gain.
The value of tax losses (excluding capital losses) carried forward and their
expiry dates are as follows:
<TABLE>
<CAPTION>
(POUND STERLING)M
-----------------
<S> <C>
1998.......................................................... 4.4
1999.......................................................... 4.1
2000.......................................................... 3.2
2001.......................................................... 1.0
After 2001.................................................... 23.8
----
36.5
====
</TABLE>
F-65
<PAGE>
T&N PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
26. RELATED PARTY TRANSACTIONS
The T&N Group is related to all its associated undertakings because it
exerts significant influence over them. During the year various transaction
have occurred between the T&N Group and its associates including:
. Sales of goods and equipment to associated undertakings of (pound
sterling)12.1m (1996 (pound sterling)12.8m);
. purchases of goods from associated undertakings of (pound sterling)15.9m
(1996 (pound sterling)15.5m);
. royalties received from associated undertakings of (pound sterling)1.9m
(1996 (pound sterling)1.4m);
. dividends received from associated undertakings of (pound sterling)6.5m
(1996 (pound sterling)6.8m);
. investments in associated undertakings as set out in Note 12.
Sales between associated undertakings totalled (pound sterling)26.1m (1996
(pound sterling)16.0m).
Trading balances with associated undertakings at 31 December 1996 and 1997 are
set out in Notes 14 and 16.
Entities which the T&N Group sold and acquired during the year, details of
which are set out in Notes 3 and 23, are deemed to be related parties because
the T&N Group exercise control over these whilst they were part of the T&N
Group. Transactions during the year which are not eliminated on consolidation
totalled (pound sterling)0.3m (1996 (pound sterling)1.0m) comprising mainly
the provision of utilities to disposed businesses.
All these transaction were entered into on arms length terms.
27. COMMITMENTS AND CONTINGENT LIABILITIES
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
Future capital expenditure--contracts
placed................................... 20.0 12.6
==== ====
Operating leases--payment commitments for
1998 on leases of land and buildings
expiring:
--within one year....................... 1.0 1.0
--between two and five years............ 3.3 2.1
--in more than five years............... 2.5 2.1
---- ----
6.8 5.2
==== ====
On leases of plant and machinery expiring:
--within one year....................... 1.2 1.4
--between two and five years............ 5.7 7.0
--in more than five years............... -- 0.1
---- ----
6.9 8.5
==== ====
</TABLE>
At 31 December 1997 the Company and its UK subsidiaries had contingent
liabilities of (pound sterling)67.6m (1996 (pound sterling)64.3m) in
connection with guarantees relating to bank borrowings of certain overseas
subsidiaries. The maximum potential liability under those guarantees is (pound
sterling)99.4m (1996 (pound sterling)121.4m). Contingent liabilities also
exist in respect of cross-guarantees given by the Company and its UK
subsidiaries to support some of the Group's UK bank borrowings.
F-66
<PAGE>
T&N PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
28. ASBESTOS-RELATED LITIGATION
In the United States of America, T&N plc and two of its US subsidiaries
("the T&N Companies") are among many defendants named in numerous court
actions alleging personal injury resulting from exposure to asbestos or
asbestos-containing products. T&N plc is also subject to asbestos-disease
litigation, to a lesser extent, in the UK. Because of the slow onset of
asbestos-related diseases, the directors anticipate that similar claims will
be made in the future. It is not known how many such claims may be made nor
the expenditure which may arise therefrom. Provisions are, however, made in
respect of both known and possible future claims, on the following bases.
Claims Notified after 30 June 1996
As announced on 27 November 1996 the Company has secured, by payment of a
premium of (pound sterling)92m, a (pound sterling)500m layer of insurance
cover which will be triggered should the aggregate number of claims notified
after 30 June 1996, where the exposure occurred prior to that date ("IBNR
claims"), exceed (pound sterling)690m.
This, together with recent claims experience and medical information,
enabled the directors of the company during 1996 to estimate the cost of IBNR
claims with reasonable accuracy. Accordingly, provision was made of (pound
sterling)550m during the year ended 31 December 1996 for IBNR claims at 30
June 1996 (being a point between the high ((pound sterling)690m) and low
((pound sterling)429m) estimates prepared by actuaries using assumptions
referred to below). The provision was made on a discounted basis, using a rate
of 7%. The directors intend to set aside this provision in a separate fund,
and the provision established in 1996 of (pound sterling)327m allowed a margin
to enable this to be phased in accordance with the assumptions over a period
of approximately 36 months. Tax relief is available on this provision when
payments are made. At 31 December 1997, the provision amounted to (pound
sterling)300m and the fund established for IBNR claims stood at (pound
sterling)78.2m. Details of the movement in the IBNR provision are set out in
Note 19.
Claims Notified and Outstanding at 30 June 1996
As regards claims notified and outstanding at 30 June 1996 in the UK, full
provision is made in respect of such claims, based on estimates agreed with
the Company's external litigation lawyers.
As regards claims notified and outstanding at 30 June 1996 in the US,
provision continues to be made based on data provided by the Center for Claims
Resolution (CCR), who T&N has appointed as its exclusive representative in
relation to all asbestos-related personal injury claims made against the T&N
Companies in the United States. In estimating the provision, the directors
have had regard principally to the industry in which the plaintiff claims
exposure, the alleged disease type, the State in which the action is being
brought and the share which will be applicable to the T&N Companies having
regard to the agreed method of operation of the CCR. Such shares may in
certain circumstances be subject to retroactive adjustment. Even where
settlement has already been agreed in principle with plaintiffs' lawyers in
respect of a group of cases, the actual cost of each claim to the T&N
Companies may not be determined until it is finally processed and paid
sometime in the future.
Contingent Liability
Accordingly, although the directors believe that they have made appropriate
provision for claims, because of the factors described in this note, there are
contingencies in relation to the amount at which such claims will be finally
settled.
Given the substantial layer of insurance cover, one contingency in relation
to IBNR claims concerns claims exceeding the amount provided, but below the
level of insurance cover. This amounts to (pound sterling)140m
F-67
<PAGE>
T&N PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
gross, and (pound sterling)58m when discounted. The directors also recognise
the importance of setting up a separate fund in accordance with the
assumptions used in arriving at the discounted provision. During 1997 the sum
of (pound sterling)88.2m was put into such a fund.
In arriving at the IBNR provision, assumptions have been made regarding the
total number of claims which it is anticipated may be received in the future,
the average cost of settlement (which is sensitive to the industry in which
the plaintiff claims exposure, the alleged disease type and the State in which
the action is being brought), the rate of receipt of claims and the timing of
settlement and the level of subrogation claims brought by insurance companies.
So far as relates to claims reported at 30 June 1996, T&N is primarily
exposed to differences between the assumptions referred to above and the
actual claims settlement experience as it emerges.
US Property Damage Litigation
Following the successful jury verdict in the Chase Manhattan property damage
case in December 1995, judgement was entered in the Company's favour on all
counts during the year. The Chase Manhattan Bank has appealed against the
decision in the Company's favour. That appeal is still pending. The Company
has received legal advice that such appeal stands no realistic prospect of
success. Full provision has been made in respect of the anticipated legal
costs which may be incurred in relation to the Chase Manhattan case, and for
the other three remaining property claims.
29. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN UNITED KINGDOM AND UNITED
STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.
The Group's accounts are prepared in conformity with generally accepted
accounting principles applicable in the United Kingdom (UK GAAP), which differ
in certain significant respects from those applicable in the United States (US
GAAP). These differences, together with the approximate effects of the
adjustments on net profit and shareholders' funds, relate principally to the
items set out below:
Goodwill and Other Intangible Assets
Under UK GAAP goodwill arising on acquisition is charged to reserves. Under
US GAAP goodwill is capitalised and amortised by charges against income over
the period, not to exceed 40 years, over which the benefit arises. For US
GAAP, goodwill has been amortised by the Group over periods not exceeding 40
years.
Under UK GAAP the profit and loss on the disposal of all or part of a
previously acquired business is calculated after taking account of the gross
amount of any goodwill previously charged to reserves. Under US GAAP an
adjustment to profit or loss on disposal is required in respect of goodwill
previously amortised.
Under UK GAAP patents acquired as part of the acquisition of a company are
written off to reserves as part of goodwill. US GAAP requires patents to be
capitalised and amortised by charges against income over the period to
expiring of the patent.
US GAAP requires direct costs, such as legal fees and filing fees, to be
capitalised in respect of internally developed intangibles.
Dividends
Under UK GAAP dividends proposed after the end of an accounting period in
respect of that accounting period are deducted in arriving at retained
earnings for that period. Under US GAAP such dividends are not deducted until
formally approved.
F-68
<PAGE>
T&N PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred Taxation
Under UK GAAP provision is made for deferred taxation only to the extent
that it is probable that an actual liability or asset will crystallise in the
foreseeable future. US GAAP requires full provision for deferred income taxes
under the liability method on all temporary differences and, if required, a
valuation allowance is established to reduce gross deferred taxation assets to
the amount which is likely to be realised.
Deferred taxation also arises in relation to the tax effect of other US GAAP
differences.
Pension Costs
Under UK GAAP, the cost of providing pensions and post employment benefits
is charged against profits on a systematic basis, with pension surpluses and
deficits being amortised over the expected remaining service lives of current
employees. Under US GAAP, costs and surpluses are similarly spread over the
expected remaining service lives but based on prescribed actuarial
assumptions, allocation of costs and valuation methods, which differ in
certain respects from those used for UK GAAP.
Derivatives
Under UK GAAP only the accrued interest to the balance sheet date is carried
on the consolidated balance sheet. Under US GAAP, where the swaps do not meet
specific hedging criteria the swap must be carried on the consolidated balance
sheet at fair value with the related gains or losses recorded in income.
Asbestos Provision
Under UK GAAP an element of asbestos provision has been discounted to
reflect the long term nature of this environmental provision. Under US GAAP,
such environmental provisions are not generally discounted.
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
The Group, for US GAAP purposes, has adopted the provision of SFAS No. 121,
Accounting for The Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of. This Statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows
expected to be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognised is measured by the amount by which
the carrying amount of the assets exceed the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
Restructuring Costs
Under US GAAP the Group recognises a liability for restructuring costs and
charges the Group's profit and loss account in the period in which the
decision has been made to restructure a part of the business. Under US GAAP,
certain types of restructuring costs are only recognised when further specific
criteria have been met. Among these criteria is the requirement that all
significant actions arising from a restructuring and integration plan and
their completion dates must be identified by the balance sheet date. These
criteria also apply to the recognition of integration costs considered
liabilities on acquisition.
Capitalisation of Interest
Under UK GAAP the capitalisation of interest is not required. US GAAP
requires that gross interest should be capitalised on all qualifying assets
during the time required to prepare them for their intended use.
F-69
<PAGE>
T&N PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Share Option Schemes
Under UK GAAP the Group does not recognise any compensation cost for share
options granted to directors and employees. US GAAP requires compensation cost
to be recorded, over the vesting period, for the excess of the market value of
the underlying shares, at the date of granting of the options, over the
exercise price of the options.
Revaluation of Fixed Assets
Under UK GAAP the Group has revalued certain fixed assets. This is not
permitted under US GAAP.
Carrying Value of Investments
Under UK GAAP the Group has during 1997 reversed certain provisions in
respect of fixed asset investments held at the balance sheet date. Under US
GAAP these provisions would not be reversed on the basis that they related to
impairments which were other than temporary in nature.
Discontinued Operations
UK and US GAAP have different criteria for determining discontinued
operations. Under UK GAAP, certain disposals in 1996 and 1997 have been
treated as discontinued operations. Under US GAAP, the only disposal in 1996
and 1997 treated as discontinued operations was the disposal of the
Construction Materials business in 1996.
Current Assets and Liabilities
Under UK GAAP current assets include amounts which fall due after more than
one year. Under US GAAP such assets would be reclassified as non-current
assets. Also under UK GAAP provisions for liabilities and charges include
amounts due within one year which would be reclassified to current liabilities
under US GAAP.
Associated Undertakings
The Group's share of the results of associated undertakings, excluding
interest and taxation, have been disclosed within the UK Group financial
statements as part of operating results. The net interest in respect of
associated undertakings is included, and separately disclosed, within net
interest payable and similar charges; The tax attributable to the Group's
share of the results of associated undertakings is included within the Group
tax charge.
Under US GAAP, the Group's share of the results of associated undertakings
would be disclosed, net of interest and tax, below the operating result of the
Group.
Capital Grants
Under UK GAAP capital grants not yet released to the profit and loss account
are held as deferred income within creditors due within one year and due after
more than one year. Under US GAAP such capital grants are netted off against
the carrying value of the fixed assets to which they relate.
Cash Flows
The principal difference between UK GAAP and US GAAP is in respect of
classification. Under UK GAAP, the Group presents its cash flows for operating
activities, returns on investments and servicing of finance, taxation, capital
expenditures and financial investments, acquisition and disposals, equity
dividends paid,
F-70
<PAGE>
T&N PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
management of liquid resources, and financing. US GAAP requires only three
categories of cash flow activities which are operating, investing and
financing.
Cash flows arising from taxation and returns on investments and servicing of
finance under UK GAAP would, with the exception of dividends paid, be included
as operating activities under US GAAP; dividend payments would be included as
a financing activity under US GAAP. In addition, capital expenditures and
financial investment, acquisition and disposals, and management of liquid
resources under UK GAAP would be presented as investing activities under US
GAAP.
UK GAAP defines cash as cash in hand and deposits repayable on demand. Short
term deposits which are readily convertible into cash into known amounts of
cash at, or close to, their carrying value are classified as liquid resources.
US GAAP defines cash and cash equivalents as cash in hand and short term
highly liquid investments with original maturities of three months or less.
Cash flows in respect of short term deposits with original maturities
exceeding three months are included in investing activities under US GAAP and
are included in capital expenditure and financial investment under UK GAAP.
Under US GAAP, the following amounts would be reported:
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
Net cash provided by operating activities.. 163.4 73.7
Net cash used in investing activities...... (70.9) (135.1)
Net cash provided by/(used in) financing
activities................................ (71.9) 56.7
Effect of changes in exchange rate......... (4.1) (5.6)
----- ------
Net increase/(decrease) in cash and cash
equivalents............................... 16.5 (10.3)
Cash and cash equivalents at beginning of
year...................................... 114.8 131.3
----- ------
Cash and cash equivalents at end of year... 131.3 121.0
===== ======
</TABLE>
Effect on profit/(loss) attributable to shareholders of differences between
UK and US GAAP
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
Profit/(loss) attributable to shareholders
as reported under UK GAAP................. 122.4 (400.8)
US GAAP adjustments:
Goodwill................................. (6.8) (3.4)
Amortisation of patents.................. (1.6) (1.6)
Deferred taxation--full provision........ (40.8) 101.2
Tax effect of other US GAAP reconciling
items................................... 1.8 77.7
Pension costs............................ (7.0) (15.1)
Asbestos provision....................... (0.5) (227.0)
Fixed asset revaluations................. 5.8 6.2
Carrying value of investments............ (19.2) --
Other.................................... 1.3 1.3
Minority interests....................... (0.5) (0.7)
----- ------
Net income/(loss) under US GAAP............ 54.9 (462.2)
===== ======
Basic and diluted earnings per 40p
(1996:(pound sterling)1) share under US
GAAP......................................
.10 (0.87)
===== ======
</TABLE>
F-71
<PAGE>
T&N PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The after-tax net loss under US GAAP for 1996 comprises income from
discontinued operations of(pound sterling)3.6 million (per share(pound
sterling)0.01) and loss from continuing operations of(pound sterling)465.8
million (per share(pound sterling)0.87).
Effect on shareholders' funds of differences between UK and US GAAP
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
Shareholders' funds as reported under UK
GAAP...................................... 191.4 118.3
US GAAP adjustments:
Goodwill................................. 208.0 207.0
Amortisation of patents.................. 9.2 10.7
Deferred taxation--full provision........ 64.5 100.8
Tax effect of other US GAAP reconciling
items................................... 85.6 83.5
Pension costs............................ (11.0) (4.0)
Asbestos provision....................... (230.5) (227.0)
Fixed asset revaluations................. (14.2) (21.6)
Carrying value of investments............ (19.2) --
Other.................................... (0.1) (1.4)
Minority interests....................... (0.1) 0.4
------ ------
Shareholders' funds under US GAAP.......... 283.6 266.7
====== ======
</TABLE>
Under US GAAP the gross value of goodwill, prior to amortisation, at 31
December 1997 was (pound sterling)254.6 million (1996: (pound sterling)248.3
million).
New US Accounting Standards and Pronouncements Not Yet Adopted
SFAS No. 131--Disclosure about segments of an Enterprise and Related
Information: SFAS No. 131 was issued in June 1997 and is effective for fiscal
years beginning after 15 December 1997. In the initial year of application,
comparative information for earlier years is to be restated. It requires that
companies disclose segment data based on how management makes decisions about
allocating resources to segments and measuring their performance. It also
requires entity wide disclosures about the products and services and entity
provides, the material countries in which it holds assets and reports revenues
and its major customers.
New UK Accounting Standards Not Yet Adopted
FRS 9--Associates and Joint Ventures: In December 1997, the Accounting
Standards Board in the United Kingdom issued Financial Reporting Standard No.
9 "Associates and Joint Ventures" (FRS 9). FRS 9 sets out the definitions and
accounting treatments for associated companies, joint ventures and joint
arrangements. It requires the Group's share of results of associated companies
to be analysed between operating income, interest, exceptional items and
taxation. Previously the Group's share of associated companies income before
tax was included in the consolidated statement of income on a single line. FRS
9 requires the sales of joint ventures to be separately disclosed, though the
underlying accounting is the same as for associated companies. FRS 9 is
effective for accounting periods ending on or after 23 June 1998.
FRS 10--Goodwill and Intangible Assets: In December 1997, the Accounting
Standard Board in the United Kingdom issued Financial Reporting Standard No.
10 "Goodwill and Intangible Assets" (FRS 10). FRS 10 requires that purchased
goodwill and intangible assets should be capitalised as assets and amortised
over the life of the assets. Goodwill and intangible assets need not be
amortised if it can be demonstrated that the current
F-72
<PAGE>
T&N PLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
market value of the goodwill or intangible is not below its carrying value.
FRS 10 is effective for accounting periods ending on or after 23 December
1998. The standard does not require reinstatement of goodwill previously
eliminated against retained surplus.
Companies Act 1985
These consolidated financial statements do not constitute "statutory
accounts" within the meaning of the Companies Act 1985 of Great Britain for
any of the periods presented. Statutory accounts for the year ended 31
December 1996 have been filed with the United Kingdom's Registrar of Companies
and statutory accounts for the year ended 31 December 1997 will be filed with
the United Kingdom's Registrar of Companies. The auditor has reported on these
accounts. The reports were unqualified and did not contain statements under
Section 237 (2) or (3) of the Act.
These consolidated financial statements exclude certain parent company
statements and other information required by the Companies Act 1985, however,
they include all material disclosures required by generally accepted
accounting principles in the United Kingdom including those Companies Act 1985
disclosures relating to the statement of income and balance sheet items.
F-73
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Management of the Operating Businesses of the Fel-Pro Group
We have audited the accompanying balance sheets of the Operating Businesses
of the Fel-Pro Group as of December 28, 1997 and December 29, 1996 and the
related statements of operations and cash flows for each of the three fiscal
years in the period ended December 28, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Operating Businesses
of the Fel-Pro Group at December 28, 1997 and December 29, 1996 and the
results of their operations and their cash flows for each of the three fiscal
years in the period ended December 28, 1997 in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
February 13, 1998
Chicago, Illinois
F-74
<PAGE>
OPERATING BUSINESSES OF THE FEL-PRO GROUP
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------
DECEMBER 28, DECEMBER 29, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net sales................................ $489,305 $448,042 $387,928
Cost of goods sold....................... 268,477 245,761 217,572
-------- -------- --------
Gross profit............................. 220,828 202,281 170,356
Operating expenses:
Shipping............................... 22,537 19,808 16,946
Advertising and selling................ 74,955 72,433 63,335
General and administrative............. 72,829 68,026 57,754
Other.................................. 3,496 2,897 3,831
-------- -------- --------
173,817 163,164 141,866
-------- -------- --------
Income from operations................... 47,011 39,117 28,490
Other income (expense), net.............. (66) 125 (265)
-------- -------- --------
Income before income taxes............... 46,945 39,242 28,225
Income taxes............................. 25,488 6,871 4,796
-------- -------- --------
Net income............................... $ 21,457 $ 32,371 $ 23,429
======== ======== ========
</TABLE>
See notes to financial statements.
F-75
<PAGE>
OPERATING BUSINESSES OF THE FEL-PRO GROUP
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29,
1997 1996
------------ ------------
ASSETS
------
<S> <C> <C>
Current assets:
Trade accounts receivable, less allowances of
$5,009 in 1997 and $3,210 in 1996................. $ 83,412 $ 79,266
Inventories, net................................... 61,009 51,469
Refundable income taxes............................ 530 3,859
Deferred income taxes.............................. -- 5,530
Other current assets............................... 4,162 2,972
-------- --------
Total current asset.............................. 149,113 143,096
Property, plant, and equipment:
Land............................................... 4,197 4,165
Buildings and improvements......................... 45,750 44,371
Machinery and equipment............................ 64,426 58,555
Construction in process............................ 9,087 5,945
Accumulated depreciation........................... (42,828) (41,419)
-------- --------
Total property, plant, and equipment............. 80,632 71,617
Other assets:
Investment in marketable securities................ 7,490 10,352
Intangible assets, net............................. 16,685 17,665
Deferred income taxes.............................. -- 10,183
Other long-term assets............................. 16,199 8,872
-------- --------
Total other assets............................... 40,374 47,072
-------- --------
Total assets..................................... $270,119 $261,785
======== ========
<CAPTION>
LIABILITIES AND EQUITY
----------------------
<S> <C> <C>
Current liabilities:
Trade accounts payable............................. $ 22,703 $ 17,596
Accrued income taxes............................... 6,725 --
Accrued sales rebates.............................. 10,466 7,999
Accrued real estate taxes.......................... 2,169 1,958
Accrued payroll and benefits....................... 24,142 21,640
Other current liabilities.......................... 10,507 8,969
-------- --------
Total current liabilities........................ 76,712 58,162
Accrued postretirement benefit obligation............ 46,835 46,572
Other long-term liabilities.......................... 6,633 5,203
Equity:
Owners' equity..................................... 138,159 149,925
Foreign currency translation adjustments........... 1,256 1,483
Unrealized gain on marketable equity securities,
net of taxes...................................... 524 440
-------- --------
Total equity..................................... 139,939 151,848
-------- --------
Total liabilities and equity..................... $270,119 $261,785
======== ========
</TABLE>
See notes to financial statements.
F-76
<PAGE>
OPERATING BUSINESSES OF THE FEL-PRO GROUP
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------
DECEMBER 28, DECEMBER 29, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................. $ 21,457 $ 32,371 $ 23,429
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation......................... 9,486 8,775 8,003
Amortization of intangibles.......... 2,016 2,526 2,750
Provision for losses on accounts
receivable.......................... 2,754 707 (71)
Deferred income taxes................ 15,978 (835) (209)
Accrued postretirement benefit
obligation.......................... 263 2,406 2,139
Other................................ (406) (165) (8,591)
Changes in operating assets and
liabilities:
Trade accounts receivable.......... (6,121) (17,447) (3,351)
Inventories........................ (8,553) (4,608) 348
Other assets....................... (5,166) (6,578) (4,443)
Trade accounts payable............. 5,107 1,615 3,555
Accrued payroll and benefits....... 2,502 6,354 1,132
Other liabilities.................. 12,371 5,979 (2,480)
-------- -------- --------
Net cash provided by operating
activities...................... 51,688 31,100 22,211
INVESTING ACTIVITIES
Acquisition of business, less cash
acquired.............................. (3,501) (13,491) (7,101)
Proceeds from sale of marketable
securities............................ 3,850 -- --
Purchases of marketable securities..... (988) (3,042) (7,310)
Purchases of property, plant, and
equipment............................. (18,277) (14,058) (12,505)
Proceeds from disposal of property,
plant, and equipment.................. 451 72 --
Other investment activities............ -- (112) --
-------- -------- --------
Net cash used in investing
activities...................... (18,465) (30,631) (26,916)
FINANCING ACTIVITIES
Cash distributions to owners........... (27,500) (21,055) (11,099)
-------- -------- --------
Net Cash provided to/from
affiliates...................... $ (5,723) $ 20,586 $ 15,804
======== ======== ========
</TABLE>
See notes to financial statements
F-77
<PAGE>
OPERATING BUSINESSES OF THE FEL-PRO GROUP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 28, 1997
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
On January 9, 1998, the owners of the Fel-Pro Group of affiliated entities
signed an agreement to sell the Fel-Pro Group operating businesses and certain
related real estate (collectively, the operating businesses of the Fel-Pro
Group or the Company) to Federal Mogul Corporation (Federal Mogul). Certain
non-operating assets, including cash, debt, certain marketable securities,
real estate and insurance assets, are not included in the transaction. The
transaction closed on February 24, 1998 and the owners received $491.8 million
in cash plus $225 million of Federal Mogul Corporation stock.
The accompanying financial statements include the net assets and operations
purchased by Federal Mogul and are presented as if the Company had existed as
an entity separate from certain affiliated entities not purchased by Federal
Mogul. Any activity with those affiliated entities has been reflected in
owners' equity.
The operating businesses of the Fel-Pro Group are owned by the following
affiliated entities:
Felt Products Mfg. Co. and subsidiaries (Felt)
Fel-Pro Specialty Sealing Products
Fel-Pro Mexico S.A. de C.V. (FP Mexico) L.P. (SSP)
Fel-Pro Chemical Products L.P.
Meridian Parts Corporation (Meridian) (Chemical)
FP Performance Products L.P.
FP Diesel L.P. (Diesel) (Performance)
All significant intercompany accounts and transactions have been eliminated
in the financial statements.
The Company is engaged in the manufacture and/or distribution of automotive,
heavy duty and industrial gaskets (primary product line); replacement parts
for heavy duty diesel engines; adhesives, lubricants, sealers, and other
chemical products for industrial use, and high performance transmissions and
torque converters. Products are primarily sold to customers located throughout
the United States, Canada, Mexico, South America, the Middle East, Asia and
Europe either directly to original equipment manufacturers or to aftermarket
customers. All of these activities constitute a single business segment.
Domestic sales, including export sales, represent over 90% of total net sales
in 1997, 1996 and 1995. Export sales represent approximately 13%, 11% and 9%
of total net sales for 1997, 1996 and 1995, respectively. The Company performs
periodic credit evaluations of its customers' financial condition and
generally does not require collateral.
The terms of customer receivables vary based on customer agreements. Credit
losses are provided for in the financial statements and consistently have been
within management's expectations. Primary manufacturing operations and
corporate offices are located at facilities in Skokie, Illinois.
The following is a summary of significant accounting policies:
Fiscal Year
The Company uses a 52 or 53 week year, ending on the last Sunday in
December. The fiscal years ended December 28, 1997 and December 29, 1996
include 52 weeks, while the fiscal year ended December 31, 1995 includes 53
weeks.
Cash and Cash Equivalents
An affiliated entity provides a centralized cash management function;
accordingly, the Company does not maintain separate cash accounts and its cash
disbursements and collections are settled through owners' equity.
F-78
<PAGE>
OPERATING BUSINESSES OF THE FEL-PRO GROUP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Marketable Securities
Management determines the appropriate classification of its investments at
the time of acquisition and reevaluates such determination at each balance
sheet date. All investments are classified as available-for-sale securities
which are carried at fair value, with unrealized holding gains and losses, net
of tax, reported as a separate component of equity. Marketable equity and debt
securities being held for non-current uses such as the funding of
postretirement benefit obligations are classified as long-term assets. Quoted
market prices have been used in determining the fair value of these
investments.
Inventories
Inventories owned by Felt, Diesel and Meridian, are carried at the lower of
last in, first out (LIFO) cost or market. The aggregate inventories owned by
all other entities are carried at the lower of first in, first out (FIFO) cost
or market. At December 28, 1997 and December 29, 1996, 21% of total
inventories are carried on a FIFO basis.
Intangible Assets
Goodwill, patents, and trademarks are being amortized over periods of 14 to
20 years using the straight-line method. Noncompetition agreements are being
amortized over the terms of the related agreements.
Translation of Foreign Operations
The financial statements of the foreign entities have been translated in
accordance with Statement of Financial Accounting Standards No. 52 and
accordingly, unrealized foreign currency translation adjustments are reflected
as a component of equity, except for those related to FP Mexico. In 1997,
Mexico was determined to be a highly inflationary country. As a result,
unrealized foreign currency translation adjustments related to peso
denominated monetary assets and liabilities, which are not significant, are
reported under "Other income, net", and other assets and liabilities are
translated at historical exchange rates.
Depreciation and Amortization
Property, plant, and equipment is recorded at cost. For depreciable assets
acquired prior to 1991, provisions for depreciation and amortization are
computed using both straight-line and accelerated methods for financial
reporting purposes, based on the estimated useful lives of the assets.
Beginning in 1991, provisions for newly acquired depreciable assets are
computed using the straight-line method, based on the estimated useful lives
of the assets.
Research and Development
Activities related to new product development and major improvements to
existing products and processes are expensed as incurred and amounted to
approximately $4.4 million in 1997, $4.1 million in 1996, and $4.2 million in
1995.
Management Estimates
The financial statements include estimated amounts and disclosures based on
management's assumptions about future events. Actual results could differ from
those estimates.
F-79
<PAGE>
OPERATING BUSINESSES OF THE FEL-PRO GROUP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. INVESTMENTS
The composition of marketable securities is as follows:
<TABLE>
<CAPTION>
DECEMBER 28, 1997 DECEMBER 29, 1996
----------------- -----------------
COST FAIR VALUE COST FAIR VALUE
------ ---------- ------ ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Long term investments:
Brinson Global Fund................. $6,617 $7,490 $9,618 $10,352
====== ====== ====== =======
</TABLE>
Interest and dividend income, net is included in other income(expense), net,
and was $.8 million in 1997 and 1996, and $.5 million in 1995.
3. INVENTORIES
Inventories at December 28, 1997, and December 29, 1996 consist of the
following:
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Raw materials............................................ $13,931 $12,595
Work in process.......................................... 6,869 7,930
Finished goods........................................... 59,871 51,396
------- -------
Inventories at FIFO...................................... 80,671 71,921
Less: Excess of FIFO cost over LIFO cost................. 19,662 20,452
------- -------
$61,009 $51,469
======= =======
</TABLE>
4. INCOME TAXES
Earnings of the operating businesses of the Fel-Pro Group owned by Diesel,
SSP, Performance and Chemical are not subject to federal or state income taxes
because these entities are partnerships. The partners include the earnings
from these partnerships in the partner's Federal and state income tax returns.
Effective December 30, 1996, the stockholders of Felt elected under
Subchapter S of the Internal Revenue Code to include Felt's income in their
own income for federal tax purposes. Accordingly, Felt is not subject to
federal income taxes effective December 30, 1996, and the net deferred tax
asset of approximately $15.7 million at December 29, 1996 was written off as a
charge to tax expense in fiscal 1997. Additionally, the LIFO reserve of $21.2
million was included in taxable income and the tax cost recorded as a charge
to tax expense in the income statement in fiscal 1997.
F-80
<PAGE>
OPERATING BUSINESSES OF THE FEL-PRO GROUP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes for Felt for the year
ended December 29, 1996. Significant components of the deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
1996
--------------
(IN THOUSANDS)
<S> <C>
Deferred Tax Assets
Postretirement benefit obligation........................ $14,383
Other.................................................... 7,538
-------
Total deferred tax assets................................ 21,921
Deferred Tax Liabilities
Tax over book depreciation............................... (5,877)
Other.................................................... (331)
-------
Total deferred tax liabilities........................... (6,208)
=======
Net deferred tax assets/(liabilities).................... $15,713
=======
</TABLE>
The income tax provision consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal......................................... $ 8,986 $5,500 $3,992
State........................................... 719 1,436 758
Foreign......................................... 70 770 255
------- ------ ------
9,775 7,706 5,005
Deferred (credit)................................. 15,713 (835) (209)
------- ------ ------
$25,488 $6,871 $4,796
======= ====== ======
</TABLE>
The reconciliation of income taxes (tax benefits) computed at the United
States federal statutory tax rate to income tax expense is:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Pretax income for taxable entities........ $ 2,133.0 $19,502.0 $11,966.0
========= ========= =========
Income taxes at U.S. statutory rate....... $ 746.6 $ 6,825.7 $ 4,088.1
Tax effect from:
Reversal of deferred taxes.............. 15,713.0
LIFO recapture.......................... 7,420.0
State income taxes...................... 251.6 933.4 492.7
Other................................... 1,356.8 (888.1) 215.2
--------- --------- ---------
$25,488.0 $ 6,871.0 $ 4,796.0
========= ========= =========
</TABLE>
Income taxes paid were approximately $3.7 million in 1997, $12.8 million in
1996, and $5.6 million in 1995.
F-81
<PAGE>
OPERATING BUSINESSES OF THE FEL-PRO GROUP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. OWNERS' EQUITY
A summary of the account activity is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning balance........................... $149,925 $118,023 $ 89,889
Net income.................................. 21,457 32,371 23,429
Distribution to owners...................... (27,500) (21,055) (11,099)
Net cash provided to/(from) affiliates...... (5,723) 20,586 15,804
-------- -------- --------
Ending balance.............................. $138,159 $149,925 $118,023
======== ======== ========
</TABLE>
The operating businesses of the Fel-Pro Group are owned by entities having
the following stock authorized and issued at December 28, 1997. These amounts
are included in owners' equity above.
<TABLE>
<S> <C>
FELT
Authorized shares ($.01 par value)........................... 200,100
Shares issued and outstanding................................ 198,137.62
Par value.................................................... $ 1,981
FP MEXICO
Authorized shares ($.12 par value)........................... 410,000
Shares issued and outstanding................................ 410,000
Par value.................................................... $ 48,200
MERIDIAN
Authorized shares ($1 par value)............................. 250,000
Shares issued and outstanding................................ 20,000
Par value.................................................... $ 20,000
</TABLE>
6. EMPLOYEE BENEFIT PLANS AND OTHER POSTRETIREMENT BENEFITS
The Company maintains, for the benefit of its eligible employees, the
following benefit plans:
Employees' Profit-Sharing and Retirement Plan
This plan is noncontributory on the part of participants, except for their
voluntary contributions (which are limited, as provided in the plan
agreement). Discretionary contributions by the Company for each year are
determined by the Board of Directors. Distributions from the plan are made to
participants or their beneficiaries on death, retirement, disability, or
termination of employment. Contributions were approximately $9.8 million in
1997, $9.3 million in 1996, and $7.8 million in 1995.
Death Benefit Plan
The Company maintains a "death benefit plan" for selected managerial
employees. The plan provides that in the event of death of a participant,
before termination of employment or retirement, the applicable death benefits,
as defined, are payable to the participant's designated beneficiaries. There
were no beneficiary payments made in 1997, 1996, or 1995.
The Company may at any time amend or revoke the "death benefit plan" without
the consent of its participants. Since the plan is presently fully funded
through life insurance policies in which the participants possess no interest
and the payment of benefits is contingent upon the death of participants, no
provision for such future possible payments has been reflected in the
financial statements.
F-82
<PAGE>
OPERATING BUSINESSES OF THE FEL-PRO GROUP
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Deferred Compensation Plan
The Company maintains deferred compensation plans for qualified managers.
The plans allow such participants to defer up to 90% of their annual bonuses
and salary (subject to certain limitations). The plans also provide for
matching amounts (as defined) from the employer, provide for a growth
increment dependent on several factors, and provide for additional employer
contributions on compensation in excess of $160,000. Distributions from the
plan are made to the participants or their designated beneficiaries upon the
earlier of death, retirement, disability, termination of employment, or by
participant choice. Employer and employee contributions, including interest,
of $2.7 million, $2.3 million, and $2.2 million were paid to the plans in
1997, 1996, and 1995, respectively.
Other Postretirement Benefits
The Company provides postretirement medical, dental, and death benefits to
domestic employees hired prior to January 1, 1988, who have worked at least 10
years and attained age 55 while in service with the Company. All employees
hired subsequent to this date are eligible for these benefits if they have
worked at least 20 years and attained age 55. The plan amendment in November
1996 provided that for all retiree groups, the Company caps its contributions
toward retiree health care at the employer cost levels reached in 2004,
thereby reducing the liability and annual expense. The plan is contributory
and contains certain cost-sharing features such as deductibles, coinsurance,
and a lifetime payout maximum. Assets with a fair value of $7.5 million and
$10.4 million which are included in investments in marketable securities at
December 28, 1997 and December 29, 1996, respectively, are being held for non-
current uses such as the posretirement benefits. The Company's foreign
entities provide no significant postretirement benefits. The following table
presents the components of the liability recognized in the Company's balance
sheet:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees............................................... $16,297 $13,412
Fully eligible active plan participants................ 4,708 7,592
Other active plan participants......................... 7,381 9,238
Unrecognized net gain.................................... 4,514 1,205
Unrecognized plan reduction.............................. 13,935 15,125
------- -------
Accrued postretirement benefit cost...................... $46,835 $46,572
======= =======
</TABLE>
A summary of the components of net periodic postretirement benefit cost is
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost..................................... $ 666 $1,612 $1,435
Interest cost.................................... 1,991 2,824 2,978
Amortization of plan reduction................... (1,190) (421) (267)
Amortization of unrecognized gain................ (97) -- --
------- ------ ------
Net periodic postretirement benefit cost......... $ 1,370 $4,015 $4,146
======= ====== ======
</TABLE>
The health care cost trend rate utilized to determine the benefit cost was
9.5% for 1997 and 1996, decreasing gradually to 5.5% for 2005 and thereafter.
Increasing the trend rate by one percentage point in each year would increase
the accumulated postretirement benefit obligation as of December 28, 1997, by
$1.8 million and increase the 1997 postretirement benefit cost by $0.2
million. The discount rate used in determining the accumulated postretirement
benefit obligation was 7.50% at December 28, 1997 and December 29, 1996.
F-83
<PAGE>
OPERATING BUSINESSES OF THE FEL-PRO GROUP
NOTES TO FINANCIAL STATEMENTS--(CONCLUDED)
7. COMMITMENTS AND CONTINGENCIES
The Company is engaged in various legal actions arising in the ordinary
course of its business. Management, after taking into consideration legal
counsel's evaluation of such actions, is of the opinion that it has adequate
legal defenses or insurance coverages and that the outcome of these matters
will not have a material adverse effect on the Company's financial position.
8. ACQUISITIONS
On September 8, 1997 Chemical acquired for $3.5 million certain operating
assets of Biwax Corporation, a manufacturer of urethane potting and
encapsulating products.
On June 27, 1996, Diesel acquired for $1.2 million certain operating assets
of Infinitive, a manufacturer of pistons and liners.
On December 29, 1995, Performance acquired for $12.3 million the net assets
of Torque Converters, Inc. (TCI), a high performance transmission and torque
converter remanufacturer, marketer and distributor and assumed a $0.4 million
of long-term liability.
On October 30, 1995, Diesel acquired for $7.1 million certain operating
assets of Korody-Colyer, a marketer and distributor of heavy duty diesel
engine parts and gaskets.
The acquisitions were accounted for under the purchase method, and,
accordingly, the accounts and transactions of the acquired companies have been
included in the financial statements from the dates of acquisition.
9. IMPACT OF YEAR 2000 (UNAUDITED)
Felt personnel are presently implementing an enterprise resource planning
system using Oracle software for manufacturing, OEM management, and financial
systems, and IMI software for an Aftermarket order management system. This
system will be Year 2000 compliant. This project was undertaken in late 1996
recognizing that information will be a key driver for growth in the 21st
century and that business needs are changing. The system solution provides the
ability to handle multiple product lines, currencies, businesses, and
locations. The existing mainframe systems lack functionality and flexibility,
and are also incompatible with the Year 2000. The total project is expected to
be completed by February 1999. Information systems for Chemical, Performance,
SSP, Meridian, Diesel and FP Mexico will undertake system changes in 1998 to
ensure compatibility with the Year 2000 by such date.
F-84
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFOR-
MATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPO-
RATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS IN CONNEC-
TION WITH THE OFFER CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING SHAREHOLDER OR THE
UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PRO-
SPECTUS, NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTI-
TUTE ANY OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OF-
FER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Presentation of Financial Information...................................... S-2
Forward Looking Statements................................................. S-3
Prospectus Summary......................................................... S-4
Risk Factors............................................................... S-10
Use of Proceeds............................................................ S-13
Exchange Rates............................................................. S-13
T&N and Fel-Pro Acquisitions............................................... S-14
Price Range of Common Stock and Dividends.................................. S-16
Capitalization............................................................. S-17
Unaudited Pro Forma Financial Data......................................... S-18
Selected Consolidated Financial Data--Federal-Mogul........................ S-28
Selected Consolidated Financial Data--T&N.................................. S-29
Selected Consolidated Financial Data--Fel-Pro.............................. S-30
Management's Discussion and Analysis of Financial Condition................ S-31
Description of Certain Indebtedness........................................ S-46
Business................................................................... S-50
Management................................................................. S-59
Principal Shareholders..................................................... S-62
Selling Shareholders....................................................... S-63
Description of Capital Stock............................................... S-64
Certain United States Tax Consequences to Non-United States Holders........ S-68
Underwriting............................................................... S-70
Legal Matters.............................................................. S-72
Experts.................................................................... S-72
</TABLE>
PROSPECTUS
<TABLE>
<S> <C>
Available Information...................................................... 2
The Company................................................................ 3
Ratio Of Earnings To Fixed Charges And Ratio Of Earnings To Combined Fixed
Charges And Preferred Stock Dividends..................................... 3
Use of Proceeds............................................................ 4
Description of Debt Securities............................................. 4
Description of Preferred Stock and Common Stock............................ 13
Selling Shareholders....................................................... 17
Plan of Distribution....................................................... 18
Incorporation of Certain Information by Reference.......................... 19
Legal Matters.............................................................. 20
Experts.................................................................... 20
FINANCIAL STATEMENTS
Index to Financial Statements.............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
. SHARES
FEDERAL-MOGUL CORPORATION
[LOGO]
COMMON STOCK
---------------
PROSPECTUS SUPPLEMENT
---------------
[UNDERWRITERS]
. , 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
[INTERNATIONAL]
UNDERWRITING
Subject to the terms and conditions set forth in the International Purchase
Agreement (the "International Purchase Agreement") among Federal-Mogul, the
Selling Shareholders and each of the underwriters named below (the
"International Managers"), and concurrently with the sale of . shares of
Common Stock to the U.S. Underwriters (as defined below), Federal-Mogul and
the Selling Shareholders severally have agreed to sell to each of the
International Managers, and each of the International Managers severally has
agreed to purchase, the aggregate number of shares of Common Stock set forth
opposite its name below:
<TABLE>
<CAPTION>
NUMBER
OF
INTERNATIONAL MANAGERS SHARES
---------------------- -------
<S> <C>
[ ]......................................................
[ ]......................................................
[ ]......................................................
-------
Total
=======
</TABLE>
Federal-Mogul and the Selling Shareholders have also entered into a Purchase
Agreement (the "U.S. Purchase Agreement" and, together with the International
Purchase Agreement, the "Purchase Agreements") with certain underwriters in
the United States and Canada (collectively, the "U.S. Underwriters" and,
together with the International Managers, the "Underwriters"). Subject to the
terms and conditions set forth in the U.S. Purchase Agreement, and
concurrently with the sale of . shares of Common Stock to the International
Managers pursuant to the International Purchase Agreement, Federal-Mogul and
the Selling Shareholders severally have agreed to sell to the U.S.
Underwriters, and the U.S. Underwriters severally have agreed to purchase from
Federal-Mogul and the Selling Shareholders, an aggregate of . shares of
Common Stock. The offering price per share and the total underwriting discount
per share are identical under the U.S. Purchase Agreement and the
International Purchase Agreement.
In each Purchase Agreement, the several International Managers and the
several U.S. Underwriters, respectively, have agreed, subject to the terms and
conditions set forth in such Purchase Agreement, to purchase all of the shares
of Common Stock being sold pursuant to such Purchase Agreement if any of such
shares of Common Stock being sold pursuant to such Purchase Agreement are
purchased. Under certain circumstances, the commitments of non-defaulting
International Managers or U.S. Underwriters (as the case may be) may be
increased. The sale of Common Stock to the International Managers is
conditioned upon the sale of shares of Common Stock to the U.S. Underwriters,
and vice versa.
The International Managers and the U.S. Underwriters have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for
the coordination of their activities. Pursuant to the Intersyndicate
Agreement, the Underwriters are permitted to sell shares of Common Stock to
each other for purposes of resale at the public offering price set forth on
the cover page of this Prospectus Supplement, less an amount not greater than
the selling concession. Under the terms of the Intersyndicate Agreement, the
International Managers and any dealer to whom they sell shares of Common Stock
will not offer to sell or sell shares of Common Stock to persons who are U.S.
or Canadian persons or to persons they believe intend to resell to persons who
are U.S. or Canadian persons, and the U.S. Underwriters and any dealer to whom
they sell shares of Common Stock will not offer to sell or sell shares of
Common Stock to non-U.S. persons or non-Canadian persons or to persons they
believe intend to resell to non-U.S. persons or non-Canadian persons, except,
in each case, for transactions pursuant to the Intersyndicate Agreement.
The International Managers have advised Federal-Mogul and the Selling
Shareholders that the International Managers propose initially to offer the
shares of Common Stock to the public at the public offering price set
<PAGE>
forth on the cover page of this Prospectus Supplement and to certain dealers
at such price less a concession not in excess of $ . per share of Common
Stock. The International Managers may allow, and such dealers may reallow, a
discount not in excess of $ . per share of Common Stock on sales to certain
other dealers. After the public offering, the public offering price,
concession and discount may be changed.
Each International Manager has agreed that (i) it has not offered or sold,
and will not for a period of six months following consummation of the
Offerings offer or sell, in the United Kingdom by means of any document, any
shares of Common Stock offered hereby, other than to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances that do not constitute an offer to the public
within the meaning of the Public Offers of Securities Regulations of 1995;
(ii) it has complied with and will comply with all applicable provisions of
the Financial Services Act of 1986 with respect to anything done by it in
relation to the Common Stock in form or otherwise involving the United Kingdom
and (iii) it has only issued or passed on and will only issue the Common Stock
if that person is a kind described in Article 11(3) of the Financial Services
Act of 1986 (Investment Advertisements) (Exemptions) Order 1996, as amended,
or is a person to whom the document may otherwise lawfully be issued or passed
on.
Purchasers of the shares of Common Stock offered hereby may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase, in addition to the offering price set forth on the
cover page hereof.
Federal-Mogul has granted an option to the International Managers,
exercisable during the 30-day period after the date of this Prospectus
Supplement, to purchase up to an additional . shares of Common Stock at the
public offering price set forth on the cover page hereof, less the
underwriting discount. The International Managers may exercise this option
only to cover over-allotments, if any, made on the sale of shares of Common
Stock offered hereby. To the extent that the International Managers exercise
this option, each International Manager will be obligated, subject to certain
conditions, to purchase approximately the number of additional shares of
Common Stock proportionate to such International Managers' initial amount
reflected in the foregoing table. Federal-Mogul has also granted an option to
the U.S. Underwriters, exercisable during the 30-day period after the date of
this Prospectus Supplement, to purchase up to an additional . shares of
Common Stock to cover over-allotments, if any, on terms similar to those
granted to the International Managers.
Federal-Mogul and the Selling Shareholders have agreed that, except under
certain circumstances, they will not, directly or indirectly, for a period of
. days following the date of the Prospectus Supplement, except with the
prior consent of . , on behalf of the Underwriters, sell, offer to sell,
grant any option for the sale of, or otherwise dispose of, any Common Stock,
except that Federal-Mogul may issue Common Stock or options for shares of
Common Stock issued pursuant to or sold in connection with any employee
benefit plan.
Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the International Managers and certain
selling group members to bid for and purchase the Common Stock. As an
exception to these rules, the International Managers are permitted to engage
in certain transactions that stabilize the price of the Common Stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing
or maintaining the price of the Common Stock.
If the International Managers create a short position in the Common Stock in
connection with the Offerings (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus Supplement), the
International Managers may reduce that short position by purchasing Common
Stock in the open market. The International Managers may also elect to reduce
any short position through the exercise of all or part of the over-allotment
option described above. In general, purchases of a security for the purpose of
stabilization or to reduce a short position could cause the price of the
security to be higher than it might be in the absence of such purchases.
<PAGE>
Neither Federal-Mogul nor the International Managers make any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither Federal-Mogul nor the Underwriters make any representation
that the Underwriters will engage in such transactions or that such
transactions, once commenced, will not be discontinued without notice.
Federal-Mogul and the Selling Shareholders have agreed to indemnify the
International Managers and the U.S. Underwriters, Federal-Mogul has agreed to
indemnify certain Selling Shareholders, and such Selling Shareholders have
agreed to indemnify Federal-Mogul, in each case against certain liabilities,
including liabilities under the Securities Act of 1933.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses of issuance and distribution, other than underwriting
discounts and commissions, expected to be incurred by the Registrant are as
follows:
<TABLE>
<S> <C>
Filing fee of Securities and Exchange Commission relating to
registration statement........................................ $737,500
Fees and expenses of counsel for the Registrant................ *
Fee of accountants............................................. *
Miscellaneous.................................................. *
--------
Total...................................................... $ *
========
</TABLE>
- --------
*Except for the SEC registration fee, all of the foregoing will be completed
by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 561 through 571 of the Michigan Business Corporation Act (the
"Act"), and Article XI of Federal-Mogul's Bylaws relate to the indemnification
of Federal-Mogul's directors and officers, among others, in a variety of
circumstances against Liabilities arising in connection with the performance
of their duties.
The Act permits indemnification of directors and officers acting in good
faith and in a manner they reasonably believe to be in or not opposed to the
best interests of Federal-Mogul or its shareholders (and, with respect to a
criminal proceeding, if they have no reasonable cause to believe their conduct
to be unlawful) against (i) expenses (including attorney's fees), judgments,
penalties, fines and amounts paid in settlement actually and reasonably
incurred in connection with any threatened, pending, or completed action,
suit, or proceeding (other than an action by or in the right of Federal-Mogul)
arising by reason of the fact that such person is or was a director or officer
of Federal-Mogul (or with some other entity at Federal-Mogul's request) and
(ii) expenses (including attorneys' fees) and amounts paid in settlement
actually and reasonably incurred in connection with a threatened, pending or
completed action or suit by or in the right of Federal-Mogul, unless the
director or officer is found liable to Federal-Mogul and an appropriate court
does not determine that he or she is nevertheless fairly and reasonably
entitled to indemnification.
The Act requires indemnification for expenses to the extent that a director
or officer is successful on the merits in defending against any such action,
suit or proceeding, and otherwise requires in general that the indemnification
provided for in (i) and (ii) above be made only on a determination by (a) a
majority vote of a quorum of the Board of Directors who were not parties or
threatened to be made parties to the action, suit or proceeding, (b) if a
quorum cannot be obtained, by a majority vote of a committee duly designated
by the Board and consisting solely of two or more directors not at the time
parties or threatened to be made parties to the action, suit or proceeding,
(c) by independent legal counsel, (d) by all independent directors who are not
parties or threatened to be made parties to the action, suit or proceeding, or
(e) by the shareholders (but shares held by directors or officers who are
parties or are threatened to be made parties may not be voted). In certain
circumstances, the Act further permits advances to cover such expenses before
a final determination that indemnification is permissible, upon receipt of a
written affirmation by the director or officer of their good-faith belief that
they have met the applicable standard of conduct set forth in Sections 561 and
562 of the Act, receipt of a written undertaking by or on behalf of the
director or officer to repay such amounts unless it shall ultimately be
determined that they are entitled to indemnification and a determination that
the facts then known to those making the advance would not preclude
indemnification.
Indemnification under the Act is not exclusive of other rights to
indemnification to which a person may be entitled under Federal-Mogul's
Articles of Incorporation, Bylaws, or a contractual agreement. The Act permits
II-1
<PAGE>
Federal-Mogul to purchase insurance on behalf of its directors and officers
against liabilities arising out of their positions with Federal-Mogul whether
or not such liabilities would be within the foregoing indemnification
provisions.
BYLAWS
Under Federal-Mogul's Bylaws, Federal-Mogul is required to indemnify any
person who was or is a party or is threatened to be made a party to or called
as a witness in any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (whether
formal or informal) and any appeal thereof (other than an action by or in the
right of Federal-Mogul, a "derivative action") by reason of the fact that such
person is, was or agreed to become a director or officer of Federal-Mogul,
against expenses (including attorneys' fees), judgments, penalties, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding if such person was successful
in defending such action, suit or proceeding, or otherwise if such person
acted in good faith and in a manner the person reasonably believed to be in or
not opposed to the best interests of Federal-Mogul or its shareholders, and,
with respect to any criminal action or proceeding, if the person had no
reasonable cause to believe his or her conduct was unlawful. A similar
standard of care is applicable in the case of derivative actions, except the
indemnification extends only to expenses (including actual and reasonable
attorneys' fees) and amounts paid in settlement incurred by the person in
connection with such action and, where the person is found to be liable to
Federal-Mogul, only if and to the extent that the court in which such action
was brought determines that such person is fairly and reasonably entitled to
such indemnification for the expenses which the court considers proper.
Federal-Mogul's Bylaws provide that Federal-Mogul shall pay for the expenses
incurred by an indemnified director or officer in defending the proceedings
specified above, in advance of their final disposition, provided that if
required by the Act, the person furnishes Federal-Mogul with an undertaking to
reimburse Federal-Mogul if it is ultimately determined that such person is not
entitled to indemnification. Federal-Mogul shall provide indemnification to
any person who is or was serving at the request of Federal-Mogul as a
director, officer, partner, trustee, employee or agent of another corporation,
partnership, joint venture, trust, or other enterprise, whether for profit or
not, to the same degree as the foregoing indemnification of directors and
officers. In addition, Federal-Mogul may purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of
Federal-Mogul (or is serving or was serving at the request of Federal-Mogul in
a position and at an entity listed in the preceding sentence) against any
liability asserted against and incurred by such person in such capacity, or
arising out of the person's status as such whether or not Federal-Mogul would
have the power to indemnify the person against such liability under the
provisions of Federal-Mogul's Bylaws.
ITEM 16. EXHIBITS
<TABLE>
<C> <S>
**1.1 Form of Purchase Agreement--Debt Securities
**1.2 Form of Purchase Agreement--Equity
**3.1 Federal-Mogul's Second Restated Articles of Incorporation, as
amended
*3.2 Federal-Mogul's Bylaws, as amended (filed as Exhibit 3.2 to
Federal-Mogul's Form 10-K for the year ended December 31, 1997)
**4.1 Form of Senior Indenture
**4.2 Form of Subordinated Indenture
**4.3 Form of Deposit Agreement
4.4 Form of Debt Security. The form or forms of such Debt Securities
with respect to each particular offering will be filed as an
exhibit subsequently included or incorporated by reference
herein.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
4.5 Form of Preferred Stock. Any amendment to the Company's Articles
of Incorporation authorizing the creation of any series of
Preferred Stock and setting forth the rights, preferences and
designations thereof will be filed as an exhibit subsequently
included or incorporated by reference herein.
**5 Opinion of David M. Sherbin, Esq.
**12.1 Computation of Ratio of Earnings to Fixed Charges
**12.2 Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends
**23.1 Consent of Ernst & Young LLP
**23.2 Consent of KPMG Audit Plc
**23.3 Consent of David M. Sherbin, Esq.
***24 Power of Attorney is included on page II-6
**25.1 Statement of Eligibility on Form T-1 under the Trust Indenture
Act of 1939, as amended, of Bank of New York, as Trustee under
the Senior Indenture
**25.2 Statement of Eligibility on Form T-1 under the Trust Indenture
Act of 1939, as amended, of Bank of New York, as Trustee under
the Subordinated Indenture
</TABLE>
- --------
**To be filed with amendment.
***Filed herewith.
ITEM 17. UNDERTAKINGS
The Undersigned registrant hereby undertakes:
A. to file, during any period in which offers or sales are being made of
the securities registered hereby, a post-effective amendment to this
registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any fact or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in "Calculation of
Registration Fee" table in the effective registration statement;
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in this registration statement or
any material change to such information in the registration statement;
provided, however, that the undertakings set forth in the paragraphs (i)
and (ii) above do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic
reports filed by the registrant pursuant to Section 13 or Section 15(d) of
the Securities Exchange Act of 1934 that are incorporated by reference in
this registration statement.
B. that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-3
<PAGE>
C. to remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
D. that, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
E. insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions described
under Item 15 above, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in such Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in such Act and
will be governed by the final adjudication of such issue.
F. that, for purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
G. that, for purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
H. to file an application for the purposes of determining the eligibility
of the trustee to act under subsection (a) of Section 310 of the Trust
Indenture Act in accordance with the rules and regulations prescribed by
the Commission under Section 305(b)(2) of such Act.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS ALL OF THE
REQUIREMENTS FOR FILING ON FORM S-3 AND HAS DULY CAUSED THIS REGISTRATION
STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY
AUTHORIZED, IN THE CITY OF SOUTHFIELD, MICHIGAN ON THE 17TH DAY OF APRIL,
1998.
Federal-Mogul Corporation
/s/ David M. Sherbin
By: _________________________________
David M. Sherbin
Associate General Counsel
II-5
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS
BELOW CONSTITUTES AND APPOINTS DAVID A. BOZYNSKI, DAVID M. SHERBIN AND EDWARD
W. GRAY, JR., AND EACH OF THEM, HIS TRUE AND LAWFUL ATTORNEYS-IN-FACT AND
AGENTS, WITH FULL POWER OF SUBSTITUTION AND RESUBSTITUTION, FOR HIM AND IN HIS
NAME, PLACE AND STEAD, IN ANY AND ALL CAPACITIES, TO SIGN ANY AND ALL
AMENDMENTS TO THIS REGISTRATION STATEMENT, AND TO FILE THE SAME, WITH ALL
EXHIBITS THERETO, AND OTHER DOCUMENTS IN CONNECTION THEREWITH WITH THE
SECURITIES AND EXCHANGE COMMISSION, GRANTING UNTO SAID ATTORNEYS-IN-FACT AND
AGENTS, AND EACH OF THEM, FULL POWER AND AUTHORITY TO DO AND TO PERFORM EACH
AND EVERY ACT AND THING REQUISITE AND NECESSARY TO BE DONE IN AND ABOUT THE
PREMISES, AS FULLY AND TO ALL INTENTS AND PURPOSES AS HE MIGHT OR WOULD DO IN
PERSON, HEREBY RATIFYING AND CONFIRMING ALL THAT SAID ATTORNEYS-IN-FACT AND
AGENTS OR ANY OF THEM, OR THEIR OR HIS SUBSTITUTE OR SUBSTITUTES, MAY LAWFULLY
DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Richard A. Snell Chairman of the Board, April 13, 1998
____________________________________ President, Chief Executive
Richard A. Snell Officer and Director
(Principal Executive
Officer)
/s/ Thomas W. Ryan Senior Vice President and April 13, 1998
____________________________________ Chief Financial Officer
Thomas W. Ryan (Principal Financial
Officer)
/s/ Kenneth P. Slaby Vice President and April 13, 1998
____________________________________ Controller (Principal
Kenneth P. Slaby Accounting Officer)
/s/ John J. Fannon Director April 13, 1998
____________________________________
John J. Fannon
/s/ Roderick M. Hills Director April 13, 1998
____________________________________
Roderick M. Hills
/s/ Antonio Madero Director April 13, 1998
____________________________________
Antonio Madero
/s/ Robert S. Miller, Jr. Director April 13, 1998
____________________________________
Robert S. Miller, Jr.
/s/ John C. Pope Director April 13, 1998
____________________________________
John C. Pope
/s/ Dr. Hugo Michael Sekyra Director April 13, 1998
____________________________________
Dr. Hugo Michael Sekyra
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
1.1 Form of Purchase Agreement--Debt Securities
1.2 Form of Purchase Agreement--Equity
3.1 Federal-Mogul's Second Restated Articles of Incorporation, as
amended
3.2 Federal-Mogul's Bylaws, as amended (filed as Exhibit 3.2 to
Federal-Mogul's Form 10-K for the year ended December 31,
1997)
4.1 Form of Senior Indenture
4.2 Form of Subordinated Indenture
4.3 Form of Deposit Agreement
4.4 Form of Debt Security. The form or forms of such Debt Securi-
ties with respect to each particular offering will be filed as
an exhibit subsequently included or incorporated by reference
herein.
4.5 Form of Preferred Stock. Any amendment to the Company's Arti-
cles of Incorporation authorizing the creation of any series
of Preferred Stock and setting forth the rights, preferences
and designations thereof will be filed as an exhibit subse-
quently included or incorporated by reference herein.
5 Opinion of David M. Sherbin, Esq.
12.1 Computation of Ratio of Earnings to Fixed Charges
12.2 Computation of Ratio of Earnings to Combined Fixed Changes and
Preferred Stock Dividends
23.1 Consent of Ernst & Young LLP
23.2 Consent of KPMG Audit Plc
23.3 Consent of David M. Sherbin, Esq.
24 Power of Attorney (included in Part II of this Registration
Statement)
25.1 Statement of Eligibility on Form T-1 under the Trust Indenture
Act of 1939, as amended, of Bank of New York, as Trustee under
the Senior Indenture
25.2 Statement of Eligibility on Form T-1 under the Trust Indenture
Act of 1939, as amended, of The Bank of New York, as Trustee
under the Subordinated Indenture
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Experts" in the
Registration Statement (Form S-3) and related Prospectus and Prospectus
Supplements of Federal-Mogul Corporation for the registration of its common
stock, debt securities, and preferred stock, and to the inclusion and
incorporation by reference therein of our report dated January 30, 1998,
except for note 20, as to which the date is February 24, 1998, with respect to
the consolidated financial statements and the incorporation by reference of
our report dated January 30, 1998, with respect to the financial statement
schedule of Federal-Mogul Corporation included in its Annual Report on Form
10-K for the year ended December 31, 1997, and the inclusion and incorporation
by reference of our report dated February 13, 1998, with respect to the
financial statements of The Operating Businesses of the Fel-Pro Group included
in Federal-Mogul Corporation's Form 8-K/A dated April 7, 1998, and the
incorporation by reference therein of our report dated February 13, 1998, with
respect to the financial statements of The Operating Business of Felt Products
Mfg. Co. and subsidiaries included in Federal-Mogul Corporation's Form 8-K
dated April 17, 1998, filed with the Securities and Exchange Commission.
/s/ Ernst & Young LLP
April 17, 1998
Detroit, Michigan
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
Dear Sirs
We consent to the inclusion in the Registration Statement (Form S-3) and
related prospectus and prospectus supplements, all of which are dated 17 April
1998, and the incorporation by reference therein of our report dated 17
February 1998 in respect of the consolidated balance sheets of T&N plc and its
subsidiaries at 31 December 1997 and 31 December 1996, and the related
consolidated profit and loss accounts, reconciliations of movements in
shareholders' funds and consolidated cash flow statements for each of the
years in the three-year period ended 31 December 1997 and to the references to
our firm under the heading "Experts" in the Registration Statement and related
prospectus and prospectus supplements, all of which are dated 17 April 1998.
Yours faithfully
/s/ KPMG Audit Plc
London, England
17 April 1998
