<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 4, 1998
SUBJECT TO AMENDMENT
REGISTRATION NO. 333-50413
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
FEDERAL-MOGUL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
--------------
MICHIGAN 38-0533580
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
26555 NORTHWESTERN HIGHWAY
SOUTHFIELD, MICHIGAN 48034
(248) 354-7700
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
EDWARD W. GRAY, JR., ESQ.
FEDERAL-MOGUL CORPORATION
26555 NORTHWESTERN HIGHWAY
SOUTHFIELD, MICHIGAN 48034
(248) 354-7700
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
--------------
The Commission is requested to mail signed copies of all orders, notices and
communications to:
LAURENT ALPERT, ESQ. THOMAS A. COLE, ESQ.
CLEARY, GOTTLIEB, STEEN & HAMILTON SIDLEY & AUSTIN
ONE LIBERTY PLAZA ONE FIRST NATIONAL PLAZA
NEW YORK, NEW YORK 10006 CHICAGO, ILLINOIS 60603
(212) 225-2000 -------------- (312) 853-7000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(b)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
--------------
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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. 1 WITH
RESPECT TO SUCH REGISTRATION STATEMENT.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<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 (including the financial statements paginated with numbers
preceded by "F-" reprinted after the base prospectus in this Registration
Statement). Securities registered hereby, including Common Stock, which are
not offered or sold in reliance upon the procedures contemplated by Rule 430A
may be offered or sold by means of the base prospectus included herein and a
prospectus supplement in a form other than the form of prospectus supplement
included herein.
<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 MAY 14, 1998
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED , 1998)
11,000,000 SHARES
LOGO
COMMON STOCK
-----------
Of the 11,000,000 shares of Common Stock, without par value (the "Common
Stock"), of Federal-Mogul Corporation (the "Company" or "Federal-Mogul") being
offered hereby, 9,712,093 shares are being offered by Federal-Mogul and
1,287,907 shares are being offered by certain shareholders of Federal-Mogul
(the "Selling Shareholders"). Federal-Mogul will not receive any of the
proceeds from the sale of shares of Common Stock by the Selling Shareholders.
See "Selling Shareholders" and "Underwriting."
Of the 11,000,000 shares of Common Stock offered hereby, 8,800,000 are being
offered initially in the United States and Canada (the "U.S. Offering") and
2,200,000 shares are being offered initially in a concurrent international
offering outside the United States and Canada (the "International Offering,"
and together with the U.S. Offering, the "Offerings"). The public offering
price and the underwriting discount per share are identical for both Offerings.
See "Underwriting."
The Common Stock is listed on the New York Stock Exchange, Inc. (the "NYSE")
under the trading symbol "FMO." On May 12, 1998, the last reported sale price
of Common Stock on the NYSE was $63 15/16 per share. See "Price Range of Common
Stock and Dividends."
SEE "RISK FACTORS" BEGINNING ON PAGE S-11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO
WHICH IT RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROCEEDS TO PROCEEDS TO
PRICE TO UNDERWRITING FEDERAL- SELLING
PUBLIC DISCOUNT(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 $2,000,000.
(3) Federal-Mogul and the Selling Shareholders have granted options to the U.S.
Underwriters, exercisable within 30 days of the date hereof, to purchase up
to an aggregate of 1,320,000 additional shares of Common Stock and options
to the International Managers, exercisable within 30 days of the date
hereof, to purchase up to an aggregate of 330,000 additional shares of
Common Stock, solely to cover over-allotments, if any. If such options are
exercised in full, the total Price to Public, Underwriting Discounts,
Proceeds to Federal-Mogul and Proceeds to Selling Shareholders will be
$ , $ , $ and $ , respectively. See "Underwriting."
-----------
The shares of Common Stock are being offered by the several Underwriters,
subject to prior sale, when, as and if delivered to and accepted by them,
subject to approval of certain legal matters by counsel to the Underwriters and
to certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of Common Stock will be made in New York, New York on or
about , 1998.
-----------
MERRILL LYNCH & CO.
BEAR, STEARNS & CO. INC.
MORGAN STANLEY DEAN WITTER
SALOMON SMITH BARNEY
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SCHRODER & CO. INC.
-----------
The date of this Prospectus Supplement is , 1998.
<PAGE>
[PHOTOS]
CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF COMMON STOCK TO
COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
S-2
<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 (as hereinafter defined) appearing elsewhere in this Prospectus
Supplement and the accompanying Prospectus or incorporated herein or therein by
reference. See "Presentation of Financial Information." Except as otherwise
indicated, all information in this Prospectus Supplement and the accompanying
Prospectus assumes no exercise of the Underwriters' over-allotment options.
Prospective investors should carefully consider the matters discussed under the
caption "Risk Factors."
FEDERAL-MOGUL CORPORATION
Federal-Mogul is a leading global manufacturer and distributor of a broad
range of vehicular components for automobiles and light trucks, heavy duty
trucks, farm and construction vehicles and industrial products. Such components
include powertrain systems components (primarily bearings, rings and pistons),
sealing systems components (dynamic seals and gaskets) and general products
(primarily camshafts, friction products, sintered products and systems
protection products). Federal-Mogul markets its products to many of the world's
major original equipment ("OE") manufacturers. Federal-Mogul also manufactures
and supplies its products and related parts to the aftermarket relating to each
of these categories of equipment. Among Federal-Mogul's largest customers are
Caterpillar, Chrysler, Cummins, Ford, General Motors, Mercedes-Benz, NAPA,
Peugeot and Volkswagen/Audi (in alphabetical order).
Founded in 1899, Federal-Mogul traditionally focused on the manufacture and
distribution of engine bearings and sealing systems. From 1990 through 1996,
Federal-Mogul pursued a strategy of opening retail auto stores in various
domestic and international locations. These geographically-dispersed stores
proved burdensome to manage and resulted in substantial operating losses. In
the fourth quarter of 1996, Federal-Mogul initiated a change of management,
following which the Company initiated a significant restructuring program
designed to refocus the Company on its core competency of manufacturing. As
part of its restructuring, Federal-Mogul closed or sold substantially all of
its retail operations. Federal-Mogul also began to pursue a growth strategy of
acquiring complementary manufacturing companies that enhance the Company's
product base, expand its global manufacturing operations and provide
opportunities to capitalize on the Company's aftermarket distribution network
and technological resources.
In connection with its growth strategy, on March 6, 1998 Federal-Mogul
acquired T&N plc ("T&N"), a U.K. based supplier of engine and transmission
products, for total consideration of approximately (Pounds)1.46 billion ($2.42
billion, converted at a blended exchange rate of 1 pound sterling to 1.6510
U.S. dollars). T&N manufactures and supplies high technology engineered
automotive components and industrial materials including pistons, friction
products, bearings, systems protection, camshafts and sealing products. On
February 24, 1998, Federal-Mogul acquired Fel-Pro Incorporated and certain
affiliated entities, which constitute the operating businesses of the Fel-Pro
group of companies ("Fel-Pro"), a privately-owned automotive parts
manufacturer, for total consideration of approximately $717 million. Fel-Pro is
a premier gasket manufacturer for the North American aftermarket and OE heavy
duty market. See "T&N and Fel-Pro Acquisitions."
Federal-Mogul currently operates facilities at over 240 locations in 24
countries. On a pro forma basis adjusted for the acquisitions of T&N and Fel-
Pro, Federal-Mogul's total sales for 1997 were $4.8 billion. See "Unaudited Pro
Forma Financial Data."
S-3
<PAGE>
The following charts set forth Federal-Mogul's net sales by customer group,
geographic region and manufacturing division as a percentage of total net sales
for the year ended December 31, 1997, on a pro forma basis.
[Charts setting forth net sales by customer group, geographic region and
manufacturing division for the year ended December 31, 1997]
BUSINESS STRATEGY
The Company believes its recent restructuring program, which refocused the
Company on its core competency of manufacturing, and the acquisitions of T&N
and Fel-Pro, which expanded the Company's product base and geographic reach,
significantly enhanced its position within the automobile, truck and other
vehicular components markets. The Company believes that opportunities exist to
continue its growth and further enhance its market presence through the
following initiatives:
. Systems Approach. The breadth of the Company's manufacturing
capabilities and product offerings enable it to be one of a small number
of manufacturers with the ability to seal entire engine, transmission
and axle systems and to be a single source supplier of engine and
sealing components. In addition, Federal-Mogul is committed to becoming
a provider of complete engine and transmission modules for its OE
customers. The Company believes that OE manufacturers of automobiles,
trucks and other vehicles are increasingly seeking to reduce the number
of suppliers from which they source parts and to develop relationships
with suppliers that can offer integrated systems and modules in order to
lower production costs, increase quality, provide better technology and
shorten product development cycles. The T&N and Fel-Pro acquisitions,
which expanded the Company's gasket, cast aluminum piston, large bearing
and sealing product lines and added product lines for articulated
pistons, cylinder liners and piston rings, are major steps toward
Federal-Mogul's strategic goal of developing global engine and sealing
systems for its OE customers.
. Continue Focus on New Product Innovation. The Company's expertise in
engineering and research and development has made Federal-Mogul a leader
in virtually all of the product segments in which it competes. The
Company utilizes the latest technologies, processes and materials to
solve problems for customers and to bring new, innovative products to
market. The Company has special competencies in alloy development,
customized materials formulations, surface technology, advanced modeling
and testing and systems engineering. These capabilities allow the
Company to reduce production costs and to develop products that are more
durable and exhibit better interaction with surrounding components.
These innovative products better serve OE customers and aid brand
development, resulting in a higher margin product mix.
S-4
<PAGE>
. Extend Global Manufacturing Reach. The Company is committed to extending
its manufacturing capabilities worldwide in response to the global
expansion of its OE manufacturing customers. The acquisitions of T&N and
Fel-Pro have substantially increased the Company's manufacturing
presence, particularly in North America and Europe. Management believes
expansion of manufacturing operations to follow the expansion of OE
manufacturers into Latin America, Eastern Europe and Asia provides
significant growth opportunities for the Company in the future.
. Pursue Strategic Acquisitions. The vehicular engine and sealing
component industry is large and highly fragmented. The Company believes
that as OE manufacturers continue to outsource and reduce the number of
suppliers, opportunities will exist for further consolidation within
this industry. The Company believes that, through its established
presence in these markets and its strong relationships with OE
manufacturers worldwide, the Company is in a favorable position to
capitalize on future industry consolidation. The Company's management
has substantial experience in completing and integrating acquisitions
within the automobile parts industry and believes that this experience
will help it select and pursue acquisition opportunities that can
enhance the Company's product base, expand its global manufacturing
operations and further capitalize on the Company's aftermarket
distribution network and technological resources.
. Expand Aftermarket Presence. Approximately 48% of the Company's 1997
sales, on a pro forma basis, were generated from the aftermarket. The
Company believes that opportunities exist to further leverage its broad
product offerings, reputation for new product innovation and presence
within the OE market to increase its penetration of the worldwide
aftermarket. In addition, the Company believes that its ability to sell
products developed for the OE market to aftermarket customers reduces
the impact of adverse changes in demand for new vehicles.
. EVA Focus. In 1997, the Company adopted Economic Value Added (EVA(R)) as
its primary financial measurement and incentive compensation metric. EVA
is equal to net operating profits after economic taxes and a charge for
capital invested in the Company, which is equal to the product of the
total capital invested in the Company and the weighted average cost of
capital for the Company's target blend of debt and equity. The Company's
management has placed significant emphasis on improving the Company's
financial performance and achieving various operating efficiencies
through technical development, manufacturing, marketing and
administrative rationalization in connection with this effort. The
Company's EVA improved significantly in 1997 due primarily to improved
operating margins (4.9% in 1996 and 7.7% in 1997) combined with $166
million of cash flow from continuing operations (net of expenditures for
property, plant and equipment) in 1997. EVA is also being applied to the
integration of T&N and Fel-Pro to optimize synergies and cost savings.
As the Company continues to expand both its product base and its
geographic scope, management will evaluate investments and acquisitions
based on both EVA and strategic importance. In addition, the Company
currently determines compensation for certain top managers using an EVA
based system and expects to increase the number of managers
participating in its EVA based compensation system to over 200 in 1999.
* * *
Federal-Mogul is a Michigan corporation with its principal executive offices
located at 26555 Northwestern Highway, Southfield, Michigan 48034. The
telephone number of those offices is (248) 354-7700.
S-5
<PAGE>
THE OFFERINGS
<TABLE>
<C> <S>
Common Stock offered by (1):
Federal-Mogul (2).......................... 9,712,093 shares
Selling Shareholders (3)................... 1,287,907 shares
Common Stock to be Outstanding
after the Offerings (4)..................... 55,470,160 shares
Use of Proceeds.............................. To prepay certain indebtedness
of Federal-Mogul, which was
incurred to finance the
acquisitions of T&N and Fel-
Pro. Federal-Mogul will not
receive any of the proceeds
from the sale of Common Stock
offered by the Selling
Shareholders. See "Use
of Proceeds" and "Selling
Shareholders."
NYSE Symbol.................................. FMO
Risk Factors................................. For a discussion of certain
risks that should be considered
by prospective investors before
investing in the Common Stock
offered hereby, see "Risk
Factors."
</TABLE>
- --------
(1) Assumes no exercise of the Underwriters' over-allotment options granted by
the Company to the U.S. Underwriters for up to an additional 660,000 shares
and to the International Underwriters for an additional 165,000 shares or
the Underwriters' over-allotment options granted by the Selling
Shareholders to the U.S. Underwriters of up to an additional 660,000 shares
and to the International Underwriters of up to an additional 165,000
shares. See "Underwriters."
(2) Of the 9,712,093 shares of Common Stock to be sold in the Offerings by
Federal-Mogul, 7,769,674 shares are being offered initially in the United
States and Canada by the U.S. Underwriters and 1,942,419 shares are being
offered initially in a concurrent international offering outside the United
States and Canada by the International Managers. See "Underwriting."
(3) Of the 1,287,907 shares of Common Stock to be sold in the Offerings by the
Selling Shareholders, 1,030,326 shares are being offered initially in the
United States and Canada by the U.S. Underwriters and 257,581 shares are
being offered initially in a concurrent international offering outside the
United States and Canada by the International Managers. See "Underwriting."
(4) Includes 5,151,628 shares issuable upon the conversion of the Series E
Mandatory Exchangeable Preferred Stock ("Series E Stock") (including Series
E Stock to be converted in connection with the Offerings). Does not
include: (i) 1,882,383 shares issuable upon exercise of outstanding options
under Federal-Mogul's various stock option and incentive stock plans as of
May 12, 1998 and (ii) 826,207 additional shares reserved for issuance upon
exercise of options not yet granted under those plans.
S-6
<PAGE>
SUMMARY FINANCIAL DATA
The following summary historical financial information is derived from, and
should be read in conjunction with, the Federal-Mogul Financial Statements (as
hereinafter defined), T&N Financial Statements (as hereinafter defined) and
Fel-Pro Financial Statements (as hereinafter defined), and the summary
unaudited pro forma financial information is derived from, and should be read
in conjunction with, the "Unaudited Pro Forma Financial Data," all of which are
included elsewhere in this Prospectus Supplement. See "Presentation of
Financial Information." The Federal-Mogul Audited Financial Statements (as
hereinafter defined) were audited by Ernst & Young LLP. The T&N Financial
Statements were audited by KPMG Audit Plc. The Fel-Pro Financial Statements
were audited by Ernst & Young LLP. The Federal-Mogul Unaudited Interim
Financial Statements (as hereinafter defined) are unaudited but, in the opinion
of management, reflect all adjustments necessary for a fair presentation of
such information.
FEDERAL-MOGUL
<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 $ 658.0 $ 485.6
Costs and expenses...... (1,703.7)(2) (2,258.0)(3) (2,000.7)(4) (650.6)(5) (461.1)
Other expense........... (3.4) (3.4) (2.4) (5.8) (2.0)
Income tax (expense)
benefit................ (27.5) 22.4 (2.5) (8.8) (8.6)
--------- --------- --------- --------- --------
Net earnings (loss)
before extraordinary
item................... 72.0 (206.3) (5.8) (7.2) 13.9
Extraordinary item --
loss on early
retirement of debt, net
of applicable income
tax benefit............ (2.6) -- -- -- --
--------- --------- --------- --------- --------
Net earnings (loss)..... $ 69.4 $ (206.3) $ (5.8) $ (7.2) $ 13.9
========= ========= ========= ========= ========
COMMON SHARE SUMMARY
(DILUTED):
Average shares and
equivalents outstanding
(in thousands)......... 41,854 34,659 34,642 40,114 37,159
Earnings (loss) per
share:
Before extraordinary
item................. $ 1.67 $ (6.20) $ (0.42) $ (0.20) $ 0.32
Extraordinary item --
loss on early
retirement of debt,
net of applicable
income tax benefit... (0.06) -- -- -- --
--------- --------- --------- --------- --------
Net earnings (loss) per
share.................. $ 1.61 $ (6.20) $ (0.42) $ (0.20) $ 0.32
========= ========= ========= ========= ========
Dividends declared per
share.................. $ 0.48 $ 0.48 $ 0.48 $ 0.12 $ 0.12
========= ========= ========= ========= ========
CONSOLIDATED BALANCE
SHEET DATA:
Total assets............ $ 1,802.1 $ 1,455.2 $ 1,701.1 $ 7,398.7 $1,419.7
Short-term debt(6)...... 28.6 280.1 111.9 837.8 258.7
Long-term debt.......... 273.1 209.6 481.5 2,273.7 206.9
Shareholder's equity.... 369.3 318.5 550.3 586.0 310.2
OTHER FINANCIAL
INFORMATION:
Cash provided from (used
by) operating
activities............. $ 215.7 $ 149.0 $ (34.7) $ 82.7 $ 28.1
Cash provided from (used
by) investing
activities............. (5.5) (12.5) (109.4) (2,586.5) 2.0
Cash provided from (used
by) financing
activities............. 298.1 (122.8) 138.5 2,063.9 (30.2)
EBITDA(7)............... 194.5 97.9 163.6 82.7 46.3
Expenditures for
property, plant,
equipment and other
long term assets....... 49.7 54.2 78.5 19.5 8.4
Depreciation and
amortization expense... 52.8 63.7 61.0 29.8 14.0
</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.
S-7
<PAGE>
(5) Includes $18.6 million for a purchased in-process research and development
charge, $10.5 million for restructuring charges, $20.0 million for
adjustment of assets held for sale to fair value and other long-lived
assets, and a $13.3 million net gain on British pound currency option and
forward contract.
(6) Includes current maturities of long-term debt.
(7) "EBITDA" represents the sum of income before interest expense and income
taxes, plus depreciation and amortization as well as nonrecurring charges
including gains on the sale of businesses, restructuring and reengineering
charges, adjustments of assets held for sale to fair value and other long
lived assets, the net effect of British pound currency options and forward
contracts, and purchased in-process research and development charge. EBITDA
should not be construed as a substitute for income from operations, net
income or cash flow from operating activities, for the purpose of analyzing
Federal-Mogul's operating performance, financial position and cash flows.
EBITDA measures are calculated differently by other companies. As such, the
EBITDA measures presented may not be comparable to other similarly titled
measures of other companies. The Company has presented EBITDA because it is
commonly used by investors to analyze and compare companies on the basis of
operating performance and to determine a company's ability to service debt.
T&N
<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
<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------------------
1997 1996
T&N UNAUDITED PRO FORMA IN U.S. GAAP(1)(2) --------------- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................. $ 2,948.4 $ 3,055.4
Costs and expenses........................ (2,698.7) (4,058.6)(3)
Income tax (expense) benefit.............. (159.3) 278.5
--------------- ---------------
Net earnings (loss)....................... $ 90.4 $ (724.7)
=============== ===============
CONSOLIDATED BALANCE SHEET DATA:
Total assets.............................. $ 3,120.1 $ 3,299.5
Short-term debt........................... 125.4 68.1
Long-term debt............................ 469.5 445.2
Shareholders' equity...................... 466.5 456.1
OTHER FINANCIAL INFORMATION:
Cash flow provided from operating
activities............................... 268.8 115.6
Cash flow used by investing activities.... (116.7) (211.8)
Cash flow provided from (used by)
financing activities..................... (125.0) 80.1
EBITDA(4)................................. 435.0 399.1
Expenditures for property, plant,
equipment and other long term assets..... 170.9 179.2
Depreciation and amortization expense..... 167.6 161.9
</TABLE>
(see footnotes on the following page)
S-8
<PAGE>
- --------
(1) The T&N historical financial statements were prepared in accordance with
U.K. GAAP, which differs in certain significant respects from U.S. GAAP
(see Note 29 to the T&N Financial Statements). The following table
reconciles the T&N profit/(loss) attributable to shareholders as reported
under U.K. GAAP to net earnings/(loss) as stated under U.S. GAAP:
<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.................... $ 201.4 $ (628.4)
U.S. GAAP adjustments (in U.S. dollars):
Amortization of goodwill................... (11.2) (5.3)
Amortization of patents.................... (2.6) (2.5)
Deferred taxation--full provision.......... (67.1) 158.7
Tax effect of other U.S. GAAP reconciling
items..................................... 3.0 121.8
Pension costs.............................. (11.5) (23.7)
Asbestos provision discount................ (0.8) (355.9)
Depreciation on fixed asset revaluations... 9.5 9.7
Carrying value of investments.............. (31.6) --
Other...................................... 2.1 2.0
Minority interests......................... (0.8) (1.1)
------------- --------------
Net earnings (loss) under U.S. GAAP.......... $ 90.4 $ (724.7)
============= ==============
</TABLE>
(2) Operating results and balance sheet data for 1997 have been translated at a
rate of 1.6453 U.S. dollars to 1 pound sterling and 1.6451 U.S. dollars to
1 pound sterling, respectively. Operating results and balance sheet data
for 1996 have been translated at a rate of 1.5680 U.S. dollars to 1 pound
sterling and 1.7110 U.S. dollars to 1 pound sterling, respectively.
(3) Includes charge for asbestos-related costs of (Pounds)515 million under
U.K. GAAP and $1.244 billion under U.S. GAAP.
(4) "EBITDA" represents the sum of income before interest expense and income
taxes, plus depreciation and amortization as well as nonrecurring charges
including gains on the sale of businesses, the cost and gains associated
with options over shares of Kolbenschmidt AG, asbestos related costs and
bid costs. EBITDA should not be construed as a substitute for income from
operations, net income or cash flow from operating activities, for the
purpose of analyzing T&N's operating performance, financial position and
cash flows. EBITDA measures are calculated differently by other companies.
As such, the EBITDA measures presented may not be comparable to other
similarly titled measures of other companies. The Company has presented
EBITDA because it is commonly used by investors to analyze and compare
companies on the basis of operating performance and to determine a
company's ability to service debt.
FEL-PRO
<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:
EBITDA(1)............................................ $ 58.4 $ 50.5
Expenditures for property, plant, equipment and other
long term assets.................................... 18.3 14.1
Depreciation and amortization expense................ 11.5 11.3
</TABLE>
- --------
(1) "EBITDA" represents the sum of income before income taxes, plus
depreciation and amortization. EBITDA should not be construed as a
substitute for income from operations, net income or cash flow from
operating activities, for the purpose of analyzing Fel-Pro's operating
performance, financial position and cash flows. EBITDA measures are
calculated differently by other companies. As such, the EBITDA measures
presented may not be comparable to other similarly titled measures of other
companies. The Company has presented EBITDA because it is commonly used by
investors to analyze and compare companies on the basis of operating
performance and to determine a company's ability to service debt.
S-9
<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 summary unaudited pro forma
financial information below should be read in conjunction with the information
set forth under the caption "Unaudited Pro Forma Financial Data," the Federal-
Mogul Audited Financial Statements, the T&N Financial Statements and the Fel-
Pro Financial Statements included elsewhere in this Prospectus Supplement.
<TABLE>
<CAPTION>
PRO FORMA
COMBINED YEAR PRO FORMA COMBINED
ENDED THREE MONTHS ENDED
DECEMBER 31, 1997 MARCH 31, 1998
----------------- ------------------
(DOLLARS IN MILLIONS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................. $4,824.0 $1,193.6
Costs and expenses........................ 4,791.8 1,208.6
Income tax expense........................ 93.5 1.5
-------- --------
Net loss before extraordinary items and
nonrecurring charges(1)(2)............... $ (61.3) $ (16.5)
======== ========
COMMON SHARE SUMMARY (DILUTED):
Average shares and equivalents outstanding
(in thousands)........................... 36,647 40,104
Loss per share before extraordinary item
and nonrecurring charges(2)(3)........... $ (2.16) $ (0.44)
BALANCE SHEET DATA:
Total assets.............................. $6,885.6 $7,398.7 (4)
Total debt................................ 2,606.2 3,111.5 (4)
Shareholders' equity...................... 549.2 576.4
OTHER FINANCIAL INFORMATION:
EBITDA(5)................................. $ 558.7 $ 108.5
Expenditures for property, plant,
equipment and other long term assets..... 238.9 49.5
Depreciation and amortization expense..... 296.8 62.8
</TABLE>
- --------
(1) As a result of the use of proceeds from the Offerings, Federal-Mogul will
recognize an extraordinary loss (net of tax) of approximately $5.1 million
from the early extinguishment of debt.
(2) The unaudited pro forma statements of operations include only the results
of ongoing operations and exclude such impacts as extraordinary items,
items relating to the acquisitions and synergies and expected cost savings
associated with the integration of the acquisitions. See Note m to the
"Unaudited Pro Forma Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(3) Loss per share as calculated for the pro forma combined entity includes an
increase to the net loss of $17.8 million and $1.2 million in preferred
dividend requirements for the years ended December 31, 1997 and March 31,
1998, respectively.
(4) Amounts represent actual balances at March 31, 1998.
(5) "EBITDA" represents the sum of income before interest expense and income
taxes, plus depreciation and amortization as well as nonrecurring charges
including gains on the sale of businesses, restructuring and reengineering
charges, adjustments of assets held for sale to fair value and other long
lived assets, the net effect of British pound currency options and forward
contracts, gains associated with options over shares in Kolbenschmidt AG,
asbestos related costs and bid costs. EBITDA should not be construed as a
substitute for income from operations, net income or cash flow operating
activities, for the purpose of analyzing Federal-Mogul's operating
performance, financial position and cash flows. EBITDA measures are
calculated differently by other companies. As such, the EBITDA measures
presented may not be comparable to other similarly titled measures of other
companies. The Company has presented EBITDA because it is commonly used by
investors to analyze and compare companies on the basis of operating
performance and to determine a company's ability to service debt.
S-10
<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 acquisitions of T&N and Fel-Pro, Federal-Mogul is
substantially leveraged. As of March 31, 1998, Federal-Mogul had total debt of
$3,111.5 million (total long-term debt of $2,273.7 million and total short-
term debt of $837.8 million), $575 million in preferred securities of
affiliates and shareholders' equity of $586.0 million, producing a total
capitalization of $4,272.5 million, so that total debt as a percentage of
total capitalization was 72.8% and total long-term debt as a percentage of
total capitalization was approximately 53.2%. Federal-Mogul may also incur
substantial additional indebtedness in the future, including, without
limitation, in connection with any future acquisitions, although its ability
to do so is restricted by the Credit Agreements (as hereinafter defined). See
"Description of Certain Indebtedness." Federal-Mogul intends to use the
proceeds to it of the Offerings to repay existing debt, resulting in a
reduction of debt by approximately $601.9 million. See "Use of Proceeds."
Federal-Mogul's leverage may have important consequences to holders of the
Common Stock, including: (i) limiting Federal-Mogul's ability to obtain
additional financing to fund future working capital requirements, capital
expenditures, debt service requirements, acquisitions or other general
corporate requirements; (ii) requiring a substantial portion of Federal-
Mogul's cash flow from operations to be dedicated to payment of principal and
interest on its indebtedness, thereby reducing the funds available for
operations and future business opportunities; (iii) placing Federal-Mogul at a
competitive disadvantage to companies with which it competes that may be less
leveraged; and (iv) increasing Federal-Mogul's vulnerability to adverse
economic and industry conditions. In addition, since certain of Federal-
Mogul's borrowings are at variable rates of interest, Federal-Mogul will be
vulnerable to increases in interest rates, which could have a material adverse
effect on Federal-Mogul's results of operations, liquidity and financial
condition. Federal-Mogul's ability to make scheduled payments of the principal
of, to pay interest on or to refinance its indebtedness depends on its future
performance, which to a certain extent is subject to economic, financial,
competitive and other factors beyond its control. There can be no assurance
that Federal-Mogul's business will continue to generate cash flow from
operations in the future sufficient to service its debt and make necessary
capital expenditures. If unable to generate such cash flow, Federal-Mogul may
be required to adopt one or more alternatives, such as reducing or delaying
planned expansion, selling assets, restructuring debt or obtaining additional
equity capital. There can be no assurance that any of these strategies could
be effected on satisfactory terms or without substantial additional expense
for Federal-Mogul. These and other factors could have a material adverse
effect on the results of operations, liquidity and financial condition of
Federal-Mogul and on the marketability, price and future value of the Common
Stock.
The Credit Agreements impose financial and other restrictions on Federal-
Mogul, including limitations on the incurrence of debt and on Federal-Mogul's
ability to dispose of assets. The Credit Agreements also require Federal-Mogul
to make periodic payments in respect of interest and outstanding principal,
including from material disposals, "excess cash flow" and the proceeds of
certain issuances of capital stock or indebtedness, and to maintain compliance
with certain financial ratios and minimum net worth tests. See "Description of
Certain Indebtedness." There can be no assurance that these requirements will
be met in the future. Failure to achieve compliance would result in a default
under the Credit Agreements and could lead to acceleration of the related debt
and the acceleration of debt under other instruments evidencing indebtedness
that contain cross-acceleration or cross-default provisions. In such a case,
there can be no assurance that Federal-Mogul would be able to refinance or
otherwise repay such indebtedness.
The information set forth under the caption "Unaudited Pro Forma Financial
Data" has been based on certain assumptions as to the estimated proceeds of
the divestitures of the T&N Bearings Business (as hereinafter defined). Such
proceeds will be used to reduce Federal-Mogul's indebtedness. There can be no
assurance that the actual proceeds received from the divestitures will fall
within the range utilized in making the pro forma calculations.
S-11
<PAGE>
INTEGRATION OF THE BUSINESSES OF T&N AND FEL-PRO
The acquisitions of T&N and Fel-Pro substantially increased the size and
complexity of Federal-Mogul's operations and have created the need for
Federal-Mogul to integrate three businesses that have previously operated
independently. There can be no assurance that Federal-Mogul will not encounter
difficulties in integrating T&N's and Fel-Pro's operations with its own or
that the expected benefits will be realized from such integration. Any
material delays or unexpected costs incurred in connection with such
integration could have a material adverse effect on Federal-Mogul and its
results of operations, liquidity and financial condition. Furthermore, there
can be no assurance that the operations, management and personnel of Federal-
Mogul, T&N and Fel-Pro will be compatible. Among the factors considered by
Federal-Mogul in connection with the acquisitions of T&N and Fel-Pro were the
opportunities for synergies expected to be achieved. However, there can be no
assurance that Federal-Mogul will achieve the desired levels of synergies when
anticipated or at all. Failure to achieve the desired levels of synergies
could have a material adverse effect on the business, results of operations,
liquidity and financial condition of Federal-Mogul.
In addition, Federal-Mogul has announced that it intends, in connection with
its targeted synergies, to incur restructuring charges and related costs of
$205 million, which is moderately less than the annual level of synergy
benefits anticipated in the year 2000. See "T&N and Fel-Pro Acquisitions." No
assurance can be given that such costs will not be substantially greater than
this amount or that achieving such synergies will be possible without
additional cost or charges to earnings in future periods. Any such charges
could have a material adverse effect on the business, results of operations,
liquidity and financial condition of Federal-Mogul.
In connection with securing regulatory approvals for the acquisition of T&N,
Federal-Mogul agreed with the U.S. Federal Trade Commission (the "FTC") to
divest T&N's thinwall and dry bearings (polymer bearings) operations (the "T&N
Bearings Business"). See "Business--Reorganization" and "Unaudited Pro Forma
Financial Data." The purchaser of the T&N Bearings Business will become a
direct competitor of Federal-Mogul.
T&N'S ASBESTOS LIABILITY
T&N and certain of its subsidiaries are among many defendants named in a
large number of court actions brought in the United States, and a smaller
number of claims brought in the United Kingdom, relating to alleged asbestos-
related diseases resulting from exposure to asbestos or products containing
asbestos. T&N is also one of many defendants named in a small number of U.S.
property damage claims. T&N has incurred significant charges to income in
connection with settling claims and the establishment of reserves for asbestos
liabilities and has obtained insurance coverage for certain asbestos
liabilities. See "Business--Legal Proceedings," "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Federal-Mogul--
Three Months Ended March 31, 1998 Compared with Three Months Ended March 31,
1997--Asbestos Liability and Legal Proceedings" and "--T&N--Asbestos." No
assurance can be given that T&N will not be subject to material additional
liabilities and significant additional litigation relating to asbestos that
would result in significant additional charges not covered by reserves or
insurance. Any such liabilities or litigation could have a material adverse
effect on Federal-Mogul's results of operations, business, liquidity and
financial condition.
ACQUISITION STRATEGY
One of Federal-Mogul's principal business strategies is to expand its core
competencies in manufacturing and distribution through acquisitions of
companies that Federal-Mogul identifies as complementary to its existing
businesses and capable of achieving satisfactory rates of return. Federal-
Mogul is usually engaged in various stages of evaluation of potential
acquisition candidates. Currently Federal-Mogul is in the preliminary stages
of pursuing one or more potential acquisitions, at least one of which would be
material if consummated. Any such acquisition would be paid for through the
incurrence of a significant amount of additional debt, the issuance of a
significant amount of capital stock or both. If Federal-Mogul determines that
any one or more of these potential acquisitions or other transactions would
meet its criteria and may be accomplished on appropriate terms, it expects to
act to attempt to consummate them as quickly as possible. There can be no
assurance that any of the discussions in which Federal-Mogul is currently
engaged will result in the completion of any acquisitions, that
S-12
<PAGE>
Federal-Mogul will in the future succeed in locating or acquiring appropriate
companies on attractive terms or that Federal-Mogul will be successful in
integrating acquired companies or realizing desired benefits of such
acquisitions.
Federal-Mogul believes that successful implementation of this strategy will
require significant capital expenditures which it might not be able to fund
from its cash from operations. Therefore, Federal-Mogul may be required to
borrow money or otherwise obtain financing for future acquisitions. Increased
leverage of Federal-Mogul may have important consequences to holders of the
Common Stock. See "--Effect of Substantial Leverage." If Federal-Mogul is
unable to procure suitable financing, it may be unable to complete desired
acquisitions.
CYCLICAL NATURE OF AUTOMOTIVE INDUSTRY
Federal-Mogul's principal operations are directly related to domestic and
foreign automotive vehicle production. Automobile sales and production are
cyclical and can be affected by the strength of a country's general economy.
In addition, automobile production and sales can be affected by labor
relations issues, regulatory requirements, trade agreements and other factors.
A decline in automotive sales and production would likely affect not only
sales to OE customers but also sales to aftermarket customers and could result
in a decline in Federal-Mogul's results of operations or a deterioration in
Federal-Mogul's financial condition. If demand changes and Federal-Mogul fails
to respond accordingly, its results of operations could be adversely affected
in any given quarter. In addition, technical improvements in automotive
component designs may adversely affect aftermarket demand.
INTERNATIONAL OPERATIONS
Federal-Mogul has manufacturing and distribution facilities located in many
countries, principally in North America, Europe and Latin America. The
acquisition of T&N significantly increased the portion of Federal-Mogul's
business located outside the United States. International operations are
subject to certain risks inherent in doing business abroad, including exposure
to local economic conditions, expropriation and nationalization, currency
exchange rate fluctuations and currency controls, and export and import
restrictions. The likelihood of such occurrences and their potential effect on
Federal-Mogul vary from country to country and are unpredictable.
FOREIGN CURRENCY TRANSLATION AND TRANSACTION RISK
The financial condition and results of operations of certain Federal-Mogul
operating entities are reported in various foreign currencies (principally
pounds sterling, German marks, and to a lesser extent South African rand and
French francs, among others) and then translated into U.S. dollars at the
applicable exchange rate for inclusion in Federal-Mogul's financial
statements. As a result, the appreciation of the dollar against these foreign
currencies will have a negative impact on the reported sales and operating
margin of T&N and other subsidiaries, as consolidated into Federal-Mogul (and
conversely, the depreciation of the dollar against these foreign currencies
will have a positive impact). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Federal-Mogul--Year Ended
December 31, 1997 Compared with Year Ended December 31, 1996 and Year Ended
December 31, 1996 Compared with Year Ended December 31, 1995--Foreign Currency
and Commodity Contracts."
In addition, Federal-Mogul incurs currency transaction risk whenever it or
one of its foreign subsidiaries enters into either a purchase or sales
transaction using a different currency than the relevant entity's functional
currency. Currency transaction risk is reduced by matching revenues and costs
with the same currency. Given the volatility of currency exchange rates, there
can be no assurance that Federal-Mogul will be able to effectively manage its
currency transaction risks or that any volatility in currency exchange rates
will not have a material adverse effect on Federal-Mogul's financial condition
or results of operations.
COMPETITION
The global vehicular parts business is highly competitive. Federal-Mogul
competes with many of its customers that produce their own components as well
as with independent manufacturers and distributors of components in the United
States and abroad. Certain of the Company's competitors have significantly
greater financial and other resources than the Company. The inability of the
Company to successfully respond to changing competitive conditions could
adversely affect demand for the Company's products.
S-13
<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, plans to address computer
software issues related to the approach of the year 2000, estimated proceeds
of planned dispositions and the effects of such dispositions on Federal-
Mogul's balance sheet and statement of operations, and the scope and effect of
T&N's asbestos liability. Such matters are discussed under the captions "Risk
Factors," "T&N and Fel-Pro Acquisitions," "Business," "Summary Unaudited Pro
Forma Financial Information," "Unaudited Pro Forma Financial Data" and
elsewhere in this Prospectus Supplement, the accompanying Prospectus or in the
information incorporated by reference herein or therein.
Forward-looking statements may involve known and unknown risks,
uncertainties and other factors which may cause the actual results,
performance or achievements of Federal-Mogul to differ materially from any
future results, performance or achievements expressed or implied by such
forward-looking statements. Such risks, uncertainties and other factors
include, without limitation, those relating to the combination of Federal-
Mogul's business with those of T&N and Fel-Pro and the anticipated synergies
and operating efficiencies and restructuring charges in connection therewith,
conditions in the automotive components industry, certain global and regional
economic conditions and other factors detailed herein and from time to time in
the documents incorporated by reference herein. Moreover, Federal-Mogul's
plans, objectives and intentions are subject to change based on these and
other factors (some of which are beyond Federal-Mogul's control). Some of the
factors that may cause such material differences are set forth herein under
the caption "Risk Factors."
S-14
<PAGE>
USE OF PROCEEDS
The net proceeds to Federal-Mogul from the sale of the 9,712,093 shares of
Common Stock offered by Federal-Mogul hereby are estimated to be $601.9
million, assuming a public offering price of $63 15/16 per share, after
deducting the estimated underwriting discounts and offering expenses,
estimated at $19.1 million.
Federal-Mogul intends (i) to apply net proceeds to it of the Offerings to
prepay the entire outstanding $500 million principal amount of the Senior
Subordinated Loans (as hereinafter defined), and (ii) to apply any remaining
balance of the net proceeds to repay a portion of the Interim Loans (as
hereinafter defined), the outstanding principal amount of which was $925
million at May 12, 1998. However, if the net proceeds to Federal-Mogul of the
Offerings are less than $500 million, the proceeds will be applied solely to
prepay the Interim Loans. The Senior Subordinated Loans currently bear
interest at a floating rate which is the offering rate of The Chase Manhattan
Bank, N.A. ("Chase") in the London interbank eurodollar market for U.S. dollar
deposits, plus an initial margin of 4.5% (which will increase to 5.5% on
September 12, 1998 and to 6.0% on December 12, 1998). The Interim Loans bear
interest at a floating rate based upon either, at Federal-Mogul's option, (i)
the higher of the prime rate of Chase and 0.5% in excess of the overnight
federal funds rate, plus a margin of 1.0% or (ii) the average of the offering
rates of banks in the London interbank eurodollar market for U.S. dollar
deposits plus a margin of 2.0%. The Senior Subordinated Loans are scheduled to
mature on March 12, 1999. If such loans have not been repaid on or prior to
such date, they will be converted to loans maturing on March 12, 2008 and
bearing interest at variable rates but in no event less than 0.5% above the
rate in effect on March 12, 1999. The Interim Loans are scheduled to mature on
September 12, 1999. Amounts borrowed under the Senior Subordinated Loans and
the Interim Loans were used as part of the financing of the acquisition of T&N
and the refinancing of the acquisition of Fel-Pro. See "T&N and Fel-Pro
Acquisitions--Financing of the Acquisitions" and "Description of Certain
Indebtedness."
Federal-Mogul will not receive any proceeds from the sale of shares of
Common Stock by the Selling Shareholders.
EXCHANGE RATES
The following table sets forth, for the periods and dates indicated, certain
information concerning the noon buying rate in New York City for cable
transfers in pounds sterling, as certified for customs purposes by the Federal
Reserve Bank of New York (the "Noon Buying Rate") for pounds sterling
expressed in U.S. dollars per (Pounds)1.00. On May 12, 1998, the Noon Buying
Rate was (Pounds)1.00=$1.6347.
<TABLE>
<CAPTION>
CALENDAR PERIOD HIGH LOW AVERAGE(1) PERIOD END
- --------------- ------ ------ ---------- ----------
<S> <C> <C> <C> <C>
1998, through May 12........................ $1.691 $1.611 $1.657 $1.635
1997........................................ $ 1.71 $ 1.49 $ 1.60 $ 1.64
1996........................................ $ 1.62 $ 1.50 $ 1.57 $ 1.53
1995........................................ $ 1.64 $ 1.46 $ 1.57 $ 1.62
1994........................................ $ 1.59 $ 1.46 $ 1.50 $ 1.49
1993........................................ $ 2.00 $ 1.42 $ 1.68 $ 1.51
</TABLE>
- --------
(1)The average of the Noon Buying Rates on the last business day of each month
during the relevant period.
S-15
<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 T&N for total consideration of
approximately (Pounds)1.46 billion ($2.42 billion, converted at a blended
exchange rate of 1 pound sterling to 1.6510 U.S. dollars). T&N, headquartered
in Manchester, England, manufactures and supplies high technology engineered
automotive components and industrial materials. In 1997, T&N had sales of
approximately (Pounds)1.80 billion ($2.96 billion) with about 80% of such
sales relating to the world automotive industry. At the time of its
acquisition, T&N's major product lines consisted of piston products, bearings,
friction products, composites and camshafts (incorporating sintered products)
and sealing products and it was active in both the original equipment and the
aftermarket markets. T&N operated in approximately 200 locations in 24
countries, employed over 28,000 people worldwide and served customers in more
than 150 countries. T&N's assets included technical centers in the U.K. and
Germany and North America.
In connection with securing regulatory approvals for the acquisition of T&N,
Federal-Mogul agreed with the FTC to divest the T&N Bearings Business. See
"Business--Reorganization" and "Unaudited Pro Forma Financial Data." The T&N
Bearings Business accounted for approximately $393.1 million of T&N's 1997
revenues and employed approximately 4,000 people.
THE FEL-PRO ACQUISITION
On February 24, 1998, Federal-Mogul acquired Fel-Pro, a group of privately-
owned automotive parts manufacturers headquartered in Skokie, Illinois. The
total consideration paid for Fel-Pro was approximately $717 million, which
included 1,030,325.6 shares of Federal-Mogul Series E Mandatory Exchangeable
Preferred Stock with an imputed value of $225 million and approximately $492
million in cash.
Fel-Pro is a leading gaskets manufacturer for the North American aftermarket
and OE heavy duty market. In 1997, Fel-Pro had sales of approximately $500
million. At the time of its acquisition, Fel-Pro's primary product lines
consisted of gaskets, heavy duty diesel engine products, diesel products, high
performance gaskets and other equipment and chemical products. Fel-Pro's
gasket sales for 1997 were approximately $350 million and included a full
range of automotive, heavy duty, marine and performance gaskets. Fel-Pro had
more than 2,700 employees in 16 locations. Its gasket facilities are located
in Illinois, Michigan, Canada and Mexico. Federal-Mogul is in the process of
reselling Fel-Pro's chemical manufacturing operations (representing
approximately $32.8 million of Fel-Pro's 1997 net sales and $2.6 million of
Fel-Pro's 1997 net income). Excluding intercompany items, net assets of Fel-
Pro Chemical were $12.2 million as of December 31, 1997.
STRATEGIC RATIONALE FOR THE ACQUISITIONS
The principal benefits to Federal-Mogul from the acquisitions of T&N and
Fel-Pro are as follows:
. Establishing Federal-Mogul as a highly competitive first tier worldwide
automotive supplier.
. Expanding Federal-Mogul's manufactured product portfolio to offer
complete systems and modules.
. Enhancing Federal-Mogul's position as a global supplier of engine and
transmission parts.
. Reinforcing Federal-Mogul's ability to provide high quality service to
both its original equipment and aftermarket customers.
. Extending Federal-Mogul's international presence and accelerating its
worldwide aftermarket growth.
S-16
<PAGE>
Federal-Mogul expects significant synergies and operating efficiencies to be
achieved as a result of the acquisitions of T&N and Fel-Pro. Federal-Mogul has
announced that it intends, in connection with its targeted synergies, to incur
restructuring charges and related costs of $205 million, which is moderately
less than the annual level of synergy benefits anticipated in the year 2000.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
FINANCING OF THE ACQUISITIONS
The acquisition of T&N was funded primarily through a $2.75 billion floating
rate Senior Credit Agreement (as hereinafter defined) (consisting of a $2.35
billion term loan facility and a $400 million revolving loan facility) and a
$500 million floating rate Senior Subordinated Credit Agreement (as
hereinafter defined). The senior term loan facility was reduced to $2.275
billion effective as of March 11, 1998. The entire amount of the senior term
loan facility, as well as the entire amount of the senior subordinated credit
facility, have been drawn down. These credit facilities also refinanced
Federal-Mogul's $350 million indebtedness under a revolving credit facility
(which had been used to finance the acquisition of Fel-Pro) and $150 million
of other indebtedness incurred in the acquisition of Fel-Pro. It is
anticipated that the net proceeds to Federal-Mogul from the Offerings will be
used to prepay the entire outstanding principal amount of the Senior
Subordinated Loans ($500 million), with the balance of the net proceeds used
to repay a portion of the Interim Loans (the outstanding principal balance of
which is $925 million at May 12, 1998). See "Use of Proceeds" and "Description
of Certain Indebtedness."
Additional funds for the acquisition of T&N were obtained through the sale
in December 1997 of 11,500,000 7% Trust Convertible Preferred Securities
(generating gross proceeds of $575 million) by Federal-Mogul Financing Trust,
a subsidiary of Federal-Mogul which invested the net proceeds of that offering
in 7% Convertible Junior Subordinated Debentures of Federal-Mogul. See
"Description of Capital Stock--Trust Preferred Securities." Federal-Mogul also
issued 1,030,325.6 shares of Series E Mandatory Exchangeable Preferred Stock,
with an imputed value of $225 million, as partial consideration for the
acquisition of Fel-Pro. See "Description of Capital Stock--Series E Mandatory
Exchangeable Preferred Stock."
S-17
<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 May 12, 1998)....... 66 7/8 53 15/16 .0025(1)
</TABLE>
- --------
(1) Declared but not yet paid.
On May 12, 1998, the reported last sale price of the Common Stock on the
NYSE was $63 15/16 per share. On that date, there were approximately 9,100
shareholders of record of Common Stock.
Dividends on the Common Stock of Federal-Mogul are payable at the discretion
of Federal-Mogul's Board of Directors out of funds legally available therefor.
The Board of Directors has declared a cash dividend payable in the second
quarter of 1998 in the amount of one-quarter cent per share of Common Stock.
The record date for this dividend will be May 29, 1998, and thus Common Stock
sold in the Offerings will not entitle holders to receive such dividend.
Management presently intends to retain future earnings for working capital, in
accordance with Federal-Mogul's growth strategy, and therefore anticipates
paying dividends at a comparable level in the foreseeable future. In addition,
the Credit Agreements contain certain limits upon dividends. See "Description
of Certain Indebtedness."
S-18
<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........................................ $ 500.0 $ --
Other short-term debt(1).................................. 337.8 337.8
-------- --------
Total short-term debt................................... 837.8 337.8
-------- --------
Long-term debt:
Revolving credit facility................................. $ 55.0 $ 55.0
Medium-term notes......................................... 125.0 125.0
Senior notes.............................................. 125.0 125.0
ESOP obligation........................................... 15.2 15.2
Senior loans.............................................. 1,879.7 1,777.8
Other..................................................... 73.8 73.8
-------- --------
Total long-term debt(2)................................. 2,273.7 2,171.8
Minority interest-preferred securities of affiliate(3)...... 575.0 575.0
Shareholders' equity:
Series C ESOP Convertible Preferred Stock................. 48.1 48.1
Series E Mandatory Exchangeable Preferred Stock........... 225.0 168.1
Common stock.............................................. 202.4 202.5
Additional paid-in capital................................ 327.3 986.0
Accumulated deficit(4)(5)................................. (130.8) (130.8)
Unearned ESOP compensation................................ (21.7) (21.7)
Accumulated other comprehensive income.................... (61.5) (61.5)
Other..................................................... (2.8) (2.8)
-------- --------
Total shareholders' equity.............................. 586.0 1,187.9
-------- --------
Total capitalization........................................ $4,272.5 $4,272.5
======== ========
</TABLE>
- --------
(1) Other short-term debt includes current maturities of long-term debt.
(2) Less current maturities included in short-term debt.
(3) This consists of Federal-Mogul-obligated 7% Trust Convertible Preferred
Securities of Federal-Mogul Financing Trust. Substantially all of the
assets of Federal-Mogul Financing Trust consist of the 7% Convertible
Junior Subordinated Debentures of Federal-Mogul.
(4) Does not include an extraordinary loss (net of tax) of approximately $19
million resulting from a contractual penalty incurred in April 1998 in
connection with the prepayment of T&N private placement debt.
(5) Excludes the extraordinary loss (net of tax) from the early retirement of
debt of approximately $5.1 million resulting from the use of proceeds of
the Offerings.
S-19
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
Federal-Mogul completed its cash offer to acquire T&N on March 6, 1998. The
acquisition has been accounted for using the purchase method of accounting.
The total consideration paid of approximately (Pounds)1.46 billion ($2.42
billion, converted at a blended exchange rate of 1 pound sterling to 1.6510
U.S. dollars) was funded primarily through a $2.75 billion floating rate
Senior Credit Agreement (consisting of a $2.35 billion (reduced to $2.275
billion effective as of March 11, 1998) term loan facility, $1.8 billion of
which was drawn down, and a $400 million revolving loan facility) and a $500
million floating rate Senior Subordinated Credit Agreement (the full amount of
which was drawn down), each from a syndicate led by Chase. These credit
facilities also refinanced the borrowings used to finance the cash portion of
the purchase price for Fel-Pro. Additional funds for the acquisition of T&N
were obtained through the December 1997 sale of 7% Trust Convertible Preferred
Securities (generating gross proceeds of $575 million) by Federal-Mogul
Financing Trust, a subsidiary of the Company. The Company intends to put into
place a permanent capital structure with an appropriate combination of debt
and equity which will partially replace the Senior Credit Agreement and Senior
Subordinated Credit Agreement debt.
Federal-Mogul completed the acquisition of Fel-Pro, for approximately $717
million, on February 24, 1998. The acquisition has been accounted for using
the purchase method of accounting. The purchase price consists of 1,030,325.6
shares of newly issued Series E Stock (exchangeable into 5,151,628 shares of
Common Stock) with an imputed value of $225 million and $492 million in cash.
The cash was provided through an existing revolving credit facility provided
by a syndicate led by Chase and three short-term loans, each in the amount of
$50 million, from Chase, ABN Amro Bank NV and First Chicago NBD Bank,
respectively.
The estimated cost of the acquisitions of Fel-Pro and T&N are computed as
follows:
<TABLE>
<CAPTION>
FEL-
PRO T&N
------ --------
(DOLLARS
IN MILLIONS)
<S> <C> <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> <C>
Current assets..................................... $173.1 $1,087.6
Liabilities assumed(1)............................. (133.1) (3,143.9)
Property, plant and equipment...................... 110.2 1,055.4
Identifiable intangible assets..................... 16.7 315.7
Other noncurrent assets............................ 31.4 525.9
Purchased research and development................. -- 18.6
Goodwill........................................... 519.4 1,990.7
Estimated fair value of T&N Bearings Business (see
below)............................................ -- 560.9
------ --------
Total.......................................... $717.7 $2,410.9
====== ========
</TABLE>
- --------
(1) Includes an increase of $329 million to adjust the acquired asbestos
liability to estimated fair value and an increase of $124 million to
adjust the acquired income tax liability in relation to the anticipated
gain on the sale of the T&N Bearings Business.
S-20
<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 six months after the FTC declares the consent
order final and must provide for independent management of the T&N Bearings
Business pending such divestiture. The assets to be divested consist
principally of T&N's thinwall and dry bearings (polymer bearings) operations.
The agreement stipulates that the T&N Bearings Business is to be maintained as
a viable, independent competitor of Federal-Mogul and that Federal-Mogul shall
not attempt to direct the activities of, or exercise control over, the T&N
Bearings Business or have contact with the T&N Bearings Business outside of
normal business activities.
Federal-Mogul has separately identified the estimated effect of the
divestiture of the T&N Bearings Business in the unaudited pro forma statement
of operations and balance sheet. The estimated net cash flows from operations
of the T&N Bearings Business from March 6, 1998 to the date of sale, the
interest expense on debt incurred during this period and the proceeds from the
sale will be accounted for as adjustments to the purchase price of T&N.
Proceeds are estimated to be between $500 and $650 million, calculated using
multiples of earnings similar to recent automotive industry transactions. An
amount within the low end of this range has been used in the pro forma
financial information. There can be no assurance that the actual proceeds
received from the disposition will fall within the estimated range.
The unaudited pro forma statement of operations for the year ended December
31, 1997, has been prepared to illustrate the effect of the acquisitions of
T&N and Fel-Pro as if they had occurred on January 1, 1997. The unaudited pro
forma statement of operations includes only the results of ongoing operations
and excludes such impacts as extraordinary items, items relating to the
acquisitions and synergies and expected cost savings associated with the
integration of the acquisitions. The unaudited pro forma balance sheet as of
December 31, 1997, has been prepared to illustrate the effect of the
acquisitions of T&N and Fel-Pro as if they had occurred on that date. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
The unaudited pro forma financial information gives effect to the
acquisition transactions using the purchase method of accounting. The pro
forma adjustments are described in the accompanying notes to the unaudited pro
forma financial information and are based upon preliminary available
information and upon certain assumptions made by management of Federal-Mogul.
Accordingly, the pro forma adjustments reflected in the unaudited pro forma
financial information are preliminary and subject to revision. Such revision
could be material.
The unaudited pro forma financial information is presented for illustrative
purposes only and is not necessarily indicative of the financial position or
results of operations which may occur in the future or that would have
occurred had the acquisitions of T&N and Fel-Pro been consummated on the dates
indicated, nor are they necessarily indicative of Federal-Mogul's future
results of operations or financial position. The unaudited pro forma financial
information should be read in conjunction with the audited consolidated
financial statements of Federal-Mogul, as well as the audited financial
statements of the acquired companies.
S-21
<PAGE>
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(YEAR ENDED DECEMBER 31, 1997)
<TABLE>
<CAPTION>
FEDERAL- DISPOSITION OF T&N FEL-PRO
MOGUL T&N FEL-PRO T&N BEARINGS PRO FORMA PRO FORMA PRO FORMA
HISTORICAL HISTORICAL HISTORICAL BUSINESS ADJUSTMENTS ADJUSTMENTS COMBINED
---------- ---------- ---------- -------------- ----------- ----------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Sales................... $1,806.6 $2,948.4 $489.3 $(393.1)(a) $ (15.3)(b) $(11.9)(i) $4,824.0
Cost of products sold... 1,381.8 2,187.6 268.5 (295.4)(a) (0.9)(c) (6.9)(j) 3,534.7
-------- -------- ------ ------- ------- ------ --------
Gross margin............ 424.8 760.8 220.8 (97.7) (14.4) (5.0) 1,289.3
Selling general and
administrative
expenses............... 286.2 500.3 173.8 (46.1)(a) 58.9 (d) 13.0 (k) 986.1
Restructuring charges
(credits).............. (1.1) -- -- -- -- -- (1.1)
Reengineering and other
related charges
(benefits)............. (1.6) -- -- -- -- -- (1.6)
Adjustment of assets
held for sale to fair
value.................. 2.4 -- -- -- -- -- 2.4
Interest expense........ 32.0 60.5 -- (16.9)(a) 148.5 (e) 38.2 (l) 262.3
Interest income......... (7.1) (17.9) -- 2.3 (a) 13.7 (f) -- (9.0)
International currency
exchange losses........ 0.6 4.4 -- (0.3)(a) -- -- 4.7
British pound currency
option, net............ 10.5 -- -- -- -- -- 10.5
Gain on sale of
Kolbenschmidt AG share
purchase options....... -- (21.7) -- -- -- -- (21.7)
Other (income) expense,
net.................... 3.4 (14.5) -- (1.3)(a) 36.9 (g) -- 24.5
-------- -------- ------ ------- ------- ------ --------
Earnings before income
taxes, extraordinary
item and nonrecurring
charges.............. 99.5 249.7 47.0 (35.4) (272.4) (56.2) 32.2
Income tax expense
(benefit).............. 27.5 159.3 25.5 (9.4)(a) (85.2)(h) (24.2)(m) 93.5
-------- -------- ------ ------- ------- ------ --------
Net earnings (loss)
before extraordinary
item and nonrecurring
charges.............. $ 72.0 $ 90.4 $ 21.5 $ (26.0) $(187.2) $(32.0) $ (61.3)
======== ======== ====== ======= ======= ====== ========
Earnings (loss) per com-
mon share:
Basic................. $ 1.81 $ (2.16)
Diluted............... $ 1.67 $ (2.16)
Weighted average shares
outstanding (thou-
sands):
Basic................. 36,647 36,647
======== ========
Diluted............... 41,854 36,647
======== ========
</TABLE>
NOTES TO THE UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
RELATING TO THE DIVESTITURE OF THE T&N BEARINGS BUSINESS:
(a) To eliminate the historical statement of operations of the T&N Bearings
Business.
RELATING TO THE PURCHASE OF T&N:
(b) To eliminate intercompany sales between Federal-Mogul and T&N.
(c) To reflect the net effect of the following adjustments:
<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>
S-22
<PAGE>
(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
=======
(e) To reflect the net effect of the following adjustments:
Increase in interest expense relating to the net debt incurred
for the net purchase of T&N (see unaudited pro forma balance
sheet footnote 1).............................................. $ 148.2
Reduction in historical interest expense of T&N relating to the
elimination of historical outstanding debt..................... (23.4)
Amortization of debt issuance costs (to be amortized over a
period of 12 to 96 months)..................................... 23.7
-------
$ 148.5
=======
(f) To reflect the net effect of the following adjustments:
Reduction in interest income as a result of the use of existing
cash balances of Federal-Mogul to finance a portion of the T&N
transaction.................................................... $ 2.2
Reduction in interest income as a result of the use of existing
cash balances of T&N........................................... 11.5
-------
$ 13.7
=======
(g) To record an additional eleven months of minority interest-preferred
securities of affiliates expense.
(h) To record the income tax effects of the statement of operations adjustments.
RELATING TO THE PURCHASE OF FEL-PRO:
(i) To eliminate intercompany sales between Federal-Mogul and Fel-Pro
(j) To reflect the net effect of the following adjustments:
Increase in depreciation expense relating to the adjustment of
property, plant and equipment acquired to estimated fair value
(to be depreciated over an average period of 10 years)......... $ 3.0
Elimination of intercompany cost of products sold between
Federal-Mogul and Fel-Pro...................................... (11.9)
Elimination of profit in ending inventory on intercompany sales
between Federal-Mogul and
Fel-Pro........................................................ 0.6
Increase in postretirement benefits expense--elimination of
amortization of deferred loss.................................. 1.4
-------
$ (6.9)
=======
(k) To record the amortization of goodwill resulting from the purchase of Fel-
Pro (to be amortized over a period of 40 years)
(l) To record interest expense relating to the debt incurred for the purchase of
Fel-Pro
(m) To record the income tax effects of the statement of operations adjustments
The unaudited pro forma statement of operations discloses the income (loss)
from continuing operations before nonrecurring charges directly attributable to
the transactions. The following nonrecurring charges were not considered in the
unaudited pro forma statement of operations:
Penalty for early retirement of private placement debt of T&N. $ 25.0
Estimated purchased research and development costs............ 18.6
Adjustment of inventory to estimated fair value............... 11.0
-------
$ 54.6
=======
Net earnings before extraordinary item and non-recurring
charges...................................................... $ (61.3)
Less: Series C preferred dividend requirement................. (2.4)
Less: Series D preferred dividend requirement................. (3.1)
Less: Series E preferred dividend requirement................. (12.3)
-------
Net earnings available to common shareholders before
extraordinary item and non-recurring charges................... $ (79.1)
=======
Weighted average common shares outstanding...................... 36,647
=======
Loss per share--basic and diluted............................... $ (2.16)
=======
</TABLE>
Loss per share as calculated for the pro forma combined entity:
S-23
<PAGE>
UNAUDITED PRO FORMA BALANCE SHEET
(DECEMBER 31, 1997)
<TABLE>
<CAPTION>
DISPOSITION
FEDERAL- OF T&N FEL-PRO
MOGUL T&N FEL-PRO T&N BEARINGS PRO FORMA PRO FORMA PRO FORMA
HISTORICAL HISTORICAL HISTORICAL BUSINESS ADJUSTMENTS ADJUSTMENTS COMBINED
---------- ---------- ---------- ------------ ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Cash and equivalents.... $ 541.4 $ 319.2 $ -- $ (38.0)(28) $ (765.3)(1) $ (0.9)(15) $ 56.4
Accounts receivable..... 158.9 458.8 83.4 (49.4)(28) (2.6)(2) (4.2)(16) 645.0
Investment in accounts
receivable
securitization......... 48.7 -- -- -- -- -- 48.7
Inventories............. 277.0 365.1 61.0 (42.3)(28) 10.2 (3) 23.4 (17) 694.4
Prepaid expenses and
income tax benefits.... 113.2 58.2 4.7 (5.8)(28) 10.7 (4) 2.2 (18) 183.1
-------- -------- ------ -------- -------- ------ --------
Total current
assets............. 1,139.2 1,201.3 149.1 (135.5) (747.0) 20.5 1,627.6
Property, plant and
equipment.............. 313.9 1,089.5 80.6 (109.4)(28) 75.4 (5) 29.6 (19) 1,479.6
Goodwill................ 143.8 342.2 -- (66.8)(28) 1,715.0 (6) 519.4 (20) 2,653.6
Other intangible assets. 48.4 17.9 16.7 -- 297.8 (7) -- 380.8
Business investments and
other assets........... 156.8 469.2 23.7 (74.9)(28) 161.5 (8) 7.7 (21) 744.0
-------- -------- ------ -------- -------- ------ --------
Total assets........ $1,802.1 $3,120.1 $270.1 $ (386.6) $1,502.7 $577.2 $6,885.6
======== ======== ====== ======== ======== ====== ========
Short-term debt......... $ 28.6 $ 125.4 $ -- $ (0.5)(28) $ -- $ -- $ 153.5
Accounts payable........ 102.3 326.3 22.7 (38.5)(28) (2.6)(2) (2.0)(22) 408.2
Accrued compensation.... 36.8 57.6 24.1 (10.9)(28) -- -- 107.6
Accrued customer
incentives............. 22.4 -- 10.5 -- -- -- 32.9
Restructuring reserves.. 31.5 -- -- -- 150.0 (9) 15.0 (23) 196.5
Current portion of
asbestos liability..... -- 101.3 -- -- -- -- 101.3
Other accrued
liabilities............ 108.0 305.3 19.4 (22.0)(28) -- -- 410.7
-------- -------- ------ -------- -------- ------ --------
Total current
liabilities........ 329.6 915.9 76.7 (71.9) 147.4 13.0 1,410.7
Long-term debt.......... 273.1 469.5 -- (2.1)(28) 1,220.4 (1) 491.8 (15) 2,452.7
Postemployment benefits. 190.9 223.7 46.8 (12.3)(28) 6.4 (10) (18.0)(24) 437.5
Noncurrent portion of
asbestos liability..... -- 948.7 -- 329.0 (11) -- 1,277.7
Other accrued
liabilities............ 64.2 53.8 6.6 (43.5)(28) 53.7 (12) 6.0 (25) 140.8
-------- -------- ------ -------- -------- ------ --------
Total liabilities... 857.8 2,611.6 130.1 (129.8) 1,756.9 492.8 5,719.4
Minority interest-
preferred securities of
affiliates............. 575.0 -- -- -- -- -- 575.0
Minority interest,
other.................. -- 42.0 -- -- -- -- 42.0
Series C ESOP preferred
stock.................. 49.0 -- -- -- -- -- 49.0
Series E preferred
stock.................. -- -- -- 225.0 (26) 225.0
Common stock............ 201.0 361.1 -- -- (361.1)(13) -- 201.0
Additional paid-in
capital................ 332.6 4.4 -- -- (4.4)(13) -- 332.6
Retained earnings
(Accumulated deficit),
currency translation
and other.............. (191.5) 101.0 140.0 (256.8)(28) 111.3 (14) (140.6)(27) (236.6)
Unearned ESOP
compensation........... (21.8) -- -- -- -- -- (21.8)
-------- -------- ------ -------- -------- ------ --------
Total equity........ 369.3 466.5 140.0 (256.8) (254.2) 84.4 549.2
-------- -------- ------ -------- -------- ------ --------
$1,802.1 $3,120.1 $270.1 $ (386.6) $1,502.7 $577.2 $6,885.6
======== ======== ====== ======== ======== ====== ========
</TABLE>
See accompanying notes to Unaudited Pro Forma Balance Sheet.
S-24
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA BALANCE SHEET
(DOLLARS IN MILLIONS UNLESS OTHERWISE NOTED)
RELATING TO THE PURCHASE OF T&N:
(1) To reflect the net effect of the following adjustments:
<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
(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>
S-25
<PAGE>
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
(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-26
<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 Federal-Mogul Audited Financial
Statements. Such consolidated financial statements have been audited by Ernst
& Young LLP, independent certified public accountants. The unaudited financial
information for the three-month periods ended March 31, 1998 and 1997 have
been derived from the Federal-Mogul Unaudited Financial Statements. The
Federal-Mogul Unaudited Financial Statements are unaudited, but in the opinion
of management, reflect all adjustments necessary for a fair presentation of
such information. The selected consolidated financial information provided
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Federal-Mogul" and the
consolidated financial statements of Federal-Mogul and the notes thereto
included elsewhere in this Prospectus Supplement.
<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> <C> <C> <C> <C>
CONSOLIDATED STATEMENT
OF OPERATIONS DATA:
Net sales............... $1,806.6 $2,032.7 $1,999.8 $ 658.0 $ 485.6
Costs of products sold.. 1,381.8 1,660.5 1,602.2 496.7 373.5
-------- -------- -------- --------- --------
Gross margin............ 424.8 372.2 397.6 161.3 112.1
Selling, general and
administrative
expenses............... (286.2) (333.8) (299.3) (108.2) (78.4)
Purchased in-process
research and
development charge..... -- -- -- (18.6) --
Gain on sales of
businesses............. -- -- 24.0 -- --
Restructuring (charges)
credits................ 1.1 (57.6) (26.9) (10.5) --
Reengineering and other
related (charges)
credits................ 1.6 (11.4) (13.9) -- --
Adjustment of assets
held for sale to fair
value and
other long lived
assets................. (2.4) (151.3) (51.8) (20.0) --
Interest expense........ (32.0) (42.6) (37.3) (15.5) (9.8)
Interest income......... 7.1 2.9 9.6 6.7 0.7
International currency
exchange losses........ (0.6) (3.7) (2.9) (1.1) (0.1)
British pound currency
option and foreign
contract, net.......... (10.5) -- -- 13.3 --
Other expense, net...... (3.4) (3.4) (2.4) (5.8) (2.0)
-------- -------- -------- --------- --------
Earnings (Loss)
before income taxes
and extraordinary
item................ 99.5 (228.7) (3.3) 1.6 22.5
Income tax expense
(benefit).............. 27.5 (22.4) 2.5 8.8 8.6
-------- -------- -------- --------- --------
Net Earnings (Loss)
before extraordinary
item................ 72.0 (206.3) (5.8) (7.2) 13.9
======== ======== ======== ========= ========
Extraordinary item--loss
on early retirement of
debt, net of applicable
income tax benefit..... (2.6) -- -- -- --
-------- -------- -------- --------- --------
Net Earnings (Loss).. 69.4 (206.3) (5.8) (7.2) 13.9
Preferred dividends..... 5.5 8.7 8.9 0.8 2.1
-------- -------- -------- --------- --------
Net Earnings (Loss)
Available to Common
Shareholders........ $ 63.9 $ (215.0) $ (14.7) $ (8.0) $ 11.8
======== ======== ======== ========= ========
Dividends declared per
share.................. $ 0.48 $ 0.48 $ 0.48 $ 0.12 $ 0.12
======== ======== ======== ========= ========
COMMON SHARE SUMMARY
(DILUTED):
Income (loss) before
extraordinary item..... $ 1.67 $ (6.20) $ (.42) $ (.20) $ .32
Extraordinary item...... (0.6) -- -- -- --
-------- -------- -------- --------- --------
Net Earnings (Loss)
Per Common Share.... $ 1.61 $ (6.20) $ (.42) $ (.20) $ .32
======== ======== ======== ========= ========
CONSOLIDATED BALANCE
SHEET DATA:
Total assets............ $1,802.1 $1,455.2 $1,701.1 $ 7,398.7 $1,419.7
Short-term debt (2)..... 28.6 280.1 111.9 837.8 258.7
Long-term debt.......... 273.1 209.6 481.5 2,273.7 206.9
Shareholders' equity.... 369.3 318.5 550.3 586.0 310.2
OTHER FINANCIAL
INFORMATION:
Cash provided from (used
by) operating
activities............. $ 215.7 $ 149.0 $ (34.7) $ 82.7 $ 28.1
Cash provided from (used
by) investing
activities............. (5.5) (12.5) (109.4) (2,586.5) 2.0
Cash provided from (used
by) financing
activities............. 298.1 (122.8) 138.5 2,063.9 (30.2)
EBITDA(3)............... 194.5 97.9 163.6 82.7 46.3
Expenditures for
property, plant,
equipment and other
long term assets....... 49.7 54.2 78.5 19.5 8.4
Depreciation and
amortization expense... 52.8 63.7 61.0 29.8 14.0
</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.
(3) "EBITDA" represents the sum of income before interest expense and income
taxes, plus depreciation and amortization as well as nonrecurring charges
including gains on the sale of businesses, restructuring and reengineering
charges, adjustments of assets held for sale to fair value and other long
lived assets, the net effect of British pound currency options and forward
contract, and purchased in-process research and development charge. EBITDA
should not be construed as a substitute for income from operations, net
income or cash flow from operating activities, for the purpose of
analyzing Federal-Mogul's operating performance, financial position and
cash flows. EBITDA measures are calculated differently by other companies.
As such, the EBITDA measures presented may not be comparable to other
similarly titled measures of other companies. The Company has presented
EBITDA because it is commonly used by investors to analyze and compare
companies on the basis of operating performance and to determine a
company's ability to service debt.
S-27
<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 T&N Financial Statements. The T&N Financial Statements have
been audited by KPMG Audit Plc, independent certified public accountants, and
are stated in accordance with U.K. GAAP. The selected consolidated financial
information provided below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations--T&N"
and the T&N Financial Statements included elsewhere in this Prospectus
Supplement.
<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
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996
T&N PRO FORMA IN U.S. GAAP(2)(3) --------------- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................. $ 2,948.4 $ 3,055.4
Costs and expenses........................ (2,698.7) (4,058.6)(1)
Income tax (expense) benefit.............. (159.3) 278.5
--------------- ---------------
Net earnings (loss)....................... $ 90.4 $ (724.7)
=============== ===============
CONSOLIDATED BALANCE SHEET DATA:
Total assets.............................. $ 3,120.1 $ 3,299.5
Short-term debt........................... 125.4 68.1
Long-term debt............................ 469.5 445.2
Shareholders' equity...................... 466.5 456.1
OTHER FINANCIAL INFORMATION:
Cash flow provided from (used by)
operating activities..................... $ 268.8 $ 115.6
Cash flow provided from (used by)
investing activities..................... (116.7) (211.8)
Cash flow provided from (used by)
financing activities..................... (125.0) 80.1
EBITDA(4)................................. 435.0 399.1
Expenditures for property, plant,
equipment and other long term assets..... 170.9 179.2
Depreciation and amortization expense..... 167.6 161.9
</TABLE>
S-28
<PAGE>
- --------
(1) Includes charge for asbestos related costs of (Pounds)515 million under
U.K. GAAP and $1.244 billion under U.S. GAAP.
(2) The T&N historical financial statements were prepared in accordance with
U.K. GAAP, which differs in certain significant respects from U.S. GAAP
(see Note 29 to the T&N Financial Statements). The following table
reconciles the T&N profit/loss attributable to shareholders as reported
under U.K. GAAP to net earnings/loss as stated under U.S. GAAP:
<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................... $ 201.4 $ (628.4)
U.S. GAAP adjustments (in U.S. dollars):
Amortization of goodwill................... (11.2) (5.3)
Amortization--of patents................... (2.6) (2.5)
Deferred taxation--full provision.......... (67.1) 158.7
Tax effect of other U.S. GAAP reconciling
items..................................... 3.0 121.8
Pension costs.............................. (11.5) (23.7)
Asbestos provision discount................ (0.8) (355.9)
Depreciation on fixed asset revaluations... 9.5 9.7
Carrying value of investments.............. (31.6) --
Other...................................... 2.1 2.0
Minority interests......................... (0.8) (1.1)
------------- --------------
Net earnings (loss)......................... $ 90.4 $ (724.7)
============= ==============
</TABLE>
(3) Operating results and balance sheet data for 1997 have been translated at
a rate of 1.6453 U.S. dollars to 1 pound sterling, and 1.6451 U.S. dollars
to 1 pound sterling, respectively. Operating results and balance sheet
data for 1996 have been translated at a rate of 1.5680 U.S. dollars to 1
pound sterling and 1.1710 U.S. dollars to 1 pound sterling, respectively.
(4) "EBITDA" represents the sum of income before interest expense and income
taxes, plus depreciation and amortization as well as nonrecurring charges
including gains on the sale of businesses, the cost and gains associated
with options over shares of Kolbenschmidt AG, asbestos related costs and
bid costs. EBITDA should not be construed as a substitute for income from
operations, net income or cash flow operating activities, for the purpose
of analyzing T&N's operating performance, financial position and cash
flows. EBITDA measures are calculated differently by other companies. As
such, the EBITDA measures presented may not be comparable to other
similarly titled measures of other companies. The Company has presented
EBITDA because it is commonly used by investors to analyze and compare
companies on the basis of operating performance and to determine a
company's ability to service debt.
S-29
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA--FEL-PRO
The following selected historical consolidated financial information of Fel-
Pro with respect to the years ended December 28, 1997 and December 29, 1996 is
derived from the Fel-Pro Financial Statements. The Fel-Pro Financial
Statements have been audited by Ernst & Young LLP, independent certified
public accountants. The selected consolidated financial information provided
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Fel-Pro" and the Fel-Pro
Financial Statements included elsewhere in this Prospectus Supplement.
<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:
EBITDA(1)............................................ $ 58.4 $ 50.5
Expenditures for property, plant, equipment and other
long term assets.................................... 18.3 14.1
Depreciation and amortization expense................ 11.5 11.3
</TABLE>
- --------
(1) "EBITDA" represents the sum of income before income taxes, plus
depreciation and amortization. EBITDA should not be construed as a
substitute for income from operations, net income or cash flow from
operating activities, for the purpose of analyzing Fel-Pro's operating
performance, financial position and cash flows. EBITDA measures are
calculated differently by other companies. As such, the EBITDA measures
presented may not be comparable to other similarly titled measures of
other companies. The Company has presented EBITDA because it is commonly
used by investors to analyze and compare companies on the basis of
operating performance and to determine a company's ability to service
debt.
S-30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Federal-Mogul is a leading global manufacturer and distributor of a broad
range of vehicular components for automobiles and light trucks, heavy duty
trucks, farm and construction vehicles and industrial products. The Company's
principal customers include many of the world's major original equipment
manufacturers of such vehicles and industrial products. The Company also
manufactures and supplies its products and related parts to the aftermarket.
The Company, which had traditionally focused on the manufacture and
distribution of engine bearings and sealing systems, in 1990 began to add
retail auto stores in various domestic and international locations. These
geographically-dispersed stores proved burdensome to manage and resulted in
substantial operating losses. In the fourth quarter of 1996, Federal-Mogul
underwent a change of management, following which the Company initiated a
significant restructuring program designed to refocus the Company on its core
competency of manufacturing. As part of such restructuring, Federal-Mogul took
the following actions: (i) closed international aftermarket distribution
centers in Malaysia and Singapore; (ii) divested 72 international retail
aftermarket operations and sold or restructured 25 wholesale aftermarket
operations; (iii) closed its Leiters Ford, Indiana manufacturing facility and
consolidated its lighting products operations in Juarez, Mexico; (iv)
consolidated certain of its North American warehouse facilities; (v)
consolidated its customer support functions previously housed in Phoenix,
Arizona into the Company's Southfield headquarters; (vi) consolidated its
European aftermarket management functions in Geneva, Switzerland into the
Wiesbaden, Germany manufacturing headquarters; and (vii) streamlined certain
of its administrative and operational staff functions worldwide. In addition,
by the end of the first quarter of 1998, the Company expects to have
successfully exited all of its retail businesses, except for Puerto Rico where
the Company continues to seek a buyer.
In connection with the restructuring, Federal-Mogul also began to pursue a
growth strategy of acquiring complementary manufacturing companies that
enhance Federal-Mogul's product base, expand its global manufacturing
operations and provide opportunities to capitalize on Federal-Mogul's
aftermarket distribution network and technological resources.
On March 6, 1998, Federal-Mogul completed its cash offer to acquire all
outstanding common stock of T&N for 260 pence per share. On February 24, 1998,
Federal-Mogul acquired all the equity interests of Fel-Pro. See "T&N and Fel-
Pro Acquisitions."
The Company also acquired Bimet S.A. ("Bimet") during the first quarter of
1998 and increased its ownership in Federal-Mogul/Bruss Sealing Systems
("Summerton") and KFM Bearing Co., Ltd. ("KFM"), as well as divesting its
minority interest in G. Bruss GmbH & Co. KG ("Bruss"). See notes 2 and 7 to
the "Federal-Mogul Unaudited Interim Financial Statements."
The consolidated statement of operations for the three months ended March
31, 1998 includes the operating results of T&N and Fel-Pro from their
respective acquisition dates. Operating results for the T&N Bearings Business
and Fel-Pro chemical business (which includes amortization expense for
goodwill allocated to the businesses and interest expense relating to the
holding costs of the businesses) have been excluded from the condensed
consolidated statement of operations for the three months ended March 31,
1998.
S-31
<PAGE>
FEDERAL-MOGUL
THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH
THREE MONTHS ENDED MARCH 31, 1997
THE FOLLOWING IS BASED ON TEXT INCLUDED IN FEDERAL-MOGUL'S QUARTERLY REPORT ON
FORM 10-Q FILED IN RESPECT OF THE THREE-MONTH PERIOD ENDED MARCH 31, 1998 AND
SPEAKS AS OF THAT DATE.
RESULTS OF OPERATIONS
Following the acquisitions of T&N and Fel-Pro, Federal-Mogul's integrated
operations are being reorganized to realize synergies and effectively
coordinate operations. Operations will be conducted through three
manufacturing operating units corresponding to major product areas: Powertrain
Systems, Sealing Systems and General Products. The major product categories in
Powertrain Systems include engine bearings and piston products. Sealing
Systems includes dynamic seals and gaskets. General Products include
camshafts, friction products, sintered products, systems protection products
and a number of smaller product lines. The Worldwide Aftermarket organization
is responsible for the Company's global aftermarket sales, marketing and
distribution.
Net Sales
Sales for the first quarter of 1998 were $658.0 million compared to $485.6
million in the same 1997 quarter. The 35.5% increase in net sales is primarily
attributable to the acquisitions of T&N and Fel-Pro, the results of which were
included from their respective dates of acquisition. Excluding the impact of
T&N and Fel-Pro acquisitions and the impact of previously divested retail
aftermarket businesses, net sales decreased 2.3%.
Powertrain Systems sales were $279.0 million for the first quarter of 1998
compared to $209.2 million for the same 1997 quarter. Approximately $84
million of the 33.4% increase related to sales of T&N. Excluding the
acquisition of T&N and powertrain products previously sold through the
divested retail aftermarket businesses, sales were relatively flat compared to
1997.
Sealing Systems sales were $163.3 million in the first quarter of 1998
compared to $83.8 million in the first quarter of 1997. Approximately $20
million of the 94.9% increase related to sales of T&N and approximately $52
million related to sales of Fel-Pro. Excluding the acquisitions of T&N and
Fel-Pro and sealing products previously sold through the divested retail
aftermarket businesses, sales increased 9.7% due to strong heavy duty and
industrial sales.
General Products sales were $215.7 million in the first quarter of 1998
compared to $192.6 million in 1997. Approximately $69 million of the 12.0%
increase related to sales of T&N. Excluding the acquisitions of T&N and
general products previously sold through the divested retail aftermarket
businesses, sales decreased 10.2% primarily due to continuing softness in the
North American aftermarket business.
Cost of Products Sold
Cost of products sold as a percent of net sales decreased to 75.5% for the
first quarter of 1998 from 76.9% for the same 1997 quarter. Excluding the
effect of a $10.9 million charge in the first quarter of 1998 associated with
the purchase accounting write-up of acquired inventory to fair value and the
subsequent sale of this inventory at the higher cost, as well as a $3.5
million write-down of inventory associated with the Puerto Rico retail
aftermarket to be divested, cost of products sold as a percent of sales
decreased to 73.3%. Management attributes this decrease to productivity
improvements, cost controls, streamlined operations, the divestiture of
underperforming assets and the acquisitions previously discussed.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses as a percent of net
sales increased to 14.9% for the first quarter of 1998 compared to 15.6% for
the first quarter of 1997. The decrease is primarily attributable to the
benefits of prior restructuring actions and the divestiture of retail
aftermarket businesses, slightly offset by a $1.1 million charge related to
Year 2000 costs.
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<PAGE>
Amortization Expense
Amortization expense in the first quarter of 1998 was $10.1 million compared
to $2.5 million for the first quarter of 1997. The increase in amortization
expense was attributable to the expense related to the increase in goodwill
and other intangible assets associated with the T&N and Fel-Pro acquisitions.
Purchased In-Process Research and Development Charge
The Company recognized an $18.6 million charge in the first quarter of 1998
associated with the estimated fair value of in-process research and
development costs allocated in purchase accounting to a portion of the total
consideration paid.
Restructuring Charges
During the first quarter of 1998, the Company recognized a $10.5 million
restructuring charge related to operations in place prior to the acquisitions
of T&N and Fel-Pro. The restructuring charge included $10.2 million and $0.3
million for severance and exit costs, respectively. Employee severance costs
result from planned terminations in various business operations of the
Company. The severance costs were based on the estimated levels that will be
paid to the affected employees pursuant to the Company's workforce reduction
policies and certain foreign governmental regulations. The Company anticipates
that the actions related to the first quarter 1998 restructuring plan will be
completed primarily within one year.
Rationalization of Acquired Businesses
In connection with the previously discussed acquisitions, the Company
recognized approximately $151 million in reserves related to the
rationalization and integration of acquired businesses. The rationalization
reserves provide for approximately $125 million and $26 million in severance
and exit costs, respectively.
The components of the integration plan include: closure of four
manufacturing facilities worldwide; relocation of highly manual manufacturing
product lines to lower cost regions or more suitable locations; consolidation
of overlapping manufacturing, technical and sales facilities and joint
ventures; closure of two aftermarket central warehouses and five in-country
warehouses; consolidation of aftermarket marketing and customer support
functions; and streamlining of administrative, sales, marketing and product
engineering staffs worldwide. An anticipated result of the integration plan
and the restructuring will be a reduction of approximately 4,200 full-time
employees.
In addition to the $10.5 restructuring charge and the $151 million
rationalization reserve, the Company expects to incur additional expenses of
approximately $43 million necessary to complete the integration of the
acquired companies. The anticipated annual synergy associated with the
restructuring, rationalization and integration is expected to be moderately in
excess of these costs in the year 2000.
Adjustment of Assets Held for Sale to Fair Value
In addition to the T&N Bearings Business and chemical businesses held for
sale, during the first quarter of 1998 the Company decided to sell its
subsidiary, Bertolotti Pietro e Figli, S.r.l. ("Bertolotti"), conducting
aftermarket operations in Italy. The carrying value of Bertolotti's assets
have been reduced to its fair value based on estimates of selling values less
costs to sell, calculated using multiples of earnings similar to recent
automotive industry transactions in Italy. The Company recognized a $20.0
million first quarter charge primarily associated with the write-down of
Bertolotti's assets to the estimated fair value. The Company expects to
complete the sale of Bertolotti within one year.
As part of its 1996 restructuring plan, the Company continued to close or
sell certain retail aftermarket operations during the first quarter of 1998.
As of March 31, 1998, retail aftermarket operations that continue to be held
for sale include those in Puerto Rico. Net cash proceeds received for those
retail aftermarket locations sold in the first quarter approximated $2
million. No gain or loss was recognized on the dispositions of those retail
aftermarket locations, as the related assets had been previously adjusted to
fair value.
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<PAGE>
Interest Expense
Interest expense in the first quarter of 1998 was $15.5 million compared to
$9.8 million for the first quarter of 1997. The increase in interest expense
is attributable to the interest expense related to the financing of the T&N
and Fel-Pro acquisitions slightly offset by reduced preacquisition debt levels
as compared to the first quarter of 1997.
Net Gain on British Pound Currency Option and Forward Contract
In the fourth quarter of 1997, in anticipation of the then pending T&N
acquisition, the Company purchased a British pound currency option for $28.1
million with a notional amount of $2.5 billion. In January 1998, the Company
settled the option and recognized a loss of $17.3 million.
Also in January 1998, in anticipation of the then pending T&N acquisition,
the Company entered into a forward contract to purchase (Pounds)1.5 billion
for a notional amount of approximately $2.45 billion. As a result of favorable
exchange fluctuations in the British pound/U.S. dollar exchange rate
experienced during the contract period, the Company recognized a $30.6 million
gain.
The Company entered into the above transactions to effectively serve as
economic hedges for the purchase of T&N. Such transactions, however, do not
qualify for "hedge accounting" under U.S. GAAP, and therefore the loss on the
British pound currency option and the gain on the British pound forward
contract are reflected in the statement of operations caption "Net gain on
British pound currency option and forward contract."
Income Tax Expense
During the first quarter of 1998, the Company recognized charges for
adjustment of assets held for sale to fair value and purchased research and
development and recognized a net gain on the British pound currency option and
forward contract. These transactions resulted in a pre-tax net charge of $25.3
million. The net income tax benefit related to these transactions totaled $2.1
million.
Pro Forma Results
The following unaudited pro forma financial information for the three months
ended March 31, 1998 and 1997 assume the T&N and Fel-Pro acquisitions occurred
as of the beginning of the respective periods, after giving effect to certain
adjustments, including the amortization of intangible assets, interest expense
on acquisition debt, divestitures of the T&N Bearings Business and Fel-Pro
chemical business and income tax effects. The pro forma results (in millions
of dollars, except per share data) have been prepared for comparative purposes
only and are not necessarily indicative of the results of operations which may
occur in the future or that would have occurred had the acquisitions of T&N
and Fel-Pro been consummated on the dates indicated, nor are they necessarily
indicative of the Company's future results of operations.
<TABLE>
<CAPTION>
UNAUDITED PRO
FORMA FINANCIAL
INFORMATION THREE
MONTHS ENDED
MARCH 31,
------------------
1998 1997
-------- --------
<S> <C> <C>
Net sales............................................ $1,193.6 $1,247.9
Net loss............................................. $ (16.5) $ (7.0)
Loss per share....................................... $ (0.44) $ (0.28)
Loss per share assuming dilution..................... $ (0.44) $ (0.28)
</TABLE>
The unaudited pro forma financial information for the three months ended
March 31, 1998 include charges for adjustment of assets held for sale to fair
value, restructuring, the effect of the previously described purchase
accounting write-up of acquired inventory to fair value and writedown of
inventory associated with the Puerto Rico retail aftermarket business to be
divested, and certain other charges. Also included in the 1998 unaudited
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<PAGE>
pro forma financial information were the recognized net gain on the British
pound currency option and forward contract and the gain on the Bruss
divestiture. The net after tax effect of these transactions was a charge of
approximately $19 million ($0.48 per diluted share).
The $18.6 million charge for purchased in-process research and development
has been excluded from the 1998 unaudited pro forma financial information.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Provided from Operating Activities
Cash flow provided from operating activities was $82.7 million for the first
quarter of 1998. Cash flow was generated primarily from a decrease in
inventories of $36.8 million and net earnings adjusted for the non-cash
charges of depreciation and amortization, purchased in-process research and
development, restructuring and adjustment of assets held for sale to fair
value. Partially offsetting these items was an increase in accounts receivable
of $57.1 million.
Cash Flow used by Investing Activities
Cash flow used by investing activities was $2,586.5 million and was
primarily related to the acquisitions of T&N, Fel-Pro, Bimet and the increase
in ownership of Summerton and KFM partially reduced by the sale of the
Company's interest in Bruss. Partially offsetting the acquisitions, the
Company received proceeds from the sale of options which were acquired with
the acquisition of T&N. In addition, capital expenditures of $19.5 million
were made for property, plant and equipment to implement process improvements,
information technology and new product introductions. Capital expenditures are
anticipated to be approximately $235 million in 1998, primarily for enhanced
manufacturing capabilities and process improvements.
Cash Flow Provided from Financing Activities
Cash flow provided from financing activities was $2,063.9 million for the
first quarter of 1998 primarily from the increase in debt related to the
acquisitions of T&N and Fel-Pro detailed below, partially offset by the
related debt issuance fees of $33.3 million.
In connection with the Company's effort to put into place a permanent
capital structure with an appropriate combination of debt and equity to
partially replace the Senior Credit Agreement and Senior Subordinated Credit
Agreement debt, the Company on April 17, 1998 filed a registration statement
with the Securities and Exchange Commission for the offering from time to time
of up to an aggregate $2.5 billion of debt or equity securities (including
shares of Common Stock registered for the account of the Selling
Shareholders).
In addition to the Offerings, the Company is also evaluating the possibility
of issuing debt securities pursuant to such registration statement, all or a
significant portion of the net proceeds of which the Company would use to
refinance certain additional indebtedness of the Company. There can be no
assurance that any such offering of equity or debt securities will be
consummated. The accelerated payment, if any, of certain portions of the
Senior Credit Agreement and Senior Subordinated Credit Agreement debt would
result in a significant extraordinary charge due to the write-off of the
issuance costs associated with the early retirement of debt. The total
unamortized issuance costs related to the Senior Credit Agreement and Senior
Subordinated Credit Agreement were approximately $56 million at March 31,
1998.
In connection with the Fel-Pro acquisition the Company paid approximately
$492 million cash which was provided through an existing revolving credit
facility and three short-term loans and issued 1,030,325.6 shares of Federal-
Mogul Series E Stock with an imputed value of $225 million. The shares of
Series E Stock are exchangeable into shares of Common Stock at a rate of five
shares of Common Stock per share of Series E Stock and pay dividends of $.12
per quarter per common stock equivalent. The Series E Stock are required to be
exchanged no later than February 24, 1999, subject to certain conditions.
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<PAGE>
The Company believes that cash flow from operations, together with
borrowings available under the Company's revolving credit facility, will
continue to be sufficient to meet its ongoing working capital requirements.
Foreign Currency and Commodity Contracts
The financial condition and results of operations of certain of the
Company's operating entities are reported in various foreign currencies
(principally pounds sterling, German marks, and to a lesser extent South
African rand and French francs, among others) and then translated into U.S.
dollars at the applicable exchange rate for inclusion in the Company's
financial statements. As a result, the appreciation of the dollar against
these foreign currencies will have a negative impact on the reported sales and
operating margin of T&N and other subsidiaries as consolidated into the
Company. Conversely, the depreciation of the dollar against these foreign
currencies will have a positive impact.
In addition, the Company incurs currency transaction risk whenever it or one
of its foreign subsidiaries enters into either a purchase or sales transaction
using a different currency than the relevant entity's functional currency.
Currency transaction risk is reduced by matching revenues and costs with the
same currency. Given the volatility of currency exchange rates, there can be
no assurance that the Company will be able to effectively manage its currency
transaction risks or that any volatility in currency exchange rates will not
have a material adverse effect on the Company's financial condition or results
of operations.
ASBESTOS LIABILITY AND LEGAL PROCEEDINGS
T&N Asbestos
As of March 31, 1998, the Company has provided $1.351 billion as its
estimate for future costs related to resolving asbestos claims. In the United
States, T&N plc and two of T&N plc's U.S. subsidiaries are among many
defendants named in numerous court actions alleging personal injury resulting
from exposure to asbestos or asbestos-containing products. T&N is also subject
to asbestos-disease litigation, to a lesser extent, in the United Kingdom and
to property damage litigation based upon asbestos in the United States.
Because of the slow onset of asbestos-related diseases, management anticipates
that similar claims will be made in the future. It is not known how many such
claims may be made nor the expenditure which may arise therefrom. T&N has
appointed the Center for Claims Resolution ("CCR") as its exclusive
representative in relation to all asbestos-related personal injury claims made
against the T&N Companies in the United States.
Prior to its acquisition, T&N secured a 500 million pounds sterling
(approximately $838 million at the March 31, 1998 exchange rate of 1 pound
sterling to 1.6758 U.S. dollars) layer of insurance which will be triggered
should the aggregate number of claims notified after June 30, 1996, where the
exposure occurred prior to that date, exceed 690 million pounds sterling
(approximately $1,156 million at the March 31, 1998 exchange rate). At March
31, 1998 the Company has recorded reserves for incurred but not reported
claims up to the insurance level, which is 690 million pounds sterling.
While management believes that estimated reserves, which have not been
reduced by any potential insurance proceeds, are appropriate for anticipated
losses arising from T&N's asbestos related claims, no assurance can be given
that T&N will not be subject to material additional liabilities and
significant additional litigation relating to asbestos. Any such liabilities
or litigation could have a material adverse effect on the Company's results of
operations, business, liquidity and financial condition.
Federal-Mogul and Fel-Pro Asbestos
Federal-Mogul Corporation also is one of a large number of defendants in a
number of lawsuits brought by claimants alleging injury due to exposure to
asbestos. In addition, Fel-Pro has been named as a defendant in approximately
18,000 product liability cases involving asbestos, primarily involving gasket
or packing products
S-36
<PAGE>
sold to ship owners. The Company is defending all such claims vigorously and
believes that it and Fel-Pro have substantial defenses to liability and
adequate insurance coverage for defense and indemnity costs (though Fel-Pro
has agreed with its insurers to pay 20% of defense costs, in exchange for the
right to a significant role in decisions regarding litigation). While the
outcome of litigation can't be predicted with certainty, management believes
that asbestos claims pending against Federal-Mogul Corporation and Fel-Pro as
of March 31, 1998 will not have a material effect on the Company's financial
position. No related reserves, or payments, have been provided, or paid to
date, related to asbestos claims pending against Federal-Mogul Corporation and
Fel-Pro.
Other
The Company is involved in various other legal actions and claims, directly
and through its subsidiaries (including T&N and Fel-Pro). After taking into
consideration legal counsel's evaluation of such actions, management is of the
opinion that its outcomes are not reasonably likely to have a material adverse
affect on the Company's financial position, operating results, or cash flows.
OTHER MATTERS
New Dividend Policy
Dividends on the Common Stock of the Company are payable at the discretion
of the Company's Board of Directors. Historically, quarterly dividends had
been 12 cents per share. The Board of Directors has recently reduced the
quarterly dividend and has declared a cash dividend payable in the second
quarter of 1998 in the amount of one-quarter cent per share of Common Stock.
The Company, consistent with its growth strategy, presently intends to retain
future earnings in the business and therefore anticipates paying dividends at
a comparable level in the foreseeable future.
Effect of Accounting Pronouncements
In 1997, the Financial Accounting Standards Board issued Statement No. 130
("SFAS No. 130") "Reporting Comprehensive Income." SFAS No. 130 establishes
standards for the reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. The Company
adopted Statement 130 as of January 1, 1998. The adoption of this statement
had no impact on Federal Mogul's net earnings (loss) or shareholders' equity.
SFAS No. 130 requires foreign currency translation adjustments and unrealized
gains or losses on investments and derivative instruments to be included in
other comprehensive income. Prior to the adoption of SFAS No. 130 these items
were reported as a component of shareholders' equity.
Total comprehensive income (loss), net of the related estimated tax, was
$(4.6) million and $5.3 million for the three months ended March 31, 1998 and
1997, respectively.
Subsequent Event
In April 1998, the Company retired $251 million in private placement debt
assumed in connection with the acquisition of T&N. The early retirement of the
debt required a make whole payment of approximately $27 million, which will be
recognized as an extraordinary loss in the second quarter of 1998 of
approximately $19 million, net of the related tax benefit.
S-37
<PAGE>
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996 AND
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
THE FOLLOWING IS BASED ON TEXT INCLUDED IN FEDERAL-MOGUL'S ANNUAL
REPORT ON FORM 10-K FILED IN RESPECT OF THE YEAR ENDED DECEMBER 31,
1997 AND SPEAKS AS OF THAT DATE.
RESULTS OF OPERATIONS
Net Sales
Consolidated net sales decreased 11.1% in 1997, primarily due to the
divestiture of certain international retail and wholesale operations, the sale
of the heavy wall bearings operations in Brazil and Germany, the sale of the
United States ball bearing business and continued softness in the North
American aftermarket business. These decreases were partially offset by
certain volume increases primarily in the original equipment business.
Original equipment and aftermarket sales were:
<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 operations in Turkey, Australia, South Africa and
Chile. Excluding the effects of exchange and 1997 divestitures, sales were
essentially flat. In 1996, sales increased as compared to 1995 due to the full
year impact of the acquisitions of Bertolotti in June 1995 and Centropiezas in
September 1995, and to a lesser extent, volume and pricing increases in
Mexico, increased sales volume in Australia and new local operations in
Brazil. These increases were partially offset by $21 million resulting from
the devaluation of the South African rand and a decrease in Venezuela due to a
recession.
S-38
<PAGE>
Original equipment sales as a percentage of total sales of the Company
increased to 34.4% in 1997 from 32.8% in 1996, with a corresponding decrease
in aftermarket sales. This shift in 1997 reflects the Company's pursuit and
implementation of its strategy to focus on manufacturing and distribution, as
demonstrated by the previously discussed 1997 divestitures and planned
acquisitions. Previously, as the Company was implementing its retail growth
strategy, original equipment sales as a percentage of total sales of the
Company decreased to 32.8% in 1996 from 34.4% in 1995, with a corresponding
increase in aftermarket sales.
Cost of Products Sold
Cost of products sold as a percent of net sales decreased to 76.5% in 1997
compared to 81.7% for 1996. The decrease is primarily due to the 1997
divestitures of less profitable operations and productivity improvements in
the North American aftermarket and the Americas original equipment business.
In addition, a portion of the 1997 decrease is attributable to 1996 third and
fourth quarter charges incurred of $8 million for customer incentive programs
and $13 million for excess and obsolete inventory. See "--Changes in
Accounting Estimates."
Cost of products sold as a percent of net sales increased to 81.7% in 1996
compared to 80.2% in 1995. The increase is primarily attributable to 1996
third and fourth quarter charges incurred of $8 million for customer incentive
programs and $13 million for excess and obsolete inventory. See "--Changes in
Accounting Estimates."
Selling, General and Administrative Expenses
SG&A expenses as a percent of net sales decreased to 15.8% for 1997 compared
to 16.4% for 1996. In contrast, SG&A expenses as a percent of net sales
increased to 16.4% for 1996 compared to 15.0% for 1995. The 1997 decrease and
1996 increase in SG&A as a percent of net sales is primarily attributable to
bad debt expense, customer incentive programs and environmental and legal
matters (see "--Changes in Accounting Estimates" of $3 million for bad debt
expense, $8 million for customer incentive programs and $9 million for
environmental and legal matters) incurred in the third and fourth quarters of
1996. In addition, the 1996 increase was partially due to higher SG&A costs in
the international aftermarket business.
Changes in Accounting Estimates
In 1996, the Company made certain changes in accounting estimates totaling
$51 million in the third and fourth quarters attributable to 1996 events and
new information becoming available. The changes in accounting estimates
included the following:
Customer Incentive Programs: The increase in the provision for customer
incentive programs of $18 million resulted from contractual changes
implemented primarily in the third and fourth quarters of 1996 with certain
customers, new sales programs, additional customer participation in these
programs and current experience with these programs.
Excess and Obsolete Inventory: Business volume growth remained below
expectations in 1996, principally in the third and fourth quarters, causing a
build up of certain inventories beyond anticipated demand. In addition, the
Company's strategic initiative to focus on its manufacturing business and
divest its retail and certain aftermarket businesses and the sale of the U.S.
ball bearings operations in the fourth quarter adversely affected the utility
of the North American aftermarket business inventory. As a result, the Company
recorded an additional $13 million provision for excess and obsolete
inventory.
Bad Debts: The increase in the bad debt provision of $3 million was
principally attributable to the deterioration of account balances of numerous
low volume customers and termination of business with certain North American
aftermarket customers during 1996.
Environmental and Legal Matters: The environmental and legal provision was
increased by $9 million due to the completion of environmental studies and
related analyses, new issues arising and changes in the status of other legal
matters.
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<PAGE>
Other: The remaining $8 million of changes in accounting estimates is
comprised of $1 million for changes in the workers' compensation reserve based
on worsening experience in outstanding claims in certain older policy years,
$3 million for interest capitalization, $2 million to adjust estimates of
inventoriable costs and $2 million for other items.
Sales of Businesses
During 1997, the Company received $73.6 million in net cash proceeds from
the sale of its aftermarket operations in South Africa, Australia and Chile,
and its heavy wall bearing operations in Germany and Brazil.
During 1996, the Company received $42.0 million in net cash proceeds from
the sale of its United States ball bearings and electrical products
manufacturing operations.
Except for the sale of the electrical products manufacturing operations,
sales of businesses in 1997 and 1996 relate to assets previously adjusted to
fair value. See "--Adjustment of Assets Held for Sale to Fair Value and Other
Long Lived Assets." Accordingly, no gain or loss was recognized on the date of
sale related to these transactions. In addition, no gain or loss was
recognized related to the sale of the electrical products manufacturing
operations.
During 1995, the Company sold its equity interest in Westwind Air Bearings,
Limited, recognizing a pretax gain of $16.2 million and its Precision Forged
Products Division for a pretax gain of $7.8 million.
Restructuring Charges
Primarily as a result of the amendments to the 1996 restructuring plan,
described previously in this section, the Company's 1997 operating results
were increased by $23.1 million for the reversal of previously recognized 1996
and 1995 restructuring charges. Offsetting this reversal is a $22.0 million
charge for new 1997 restructuring programs. The net impact on 1997 operations,
as a result of the restructuring activities, was a credit of $1.1 million. The
1997 charge includes $3.1 million for exiting certain European aftermarket
product lines and the related employment reductions, $6.8 million for
termination of certain European administrative and support personnel, $7.5
million for additional exit and severance costs related to the Puerto Rican
retail operations, $2.6 million for consolidation and reconfiguration of the
North American aftermarket service branch network and $2.0 million for other
actions. The Company anticipates that the actions related to the 1997
restructuring plan will be complete by the end of 1998, and that most of the
severance and exit costs will be paid in 1998.
In the fourth quarter of 1996, the Company recognized a restructuring charge
of $57.6 million for costs associated with employee severance, exit and
consolidation costs for 132 international retail operations and 30 wholesale
aftermarket operations, rationalization of European manufacturing operations,
consolidation of lighting products, consolidation or closure of certain North
American warehouse facilities, consolidation of customer support functions in
the United States and streamlining of administrative and operational staff
functions worldwide. The charge consists of $22.7 million for the sale of 132
international retail aftermarket and 30 wholesale aftermarket operations,
$14.7 million for corporate employee severance costs, $7.7 million for the
rationalization of European manufacturing operations, $5.3 million for
consolidation or closure of certain North American warehouse facilities, $2.8
million for consolidation of customer support functions in the United States,
$2.5 million for closure of the Leiters Ford facility and $1.9 million for
other miscellaneous actions, including the consolidation of the European
aftermarket management function into the European manufacturing headquarters.
The Company's 1997 progress and actual implementation of the 1996
restructuring plan resulted in 1997 operating results being increased by $20.8
million for severance and $1.4 million of exit and consolidation costs being
reversed. The Company expects to pay out most of the remaining 1996 severance
and exit costs in 1998.
Results of operations in the second and fourth quarters of 1995 include
restructuring charges of $6.1 million and $20.8 million, respectively. These
charges were comprised of $20.1 million for employee severance and $6.8
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<PAGE>
million for exit costs and consolidation of certain facilities. The workforce
reductions and consolidation of facilities were completed as of December 31,
1996. Operating results for 1997 were increased by $0.9 million relating to
1995 exit costs being reversed. The Company expects to pay out the remaining
1995 exit costs in 1998.
Reengineering and Other Related Charges
Operating results for 1997 include a credit of $1.6 million relating to 1996
reengineering and other related charges being reversed.
In 1996, the Company initiated an extensive effort to strategically review
its businesses and focus on its competencies manufacturing, engineering and
distribution. As a result of this process, the Company recognized a charge of
$11.4 million for professional fees and personnel costs related to the
strategic review of the Company and changes in management and related costs.
In 1995, the Company recognized a charge of $13.9 million for reengineering
and other costs. These costs included $7.0 million for professional fees and
personnel costs, and $6.9 million primarily for certain other non-recurring
costs relating to brand consolidation at the customer level of the Company's
Federal-Mogul(R), TRW(R) and Sealed Power(R) branded engine parts.
Adjustment of Assets Held for Sale to Fair Value and Other Long Lived Assets
The Company continually reviews all components of its businesses for
possible improvement of future profitability through acquisition, divestiture,
reengineering or restructuring. The Company also continually reviews and
updates its impairment reserves related to the divestiture of its remaining
international retail aftermarket operations and adjusts the reserve components
to approximate their net fair value.
In the fourth quarter of 1997, the Company recognized a charge of $2.4
million to write-down certain long lived assets to fair value. As of December
31, 1997, assets held for sale primarily include retail aftermarket operations
in Puerto Rico, Ecuador, Venezuela and Panama. By the end of the first quarter
of 1998, the Company expects to have successfully exited all of its retail
aftermarket businesses, except for Puerto Rico where the Company continues to
seek a buyer.
During 1996, management designed a restructuring plan to aggressively
improve the Company's cost structure, streamline operations and divest the
Company of underperforming assets. As part of this plan, the Company decided
to sell 132 international retail aftermarket operations, sell or restructure
30 wholesale aftermarket operations and consolidate a North American
manufacturing operation. The carrying value of assets held for sale was
reduced to fair value based on estimates of selling values less costs to sell.
Selling values used to determine the fair value of assets held for sale were
determined using market prices (i.e., valuation multiples) of comparable
companies from other 1996 transactions. The resulting adjustment of $148.5
million to reduce assets held for sale to fair value was recorded in the
fourth quarter of 1996. As previously described in this section, the Company
made significant progress related to the implementation of the 1996
restructuring plan. Also in 1996, based upon the final sale, the Company
recognized an additional writedown of $2.8 million to the net asset value of
the United States ball bearings operations. In 1995, the Company decided to
sell the ball bearings operations and reduced the carrying value by $17.0
million to record assets held for sale at fair value.
In 1995, the Company also decided to sell its heavy wall bearing operations
in Germany and Brazil. The Company estimated the fair value of the businesses
held for sale based on discussions with prospective buyers, adjusted for
selling costs. The Company reduced its carrying value by $17 million to record
assets held for sale at fair value. The heavy wall bearing operations were
sold in January 1997 for net proceeds of $8.9 million, which approximated the
carrying value of the assets at December 31, 1996.
In addition, in 1995, the Company reduced the carrying value of certain
other impaired long-lived assets by $17.8 million to record them at fair
value. No further fair value adjustments were recorded for these assets in
1996 or 1997.
S-41
<PAGE>
Net sales for all assets held for sale and adjusted to fair value
approximated $114 million, $335 million, and $322 million in 1997, 1996 and
1995, respectively. Net sales for the remaining retail aftermarket operations
held for sale at December 31, 1997 approximated $44 million, $48 million and
$22 million in 1997, 1996 and 1995, respectively.
Interest Expense
Interest expense decreased $10.6 million in 1997 to $32.0 million. The
decrease was primarily due to a $188 million reduction of debt which resulted
from improvements in working capital and the sale of the South African and
Australian businesses. Although the Company decreased its debt by $104 million
from 1995 to 1996, interest expense increased $5.3 million in 1996 primarily
due to a higher average debt level than in 1995. Excluding the U.S. and
European revolving credit facilities, which were classified as short-term debt
during 1996 and as long-term debt during 1995, the weighted average interest
rate for short-term debt increased to 10.9% for 1996 from 9.5% for 1995. The
interest rate on the U.S. and European revolving credit facilities at December
31, 1996 and 1995 was 6.1% and 6.2%, respectively.
Income Taxes
At December 31, 1997, the Company had deferred tax assets, net of a $44.4
million valuation allowance, of $140.5 million and deferred tax liabilities of
$75.9 million.
The net deferred tax asset of $64.6 million included the tax benefits of
$58.2 million related to the Company's postretirement benefit obligation at
December 31, 1997. The Company expects to realize the benefits associated with
this obligation over a period of 35 to 40 years.
The difference between the 1997 effective income tax rate and the statutory
tax rate is principally due to utilization of losses on foreign investment and
an income tax benefit related to the sales of the South African and Australian
businesses (refer also to Note 16 of the Consolidated Financial Statements).
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations of $215.7 million in 1997 increased significantly
during 1997 primarily due to increased earnings. The Company also reduced
inventory from operations by $59.9 million in 1997. Inventory reductions in
the North American aftermarket business were primarily responsible for the
decrease. The decrease in North America aftermarket inventory is attributable
to reduced lead times while still maintaining availability of products and
modifying safety stock levels.
Cash flow used by investing activities of $5.5 million in 1997 include $28.1
million for the British pound currency option, described later in this
section, and $2.4 million for other professional fees paid in anticipation of
the T&N acquisition. In addition, cash flows used by investing activities
include the receipt of $73.6 million in net proceeds from the 1997
divestitures.
Cash flow from 1997 financing activities were $298.1 million, an increase of
$420.9 million from 1996. The following events were primarily responsible for
the net increase for 1997:
Issuance of Preferred Securities of Affiliate: In December 1997, the
Company's financing trust completed a $575 million private issuance of
11,500,000 shares of 7% Trust Convertible Preferred Securities. The
convertible preferred securities are redeemable at the Company's option, in
whole or in part, on or after December 6, 2000. All outstanding convertible
securities are required to be redeemed no later than December 1, 2027.
Issuance of Senior Notes: In April 1997, the Company issued a fully
subscribed $125 million debt offering of ten year 8.8% senior notes. Proceeds
from the offering were used to reduce the Company's short-term debt and the
early extinguishment of the private placement debt.
S-42
<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 T&N
acquisition. The facility provides for up to $2.75 billion of senior debt and
up to $500 million of subordinated debt. Because this facility was contingent
upon the acquisition of T&N, no amounts were outstanding as of December 31,
1997. Certain fees relating to this facility have been incurred and paid as of
December 31, 1997.
The Company believes that cash flow from operations will continue to be
sufficient to meet its ongoing working capital requirements.
ENVIRONMENTAL MATTERS
The Company is a party to lawsuits filed in various jurisdictions alleging
claims pursuant to the Comprehensive Environmental Response Compensation and
Liability Act of 1980 ("CERCLA") or other state or federal environmental laws.
In addition, the Company has been notified by the Environmental Protection
Agency and various state agencies that it may be a potentially responsible
party ("PRP") for the cost of cleaning up certain other hazardous waste
storage or disposal facilities pursuant to CERCLA and other federal and state
environmental laws. PRP designation requires the funding of site
investigations and subsequent remedial activities. Although these laws could
impose joint and several liability upon each party at any site, the potential
exposure is expected to be limited because at all sites other companies,
generally including many large, solvent public companies, have been named as
PRPs. In addition, the Company has identified certain present and former
properties at which it may be responsible for cleaning up environmental
contamination.
The Company is actively seeking to resolve these matters. Although difficult
to quantify based on the complexity of the issues, the Company has accrued the
estimated cost associated with such matters based upon current available
information from site investigations and consultants. The environmental and
legal reserve was approximately $11 million at December 31, 1997 and $12
million at December 31, 1996. Management believes that such accruals will be
adequate to cover the Company's estimated liability for its exposure in
respect of such matters.
FOREIGN CURRENCY AND COMMODITY CONTRACTS
In connection with the T&N acquisition, the Company purchased for $28.1
million a foreign currency option with a notional amount of $2.5 billion to
cap the effect of potential unfavorable fluctuations in the British pound/U.S.
dollar exchange rate. The cost of the option and its change in fair value has
been reflected in the results of operations in the fourth quarter of 1997. At
December 31, 1997 the Company has recognized a net loss on this transaction of
$10.5 million.
S-43
<PAGE>
The Company is subject to exposure to market risks from changes in foreign
exchange rates and raw material price fluctuations, derivative financial
instruments are utilized by the Company to reduce those risks. Except for the
British pound currency option discussed above, the Company does not hold or
issue derivative financial instruments for trading purposes.
Other than the British pound currency option discussed above, the Company
does not have foreign exchange forward or currency option contracts
outstanding at December 31, 1997.
In the first quarter of 1998, the Company settled the British pound currency
option, resulting in a pretax loss of $17.3 million. Also in the first quarter
of 1998, the Company entered into a forward contract to purchase 1.5 billion
British pounds for a notional amount approximating $2.45 billion. The forward
contract expires in the first quarter of 1998.
OTHER MATTERS
Conversion of Series D Convertible Exchangeable Preferred Stock
In August 1997, the Company announced a call for the redemption of all its
outstanding $3.875 Series D Convertible Exchangeable Preferred Stock. These
preferred shareholders elected to convert each preferred share into 2.778
shares of Common Stock. The Company issued 4.4 million shares of Common Stock
in exchange for all of the outstanding Series D convertible exchangeable
preferred stock.
Year 2000 Costs
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. The Company has
established a team that has completed an awareness program and assessment
project to address the Year 2000 issue. In addition, the Board of Directors
has received status reports related to the Company's progress in addressing
the Year 2000 issue. The Company has determined that it will be required to
modify or replace portions of its software so that its computer systems will
properly utilize dates beyond December 31, 1999. The Company has initiated
remediation, and is implementing the action plan to address the Year 2000
issue. The Company presently believes that with modifications to existing
software and conversions to new software, the Year 2000 issue can be
mitigated. However, if such modifications and conversions are not made, or are
not completed timely, the Year 2000 issue could have a material impact on the
operations of the Company.
The Company has initiated formal communications with a substantial majority
of its significant suppliers and large customers to determine their plans to
address the Year 2000 issue. While the Company expects a successful resolution
of all issues, there can be no guarantee that the systems of other companies
on which the Company's systems rely will be converted in a timely manner, or
that a failure to convert by a supplier or customer, or a conversion that is
incompatible with the Company's systems, would not have a material adverse
effect on the Company. The Company has determined it has no exposure to
contingencies related to the Year 2000 issue for the products it has sold.
The Company has contracts in place with external resources and has allocated
internal resources to reprogram or replace, and test the software for Year
2000 modifications. The Company plans to complete the Year 2000 project within
one year. The total cost of the Year 2000 project is estimated to be $17
million and is being funded through operating cash flows. Of the total project
cost, approximately $11 million is attributable to the purchase of new
software which will be capitalized. The remaining $6 million represents
maintenance and repair of existing systems and will be expensed as incurred.
The Company expects a substantial majority of the costs will be incurred in
1998, and any remaining costs incurred in 1999 are expected to be immaterial.
As of December 31, 1997, the Company had incurred and expensed approximately
$0.7 million related to the completed awareness program and assessment project
and the implementation of their remediation plan.
The costs of the project and the date which the Company plans to complete
the Year 2000 modifications are based on management's best estimates, which
were derived utilizing numerous assumptions of future events
S-44
<PAGE>
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially
from those plans. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel
trained in this area, the ability to locate and correct all relevant computer
codes and similar uncertainties.
As a result of the Company's due diligence related to the T&N acquisition
and the Fel-Pro acquisition, the Company expects costs to address the Year
2000 issue for Fel-Pro to be immaterial, and T&N costs for repair and
maintenance of existing systems are expected to approximate $8 million.
Divestiture of Minority Interest
In February 1998, the Company announced the divestiture of its minority
interest in G. Bruss GmBH & Co. KG, a German manufacturer of seals and
gaskets. As part of the divestiture agreement, the Company increased their
ownership to 100% in the Summerton, South Carolina gasket business. The
Company also received cash and recognized a gain as a result of these
transactions. The gain recognized is not expected to be significant to 1998
first quarter operating results.
Customer Reorganization
On February 2, 1998, APS Holding Corporation ("APS"), filed for
reorganization protection under Chapter 11 of the United States Bankruptcy
Code. As of the date of the Chapter 11 filing, the Company's total receivables
with APS approximated $10 million. APS has received a capital line of credit
from a reputable financial institution and is continuing business operations.
The Company continues to do business with APS on a cash in advance basis.
Although difficult to quantify based upon the uncertainty of the financial
condition of APS, the Company believes that net uncollectible receivables, if
any, from APS will be immaterial.
In addition, APS is a customer of Fel-Pro. The Company believes that the
allowance established by Fel-Pro prior to the acquisition of Fel-Pro related
to receivables from APS is adequate to cover any uncollectible amounts.
Effect of Accounting Pronouncements
In 1997, the Financial Accounting Standards Board issued Statement No. 130,
Reporting Comprehensive Income. This Statement establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. Statement 130 is effective for fiscal
years beginning after December 15, 1997. Beginning in 1998, the Company will
provide the information relating to comprehensive income to conform to the
Statement 130 requirements.
Also in 1997, the Financial Accounting Standards Board issued Statement No.
131, Disclosures about Segments of an Enterprise and Related Information. The
statement supersedes Financial Accounting Standards Board Statement No. 14 and
establishes standards for the way public business enterprises report selected
information about operating segments in annual reports and interim financial
reports issued to shareholders. Statement 131 is effective for fiscal years
beginning after December 15, 1997. For the year ended 1998, the Company will
provide financial and descriptive information about its reportable operating
segments to conform to the Statement 131 requirements. Management plans to
report the requirements of Statement 131 for the following operating segments:
Sealing Systems, Powertrain Systems and General Products.
S-45
<PAGE>
T&N
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
AND YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
On March 6, 1998, Federal-Mogul completed its cash offer to acquire all
outstanding common stock of T&N for 260 pence per share. Total consideration
paid was (Pounds)1.4636 billion ($2.4164 billion, converted at a blended
exchange rate of 1 pound sterling to 1.6510 U.S. dollars). In connection with
securing regulatory approvals for the acquisition of T&N, Federal Mogul agreed
subsequently to divest certain assets, consisting principally of T&N's
thinwall and dry bearings (polymer bearings) operations. See "Business--
Reorganization." These assets are a subset of the operations T&N included in
its bearings product group and the discussion below of such product group does
not, therefore, directly correspond to the assets to be divested (which are
referred to elsewhere in this Prospectus Supplement as the "T&N Bearings
Business").
The following discussion is based upon the T&N Financial Statements included
elsewhere in this Prospectus Supplement, which have been prepared in
conformance with U.K. GAAP. U.K. GAAP differ in certain significant respects
from U.S. GAAP. The significant differences between U.S. GAAP and U.K. GAAP as
they relate to T&N are summarized in Note 29 to the T&N Financial Statements.
RESULTS OF OPERATIONS
Turnover (Net Sales)
T&N's consolidated turnover excluding associated undertakings (hereinafter
referred to as net sales) decreased by 8.0% in 1997. The 1997 decrease was
primarily due to the effects of adverse foreign exchange fluctuations, 1997
divestitures and the full year impact of 1996 divestitures. These decreases
were partially offset by the 1997 acquisition of Metal Leve, Inc., which
expanded T&N's product offerings in piston-related products, and certain
volume improvements for continuing businesses. Excluding 1997 acquisitions
(which added (Pounds)30 million to 1997 net sales) and the impact of
divestitures, 1997 net sales decreased 4.4% as compared to 1996.
The primary source of the foreign exchange fluctuation impact on T&N in 1997
was the continued appreciation of the pound sterling in relation to other
European currencies (and, to a lesser extent, the U.S. dollar) through the
year. This appreciation resulted in an adverse currency translation effect
upon overseas earnings and erosion of margins on exports billed in foreign
currency. These effects were partially offset by reduced expense for materials
imported into the U.K. Excluding the effects of (Pounds)153 million in adverse
foreign currency fluctuations and acquisitions, net sales from continuing
operations increased by approximately 4.0%.
Net sales by market were:
<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-46
<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 18.9 170.8
Construction materials and
engineering.................... -- 54.3 83.2
------------ ------------- -------------
(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-47
<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 a charge to establish provisions for IBNR claims for the year
ended December 31, 1996 in the amount of (Pounds)323 million ((Pounds)550
million on an undiscounted basis); T&N also recognized a second charge in the
amount of (Pounds)50 million related to the risk that U.S. courts would reject
a class action settlement to which the T&N Companies were party (in Georgine
et al v. Amchem et al). This settlement was ultimately rejected by the U.S.
Supreme Court in 1997 and some increase in new IBNR claims filed has resulted.
T&N also recognized a (Pounds)50 million charge in 1996 for claims notified
and outstanding as of June 30, 1996. In addition, T&N recorded the (Pounds)92
million cost of the (Pounds)500 million layer of insurance in 1996, and the
premium was paid in 1997. T&N recognized no additional provisions relating to
asbestos in 1997.
Asbestos-Related Payments in 1996 and 1997
T&N paid (Pounds)149.4 million for asbestos-related claims, including the
(Pounds)92 million insurance premium, during 1997 and (Pounds)64.8 million in
1996.
RELEASE OF PROVISION/(PROVISION AGAINST) FIXED ASSET INVESTMENTS:
KOLBENSCHMIDT COSTS
In March 1995, T&N entered into option arrangements for 1,345,452 shares of
Kolbenschmidt AG ("KS"), which represented approximately 49% of the
outstanding share capital of KS. In 1995, T&N recognized a charge of
(Pounds)19.5 million related to the creation of provisions relating to the
reduction of the value of fixed asset investments (the Kolbenschmidt options).
In 1996, KS issued nine shares for each share already outstanding such that
the option arrangements increased to 13,454,520 shares. In December 1996,
options over 6,727,260 shares expired and T&N recognized a (Pounds)23.4
million related charge.
In 1997, Commerzbank subsequently sold the KS shares and, subject to the
option arrangement, T&N received part of the proceeds and recognized a gain of
(Pounds)13.2 million, accordingly. In addition, T&N received an offer to
purchase its remaining interest in KS, and, as a result, T&N recognized in
1997 an additional (Pounds)19.2 million gain (the sale of such remaining
interest occurred in March 1998). (See Note 4 to the T&N Financial
Statements.)
NET INTEREST PAYABLE AND SIMILAR CHARGES - GROUP
Net interest payable and similar charges - group (hereinafter referred to as
interest expense or interest income) was (Pounds)28.4 million in 1997 as
compared to (Pounds)26.8 million in 1996.
S-48
<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, Inc., a
manufacturer of articulated pistons based in the United States.
LEGAL MATTERS
In addition to the asbestos litigation, T&N is engaged in various actions
arising in the ordinary course of its business. Management is of the opinion
that the outcome of these matters will not have a material adverse effect on
T&N's financial condition.
FOREIGN CURRENCY AND COMMODITY CONTRACTS
T&N was subject to exposure to market risks from changes in foreign exchange
rates and raw material price fluctuations. Derivative financial instruments
were utilized by T&N to reduce those risks. T&N does not hold or issue
derivative financial instruments for trading purposes.
OTHER MATTERS - YEAR 2000 COSTS
T&N has established a Year 2000 steering group to coordinate and address the
Year 2000 issue. Awareness and assessment stages have been completed. T&N is
currently implementing its action plan with a target completion date of
September 1998. Total costs for repair and maintenance of existing systems are
expected to approximate (Pounds)5 million ($8 million).
S-49
<PAGE>
FEL-PRO
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996
AND YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995
On January 9, 1998, Fel-Pro's owners signed an agreement to sell the Fel-Pro
group, consisting of Fel-Pro Inc., certain operating businesses and holding
companies affiliated with Fel-Pro Inc. and certain real estate owned by Fel-
Pro Inc. or its affiliates to Federal-Mogul. The transaction closed on
February 24, 1998, at which time Federal-Mogul acquired all equity interests
in the specified Fel-Pro entities for approximately $717 million, which
included 1,030,325.6 shares of Series E Stock (as hereinafter defined) with an
imputed value of $225 million and approximately $492 million in cash. Federal-
Mogul is in the process of reselling the chemical manufacturing operations
acquired with Fel-Pro (representing approximately $32.8 million of Fel-Pro's
1997 net sales and $2.6 million of Fel-Pro's 1997 net income).
RESULTS OF OPERATIONS
Net Sales
Fel-Pro's consolidated net sales increased 9.2% in 1997 as compared to 1996,
primarily due to volume increases from new and existing customers in the
aftermarket business. Consolidated net sales increased 15.5% in 1996 as
compared to 1995 primarily due to volume increases from new and existing
customers in the aftermarket business, as well as the acquisition of TCI, a
high performance transmission and torque converter manufacturer in December of
1995 and the acquisition of Korody-Colyer ("KC") in October of 1995 for $12.3
million and $7.1 million, respectively. Excluding the effect of the
acquisitions of TCI and KC, Fel-Pro's net sales increased 6.4% in 1995.
Original equipment and aftermarket sales of Fel-Pro were:
<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.
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.
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Operating Expenses
Operating expenses as a percentage of net sales decreased to 35.5% in 1997
compared to 36.4% in 1996. The 1997 decrease is primarily attributable to Fel-
Pro's increases in sales volume exceeding the corresponding increase in
variable operating expenses. Operating expenses as a percentage of net sales
were relatively flat in 1996 as compared to 1995.
Income Taxes
Fel-Pro's $15.7 million deferred tax assets at December 29, 1996 were
written off in 1997 due to the conversion from C corporation status to
Subchapter S corporation status of its principal operating company effective
1997.
The difference between Fel-Pro's effective income tax rate and the statutory
tax rate is also due to the conversion of Fel-Pro's principal operating
company from C corporation status to Subchapter S corporation status in 1997.
In 1997, upon conversion of the principal operating company (Felt Products
Mfg. Co. and subsidiaries) to Subchapter S corporation status and in addition
to writing off the deferred tax assets, Fel-Pro recognized $7.4 million of
expense associated with LIFO recapture taxes.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations of $51.7 million in 1997 increased significantly
during 1997 primarily due to the write-off of $16.8 million in deferred taxes
and an $11.3 million improvement in accounts receivable over the prior year.
Cash flow used by investing activities of $18.5 million in 1997 include $3.5
million for the September purchase of certain operating assets of Biwax
Corporation. Capital expenditures were $18.3 million in 1997, primarily for
enhanced manufacturing capabilities and process improvements. Partially
offsetting these outflows were $3.9 million related to proceeds from available
for sale marketable securities.
Cash flows used by 1997 financing activities were $33.2 million, a decrease
of $32.7 million from 1996. The 1997 decrease was primarily due to lower
amounts provided to fund Fel-Pro's affiliates.
LEGAL MATTERS
Fel-Pro is engaged in various legal actions arising in the ordinary course
of its business. Management, after taking into consideration legal counsel's
evaluation of such actions, is of the opinion that it has adequate legal
defenses or insurance coverage and that the outcome of these matters will not
have a material adverse effect on Fel-Pro's financial position.
OTHER MATTERS
Year 2000 Costs
Fel-Pro is presently implementing an enterprise resource planning system
using Oracle software. This system is expected to be Year 2000 compliant. This
project was undertaken in late 1996 recognizing that information will be a key
driver for growth in the 21st century and that business needs are changing.
The system solution provides the ability to handle multiple product lines,
currencies, businesses, and locations. The existing mainframe systems lack
functionality and flexibility in addition to being incompatible with the Year
2000. The total project is expected to be completed by February 1999. The
expected cost related to Fel-Pro's Year 2000 project is immaterial.
Customer Bankruptcy Reorganization
On February 2, 1998, APS filed for reorganization protection under Chapter
11 of the United States Bankruptcy Code.
Fel-Pro believes that the allowance established related to receivables from
APS is adequate to cover any uncollectible amounts.
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<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
In connection with the acquisitions of T&N and Fel-Pro, Federal-Mogul
entered into a $2.75 billion floating rate senior credit agreement (the
"Senior Credit Agreement") (consisting of a $2.35 billion term loan facility,
which was reduced to $2.275 billion effective as of March 11, 1998 and a $400
million revolving loan facility) and a $500 million floating rate senior
subordinated credit agreement (the "Senior Subordinated Credit Agreement" and,
together with the Senior Credit Agreement, the "Credit Agreements"), each with
Chase as agent and as lender. The entire amount of the senior term loan
facility, as well as the entire amount of senior subordinated credit facility
have been drawn down. It is anticipated that the net proceeds to Federal-Mogul
from the Offerings will be used to prepay the entire outstanding principal
amount of the Senior Subordinated Loans, with the balance of the net proceeds
used to repay a portion of the Interim Loans. The Credit Agreements have been
syndicated to other lenders. These credit facilities have replaced a revolving
credit facility that provided for loans in an amount of up to $350 million
outstanding at any time and refinanced the outstanding balance under such
facility ($350 million, which was used to finance the acquisition of Fel-Pro)
and other indebtedness incurred in the acquisition of Fel-Pro in the amount of
$150 million. See "T&N and Fel-Pro Acquisitions--Financing of the
Acquisitions." The Company intends to put into place a permanent capital
structure with an appropriate combination of debt and equity which will
partially replace the Senior Credit Agreement and Senior Subordinated Credit
Agreement debt.
The Senior Credit Facility
Under the Senior Credit Agreement, Federal-Mogul (i) has borrowed $2.275
billion in term loans (the "Term Loans") to (a) finance the acquisition of
T&N, (b) refinance existing indebtedness of T&N, (c) pay fees and expenses
incurred in connection with the acquisition of T&N and the Credit Agreements
and (d) refinance indebtedness incurred in the acquisition of Fel-Pro and (ii)
may borrow up to $400 million outstanding at any time in revolving credit
loans (the "Revolving Credit Loans") to be used (a) to pay fees and expenses
incurred under the Senior Credit Agreement and (b) for working capital and
other general corporate purposes.
The Term Loans are divided into three tranches: (i) interim loans (the
"Interim Loans") in the aggregate amount of $925 million maturing September
12, 1999, (ii) Tranche A loans (the "Tranche A Loans") in the aggregate amount
of $600 million maturing on December 31, 2003, which are to be repaid in 20
quarterly installments commencing March 31, 1999, the amount of each quarterly
installment being $19 million in 1999 and 2000, $30 million in 2001 and $41
million in 2002 and 2003; and (iii) Tranche B loans (the "Tranche B Loans") in
the aggregate amount of $750 million maturing on December 31, 2005, which are
to be repaid in 28 quarterly installments commencing March 31, 1999, the
amount of each quarterly installment being $1.25 million during the period
from 1999 to 2003, inclusive, $75 million in 2004 and $106.25 million in 2005.
Revolving Credit Loans are to be available for a period of six years
commencing on March 12, 1998 (the "Closing Date"). Up to $120 million of
Revolving Credit Loans may be borrowed in currencies other than U.S. dollars.
Indebtedness under the Senior Credit Agreement bears interest at a floating
rate based upon, at Federal-Mogul's option, either (i) the higher of the prime
rate of Chase and 0.5% in excess of the overnight federal funds rate ("Base
Rate"), plus (in each case) a margin of 0.5% for Revolving Credit Loans, 1.0%
for the Interim Loans and Tranche A Loans and 1.25% for Tranche B Loans, or
(ii) the average of the offering rates of banks in the London interbank
eurodollar market for U.S. dollar deposits ("Eurodollar Rate") plus a margin
of 1.5% for Revolving Credit Loans, 2.0% for the Interim Loans and Tranche A
Loans and 2.25% for Tranche B Loans. After repayment of the Interim Loans the
applicable margins will depend upon Federal-Mogul's consolidated leverage
ratio: (i) in the case of Base Rate loans the applicable margin will vary
between 0% and 0.5% for Revolving Credit Loans, 0.0% and 1.0% for Tranche A
Loans and 0.5% and 1.25% for Tranche B Loans, and (ii) in the case of
Eurodollar Rate loans the applicable margin will vary between 0.75% and 1.5%
for Revolving Credit Loans, 1.0% and 2% for Tranche A Loans and 1.5% and 2.25%
for Tranche B Loans.
Federal-Mogul's obligations under the Senior Credit Agreement are secured by
a lien on all inventory and accounts receivable of Federal-Mogul and its U.S.
subsidiaries, other than certain accounts receivable subject to
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<PAGE>
an existing securitization program. Federal-Mogul, its U.S. subsidiaries and
certain of its foreign subsidiaries have also pledged 100% (or, in the case of
the stock of certain foreign subsidiaries, 65%) of the capital stock of their
subsidiaries and certain intercompany loans to secure Term Loans and Revolving
Credit Loans. Part of such collateral also secures certain existing public
debt of Federal-Mogul, and all such collateral will be released when Federal-
Mogul has obtained investment grade ratings for its debt or met a certain
leverage ratio. In addition, Federal-Mogul, its U.S. subsidiaries and certain
of its foreign subsidiaries have guaranteed the Term Loans and Revolving
Credit Loans.
The Senior Subordinated Credit Facility
Under the Senior Subordinated Credit Agreement, Federal-Mogul has borrowed
$500 million (the "Senior Subordinated Loans") (i) to finance the acquisition
of T&N, (ii) to pay fees and expenses in connection with the acquisition of
T&N and the financing thereof and (iii) to refinance indebtedness incurred in
the acquisition of Fel-Pro. The Senior Subordinated Loans were disbursed on
the Closing Date and are subordinated to the loans under the Senior Credit
Agreement and other senior indebtedness of Federal-Mogul.
The Senior Subordinated Loans will mature on March 12, 1999, the first
anniversary of the Closing Date (the "Initial Maturity Date"). If such loans
have not been repaid on the Initial Maturity Date, they will be converted into
term loans maturing on the tenth anniversary of the Closing Date. After the
Initial Maturity Date, the lenders under the Senior Subordinated Credit
Agreement, at their option, may elect to receive Exchange Notes (as defined in
the Senior Subordinated Credit Agreement) equal to 100% of the aggregate
principal amount of the loans for which they are exchanged. The Exchange Notes
will be issued pursuant to an indenture and will grant the holders of the
exchange notes certain limited additional rights to be set forth in the
indenture.
Indebtedness under the Senior Subordinated Credit Agreement bears interest
at a floating rate which is the offering rate of Chase in the London interbank
eurodollar market for U.S. dollar deposits plus an initial margin of 4.5%.
This margin is to increase to 5.5% six months after the Closing Date and to 6%
nine months after the Closing Date. If the loans have not been repaid on or
prior to the Initial Maturity Date, the applicable interest rate thereafter is
to be the highest of (i) 0.5% in excess of the interest rate borne by the
loans immediately prior to the Initial Maturity Date, (ii) 6.5% in excess of
the treasury rate (the rate borne by direct obligations of the United States
maturing on the tenth anniversary of the Closing Date) or (iii) 3% in excess
of the CSI high yield index rate (as published in the Chase Securities
Incorporated High Yield Research Weekly Update Report), plus (in each case) an
additional margin of 0% for the first three months commencing on the Initial
Maturity Date and increasing by 5% at the beginning of each subsequent three
month period. In no event may the interest rate exceed 16% per annum and to
the extent the interest rate exceeds 14% per annum, Federal-Mogul may, at its
option, pay such excess interest by adding such excess interest to the
principal amount of loans outstanding.
The Senior Subordinated Loans have the benefit of guarantees, on a
subordinated basis, by the guarantors of the loans under the Senior Credit
Agreement.
Certain Covenants
The Credit Agreements contain certain covenants that restrict or limit
Federal-Mogul from taking various actions, including, subject to specified
exceptions, (i) the granting of additional liens, (ii) the incurrence of
additional indebtedness, (iii) the granting of additional guarantees, (iv)
mergers, acquisitions and other fundamental corporate changes, (v) the sale of
assets, (vi) the payment of dividends and other restricted payments, (vii) the
making of investments, (viii) optional prepayments of certain debt and the
modification of debt instruments, (ix) entering into sale and leaseback
transactions, (x) the imposition of restrictions on any subsidiary's ability
to make payments, loans or advances to Federal-Mogul, (xi) entering into a new
debt agreement with more restrictive covenants and (xii) transactions with
affiliates. The Senior Credit Agreement also contains certain financial
covenants that require Federal-Mogul to meet and maintain certain financial
tests and minimum ratios, including a minimum cash flow coverage ratio, a
minimum consolidated leverage ratio and a minimum consolidated net worth test.
After payment of the Interim Loans Federal-Mogul may elect to have a different
set of covenants apply to the Senior Credit Agreement, which will require
lower leverage but otherwise will be less restrictive. The Subordinated Credit
Agreement restricts in certain circumstances and, prior to
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<PAGE>
payment of the Interim Loans and the election by Federal-Mogul of alternative
covenants, the Senior Credit Agreement prohibits, payment of dividends on
Federal-Mogul Common Stock in excess of the current rate of $0.12 per quarter.
Repayments and Refinancing
The Credit Agreements require mandatory repayments with some or all of the
net proceeds received upon the occurrence of certain events, including
issuances by Federal-Mogul of capital stock, the incurrence by Federal-Mogul
of certain debt and certain sales of assets. The Senior Credit Agreement also
requires mandatory prepayment from "excess cash flow." The "asset sale" and
"excess cash flow" (each as defined in the Credit Agreements) prepayment
requirements in the Senior Credit Agreement cease to be applicable when
certain leverage tests are met.
Pursuant to these requirements it is anticipated that the net proceeds of
the Offerings will be used to prepay the entire outstanding principal amount
of the Senior Subordinated Loans ($500 million), with the balance of the net
proceeds used to repay a portion of the Interim Loans (the outstanding
principal balance of which is $925 million), though if the proceeds to
Federal-Mogul of the Offerings are less than $500 million, the proceeds will
be applied solely to prepay the Interim Loans. Thereafter (subject to certain
exceptions) the net proceeds of any equity offering or incurrence of
indebtedness by Federal-Mogul shall be used to prepay Term Loans, provided
that (i) if the Senior Subordinated Loans are not prepaid by the Offerings,
proceeds of any subsequent equity offering completed by July 12, 1998, which,
together with the proceeds of the Offerings and the proceeds of other equity
offerings, if any, completed by July 12, 1998 exceed $500 million, may be used
to prepay the Senior Subordinated Loans, with any balance being applied to
prepay the Term Loans, (ii) proceeds of certain subordinated debt offerings
may be used to prepay the Senior Subordinated Loans, if not prepaid by the
Offerings, and (iii) after payment of the Interim Loans and the Senior
Subordinated Loans, the proceeds of further issuances of equity or
subordinated debt need not be applied to prepay the Term Loans.
Federal-Mogul has the option to prepay without premium at any time the Term
Loans and the Revolving Credit Loans and (subject to certain requirements
involving prior repayment of the Term Loans and Revolving Credit Loans) the
Senior Subordinated Loans. In the event that the Senior Subordinated Loans are
exchanged for Exchange Notes which are then sold, it is contemplated that the
holders of such Exchange Notes will have the option to fix the interest rates
thereon at the rate in effect at the time of such sale and, if such option is
exercised, that the Exchange Notes will be non-callable for a period of time
and will be callable thereafter at a premium.
Federal-Mogul anticipates prepaying a portion of the balance of the Interim
Loans remaining after the Offerings with asset sales proceeds and refinancing
the Senior Subordinated Loans, if outstanding after the Offerings, and the
balance of the Interim Loans through further equity or debt offerings.
Events of Default
The Credit Agreements contain customary events of default, including
nonpayment of principal, interest or fees, violation of covenants, inaccuracy
of representations or warranties in any material respect, cross acceleration
and cross default to certain other indebtedness, bankruptcy, noncompliance
with certain provisions of ERISA, material judgments, failure of the
collateral documents or subordination provisions, and change of control. The
occurrence of any of such events could result in acceleration of Federal-
Mogul's obligations under the Credit Agreements and foreclosure on collateral
securing the Term Loans and Revolving Credit Loans.
Fees
Federal-Mogul has paid a facility fee on the used and unused portion of each
lender's commitment to make Revolving Credit Loans at the rate of 0.5% per
annum prior to repayment of the Interim Loans and at the rate of 0.25% to 0.5%
per annum thereafter, depending on Federal-Mogul's leverage ratio. In
addition, Federal-Mogul has paid customary fees to Chase on the Closing Date
and reimbursed customary expenses in connection with the Senior Credit
Agreement and the Senior Subordinated Credit Agreement.
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<PAGE>
BUSINESS
For purposes of this section of the Prospectus Supplement ("Business"),
references to "Federal-Mogul" or the "Company" include operations acquired in
the acquisitions of T&N and Fel-Pro and statistics have been prepared on a pro
forma basis, giving effect to the acquisitions of T&N and Fel-Pro and the
disposition of the T&N Bearings Business as if they had occurred on January 1,
1997, unless otherwise noted. See "Unaudited Pro Forma Financial Data."
OVERVIEW
Federal-Mogul is a leading global manufacturer and distributor of a broad
range of vehicular components for automobiles and light trucks, heavy duty
trucks, farm and construction vehicles and industrial products. Such
components include powertrain systems components (primarily bearings, rings
and pistons), sealing systems components (dynamic seals and gaskets) and
general products (primarily camshafts, friction products, sintered products
and systems protection products). Federal-Mogul markets its products to many
of the world's major OE manufacturers. Federal-Mogul also manufactures and
supplies its products and related parts to the aftermarket relating to each of
these categories of equipment.
Founded in 1899, Federal-Mogul traditionally focused on the manufacture and
distribution of engine bearings and sealing systems. From 1990 through 1996,
Federal-Mogul pursued a strategy of opening retail auto stores in various
domestic and international locations. These geographically-dispersed stores
proved burdensome to manage and resulted in substantial operating losses. In
the fourth quarter of 1996, Federal-Mogul underwent a change of management,
following which the Company initiated a significant restructuring program
designed to refocus the Company on its core competency of manufacturing. As
part of such restructuring, Federal-Mogul took the following actions: (i)
closed international aftermarket distribution centers in Malaysia and
Singapore; (ii) divested 72 international retail aftermarket operations and
sold or restructured 25 wholesale aftermarket operations; (iii) closed its
Leiters Ford, Indiana manufacturing facility and consolidated its lighting
products operations in Juarez, Mexico; (iv) consolidated certain of its North
American warehouse facilities; (v) consolidated its customer support functions
previously housed in Phoenix, Arizona into the Company's Southfield
headquarters; (vi) consolidated its European aftermarket management functions
in Geneva, Switzerland into the Wiesbaden, Germany manufacturing headquarters;
and (vii) streamlined certain of its administrative and operational staff
functions worldwide. In addition, by the end of the first quarter of 1998, the
Company expects to have successfully exited all of its retail businesses,
except for Puerto Rico where the Company continues to seek a buyer. Federal-
Mogul also began to pursue a growth strategy of acquiring complementary
manufacturing companies that enhance the Company's product base, expand its
global manufacturing operations and provide opportunities to capitalize on the
Company's aftermarket distribution network and technological resources.
In connection with its growth strategy, on March 6, 1998 Federal-Mogul
acquired T&N, a U.K. based supplier of engine and transmission products, for
total consideration of approximately (Pounds)1.46 billion ($2.42 billion
(converted at a blended exchange rate of 1 pound sterling to 1.6510 U.S.
dollars). T&N manufactures and supplies high technology engineered automotive
components and industrial materials including pistons, friction products,
bearings, systems protection, camshafts and sealing products. On February 24,
1998, Federal-Mogul acquired Fel-Pro, a privately-owned automotive parts
manufacturer, for total consideration of approximately $717 million. Fel-Pro
is a premier gasket manufacturer for the North American aftermarket and OE
heavy duty market. See "T&N and Fel-Pro Acquisitions."
Federal-Mogul currently operates facilities at over 240 locations in 24
countries. On a pro forma basis (giving effect to the acquisitions of T&N and
Fel-Pro and the disposition of the T&N Bearings Business as if they had
occurred on January 1, 1997), Federal-Mogul's total sales for 1997 were $4.8
billion.
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The following charts set forth Federal-Mogul's net sales by customer group,
geographic region and manufacturing division as a percentage of total net
sales for the year ended December 31, 1997, on a pro forma basis.
Charts setting forth net sales by customer group, geographic region and
manufacturing division for the year ended December 31, 1997
Among Federal-Mogul's largest customers are Caterpillar, Chrysler, Cummins,
Ford, General Motors, Mercedes-Benz, NAPA, Peugeot and Volkswagen/Audi (in
alphabetical order).
BUSINESS STRATEGY
The Company believes its recent restructuring program, which refocused the
Company on its core competency of manufacturing, and the acquisitions of T&N
and Fel-Pro, which expanded the Company's product base and geographic reach,
significantly enhanced its position within the automobile, truck and other
vehicular components markets. The Company believes that opportunities exist to
continue its growth and further enhance its market presence through the
following initiatives:
Systems Approach
The breadth of the Company's manufacturing capabilities and product
offerings enable it to be one of a small number of manufacturers with the
ability to seal entire engine, transmission and axle systems and to be a
single source supplier of engine and sealing components. In addition, Federal-
Mogul is committed to becoming a provider of a complete engine and
transmission modules for its OE customers. The Company believes that OE
manufacturers of automobiles, trucks and other vehicles are increasingly
seeking to reduce the number of suppliers from which they source parts and to
develop relationships with suppliers that can offer integrated systems and
modules in order to lower production costs, increase quality, provide better
technology and shorten product development cycles. The T&N and Fel-Pro
acquisitions, which expanded the Company's gasket, cast aluminum piston, large
bearing and sealing product lines and added product lines for articulated
pistons, cylinder liners and piston rings, are major steps toward Federal-
Mogul's strategic goal of developing global engine and sealing systems for its
OE customers.
Continue Focus on New Product Innovation
The Company's expertise in engineering and research and development has made
Federal-Mogul a leader in virtually all of the products segments in which it
competes. The Company utilizes the latest technologies, processes and
materials to solve problems for customers and to bring new, innovative
products to market. The Company has special competencies in alloy development,
customized materials formulations, surface technology, advanced modeling and
testing and systems engineering. These capabilities allow the Company to
reduce production costs and to develop products that are more durable and
exhibit better interaction with surrounding components. These innovative
products better serve OE customers and aid brand development, resulting in a
higher margin product mix.
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Extend Global Manufacturing Reach
The Company is committed to extending its manufacturing capabilities
worldwide in response to the global expansion of its OE manufacturing
customers. The acquisition of T&N and Fel-Pro have substantially increased the
Company's manufacturing presence, particularly in North America and Europe.
Management believes expansion of manufacturing operations to follow the
expansion of OE manufacturers into Latin America, Eastern Europe and Asia
provides significant growth opportunities for the Company in the future.
Pursue Strategic Acquisitions
The vehicular engine and sealing component industry is large and highly
fragmented. The Company believes that as OE manufacturers continue to
outsource and reduce the number of suppliers, opportunities will exist for
further consolidation within industry. The Company believes that, through its
established presence in these markets and its strong relationships with OE
manufacturers worldwide, the Company is in a favorable position to capitalize
on future industry consolidation. The Company's management has substantial
experience in completing and integrating acquisitions within the automobile
parts industry and believes that this experience will help it select and
pursue acquisition opportunities that can enhance the Company's product base,
expand its global manufacturing operations and further capitalize on the
Company's aftermarket distribution network and technological resources.
Expand Aftermarket Presence
Approximately 48% of the Company's 1997 sales, on a pro forma basis, were
generated from the aftermarket. The Company believes that opportunities exist
to further leverage its broad product offerings, reputation for new product
innovation and presence within the OE market to increase its penetration of
the worldwide aftermarket. In addition, the Company believes that its ability
to sell products developed for the OE market to aftermarket customers reduces
the impact of adverse changes in demand for new vehicles.
EVA Focus
In 1997, the Company adopted Economic Value Added (EVA(R)) as its primary
financial measurement and incentive compensation metric. EVA is equal to net
operating profits after economic taxes and a charge for capital invested in
the Company, which is equal to the product of the total capital invested in
the Company and the weighted average cost of capital for the Company's target
blend of debt and equity. The Company's management has placed significant
emphasis on improving the Company's financial performance and achieving
various operating efficiencies through technical development, manufacturing,
marketing and administrative rationalization in connection with this effort.
The Company's EVA improved significantly in 1997 due primarily to improved
operating margins (4.9% in 1996 and 7.7% in 1997) combined with $166 million
of cash flow from continuing operations (net of expenditures for property,
plant and equipment) in 1997. EVA is also being applied to the integration of
T&N and Fel-Pro to optimize synergies and cost savings. As the Company
continues to expand both its product base and its geographic scope, management
will evaluate investments and acquisitions based on both EVA and strategic
importance. In addition, the Company currently determines compensation for
certain top managers using an EVA based system and expects to increase the
number of managers participating in its EVA based compensation system to over
200 in 1999.
REORGANIZATION
Following the acquisitions of T&N and Fel-Pro, Federal-Mogul's integrated
operations are being reorganized to realize synergies and effectively
coordinate operations. Operations will be conducted through three
manufacturing operating units corresponding to major product areas: Powertrain
Systems, Sealing Systems and General Products. The major product categories in
Powertrain Systems include engine bearings and piston products. Sealing
Systems includes dynamic seals and gaskets. General Products include
camshafts, friction products, sintered products, systems protection products
and a number of smaller product lines. The Worldwide Aftermarket organization
is responsible for Federal-Mogul's global aftermarket sales, marketing and
distribution.
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The components of Federal-Mogul's plan for integrating operations acquired
with T&N and Fel-Pro include: closure of four manufacturing facilities
worldwide; relocation of highly manual manufacturing product lines to lower
cost regions or more suitable locations; consolidation of overlapping
manufacturing, technical and sales facilities and joint ventures; closure of
two aftermarket central warehouses and five in-country warehouses;
consolidation of aftermarket marketing and customer support functions; and
streamlining of administrative, sales, marketing and product engineering
staffs worldwide. An anticipated result of the integration plan and the
restructuring is a reduction of approximately 4,200 employees.
In connection with securing regulatory approvals for the acquisition of T&N,
Federal-Mogul executed an Agreement Containing Consent Order with the FTC on
February 27, 1998. Pursuant to this agreement Federal-Mogul must divest the
T&N Bearings Business, consisting principally of T&N's thinwall and dry
bearings (polymer bearings) operations, within six months after the FTC
declares the consent order final and must provide for independent management
of those assets pending such divestiture. The agreement stipulates that the
T&N Bearings Business is to be maintained as a viable, independent competitor
of Federal-Mogul and that Federal-Mogul shall not attempt to direct the
activities of, or exercise control over, the T&N Bearings Business or have
contact with the T&N Bearings Business outside of normal business activities.
The T&N Bearings Business accounted for approximately $393.1 million of T&N's
1997 revenues and employed approximately 4,000 people. Certain pro forma
information related to the disposition of the T&N Bearings Business is set
forth under the caption "Unaudited Pro Forma Financial Data." In addition,
T&N's North American aftermarket business is being held separately (on an
interim basis) as an independent business pursuant to the Agreement Containing
Consent Order.
MANUFACTURING DIVISIONS
Federal-Mogul has three manufacturing divisions as follows:
<TABLE>
<CAPTION>
% OF
MANUFACTURING 1997
DIVISION PRODUCT SALES BRAND NAMES APPLICATION
<S> <C> <C> <C> <C>
Powertrain Engine Bearings, Bushings, Washers Federal-Mogul(R), Glyco(R), automotive, light truck,
Systems and Large Bearings 40.0% AE Goetze(R) and Sterling(R) heavy duty, industrial,
($1.9 billion of Pistons and Piston Pins 33.0% marine, agricultural,
consolidated Rings and Liners 27.0% power generation and
sales ------ small air-cooled engine
in 1997)
100.0%
Sealing Systems Dynamic Seals 30.0% National(R), Mather(R), STS(R), automotive, light truck,
($1.1 billion of Gaskets 70.0% Redi-Seal(R), Redi-Sleeve(R), heavy duty truck,
consolidated ------ Unipiston(R), Engine Seal(R), Fel- agricultural, off-highway,
sales in 1997) Pro(R), Payen(R) and McCord(R) marine, railroad, high
performance and
industrial
100.0%
General Products Camshafts 13.0% Weyburn-Bartel(R), Weyburn- vehicular and industrial
($1.2 billion of Friction Products 42.0% Lydmet(R), Brico(R), Sintertech(R),
consolidated Sintered Products 17.0% Bentley-Harris(R), Silverton(R),
sales in Systems Protection Products 9.0% FHE(R), Connoisseur Auto
1997)(1) Other General Products 19.0% Air Conditioning(R), Carter(R)
------ and Signal-Stat(R)
100.0%
</TABLE>
- -------
(1) Excluding $600 million of sourced aftermarket product.
POWERTRAIN SYSTEMS
Federal-Mogul's Powertrain Systems products are used in automotive, light
truck, heavy duty, industrial, marine, agricultural, power generation and
small air-cooled engine applications. The Powertrain Systems (not including
the T&N Bearings Business to be divested) accounted for $1.9 billion of
Federal-Mogul's 1997 pro forma consolidated sales, of which 41% were in North
America, 52% were in Europe and 7% were in the rest of the world. In 1997,
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Powertrain Systems unit's five largest customers by sales volume were
Caterpillar, Cummins, Ford, General Motors and Volkswagen/Audi (in
alphabetical order). Approximately 68% of the sales in 1997 for Powertrain
Systems were to OE customers while 32% were to aftermarket customers.
Federal-Mogul's Powertrain Systems operations combine large bearings and
piston products operations acquired in the T&N acquisition with pre-existing
powertrain assets of Federal-Mogul, primarily bearings operations. The
addition of T&N greatly expanded Federal-Mogul's presence in cast aluminum
pistons and large bearings as well as adding four additional product lines,
articulated pistons, piston rings, cylinder liners and piston pins. The
Company's Powertrain Systems maintains 57 manufacturing locations in 16
countries. (T&N's other Powertrain Systems operations--thinwall bearings and
dry bearings--are to be divested for regulatory reasons and are held
separately, in the interim, see "--Reorganization.")
Engine Bearings, Bushings, Washers and Large Bearings. Engine bearings,
bushings, washers and large bearings accounted for approximately 40% of the
sales for Powertrain Systems. Federal-Mogul manufactures thin wall engine
bearings, bushings and washers for original equipment and aftermarket sales.
These products include bimetallic and trimetallic journal bearings (main,
connecting rod, thrust and tilting pad), bimetallic and trimetallic bushings
and washers, valve plates, labyrinth seals, dry bearings and sputter bearings.
Federal-Mogul's large bearings products--heavy wall bearings, rotating plant
bearings and structural products--are sold only to OE customers. Engine
bearings, bushings, washers and large bearings are sold under the brand names
Federal-Mogul(R) and Glyco(R).
Pistons and Piston Pins. Pistons and piston pins accounted for approximately
33% of the sales for Powertrain Systems. Federal-Mogul designs and
manufactures cast aluminum pistons for all gasoline and diesel engine
applications, articulated aluminum body/steel crown pistons for heavy duty
diesel applications, piston rings for all classes of internal combustion
engines, cylinder liners in cast iron for new generation aluminum block
engines and piston pins from steel. The addition of T&N has significantly
expanded the technology, scope and range of pistons offered by Federal-Mogul,
most notably in the OE market. The T&N acquisition has also added piston rings
and a wide range of high strength steel piston pins (also known as wrist pins
or gudgeon pins) to the Federal-Mogul product line. Pistons and piston rings
are sold under the brand names AE Goetze(R) and Sterling(R).
Rings and Liners. Rings and liners accounted for approximately 27% of the
sales for Powertrain Systems. Federal-Mogul manufactures a wide range of cast
iron or steel rings, plasma, chrome and CKS coatings and wet, dry and cast
liners. Federal-Mogul now designs and manufactures a wide range of cast iron
and steel piston rings. With the addition of T&N and Fel-Pro, Federal-Mogul
added cylinder liners to its product line. Rings and liners are marketed under
the brand name AE Goetze(R).
SEALING SYSTEMS
Federal-Mogul's Sealing Systems products are used in automotive, light
truck, heavy duty diesel, agricultural, off-highway, marine, railroad, high
performance and industrial applications. Sealing Systems accounted for $1.1
billion of Federal-Mogul's 1997 consolidated sales, of which 66% were in North
America, 23% were in Europe and 11% were in the rest of the world. In 1997,
this division's five largest customers by sales volume were Chrysler, Cummins,
Fiat, Ford and General Motors (in alphabetical order). Approximately 47% of
the sales in 1997 for Sealing Systems division were to OE customers while 53%
were to aftermarket customers.
Federal-Mogul's Sealing Systems operations combine the gaskets operations
acquired in the T&N and Fel-Pro acquisitions with the pre-existing Federal-
Mogul dynamic seals business. The acquisitions of T&N and Fel-Pro have made
Federal-Mogul one of a select number of manufacturers with the ability to seal
entire engines, transmission and axle systems. The Company's Sealing Systems
maintains 23 manufacturing locations in 12 countries.
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<PAGE>
Dynamic Seals. Dynamic seals accounted for approximately 30% of the sales
for Sealing Systems division. Federal-Mogul manufactures a line of dynamic
seals consisting of oil seals (for engine, transmissions and axles),
crankshaft seal carrier assemblies, valve stem seals, air conditioning
compressor seals, bonded pistons for transmissions, 24-hour made-to-order oil
seals, wear sleeves for shaft sealing surface repair and truck hub seals.
These products are marketed under the brand names National(R), Mather(R),
STS(R), Redi-Seal(R), Redi-Sleeve(R) and Unipiston(R).
Gaskets. Gaskets accounted for approximately 70% of the sales for Sealing
Systems. Federal-Mogul utilizes a wide range of material technologies to
manufacture a full range of gasket types, including cylinder head gaskets in
multi-layer steel, graphite, edge molded metal plate and other composites,
valve and rocker cover gaskets, intake and exhaust manifold gaskets and
miscellaneous gaskets in steel, composite, elastomeric and spiral wound.
Federal-Mogul also offers a complete line of repair kits for professional
installers under the brand name of Fel-Pro(R). Federal-Mogul established a
strong presence in the heavy duty OE market for gaskets (including, primarily,
gaskets for light and heavy duty diesel engines) through its acquisition of
Fel-Pro. While Fel-Pro's market share of automotive OE gaskets was more
limited, T&N's Sealing Products division has a stronger presence in the
automotive OE market, adding balance to Federal-Mogul's overall OE gasket
activities.
GENERAL PRODUCTS
Federal-Mogul's General Products includes four primary product lines, which
were primarily acquired with T&N: camshafts, friction products, sintered
products and systems protection products. In addition, General Products
includes a number of smaller product lines, some of which (fuel systems
components and lighting products) pre-date the acquisition of T&N and others
of which (heat transfer products and textiles) were acquired with T&N.
Products Federal-Mogul sources from other manufacturers, which are not related
to Powertrain Systems and Sealing Systems, are included in General Products
and distributed by Worldwide Aftermarkets.
Products manufactured by Federal-Mogul's General Products accounted for $1.2
billion of Federal-Mogul's 1997 consolidated sales (excluding $600 million of
sourced aftermarket product). Approximately 34% of the unit's manufactured
sales were in North America, 57% were in Europe and 9% were in the rest of the
world. In 1997, General Products' five largest customers by sales volume were
Ford, General Motors, LucasVarity, Peugeot and Renault (in alphabetical
order). Approximately 64% of the sales in 1997 for General Products of
products it manufactures were to OE customers while 36% were to aftermarket
customers. The Company's General Products maintains 53 manufacturing locations
in 17 countries.
Camshafts. Camshafts accounted for approximately 13% of Federal-Mogul
manufactured products sales for General Products. Federal-Mogul casts,
machines and assembles camshafts primarily for the automotive market. These
products are marketed under the brand names Weyburn-Bartel(R) and Weyburn-
Lydmet(R).
Friction Products. Friction products accounted for approximately 42% of
Federal-Mogul manufactured products sales for General Products. Federal-Mogul
manufactures disc brake pads, drum brakes and brake linings for the automotive
and commercial vehicle sector. These products are marketed under the brand
name Ferodo(R) and are sold primarily in Europe.
Sintered Products. Sintered products accounted for approximately 17% of
Federal-Mogul manufactured products sales for General Products. Federal-Mogul
utilizes advanced powder metallurgy techniques for the manufacture of a wide
range of automotive components including valve guides, valve seat inserts, ABS
sensor rings and other transmission components, together with engine
components, principally pulleys, gears and sprockets. These products are
marketed under the brand names Brico(R) and Sintertech(R), solely to OE
customers.
Systems Protection Products. Systems protection products accounted for
approximately 9% of Federal-Mogul manufactured products sales for General
Products. Federal-Mogul manufactures a wide variety of
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<PAGE>
products used for automotive under body and under hood protection from heat,
noise, abrasion and stone impingement. Most of these products are based on
braided, knitted and non-woven fabrics. Products based on the same
technologies are sold in the electrical, white goods and aerospace industries.
These products are marketed under the brand name Bentley-Harris(R), solely to
OE customers, and are sold primarily in North America.
Other General Products. Other general products--primarily consisting of heat
transfer products, fuel system components and lighting products--accounted for
approximately 19% of Federal-Mogul manufactured products sales for General
Products. Federal-Mogul is in the process of reselling the chemical
manufacturing operations acquired with Fel-Pro (representing approximately
$32.8 million of Fel-Pro's 1997 net sales and $2.6 million of Fel-Pro's 1997
net income). The primary components of other general products are:
. heat transfer products (engine cooling radiators in both aluminum and
copper brass construction and heater, ventilator and air conditioning
units for automotive in-cab use) manufactured in South Africa for sale
in the South African market and for global export under the brand names
Silverton(R), FHE(R) and Connoisseur Auto Air Conditioning(R);
. fuel system components (a full line of fuel pumps including mechanical
fuel pumps, diesel lift pumps, electric fuel pumps, electric fuel
modules and hanger assemblies) marketed in North America, under the
brand name Carter(R); and
. lighting products (clearance marker lamps, front, side and rear signal
lamps, stop, tail and turn lights, emergency lighting, turn signal
switches, auxiliary lighting and back-up lamps) marketed under the brand
name Signal-Stat(R).
WORLDWIDE AFTERMARKET
Federal-Mogul's North American distribution centers in Jacksonville,
Alabama, LaGrange, Indiana, and Maysville, Kentucky (the "Distribution
Centers"), served as the core of Federal-Mogul's domestic aftermarket
distribution network prior to the acquisitions of T&N and Fel-Pro. Products
are shipped from these Distribution Centers to service centers in the United
States and Canada. For Latin American sales, products are shipped through a
facility in Weston, Florida to two international regional distribution centers
and 15 Latin American branches. For European sales, products are shipped
through Federal-Mogul's facility in Kontich, Belgium.
T&N and Fel-Pro each brought with them developed aftermarket operations
duplicating, in part, Federal-Mogul's existing capabilities. T&N was, at the
time of its acquisition, the world's largest supplier of engine parts to the
independent aftermarket, as measured by revenues (with approximately 80% of
the parts distributed having been produced by T&N). Fel-Pro also brought
significant aftermarket penetration with it, built on the substantial brand
loyalty its gasket lines have acquired through a history of technological
innovations, merchandising and marketing, which have differentiated them in
the market, particularly among professional installers. Management thus
believes that aftermarket distribution provides significant opportunities for
realization of synergies.
T&N's aftermarket distribution system at the time of the acquisition
included 36 major distribution centers and sales offices utilizing over 1,600
employees worldwide to distribute over 200,000 component parts of 5,000 engine
models via its AE and Goetze marketing networks. The Company's Worldwide
Aftermarket includes 119 distribution facilities in 19 countries.
Fel-Pro's domestic aftermarket business, focused primarily on gaskets,
primarily distributed from a state-of- the-art facility inside its Skokie,
Illinois plant, using a highly automated, virtually paperless process.
CUSTOMERS
Among Federal-Mogul's largest customers are Caterpillar, Chrysler, Cummins,
Ford, General Motors, Mercedes-Benz, NAPA, Peugeot and Volkswagen/Audi (in
alphabetical order).
Original Equipment. Federal-Mogul's OE customers consist primarily of
automotive and heavy duty vehicle customers, as well as farm and industrial
equipment manufacturers, agricultural, off-highway, marine, railroad, high
performance and industrial applications. Federal-Mogul has well-established
relationships with substantially
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<PAGE>
all major North American and European automotive OE manufacturers, some pre-
existing and others resulting from the acquisitions of T&N and Fel-Pro.
Management believes there are additional system opportunities with OE
manufacturers in the Asia-Pacific and Latin American regions. In addition,
management believes that the acquisitions of T&N and Fel-Pro have positioned
Federal-Mogul to take advantage of developing OE customer demand for single
supplier systems and modules in the future, particularly in light of Federal-
Mogul's global reach and capabilities. See "--Strategy."
Aftermarket. Federal-Mogul's domestic and international customers include
independent warehouse distributors who redistribute products to local parts
suppliers called "jobbers," industrial bearing distributors, distributors of
heavy duty vehicular parts, engine rebuilders and retail parts stores. The
breadth of Federal-Mogul's product lines, together with the strength of its
brand names and sales force, are central to Federal-Mogul's aftermarket
operations.
RESEARCH AND DEVELOPMENT
Federal-Mogul maintains technical centers in Europe and North America to
develop and provide advanced materials, products and manufacturing processes
for all of its manufacturing units, including facilities acquired with T&N and
Fel-Pro. Federal-Mogul's expertise in engineering, research and development
ensures that the latest technologies, processes and materials are considered
in solving problems for customers and bringing new, innovative product to
market. Federal-Mogul provides its customers with real-time engineering
capabilities and design development in their home countries. In recognition of
the importance of technology throughout its operations, following the
acquisitions, Federal-Mogul created the post of Vice President--Technology to
coordinate technological activities throughout its operations.
The acquisitions of T&N and Fel-Pro provided Federal-Mogul with substantial
additional technological expertise. In particular, the newly acquired
technical centers in the United Kingdom and the United States bring a new
depth of capability in materials development, surface engineering,
computational analysis, engine testing and systems engineering. Recent
achievements of these centers include development of advanced piston alloys,
novel bearing coatings, brake pads for motor sport applications, engine
structure modelling to predict gasket performance and test techniques for
measurement of bore distortion in running engines.
The Fel-Pro acquisition brought substantial research operations focusing on
gaskets and their manufacture, including complete material, application design
and process development capabilities and a dedicated design/engineering staff
of over 100 employees. Recent technology innovations pioneered by Fel-Pro
include PermaDry Plus(R), multi-layered steel head gaskets, noise and
vibration dampening devices and rubber edge molded gaskets. In the past, Fel-
Pro has introduced several product innovations including Fel-Coprene(R),
Print-O-Seal(R) and Perma-Torque Blue(R), which have become market standards
in the gasket aftermarket.
Technological activities are conducted at facilities Federal-Mogul acquired
from T&N including, in particular, its central technical center at Cawston,
England, its facility at Burscheid, Germany and its technical center at
Plymouth, Michigan, and at Fel-Pro's facilities in Skokie, Illinois, as well
as at Federal-Mogul's major pre-existing technological centers, in Ann Arbor,
Michigan, Logansport, Indiana, Malden, Missouri, and Wiesbaden, Germany. Each
of Federal-Mogul's operating units is engaged in various engineering, research
and development efforts working side by side with customers to develop custom
solutions unique to their needs.
Total expenditures for research and development activities, on a pro forma
basis, were approximately $102.8 million in 1997, $101.6 million in 1996 and
$99.8 million in 1995.
SUPPLIERS
Federal-Mogul sells its manufactured parts as well as parts manufactured by
other manufacturers to the aftermarket. In 1997, only one outside supplier of
Federal-Mogul provided products that accounted for more than 5% of Federal-
Mogul's net sales. This supplier provided products accounting for
significantly less than 10% of Federal-Mogul's net sales, pursuant to a long-
term contract.
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<PAGE>
Federal-Mogul does not normally experience supply shortages of raw
materials. Certain of Federal-Mogul's relationships with its long-term
suppliers are contractual.
In connection with the acquisition of the automotive aftermarket business of
TRW, Inc. ("TRW") in 1992, Federal-Mogul and TRW entered into a Supply
Agreement for an initial term of 15 years (the "Supply Period"), pursuant to
which TRW agreed to supply Federal-Mogul with parts manufactured by TRW and
distributed by Federal-Mogul. During the first five years of the Supply Period
(the "Exclusive Period"), Federal-Mogul is an exclusive distributor of such
TRW parts and thereafter will be a nonexclusive distributor for the remaining
term of the Supply Agreement, subject to certain exceptions. Thereafter, both
the Exclusive Period and the Supply Period are automatically renewable for
one-year periods and are terminable upon one year's notice by either party.
LEGAL PROCEEDINGS
T&N Asbestos
In the United States, Federal-Mogul's subsidiary T&N plc and two of T&N
plc's U.S. subsidiaries ("the T&N Companies") are among many defendants named
in numerous court actions alleging personal injury resulting from exposure to
asbestos or asbestos-containing products. T&N plc is also subject to asbestos-
disease litigation, to a lesser extent, in the UK and to property damage
litigation based upon asbestos in the United States. Because of the slow onset
of asbestos-related diseases, management anticipates that similar claims will
be made in the future. It is not known how many such claims may be made nor
the expenditure which may arise therefrom. T&N has appointed the Center for
Claims Resolution ("CCR") as its exclusive representative in relation to all
asbestos-related personal injury claims made against the T&N Companies in the
United States. As of March 31, 1998, the Company has provided $1.351 billion
as its estimate for future costs to resolve asbestos claims.
Prior to its acquisition by Federal-Mogul, T&N secured, by payment of a
premium of (Pounds)92 million, a (Pounds)500 million layer of insurance cover
which will be triggered should the aggregate number of claims notified after
June 30, 1996, where the exposure occurred prior to that date ("IBNR claims"),
exceed (Pounds)690 million. At March 31, 1998, Federal-Mogul has recorded
reserves for IBNR claims up to the insurance level, which is (Pounds)690
million. For discussion of asbestos-related liabilities and reserves, see
Notes 19 and 28 to the T&N Financial Statements and "Management's Discussion
and Analysis of Financial Condition and Results of Operations--T&N--Asbestos."
While management believes that estimated reserves, which have not been
reduced by any potential insurance proceeds, coupled with T&N's asbestos-
related claims insurance policy, are appropriate for anticipated losses
arising from T&N's asbestos related claims, no assurance can be given that T&N
will not be subject to material additional liabilities and significant
additional litigation relating to asbestos. Any such liabilities or litigation
could have a material adverse effect on Federal-Mogul's results of operations,
business, liquidity and financial condition. See "Risk Factors--T&N's Asbestos
Liability."
Federal-Mogul and Fel-Pro Asbestos
Federal-Mogul also is one of a large number of defendants in a number of
lawsuits brought by claimants alleging injury due to exposure to asbestos. In
addition, Fel-Pro has been named as a defendant in approximately 18,000
product liability cases involving asbestos, primarily involving gasket or
packing products sold to ship owners. Federal-Mogul is defending all such
claims vigorously and believes that it and Fel-Pro have substantial defenses
to liability and adequate insurance coverage for defense costs (though Fel-Pro
has agreed with its insurers to pay approximately 20% of defense costs, in
exchange for the right to a significant role in decisions regarding the
litigation). While the outcome of litigation cannot be predicted with
certainty, after consulting with
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<PAGE>
the office of Federal-Mogul's general counsel, management believes that
asbestos claims pending against Federal-Mogul and Fel-Pro as of March 31, 1998
will not have a material effect on Federal-Mogul's financial position.
Other
Federal-Mogul is involved in various other legal actions and claims,
directly and through its subsidiaries (including T&N and Fel-Pro). After
taking into consideration legal counsel's evaluation of such actions,
management is of the opinion that their outcomes are not reasonably likely to
have a material adverse effect on Federal-Mogul's financial position operating
results or cash flow.
For information respecting lawsuits concerning environmental matters to
which Federal-Mogul is a party, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Federal-Mogul--Environmental
Matters."
EMPLOYEE RELATIONS
On March 31, 1998, Federal-Mogul had approximately 45,000 full-time
employees (including the T&N Bearings Business), of whom approximately 17,500
were employed in the United States. Approximately 13,700 of these employees
work for operations predating the acquisitions of T&N and Fel-Pro,
approximately 28,600 work for operations acquired with T&N and approximately
2,700 work for operations acquired with Fel-Pro. An anticipated result of the
integration plan and restructuring relating to the acquisitions of T&N and
Fel-Pro is a reduction of approximately 4,200 employees.
Approximately 45% of Federal-Mogul's United States employees are represented
by six unions. Approximately 50% of Federal-Mogul's foreign employees are
represented by various unions. Each of Federal-Mogul's unionized manufacturing
facilities has its own contract with its own expiration date and, as a result,
no contract expiration date affects more than one facility. Federal-Mogul
believes its labor relations to be good.
ENVIRONMENTAL REGULATIONS
Federal-Mogul's operations, in common with those of industry generally, are
subject to numerous existing and proposed laws and governmental regulations
designed to protect the environment, particularly regarding plant wastes and
emissions and solid waste disposal. Capital expenditures for property, plant
and equipment for environment control activities did not have a material
impact on Federal-Mogul's financial position or results of operations in 1997
and are not expected to have a material impact on Federal-Mogul's financial
position or results of operations in 1998 or 1999.
BACKLOG
The majority of Federal-Mogul's products are not on a backlog status. They
are produced from readily available materials and have a relatively short
manufacturing cycle. For products supplied by outside suppliers, Federal-Mogul
generally purchases products from more than one source. Federal-Mogul expects
to be capable of handling the anticipated 1998 sales volumes.
PATENTS AND LICENSES
Federal-Mogul is committed to protecting its technology investments and
market share through an active and growing international patent portfolio.
Federal-Mogul's patent portfolio is composed of a large number of foreign and
U.S. patents and pending patent applications which relate to a wide variety of
products and processes. In the aggregate, Federal-Mogul's international patent
portfolio is of material importance to its business; however, Federal-Mogul
does not consider any international patent or group of international patents
relating to a particular product or process to be of material importance when
judged from the standpoint of the business as a whole.
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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.
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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>
Chairman, Chief Executive Officer and
Richard A. Snell........... 56 President
Executive Vice President--Powertrain
Alan C. Johnson............ 49 Systems
Executive Vice President--Worldwide
Paul R. Lederer............ 58 Aftermarket
Executive Vice President and Chief
Thomas W. Ryan............. 50 Financial Officer
Wilhelm A. Schmelzer....... 57 Executive Vice President--Sealing Systems
Frank Tomes................ 55 Executive Vice President--General Products
Senior Vice President, General Counsel and
Edward W. Gray, Jr......... 51 Secretary
Alan R. Begg............... 43 Vice President--Technology
David A. Bozynski.......... 43 Vice President and Treasurer
Charles B. Grant........... 53 Vice President--Corporate Development
Richard P. Randazzo........ 54 Vice President--Human Resources
Kenneth P. Slaby........... 46 Vice President and Controller
James J. Zamoyski.......... 51 Vice President--Strategic Planning
<CAPTION>
DIRECTOR AGE
-------- ---
<S> <C> <C>
Richard A. Snell........... 56
John J. Fannon............. 64
Roderick M. Hills.......... 67
Paul S. Lewis.............. 61
Antonio Madero............. 60
Robert S. Miller........... 56
John C. Pope............... 49
H. Michael Sekyra.......... 56
Sir Geoffrey Whalen........ 62
</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.
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<PAGE>
Mr. Fannon has served as a director of Federal-Mogul since 1986. He is
Chairman of the Compensation Committee and a member of the Pension and the
Nominating Committees. Mr. Fannon retired in 1997 as Vice Chairman of Simpson
Paper Company, a privately held global forest products company with annual
sales exceeding $1 billion, a position that he held since 1993. From 1980
until 1993, Mr. Fannon served as President of Simpson Paper. Previously, he
was Vice President of Marketing for Simpson Paper. He also serves as a
director of Simpson Paper and Seton Medical Center.
Mr. Grant has served as Vice President--Corporate Development since December
1992. Prior to this position, Mr. Grant served as Vice President and
Controller of Federal-Mogul from May 1988 to December 1992, Vice President of
Finance, Vice President--Controller and Controller of the Fastening Systems
Group of Huck Manufacturing, and Audit Manager at Ernst & Young.
Mr. Gray has served as Senior Vice President, General Counsel and Secretary
since March 1998. Prior to this position, Mr. Gray was the managing partner
for the Washington D.C. office of Fitch, Even, Tabin, and Flannery from April
1994 to 1998, a founding partner of Gray, Blount & Associates, LLP from 1993
to 1998 and at R.R. Donnelley & Sons Company from 1986 to May 1993, where his
most recent position was Vice President--Information Services.
Mr. Hills has served as director of Federal-Mogul since 1977. He is Chairman
of the Nominating Committee and a member of the Audit, Executive and Finance,
and Pension Committees. In January 1987, Mr. Hills was named Managing
Director-Chairman of The Manchester Group Ltd., and has continued to manage
that business, which is now conducted under the name of Hills Enterprises,
Ltd. From May 1989 until June 1995, he also served successively as a partner
of and/or a consultant to the law firms of Donovan Leisure Rogovin Huge &
Schiller, Shea & Gould, and Mudge Rose Guthrie Alexander & Ferndon. Mr. Hills
is a member of the Board of Directors of Waste Management, Inc. and Oak
Industries, Inc.
Mr. Johnson has served as Executive Vice President--Powertrain Systems since
February 1998. Mr. Johnson has been with Federal-Mogul since 1970, serving as
Executive Vice President responsible for Federal-Mogul's Worldwide
manufacturing and international aftermarket operations from January 1997 to
February 1998, President--Operations from January 1995 to January 1997, Vice
President and President--Powertrain Operations--Americas from 1993 to January
1995 and Vice President and General Manager--Oil Seal Operations from 1992.
Mr. Lewis has served as director of Federal-Mogul since May 1998. Mr. Lewis
joined Tate & Lyle plc as Group Finance Director in June 1988 and became
Deputy Chairman of the Group in March 1993. He served on the Executive
Committee and various other board and committees with the Group. He joined the
Board of Dairy Crest Group as a non-executive Director in August 1993. On
December 1, 1995 Mr. Lewis joined the Board of T&N plc as a non-executive
Director. Mr. Lewis served on the Listing Policy Committee of the London Stock
Exchange until 1996 and is a Governor of Stratford School, East London and a
member of the Finance Committee of London First.
Mr. Lederer has served as Executive Vice President--Worldwide Aftermarket
since February 1998. Prior to this position, Mr. Lederer was President and
Chief Operating Officer of Fel-Pro, Incorporated. Prior to joining Fel-Pro, he
was a consultant to several automotive parts companies while serving on the
Board of Directors of Ozark/O'Reilly Automotive, Fullerton Metals and Trans-
Pro Corporation. Mr. Lederer has also served as Executive Vice President of
Stant, Chairman and Chief Executive of Epicor Industries, Incorporated,
President--Automotive Group, Group Vice President--Operations and General
Manager-Edelmann Durson at Parker Hanifin, and Executive Vice President of E.
Edelmann & Company.
Mr. Madero has served as director of Federal-Mogul since February 1994. He
is a member of the Audit, Nominating and Compensation Committees. Mr. Madero
founded SANLUIS Corporacion S. A. de C.V.
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<PAGE>
("Sanluis") and has served as its Chairman of the Board and Chief Executive
Officer since 1979. Sanluis is a Mexican holding company with interests in
gold, silver, mining and auto parts. Mr. Madero is also a member of the Boards
of Directors of Cydsa S.A., of Cydsa, S.A. de C.V., Grupo Embotelladoras
Unidas, S.A. de C.V., Alfa, S.A. de C.V., Grupo Industrial Saltillo, S.A. de
C.V., Fondo Opcion, S.A. de C.V., Grupo Industrial Durango, S.A. de C.V., G.
Accion S.A., Grupo Financier Banamex Accival S.A., Seguros Comercial America,
S.A., Grupo Posadas, S.A. de C.V., Banca Quadrum, S.A. de C.V., Banca Chase
(Mexico) S.A., Deere and Company and a member of the International Advisory
Committee of The Chase Manhattan Bank.
Mr. Miller has served as a Director of Federal-Mogul since 1993. He is the
Chairman of the Pension Committee and a member of the Audit and Nominating
Committees. From September until November 1996 he served as Acting Chief
Executive Officer of Federal-Mogul. Mr. Miller is Chairman of the Board and
Chief Executive Officer of Waste Management, Inc. Since 1993, Mr. Miller has
served as Vice President and Treasurer, and as a director, of Moore Mill and
Lumber Company, a privately held timber business in Oregon. In April 1995, he
was named Chairman of the Board of Directors of Morrison Knudsen Corporation,
a position he held until September 1996, when he became its Vice Chairman of
the Board. In addition to Waste Management and Morrison Knudsen, Mr. Miller
also serves as a member of the Board of Directors of Fluke Corporation, Pope &
Talbot, Inc. and Symantec Corp.
Mr. Pope has served as a director of Federal-Mogul since 1987. He is
Chairman of the Audit Committee and a member of the Compensation, Executive
and Finance, and Nominating Committees. Mr. Pope was President, Chief
Operating Officer and Director of UAL Corporation and United Air Lines from
May 1992 until July 1994. Mr. Pope was named Chairman of the Board of
MotivePower Industries, Inc. in 1995. Mr. Pope is a member of the Board of
Directors of Dollar Thrifty Automotive Group, Inc., Lamalie Associates, Inc.,
Medaphis Corporation, MotivePower Industries, Inc., Wallace Computer Services,
Inc. and Waste Management, Inc.
Mr. Randazzo has served as Vice President--Human Resources since January
1997. Prior thereto, Mr. Randazzo served as Senior Vice President--Human
Resources of Nextel Communications, Inc. from December 1994 to December 1996,
Senior Vice President--Human Resources--Americas Region of Asea Brown Boveri,
Inc. from December 1990 to December 1994, and various positions at Xerox
Corporation, including Vice President of Human Resources and the U.S.
Marketing Group.
Mr. Ryan has served as Executive Vice President since March 1998 and as
Chief Financial Officer since February 1997. Mr. Ryan joined Federal-Mogul in
February 1997 as Senior Vice President and Chief Financial Officer. Mr. Ryan
was Chief Financial Officer of Tenneco Automotive, a division of Tenneco, Inc.
from January 1995 to February 1997, and Vice President, Treasurer and
Controller of A.O. Smith Corporation from March 1985 to January 1995.
Mr. Schmelzer has served as Executive Vice President--Sealing Systems since
February 1998. Since joining Federal-Mogul in 1969, Mr. Schmelzer has served
as Vice President and Group Executive--Engine and Transmission Products from
April 1995 to February 1998, Vice President and Group Executive--Engine and
Transmission Products Europe from January 1992 to April 1995, General
Manager--Engine and Transmission Products--Americas from 1989 to 1991 and
General Manager of Manufacturing Operations in Spain and Mexico from 1987 to
1989. Mr. Schmelzer represents Federal-Mogul as Chairman of Supervisory Boards
at Federal-Mogul S.A., France and Federal-Mogul S.p.A., Italy. He has been an
Advisory Board member of Arkwright International Ltd. since May 1995.
Dr. Sekyra has served as a director of Federal-Mogul since 1991. He is a
member of the Compensation, Nominating, and Pension Committees. Dr. Sekyra, a
native of Austria, is Chairman and Chief Executive Officer of C.H. CHEM, a.s.,
the largest chemical company in the Czech Republic. He is also Chairman of
Bohler Uddeholm, one of the world's leading companies in tool and speed steel.
Dr. Sekyra holds a number of board positions in banking and industrial
enterprises.
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<PAGE>
Mr. Slaby has served as Vice President and Controller since April 1996.
Prior thereto, Mr. Slaby held various positions at General Electric Company
for 23 years, including Manager--Financial Operation for the global silicones
business from November 1990 to April 1996, Manager--Financial Operation with
GE Aircraft Electronics from March 1987 to November 1990, and Manager Finance
Section at GE Aircraft Electronics Systems Department from July 1985 to March
1987.
Mr. Tomes has served as Executive Vice President--General Products since
February 1998. Prior to this position, Mr. Tomes served as Chief Executive--
Composites and Camshafts Group of T&N plc from January 1996 to February 1998.
Prior to that he was Chief Executive of T&N's Industrial Products and
Materials Group.
Sir Geoffrey Whalen has served as director of Federal-Mogul since May 1998.
Between 1984 and 1995, Sir Whalen was Managing Director, and from 1990 Deputy
Chairman of Peugeot Talbot Motor Company plc. in the United Kingdom (now known
as Peugeot). In January 1995, he retired from full-time employment with
Peugeot. Sir Geoffrey Whalen is currently a director of Peugeot Motor Company
plc; Conventry Building Society; Hills Precision Components Ltd.; Camden
Motors Ltd.; Caradon plc, and Hall Engineering Holdings plc. Sir Geoffrey
Whalen has also been active in the Society of Motor Manufacturers & Traders,
the Trade Association representing vehicle and component makers in the United
Kingdom where he was President 1988-1990 and 1993-1994 and is currently Deputy
President.
Mr. Zamoyski has served as Vice President--Strategic Planning since June
1997. Prior to this position, Mr. Zamoyski served as Vice President and
General Manager from April 1995 to June 1997, Worldwide Aftermarket
Operation--International from November 1993 to April 1996, and General
Manager, Worldwide Aftermarket--Distribution and Logistics from August 1991 to
November 1993.
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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 April 15, 1998.
In accordance with regulations promulgated by the Securities and Exchange
Commission, the table reflects for each beneficial owner the conversion of
convertible securities (convertible within 60 days after April 15, 1998) owned
by such beneficial owners, but, in determining the percentage ownership of
such person, does not assume the conversion of convertible securities owned by
any other person.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED PRIOR
NAME AND TO THE OFFERINGS
ADDRESS ----------------------------------
OF BENEFICIAL NUMBER OF
HOLDER SHARES PERCENT(1)
------------- ----------------- ----------------
<S> <C> <C>
Janus Capital Corporation
100 Fillmore Street
Denver, CO 80206......................... 6,500,000 16.21%
The Capital Group Companies, Inc.
333 South Hope Street
Los Angeles, CA 90071.................... 4,143,000 10.33%
Merrill Lynch Asset Management
800 Scudders Mill Road
Plainsboro, NJ 08536..................... 2,945,200 7.34%
Fidelity Management & Research
82 Devonshire Street
Boston, MA 02109......................... 2,100,000 5.24%
</TABLE>
- --------
(1) Percentages are calculated based on outstanding shares of Common Stock as
of April 15, 1998, of 40,579,372 shares and assume conversion of Federal-
Mogul's Series C Stock and Series E Stock.
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<PAGE>
SELLING SHAREHOLDERS
The following table sets forth certain information concerning the beneficial
ownership of Common Stock held by the Selling Shareholders, as of May 12, 1998
and as adjusted to give effect to the Offerings and reflect the sale in the
Offerings of an aggregate of 1,287,907 shares of Common Stock. None of the
Selling Shareholders currently holds, and after the Offerings none of the
Selling Shareholders is expected to hold, greater than 1% of the shares of the
Company's outstanding Common Stock.
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SHARES BENEFICIALLY NUMBER OF SHARES BENEFICIALLY
OWNED PRIOR TO SHARES BEING OWNED AFTER
NAME THE OFFERINGS(1) OFFERED THE OFFERINGS(1)
---- ------------------- ------------ -------------------
<S> <C> <C> <C>
Robert J. Morris Revocable
Trust UAD 2/16/83........ 69,075 57,746 11,329
Ellen J. Morris........... 97,353 58,678 38,675
Bruce E. Morris........... 113,287 58,678 56,609
Richard A. Morris......... 85,927 58,678 27,249
Elliot Lehman Trust 5/87.. 57,930 57,930 0
Frances M. Lehman Trust
5/87..................... 99,372 99,372 0
E. Lehman 15 Year Income
Trust.................... 3,178 3,178 0
F. Lehman 15 Year Income
Trust.................... 4,104 4,104 0
Kenneth A. Lehman 1996 E.
Family Trust 6/96........ 3,213 3,213 0
Kenneth A. Lehman 1996 F.
Family Trust 6/96........ 3,213 3,213 0
Paul Lehman 1996 E. Family
Trust 6/96............... 3,213 3,213 0
Paul Lehman 1996 F. Family
Trust 6/96............... 3,213 3,213 0
Kay L. Schlozman 1996 E.
Family Trust 6/96........ 3,213 3,213 0
Kay L. Schlozman 1996 F.
Family Trust 6/96........ 3,213 3,213 0
Kenneth A. Lehman......... 106,407 26,601 79,806
Lucy G. Lehman............ 11,405 11,405 0
Paul A. Lehman............ 98,514 71,091 27,423
Ronna Stamm............... 5,973 5,973 0
Kay Schlozman Children's
Trust 12/82.............. 7,690 7,690 0
Schlozman Family Gift
Trust 9/85............... 14,456 14,456 0
Kay L. Schlozman 1997
Children's Trust 11/97... 3,845 3,845 0
Betsy G. Lehman
Irrevocable Trust #1
12/83.................... 6,867 6,867 0
K. Lehman Children's Trust
12/82 FBO Betsy.......... 20,602 1,333 19,269
K. Lehman Children's Trust
9/85 FBO Betsy........... 4,819 4,819 0
Amy G. Lehman Irrevocable
Trust #1 12/83........... 6,867 6,867 0
K. Lehman Children's Trust
12/82 FBO Amy............ 20,602 1,334 19,269
K. Lehman Children's Trust
9/85 FBO Amy............. 4,819 4,819 0
Peter G. Lehman
Irrevocable Trust #1
12/83.................... 6,867 6,867 0
K. Lehman Children's Trust
12/82 FBO Peter.......... 20,602 1,334 19,268
K. Lehman Children's Trust
9/85 FBO Peter........... 4,819 4,819 0
Daniel A. Schlozman Trust
#1 12/81................. 61,265 22,576 38,689
Daniel A. Schlozman Trust
#2 12/81................. 61,264 22,575 38,689
Schlozman 1994 Gift Trust
for Julia................ 5,922 5,922 0
Sylvia M. Radov........... 134,413 17,572 116,841
Lewis C. Weinberg
Irrevocable Trust 8/76... 54,994 5,617 49,377
Sylvia 1996 Gift Trust for
Barbara.................. 2,216 2,216 0
Sylvia 1996 Gift Trust for
David.................... 2,216 2,216 0
Sylvia 1996 Gift Trust for
Daniel................... 2,216 2,216 0
DAW Family Trust 9/85..... 45,382 21,325 24,057
Daniel C. Weinberg
Revocable Trust 7/97..... 72,382 39,218 33,164
Carol Jung................ 35,685 6,016 29,669
</TABLE>
S-71
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SHARES BENEFICIALLY NUMBER SHARES BENEFICIALLY
OWNED PRIOR TO SHARES BEING OWNED AFTER
NAME THE OFFERINGS(1) OFFERED THE OFFERINGS(1)
---- ------------------- ------------ -------------------
<S> <C> <C> <C>
Kessler 1996 Gift for
David.................... 1,323 1,323 0
Kessler 1996 Gift Trust
for Daniel............... 1,438 1,438 0
DCW Family Trust 9/85..... 123,028 33,000 90,028
Lewis Weinberg
Grandchildrens Gift Trust
12/82--Keith............. 11,788 11,788 0
Keith A. Kessler.......... 23,921 7,536 16,385
Lewis Weinberg
Grandchildrens Gift Trust
12/82--Arthur............ 11,788 11,788 0
Arthur J. Kessler......... 33,025 7,536 25,489
Lewis Weinberg
Grandchildrens Gift Trust
12/82--Eric.............. 11,788 11,788 0
Eric J. Kessler
Irrevocable Trust 12/77.. 33,025 7,536 25,489
Lewis Weinberg
Grandchildrens Gift Trust
12/82--Mindy............. 29,872 10,000 19,872
SMR-DAW Childrens Gift
Trust for Mindy 12/82.... 6,319 6,319 0
Lewis Weinberg
Grandchildrens Gift Trust
12/82--Brian............. 29,872 10,000 19,872
SMR-DAW Childrens Gift
Trust for Brian 12/82.... 6,319 6,319 0
Sylvia MGP Trust for
Daniel 06/96............. 97,893 16,000 81,893
Weinberg 1992 Gift Trust
for Barbara ............. 41,954 41,954 0
Weinberg 1992 Gift Trust
for David ............... 41,954 41,954 0
Weinberg 1992 Gift Trust
for Daniel............... 41,954 8,000 33,954
Sylvia 1992 Gift Trust for
Barbara.................. 102,185 27,884 74,301
Sylvia 1992 Gift Trust for
David.................... 102,185 30,923 71,262
Sylvia 1992 Gift Trust for
Daniel................... 102,185 25,000 77,185
H & M Realty Corporation.. 216,584 216,584 0
McCormick Investments,
Inc. .................... 81 81 0
McCormick Investments, LP. 7,926 7,926 0
</TABLE>
- --------
(1) Assumes conversion of the Series E Stock.
The 1,287,907 shares of Common Stock that may be offered and sold by the
Selling Shareholders will be acquired by such Selling Shareholders through
conversion of Series E Stock received as part of the consideration received by
them in the Federal-Mogul acquisition of Fel-Pro. Pursuant to the Registration
Rights Agreement among Federal-Mogul and the Selling Shareholders. Federal-
Mogul shall bear all expenses incident to Federal-Mogul's performance of or
compliance with the Registration Rights Agreement, except that the Selling
Shareholders will pay all underwriting discounts and commissions relating to
their shares of Common Stock, brokerage fees, transfer taxes, and the fees and
expenses of any counsel, accountants or other representatives retained by the
Selling Shareholders, if any. The Selling Shareholders will be indemnified by
Federal-Mogul against certain liabilities, including certain liabilities under
the Securities Act, or will be entitled to contribution in connection
therewith.
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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 May 12, 1998, Federal-Mogul had outstanding 762,939 shares of Series
C ESOP Convertible Preferred Stock and 40,606,439 shares of Common Stock. At
May 12, 1998, of 1,500,000 shares of Common Stock authorized in 1984 under
Federal-Mogul's incentive stock plans, no shares remained issuable; of
2,300,000 shares authorized in 1989, an aggregate of 357,548 shares remained
issuable; and of 1,300,000 shares authorized in 1997, an aggregate of 468,659
shares remained issuable. See "--Incentive Stock Plans."
COMMON STOCK
The holders of Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. The holders of Common Stock are entitled to one vote per
share on all matters submitted to a vote of shareholders and do not have
cumulative voting rights. Holders of Common Stock are entitled to receive,
upon any liquidation of Federal-Mogul, all remaining assets available for
distribution to shareholders after satisfaction of Federal-Mogul's liabilities
and the preferential rights of any preferred stock that may then be issued and
outstanding. The outstanding shares of Common Stock are, and the Shares
offered hereby will be, fully paid and nonassessable. The Common Stock is
listed on the NYSE. The holders of Common Stock have no preemptive, conversion
or redemption rights. The registrar and transfer agent for the Common Stock is
The Bank of New York.
PREFERRED SHARE PURCHASE RIGHTS
In 1988, Federal-Mogul's Board of Directors authorized the distribution of
one Preferred Share Purchase Right (a "Right") for each outstanding share of
Common Stock. Each Right entitles the holder thereof to buy one-half of one
one-hundredth of a share of Series B Junior Participating Preferred Stock at a
price of $70.00. The Rights are governed by the Rights Agreement.
As distributed, the Rights trade together with the Common Stock. They may be
exercised or traded separately only after the earlier to occur of: (i) 10 days
following a public announcement that a person or group of persons has obtained
the right to acquire 10% or more of the outstanding Common Stock (20% in the
case of certain institutional investors), or (ii) 10 business days (or such
later date as may be determined by action of the Board of Directors) following
the commencement or announcement of an intent to make a tender offer or
exchange offer which would result in beneficial ownership by a person or group
of persons of 10% or more of the outstanding Common Stock. If the acquiring
person or group of persons acquires 10% or more of the Common Stock, each
Right (other than those held by the acquirer) will entitle its holder to
purchase, at the Right's exercise price, shares of Common Stock having a
market value of twice the Right's exercise price. Additionally, if Federal-
Mogul is acquired in a merger or other business combination, each Right (other
than those held by the surviving or acquiring company) will entitle its holder
to purchase, at the Right's exercise price, shares of the acquiring company's
stock (or Common Stock of Federal-Mogul if it is the surviving corporation)
having a market value of twice the Right's exercise price.
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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 762,939 shares were
outstanding at March 31, 1998. Such shares bear a dividend of $4.78125 per
share per annum, subject to certain adjustments. The share of Series C ESOP
Convertible Preferred Stock are convertible into shares of Common Stock at a
rate of two shares of Common Stock per share, subject to adjustment. The
Series C Stock may be issued only to a trustee acting on behalf of an employee
stock ownership plan or other employee benefit plan of Federal-Mogul and will
be automatically converted into shares of Common Stock in the event of any
transfer to a person other than such trustee. Such Series C Stock shares
provide for a liquidation preference of $63.75 per share plus accrued and
unpaid dividends. The Series C Stock is redeemable, in whole or in part, at
the option of Federal-Mogul at a redemption price per share currently equal to
100.75% of the liquidation preference, declining to 100% of the liquidation
preference on and after January 1, 1999, plus, in each case, accrued and
unpaid dividends. Holders of the Series C Stock have full voting rights and
generally vote together with the Common Stock as one class, each share of the
Series C Stock having such number of votes as equals the number of shares of
Common Stock into which such share could be converted on the record date for
determining the shareholders entitled to vote, or currently two votes per
share; the shares of the Series C Stock are entitled to vote separately on
certain matters. The shares of the Series C Stock are not subject to any
sinking fund provisions and have no preemptive rights. The shares of the
Series C Stock rank senior to Common Stock as to the payment of dividends and
distribution of assets on liquidation, dissolution and winding up of Federal-
Mogul.
In the event that Federal-Mogul is unable to pay dividends on the Series C
Stock, Federal-Mogul is required, pursuant to the terms of the ESOP, to make a
contribution to the ESOP to satisfy the then current debt service requirements
of the ESOP Note (which obligation is fully reflected in long-term debt on
Federal-Mogul's balance sheet). See "Capitalization."
SERIES E MANDATORY EXCHANGEABLE PREFERRED STOCK
On February 24, 1998, Federal-Mogul issued 1,030,325.6 shares of Series E
Stock to holders of equity interests in the Fel-Pro entities as partial
compensation for the acquisition thereof. All of the shares of Series E Stock
were outstanding as of May 12, 1998. Federal-Mogul and the holders thereof
have contractually agreed that 257,581.4 shares of Series E Stock will be
converted at the time of the offering and the resulting Common Stock will be
included in the Offerings, resulting in a reduction in the number of Series E
Stock outstanding to 772,774.2 shares. See "Underwriting."
The shares of Series E Stock are mandatorily exchangeable into shares of
Common Stock at a rate of five shares of Common Stock for each share of Series
E Stock (representing an aggregate of 5,151,628 shares of Common Stock),
subject to adjustment, upon the earlier of (i) the fifteenth day after holders
of two-thirds of the outstanding Series E Stock have requested such exchange,
(ii) the effective date of a registration statement filed at the request of
holders of a majority of the Series E Stock pursuant to the registration
rights agreement Federal-Mogul executed for the benefit of holders of Series E
Stock and (iii) February 24, 1999.
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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 hereinafter defined) requires (in addition to any
other vote that may be required) the affirmative vote of at least a majority
of the outstanding shares of preferred stock entitled to vote thereon and
Common Stock, voting as a single class. In addition, (a) where the Articles of
Incorporation require the approval of the holder of the preferred stock or one
or more series thereof considered as a separate class, such business
combination shall also require the affirmative vote of at least a majority of
the outstanding shares of the preferred stock of such series thereof
considered as a separate class that are not owned by an Interested Shareholder
(as hereinafter defined) and (b) where applicable law requires that a
transaction be approved by any class or series of Federal-Mogul's stock or any
combination thereof considered as a single class, such transaction shall also
require the affirmative vote of at least a majority of the shares of each such
class or series or combination considered as a single class that are not owned
by the Interested Shareholder.
The voting requirements set forth in the previous paragraph shall not apply
to any business combination if (a) Federal-Mogul's Board of Directors includes
at least one member who was a duly elected and acting member of the Board of
Directors (each being a "Disinterested Director") prior to the time the
Interested Shareholder involved became an Interested Shareholder and such
business combination has been approved by a majority of the Disinterested
Directors and by a majority of the entire Board of Directors, (b) the
aggregate amount of the cash and the fair market value of consideration other
than cash to be received per share by holders
S-75
<PAGE>
of Common Stock in such business combination shall be at least equal to the
Specified Price (as hereinafter defined) or (c) such business combination has
been unanimously approved by the Board of Directors and the Board has, in the
faithful exercise of its fiduciary duties to the holders of Common Stock,
unanimously and expressly determined that the aggregate amount of the cash and
the fair market value of the consideration other than cash to be received per
share by holders of Common Stock in such business combination, although less
than the Specified Price, is nonetheless fair to all holders of Common Stock.
As used above:
"business combination" means (a) any merger or consolidation of Federal-
Mogul and any subsidiary with or into any Interested Shareholder or any
corporation which after such merger or consolidation would be an affiliate
of an Interested Shareholder, (b) any sale lease exchange, mortgage,
pledge, transfer or other disposition to any Interested Shareholder or its
affiliate of assets of Federal-Mogul or any subsidiary having a fair market
value of $1 million or more (except in the ordinary course of business and
on an arm's-length basis), (c) the issuance or transfer by Federal-Mogul or
any subsidiary (in one transaction or a series of related transactions) of
any securities of Federal-Mogul or a subsidiary to any Interested
Shareholder or its affiliate for cash, securities or property having a fair
market value of $1 million or more, (d) the adoption of any plan or
proposal for the liquidation or dissolution of Federal-Mogul as a result of
which any Interested Shareholder or its affiliate would receive any assets
of Federal-Mogul other than cash or (e) any reclassification of securities
(including any reverse stock split) or recapitalization of Federal-Mogul or
merger or consolidation of Federal-Mogul with any subsidiary or any similar
transaction (whether or not with an Interested Shareholder) which has the
effect, directly or indirectly, of increasing the proportion of outstanding
shares of any equity security of Federal-Mogul or a subsidiary directly
owned by an Interested Shareholder or its affiliate.
"Interested Shareholder" means a person who on the record date for
determining the shareholders entitled to vote on a business combination is
(a) the beneficial owner of 10% or more of the outstanding shares of Common
Stock, (b) an affiliate of Federal-Mogul and within two years prior to such
record date beneficially owned 10% or more of the then outstanding shares
of Common Stock or (c) an assignee or other successor to any shares of
capital stock of Federal-Mogul which were within two years prior thereto
beneficially owned by an Interested Shareholder and such assignment or
succession shall have occurred in one or more transactions not involving a
public offering.
"Specified Price" means the highest of (a) the highest per share price
paid or agreed to be paid by such Interested Shareholder to acquire
beneficial ownership of any shares of Common Stock within the two-year
period prior to the consummation of the business combination; (b) the per
share book value of the Common Stock at the end of the fiscal month
immediately preceding the consummation of such business combination; and
(c) if the Common Stock of the Interested Shareholder is publicly traded,
the price per share equal to the earnings per share of Common Stock for the
four full consecutive fiscal quarters immediately preceding the record date
for solicitation of votes on such business combination (or, if votes are
not solicited on such business combination, immediately preceding the
consummation of such business combination) multiplied by the ratio (if any)
of the highest published sale price of the Interested Shareholder's common
stock during its four fiscal quarters immediately preceding such date, to
the earnings per share of common stock of the Interested Shareholder for
such four fiscal quarters.
FEDERAL-MOGUL'S BYLAWS
Federal-Mogul's Bylaws contain provisions that govern nominations of
directors by shareholders and presentation of business by shareholders for
consideration at the annual meeting of shareholders. Generally, a shareholder
must give notice of such nomination or business within 60 to 90 days prior to
such meeting, giving specified information as to the shareholder and as to the
person nominated and the business proposed to be brought before the meeting.
S-76
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INCENTIVE STOCK PLANS
Federal-Mogul's shareholders adopted Stock Option Plans in 1976 and 1984 and
a Performance Incentive Stock Plan in 1989, and the holders of Common Stock
and Series C Stock adopted a Long Term Incentive Plan in 1997. These plans
provide generally for granting options to purchase shares of the Common Stock.
Restricted shares may be awarded under the 1989 Plan and entitle employees to
all the rights of Common Stock shareholders, subject to certain transfer
restrictions or forfeitures. Options entitle employees to purchase shares at
an exercise price not less than 100% of the fair market value of the shares on
the grant date.
The 1989 Performance Incentive Stock Plan and the 1997 Long Term Incentive
Plan additionally provide for the granting of performance unit awards
("PUA's") to eligible employees. These awards may be granted in the form of
Common Stock or units, the value of which are based on the market value of the
Common Stock. PUA's must relate to certain performance criteria established by
the Compensation Committee of the Board of Directors and are awarded on terms
and conditions fixed by the Committee on the date of grant. At April 29, 1998,
91,500 PUA's had been granted.
TRUST PREFERRED SECURITIES
In December 1997, Federal-Mogul's wholly-owned financing trust ("Affiliate")
completed a $575 million private issue of 11.5 million shares of 7.0% Trust
Convertible Preferred Securities ("TCP Securities") with a liquidation value
of $50 per convertible security. The net proceeds from the TCP Securities were
used to purchase an equal amount of 7.0% Convertible Junior Subordinate
Debentures ("Debentures") of Federal-Mogul. The TCP Securities represent an
undivided interest in the Affiliate's assets, with a liquidation preference of
$50 per security. Distribution on the TCP Securities are cumulative and will
be paid quarterly in arrears at an annual rate of 7.0%, and are included in
the consolidated statement of operations as a component of Other Expense, Net.
The Company has the option to defer payment of the distributions for an
extension period of up to 20 consecutive quarters.
The TCP Securities are convertible, at the option of the holder, into
Federal-Mogul Common Stock at an initial conversion rate of .9709 shares of
Common Stock per TCP Security (an aggregate of 11,165,049 shares of Common
Stock), subject to adjustment in certain circumstances. The TCP Securities and
the Debentures will be redeemable, at the option of Federal-Mogul, on or after
December 6, 2000 at a Redemption Price, expressed as a percentage of principal
which is added to accrued and unpaid interest. The Redemption Price range is
from 104.9% on December 6, 2000 to 100.0% after December 1, 2007. All
outstanding TCP Securities and Debentures are required to be redeemed by
December 1, 2027. At May 12, 1998, 11,500,000 Convertible Preferred Securities
were outstanding.
S-77
<PAGE>
CERTAIN UNITED STATES TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Common
Stock by a person that, for United States federal income tax purposes, is a
nonresident alien individual or foreign corporation (a "non-U.S. holder"). The
discussion does not consider specific facts and circumstances that may be
relevant to a particular non-U.S. holder's tax position. Accordingly, each
non-U.S. holder is urged to consult its own tax advisor with respect to the
United States tax consequences of the ownership and disposition of Common
Stock, as well as any tax consequences that may arise under the laws of any
state, municipality, foreign country or other taxing jurisdiction.
DIVIDENDS
Dividends paid to a non-U.S. holder of Common Stock ordinarily will be
subject to withholding of United States federal income tax at a 30 percent
rate, or at a lower rate under an applicable income tax treaty that provides
for a reduced rate of withholding. However, if the dividends are effectively
connected with the conduct by the holder of a trade or business within the
United States, then the dividends will be exempt from the withholding tax
described above and instead will be subject to United States federal income
tax on a net income basis.
GAIN ON DISPOSITION OF COMMON STOCK
A non-U.S. holder generally will not be subject to United States federal
income tax in respect of gain realized on a disposition of Common Stock,
provided that (a) the gain is not effectively connected with a trade or
business conducted by the non-U.S. holder in the United States and (b) in the
case of a non-U.S. holder who is an individual and who holds the Common Stock
as a capital asset, such holder is present in the United States for less than
183 days in the taxable year of the sale and other conditions are met and (c)
the Company is not nor has been a "United States real property holding
corporation" within the meaning of Section 897(c)(2) of the Code at any time
within the shorter of the five-year period ending on the date of disposition
or the non-U.S. holder's holding period and certain other conditions are met.
The Company does not believe that it is, or is likely to become, a "United
States real property holding corporation."
FEDERAL ESTATE TAXES
Common Stock owned or treated as being owned by a non-U.S. holder at the
time of death will be included in such holder's gross estate for United States
federal estate tax purposes, unless an applicable estate tax treaty provides
otherwise.
U.S. INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
U.S. information reporting requirements and backup withholding tax will not
apply to dividends paid on Common Stock to a non-U.S. holder at an address
outside the United States, except that with respect to payments made after
December 31, 1999, a non-U.S. holder will be entitled to such an exemption
only if it provides a Form W-8 (or satisfies certain documentary evidence
requirements for establishing that it is a non-United States person) or
otherwise establishes an exemption. As a general matter, information reporting
and backup withholding also will not apply to a payment of the proceeds of a
sale of Common Stock effected outside the United States by a foreign office of
a foreign broker. However, information reporting requirements (but not backup
withholding) will apply to a payment of the proceeds of a sale of Common Stock
effected outside the United States by a foreign office of a broker if the
broker (i) is a U.S. person, (ii) derives 50 percent or more of its gross
income for certain periods from the conduct of a trade or business in the
United States, (iii) is a "controlled foreign corporation" as to the United
States or (iv) with respect to payments made after December 31, 1999, a
foreign partnership that, at any time during its taxable year is 50% or more
(by income or capital interest) owned by U.S. persons or is engaged in the
conduct of a U.S. trade or business, unless the broker has documentary
evidence in its records that the holder is a non-U.S. holder and certain
conditions are met, or the holder otherwise establishes an exemption. Payment
by a United States office of a broker of the proceeds of a sale of Common
Stock will be subject to both backup withholding and information reporting
unless the holder certifies its non-United States status under penalties of
perjury or otherwise establishes an exemption.
S-78
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the United States Purchase
Agreement (the "U.S. Purchase Agreement") among Federal-Mogul, the Selling
Shareholders and each of the Underwriters named below (the "U.S.
Underwriters"), and concurrently with the sale of 2,200,000 shares of Common
Stock to the International Managers (as hereinafter defined), Federal-Mogul
and the Selling Shareholders severally have agreed to sell to each of the U.S.
Underwriters, and each of the U.S. Underwriters severally has agreed to
purchase, the aggregate number of shares of Common Stock set forth opposite
its name below:
<TABLE>
<CAPTION>
NUMBER
U.S. UNDERWRITERS OF SHARES
----------------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..........................................
Bear, Stearns & Co. Inc. ......................................
Morgan Stanley & Co. Incorporated .............................
Smith Barney Inc. .............................................
Donaldson, Lufkin & Jenrette Securities Corporation............
---------
Total..................................................... 8,800,000
=========
</TABLE>
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), Bear,
Stearns & Co. Inc., Morgan Stanley & Co. Incorporated, Smith Barney Inc.,
Donaldson, Lufkin & Jenrette Securities Corporation, and Schroder & Co. Inc.
are acting as representatives (the "U.S. Representatives") of the U.S.
Underwriters.
Federal-Mogul and the Selling Shareholders have also entered into an
International Purchase Agreement (the "International Purchase Agreement" and,
together with the U.S. Purchase Agreement, the "Purchase Agreements") with
certain underwriters outside the United States and Canada (the "International
Managers" and, together with the U.S. Underwriters, the "Underwriters").
Subject to the terms and conditions set forth in the International Purchase
Agreement, and concurrently with the sale of 8,800,000 shares of Common Stock
to the U.S. Underwriters pursuant to the U.S. Purchase Agreement, Federal-
Mogul and the Selling Shareholders severally have agreed to sell to the
International Managers, and the International Managers severally have agreed
to purchase, an aggregate of 2,200,000 shares of Common Stock. The offering
price per share and the total underwriting discount per share are identical
under the U.S. Purchase Agreement and the International Purchase Agreement.
In each Purchase Agreement, the several U.S. Underwriters and the several
International Managers, respectively, have agreed, subject to the terms and
conditions set forth in such Purchase Agreement, to purchase all of the shares
of Common Stock being sold pursuant to such Purchase Agreement if any of such
shares of
S-79
<PAGE>
Common Stock being sold pursuant to such Purchase Agreement are purchased.
Under certain circumstances, the commitments of non-defaulting U.S.
Underwriters or International Managers (as the case may be) may be increased.
The sale of Common Stock to the U.S. Underwriters is conditioned upon the sale
of shares of Common Stock to the International Managers, and vice versa.
The U.S. Underwriters and the International Managers have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for
the coordination of their activities. Pursuant to the Intersyndicate
Agreement, the Underwriters are permitted to sell shares of Common Stock to
each other for purposes of resale at the public offering price set forth on
the cover page of this Prospectus Supplement, less an amount not greater than
the selling concession. Under the terms of the Intersyndicate Agreement, the
U.S. Underwriters and any dealer to whom they sell shares of Common Stock will
not offer to sell or sell shares of Common Stock to persons who are non-U.S.
or non-Canadian persons or to persons they believe intend to resell to persons
who are non-U.S. or non-Canadian persons, and the International Managers and
any dealer to whom they sell shares of Common Stock will not offer to sell or
sell shares of Common Stock to U.S. persons or Canadian persons or to persons
they believe intend to resell to U.S. persons or Canadian persons, except, in
each case, for transactions pursuant to the Intersyndicate Agreement.
The U.S. Underwriters have advised Federal-Mogul and the Selling
Shareholders that the U.S. Underwriters propose initially to offer the shares
of Common Stock to the public at the public offering price set forth on the
cover page of this Prospectus Supplement and to certain dealers at such price
less a concession not in excess of $ per share of Common Stock. The U.S.
Underwriters may allow, and such dealers may reallow, a discount not in excess
of $ per share of Common Stock on sales to certain other dealers. After the
public offering, the public offering price, concession and discount may be
changed.
Federal-Mogul and the Selling Shareholders have granted options to the U.S.
Underwriters, exercisable during the 30-day period after the date of this
Prospectus Supplement, to purchase up to an additional 660,000 shares and
660,000 shares, respectively, of Common Stock at the public offering price set
forth on the cover page hereof, less the underwriting discount. The U.S.
Underwriters may exercise this option only to cover over-allotments, if any,
made on the sale of shares of Common Stock offered hereby. To the extent that
the U.S. Underwriters exercise this option, each U.S. Underwriter will be
obligated, subject to certain conditions, to purchase approximately the number
of additional shares of Common Stock proportionate to such U.S. Underwriters'
initial amount reflected in the foregoing table. Federal-Mogul and the Selling
Shareholders have also granted options to the International Managers,
exercisable during the 30-day period after the date of this Prospectus
Supplement, to purchase up to an additional 165,000 shares and 165,000 shares,
respectively, of Common Stock to cover over-allotments, if any, on terms
similar to those granted to the U.S. Underwriters.
Federal-Mogul, certain of its executive officers and the Selling
Shareholders have agreed that, except under certain circumstances (including
issuances of securities in connection with acquisitions), they will not,
directly or indirectly, for a period of 90 days following the date of the
Prospectus Supplement, except with the prior consent of Merrill Lynch, on
behalf of the Underwriters, sell, offer to sell, grant any option for the sale
of, or otherwise dispose of, any Common Stock, except that Federal-Mogul may
issue Common Stock or options for shares of Common Stock issued pursuant to or
sold in connection with any employee benefit plan.
Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the U.S. Underwriters and certain selling
group members to bid for and purchase the Common Stock. As an exception to
these rules, the U.S. Underwriters are permitted to engage in certain
transactions that stabilize the price of the Common Stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Common Stock.
If the U.S. Underwriters create a short position in the Common Stock in
connection with the Offerings (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus Supplement), the U.S.
Underwriters may reduce that short position by purchasing Common Stock in the
open market. The U.S. Underwriters may also elect to reduce any short position
through the exercise of all or part of the over-
S-80
<PAGE>
allotment option described above. In general, purchases of a security for the
purpose of stabilization or to reduce a short position could cause the price
of the security to be higher than it might be in the absence of such
purchases.
Neither Federal-Mogul nor the U.S. Underwriters make any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither Federal-Mogul nor the Underwriters make any representation
that the Underwriters will engage in such transactions or that such
transactions, once commenced, will not be discontinued without notice.
Federal-Mogul and the Selling Shareholders have agreed to indemnify the U.S.
Underwriters and the International Managers, Federal-Mogul has agreed to
indemnify certain Selling Shareholders, and such Selling Shareholders have
agreed to indemnify Federal-Mogul, in each case against certain liabilities,
including liabilities under the Securities Act.
S-81
<PAGE>
PRESENTATION OF FINANCIAL INFORMATION
All references herein to "U.S. dollar," "dollar" or "$" are to the lawful
currency of the United States of America, and all references herein to
"pounds," "pounds sterling," "(Pounds)," "pence" or "p" are to the lawful
currency of the United Kingdom. T&N, a subsidiary of Federal-Mogul, has
published its consolidated financial statements in pounds sterling. Solely for
the convenience of the reader, this Prospectus Supplement and the accompanying
Prospectus contain translations of certain amounts in pounds sterling into
U.S. dollars at specified rates. No representation is made that the pounds
sterling amounts actually represent such U.S. dollar amounts or could be
converted into U.S. dollars at those or any other rates. For informational
purposes only, the Noon Buying Rate on May 12, 1998 was $1.6347 =
(Pounds)1.00. See "Exchange Rates" for historical information regarding the
Noon Buying Rate.
Federal-Mogul acquired T&N on March 6, 1998 and acquired Fel-Pro on February
24, 1998. See "T&N and Fel-Pro Acquisitions." The financial information
relating to Federal-Mogul set forth in this Prospectus Supplement and the
accompanying Prospectus (i) to the extent it relates to the years ended
December 31, 1995, 1996 and 1997, or is stated at those dates, has been
derived from Federal-Mogul's audited consolidated financial statements of and
for the years ended December 31, 1995, 1996 and 1997 included in Federal-
Mogul's Annual Report on Form 10-K and included elsewhere in this Prospectus
Supplement (the "Federal-Mogul Audited Financial Statements") and (ii) to the
extent it relates to the three-month periods ended March 31, 1997 and 1998, or
is stated at those dates, has been derived from Federal-Mogul's unaudited
interim consolidated financial statements of and for the three-month periods
ended March 31, 1997 and 1998 (which includes the results of operations and
cash flows of T&N and Fel-Pro from March 6, 1998 and February 24, 1998,
respectively) included in Federal-Mogul's Quarterly Report on Form 10-Q and
included elsewhere in this Prospectus Supplement (the "Federal-Mogul Unaudited
Interim Financial Statements" and, together with the Federal-Mogul Audited
Financial Statements, the "Federal-Mogul Financial Statements"). The financial
information relating to T&N for the years ended December 31, 1996 and 1997 set
forth in this Prospectus Supplement and the accompanying Prospectus has been
derived from the audited consolidated financial statements of T&N included
elsewhere in this Prospectus Supplement (the "T&N Financial Statements") and
the financial information relating to Fel-Pro set forth in this Prospectus
Supplement and the accompanying Prospectus has been derived from the audited
consolidated financial statements of Fel-Pro for the years ended December 28,
1997 and December 29, 1996 included elsewhere in this Prospectus Supplement
(the "Fel-Pro Financial Statements" and, together with the Federal-Mogul
Financial Statements and the T&N Financial Statements, the "Financial
Statements"). The T&N Financial Statements have been prepared in accordance
with generally accepted accounting principles in the United Kingdom ("U.K.
GAAP"), which differ in certain significant respects from generally accepted
accounting principles in the United States ("U.S. GAAP"). The significant
differences between U.S. GAAP and U.K. GAAP as they relate to T&N are
summarized in Note 29 to the T&N Financial Statements.
LEGAL MATTERS
The validity of the Common Stock being offered hereby will be passed upon
for Federal-Mogul by David M. Sherbin, Esq., Associate General Counsel of
Federal-Mogul. Mr. Sherbin owns and holds options to purchase approximately
1,550 shares of Common Stock of Federal-Mogul. Certain legal matters in
connection with the Offerings will be passed upon for Federal-Mogul by Cleary,
Gottlieb, Steen & Hamilton, New York, New York, and for the Underwriters by
Sidley & Austin, Chicago, Illinois and Sachnoff & Weaver Ltd., Chicago,
Illinois.
EXPERTS
The Federal-Mogul Audited Financial Statements contained herein have been
audited by Ernst & Young LLP, independent auditors, as set forth in their
reports thereon included therein and contained herein. Such consolidated
financial statements and schedules audited by Ernst & Young LLP are contained
herein in reliance on such reports given upon the authority of such firm as
experts in accounting and auditing.
The Fel-Pro Financial Statements contained herein have been audited by Ernst
& Young LLP, independent auditors, as set forth in their report thereon
included therein and contained herein. Such financial statements audited by
Ernst & Young LLP are contained herein in reliance on such report given upon
the authority of such firm as experts in accounting and auditing.
The T&N Financial Statements contained herein have been audited by KPMG
Audit Plc, independent auditors, as set forth in their reports thereon
included therein and contained herein. Such consolidated financial statements
audited by KPMG Audit Plc are included herein in reliance on their report
given on their authority as experts in accounting and auditing.
S-82
<PAGE>
PROSPECTUS
$2,500,000,000
FEDERAL MOGUL CORPORATION
DEBT SECURITIES, PREFERRED STOCK AND COMMON STOCK
Federal-Mogul Corporation, a Michigan corporation ("Federal-Mogul" or the
"Company"), may offer and sell from time to time, in one or more series, (i)
its debt securities, consisting of debentures, notes and/or other evidences of
indebtedness representing unsecured obligations of Federal-Mogul (the "Debt
Securities"), (ii) shares of its preferred stock, no par value per share
("Preferred Stock"), and (iii) shares of its common stock, without par value
("Common Stock"). The Selling Shareholders (as defined herein) may offer and
sell Common Stock as provided for in an accompanying supplement to this
Prospectus. See "Plan of Distribution." Debt Securities, Preferred Stock and
Common Stock are herein collectively referred to as the "Securities."
Certain specific terms of the particular Securities in respect of which this
Prospectus is being delivered will be set forth in an accompanying supplement
to this Prospectus (the "Prospectus Supplement"), which will describe, without
limitation and where applicable, the following: (i) in the case of Debt
Securities, the specific designation, aggregate principal amount, ranking as
senior or subordinated Debt Securities, denomination, maturity, premium, if
any, interest rate (which may be fixed or variable), method of calculating
interest, if any, place or places where principal of, premium, if any, and
interest, if any, on such Debt Securities will be payable, the currencies or
currency units in which principal of, premium, if any, and interest, if any,
on such Debt Securities will be payable, any terms of redemption or
conversion, any sinking fund provisions, the purchase price, any listing on a
securities exchange, any right of Federal-Mogul to defer payment of interest
on the Debt Securities and the maximum length of such deferral period and
other special terms; (ii) in the case of Preferred Stock, the specific
designation and liquidation preference per share and number of shares offered,
the purchase price, dividend rate (which may be fixed or variable), method of
calculating payment of dividends, if any, place or places where dividends on
such Preferred Stock will be payable, any terms of redemption, dates on which
dividends shall be payable and dates from which dividends shall accrue, any
listing on a securities exchange, voting and other rights, including
conversion or exchange rights, if any, and other special terms; and (iii) in
the case of Common Stock, the number of shares offered, the initial offering
price, market price and dividend information.
The offering price to the public of the Securities will be limited to U.S.
$2,500,000,000 in the aggregate (or its equivalent (based on the applicable
exchange rate at the time of issue), if Securities are offered for
consideration denominated in one or more foreign currencies or currency units
as shall be designated by Federal-Mogul). The Debt Securities may be
denominated in United States dollars or, at the option of Federal-Mogul if so
specified in the applicable Prospectus Supplement, in one or more foreign
currencies or currency units. The Debt Securities may be issued in registered
form or bearer form, or both. If so specified in the applicable Prospectus
Supplement, Securities of one or more classes or series may be issued in whole
or in part in the form of one or more temporary or permanent global
securities.
The Common Stock is listed on the New York Stock Exchange under the trading
symbol "FMO."
The Securities may be sold to or through underwriters, through dealers or
agents or directly to purchasers. See "Plan of Distribution." The names of any
underwriters, dealers or agents involved in the sale of the Securities in
respect of which this Prospectus is being delivered and any applicable fee,
commission or discount arrangements with them will be set forth in a
Prospectus Supplement. See "Plan of Distribution" for possible indemnification
arrangements for dealers, underwriters and agents.
The Selling Shareholders will receive the net proceeds from the sale of
shares of Common Stock by the Selling Shareholders and will pay all
underwriting discounts, selling commissions and transfer taxes, if any,
applicable to any such sale. Federal-Mogul is responsible for payment of all
other expenses incident to the registration of the shares of Common Stock. The
Selling Shareholders and any broker-dealers, agents or underwriters that
participate in the distribution of the Common Stock sold by the Selling
Shareholders may be deemed "underwriters" within the meaning of the Securities
Act, and any commission received by them and any profit on the resale of the
shares of Common Stock purchased by them may be deemed to be underwriting
commissions or discounts under the Securities Act. See "Plan of Distribution"
for a description of certain indemnification arrangements.
This Prospectus may not be used to consummate sales of Securities unless
accompanied by a Prospectus Supplement.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1998.
<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 is a leading global manufacturer and distributor of a broad
range of vehicular components for automobiles and light trucks, heavy duty
trucks, farm and construction vehicles and industrial products. Such
components include powertrain systems components (primarily bearings, rings
and pistons), sealing system components (dynamic seals and gaskets) and
general products (primarily friction products, sintered products, camshafts
and systems protection products). Federal-Mogul markets its products to many
of the world's major original equipment ("OE") manufacturers. Federal-Mogul
also manufactures and supplies its products and related parts to the
aftermarket relating to each of these categories of equipment.
Founded in 1899, Federal-Mogul traditionally focused on the manufacture and
distribution of engine bearings and sealing systems. From 1990 through 1996,
Federal-Mogul pursued a strategy of opening retail auto stores in various
domestic and international locations. These geographically-dispersed stores
proved burdensome to manage and resulted in substantial operating losses. In
the fourth quarter of 1996, Federal-Mogul initiated a change of management,
following which the Company initiated a significant restructuring program
designed to refocus the Company on its core competency of manufacturing. As
part of its restructuring, Federal-Mogul closed or sold substantially all of
its retail operations. Federal-Mogul also began to pursue a growth strategy of
acquiring complementary manufacturing companies that enhance the Company's
product base, expand its global manufacturing operations and provide
opportunities to capitalize on the Company's aftermarket distribution network
and technological resources.
In connection with its growth strategy, on March 6, 1998 Federal-Mogul
acquired T&N plc ("T&N"), a U.K. based supplier of engine and transmission
products, for total consideration of approximately (Pounds)1.46 billion ($2.42
billion, converted at a blended exchange rate of 1.6510 U.S. dollars to 1
pound sterling). T&N manufactures and supplies high technology engineered
automotive components and industrial materials including pistons, friction
products, bearings, systems protection, camshafts and sealing products. On
February 24, 1998, Federal-Mogul acquired Fel-Pro, Incorporated and certain
affiliated entities ("Fel-Pro"), a privately-owned automotive parts
manufacturer, for total consideration of approximately $717 million. Fel-Pro
is a premier gasket manufacturer for the North American aftermarket and OE
heavy duty market.
Federal-Mogul operates facilities at over 240 manufacturing locations in 24
countries. On a pro forma basis (giving effect to the acquisitions of T&N and
Fel-Pro and the disposition of T&N thinwall and drywall and dry bearings
(polymer bearings) operations ("T&N Bearings Business") as if they had
occurred on January 1, 1997), Federal-Mogul's total sales for 1997 were $4.8
billion.
Federal-Mogul is a Michigan corporation with its principal executive offices
located at 26555 Northwestern Highway, Southfield, Michigan 48034. The
telephone number of those offices is (248) 354-7700.
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RATIO OF EARNINGS TO FIXED CHARGES AND RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDENDS
The following table sets forth Federal-Mogul's ratios of earnings to fixed
charges and earnings to combined fixed charges and preferred stock dividends
for each year in the five-year period ended December 31, 1997 and the three-
month period ended March 31, 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
THREE MONTHS --------------------------------
ENDED MARCH 31, 1998 1997 1996 1995 1994 1993
-------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to
Fixed Charges(1): 1.1x 3.3x N/A(2) N/A(3) 4.3x 2.7x
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
THREE MONTHS --------------------------------
ENDED MARCH 31, 1998 1997 1996 1995 1994 1993
-------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to
Combined Fixed Charges
and Preferred Stock
Dividends(1): 1.1x 2.9x N/A(2) N/A(3) 3.1x 2.2x
</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) Not applicable as 1996 earnings were inadequate to cover fixed charges by
$173.0 million.
(3) Not applicable as 1995 earnings were inadequate to cover fixed charges by
$53.4 million.
The ratio of earnings to fixed charges has been computed by dividing
earnings by fixed charges. The ratio of earnings to combined fixed charges and
preferred stock dividends has been computed by dividing earnings by the sum of
fixed charges and preferred stock dividend requirements. Earnings consist of
income before income taxes plus fixed charges excluding capitalized interest.
Fixed charges consist of interest on all indebtedness, amortization of debt
issuance costs and the portion of rental expense representative of interest.
USE OF PROCEEDS
Unless otherwise indicated in the accompanying Prospectus Supplement, the
net proceeds received by Federal-Mogul from the sale of the Securities offered
hereby are expected to be used for general corporate purposes. Any specific
allocation of the proceeds to a particular purpose that has been made at the
date of any Prospectus Supplement will be described therein. Federal-Mogul
will not receive any proceeds from the sale of shares of Common Stock by any
Selling Shareholder.
DESCRIPTION OF DEBT SECURITIES
The Debt Securities offered hereby, consisting of notes, debentures and
other evidences of indebtedness, are to be issued in one or more series
constituting either senior Debt Securities ("Senior Debt Securities") or
subordinated Debt Securities ("Subordinated Debt Securities"). Unless
otherwise specified in the applicable Prospectus Supplement, the Debt
Securities will be issued pursuant to indentures described below (as
applicable, the "Senior Indenture" or the "Subordinated Indenture," each, an
"Indenture" and, together, the "Indentures"), in each case between Federal-
Mogul and the trustee identified therein (the "Trustee"), the forms of which
have been filed as exhibits to the Registration Statement of which this
Prospectus forms a part. Except for the subordination provisions of the
Subordinated Indenture, for which there are no counterparts in the Senior
Indenture, the provisions of the Subordinated Indenture are substantially
identical in substance to the provisions of the Senior Indenture that bear the
same section numbers.
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<PAGE>
The statements herein relating to the Debt Securities and the following
summaries of certain general provisions of the Indentures do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all the provisions of the Indentures (as they may be amended or
supplemented from time to time), including the definitions therein of certain
terms capitalized in this Prospectus. All article and section references
appearing herein are to articles and sections of the applicable Indenture and
whenever particular Sections or defined terms of the Indentures (as they may
be amended or supplemented from time to time) are referred to herein or in a
Prospectus Supplement, such Sections or defined terms are incorporated herein
or therein by reference.
GENERAL
The Debt Securities will be unsecured obligations of Federal-Mogul. The
Indentures do not limit the aggregate amount of Debt Securities which may be
issued thereunder, nor do they limit the incurrence or issuance of other
secured or unsecured debt of Federal-Mogul. The Debt Securities issued under
the Senior Indenture will be unsecured and will rank pari passu with all other
unsecured and unsubordinated obligations of Federal-Mogul. The Debt Securities
issued under the Subordinated Indenture will be subordinate and junior in
right of payment, to the extent and in the manner set forth in the
Subordinated Indenture, to all Senior Indebtedness of Federal-Mogul. See "--
Subordination under the Subordinated Indenture."
Reference is made to the applicable Prospectus Supplement which will
accompany this Prospectus for a description of the specific series of Debt
Securities being offered thereby, including, but not limited to, the
following: (1) the title of such Debt Securities, including whether the Debt
Securities are Senior Debt Securities or Subordinated Debt Securities and
whether such Debt Securities will be issued under the Senior Indenture, the
Subordinated Indenture or other indenture set forth in the Prospectus
Supplement; (2) any limit upon the aggregate principal amount of such Debt
Securities; (3) the date or dates on which the principal of and premium, if
any, on such Debt Securities is payable or the method of determining such date
or dates; (4) the rate or rates (which may be fixed or variable) at which such
Debt Securities will bear interest, if any, or the method of calculating such
rate or rates of interest, the date or dates from such interest will accrue or
the method by which such date or dates will be determined, the date or dates
on which interest, if any, will be payable and the record date or dates
therefor; (5) the place or places where principal of, premium, if any, and
interest, if any, on such Debt Securities will be payable; (6) the right, if
any, of Federal-Mogul to defer payment of interest on Debt Securities and the
maximum length of any such deferral period; (7) the period or periods within
which, the price or prices at which, the currency or currencies (including
currency unit or units) in which, and the other terms and conditions upon
which, such Debt Securities may be redeemed or otherwise purchased, in whole
or in part, at the option of Federal-Mogul; (8) the obligation, if any, and
the limitations, if any, on Federal-Mogul to redeem or purchase such Debt
Securities pursuant to any sinking fund or analogous provisions or upon the
happening of a specified event or at the option of a Holder thereof or at
Federal-Mogul's option or otherwise, or to apply any purchases of such Debt
Securities to any such redemption, and, if any, the period or periods within
which, the price or prices at which, the application of purchases to
redemptions, and the other terms and conditions upon which such Debt
Securities shall be redeemed or purchased, in whole or in part; (9) the
denominations in which such Debt Securities are authorized to be issued; (10)
the currency or currencies (including currency unit or units) in which
principal of, premium, if any, and interest, if any, on such Debt Securities
will be payable, or in which such Debt Securities will be denominated and
whether Federal-Mogul or the holders of any such Debt Securities may elect to
receive payments in respect of such Debt Securities in a currency or currency
unit other than that in which such Debt Securities are stated to be payable;
(11) if other than the principal amount thereof, the portion of the principal
amount of such Debt Securities which will be payable upon declaration of the
acceleration of the maturity thereof or the method by which such portion shall
be determined; (12) the person to whom any interest on any such Debt Security
shall be payable if other than the person in whose name such Debt Security is
registered on the applicable record date; (13) any addition to, or
modification or deletion of, any Event of Default or any covenant of Federal-
Mogul specified in the Indenture with respect to such Debt Securities; (14)
the
5
<PAGE>
application, if any, of such means of defeasance or covenant defeasance as may
be specified for such Debt Securities; (15) whether such Debt Securities are
to be issued in whole or in part in the form of one or more temporary or
permanent global securities and, if so, the identity of the depositary for
such global security or securities; (16) whether the Debt Securities of the
series are convertible into Common Stock or Preferred Stock, and, if so, the
class or series of capital stock of Federal-Mogul into which such Debt
Securities are convertible and the terms and conditions upon which such
conversion will be effected; and (17) any other special terms pertaining to
such Debt Securities. Unless otherwise specified in the applicable Prospectus
Supplement, the Debt Securities will not be listed on any securities exchange.
(Section 3.1.)
Unless otherwise specified in the applicable Prospectus Supplement, Debt
Securities will be issued in fully-registered form without coupons. Where Debt
Securities of any series are issued in bearer form, the special restrictions
and considerations, including special offering restrictions and special United
States Federal income tax considerations, applicable to any such Debt
Securities and to payment on and transfer and exchange of such Debt Securities
will be described in the applicable Prospectus Supplement. Bearer Debt
Securities will be transferable by delivery. (Section 3.5.)
Debt Securities may be sold at a substantial discount below their stated
principal amount, bearing no interest or interest at a rate which at the time
of issuance is below market rates. Certain United States Federal income tax
consequences and special considerations applicable to any such Debt
Securities, or to Debt Securities issued at par that are treated as having
been issued at a discount, will be described in the applicable Prospectus
Supplement.
If the purchase price of any of the Debt Securities is payable in one or
more foreign currencies or currency units or if any Debt Securities are
denominated in one or more foreign currencies or currency units or if the
principal of, premium, if any, or interest, if any, on any Debt Securities is
payable in one or more foreign currencies or currency units, or by reference
to commodity prices, equity indices or other factors, the restrictions,
elections, certain United States Federal income tax considerations, specific
terms and other information with respect to such issue of Debt Securities and
such foreign currency or currency units or commodity prices, equity indices or
other factors will be set forth in the applicable Prospectus Supplement. In
general, holders of such series of Debt Securities may receive a principal
amount on any principal payment date, or a payment of premium, if any, on any
premium payment date or a payment of interest on any interest payment date,
that is greater than or less than the amount of principal, premium, if any, or
interest, if any, otherwise payable on such dates, depending on the value on
such dates of the applicable currency, commodity, equity index or other
factor.
PAYMENT, REGISTRATION, TRANSFER AND EXCHANGE
Unless otherwise provided in the applicable Prospectus Supplement, payments
in respect of the Debt Securities will be made in the designated currency at
the office or agency of Federal-Mogul maintained for that purpose as Federal-
Mogul may designate from time to time, except that, at the option of Federal-
Mogul, interest payments, if any, on Debt Securities in registered form may be
made (i) by check mailed to the address of the person entitled thereto as
specified in the Register or (ii) at Federal-Mogul's expense, by wire transfer
to an account maintained by the person entitled thereto as specified in the
Register. (Sections 3.7(a) and 9.2.) Unless otherwise indicated in the
applicable Prospectus Supplement, payment of any installment of interest on
Debt Securities in registered form will be made to the person in whose name
such Debt Security is registered at the close of business on the regular
record date for such interest. (Section 3.7(a).)
Payment in respect of Debt Securities in bearer form will be made in the
currency and in the manner designated in the Prospectus Supplement, subject to
any applicable laws and regulations, at such paying agencies outside the
United States as Federal-Mogul may appoint from time to time. The paying
agents outside the United States initially appointed by Federal-Mogul for a
series of Debt Securities will be named in the Prospectus Supplement. Federal-
Mogul may at any time designate additional paying agents or rescind the
designation of any paying agents, except that, if Debt Securities of a series
are issuable as Registered Securities, Federal-Mogul
6
<PAGE>
will be required to maintain at least one paying agent in each Place of
Payment for such series and, if Debt Securities of a series are issuable as
Bearer Securities, Federal-Mogul will be required to maintain a paying agent
in a Place of Payment outside the United States where Debt Securities of such
series and any coupons appertaining thereto may be presented and surrendered
for payment. (Section 9.2.)
Unless otherwise provided in the applicable Prospectus Supplement, Debt
Securities in registered form will be transferable or exchangeable at the
agency of Federal-Mogul maintained for such purpose as designated by Federal-
Mogul from time to time. (Sections 3.5 and 9.2.) Debt Securities may be
transferred or exchanged without service charge, other than any tax or other
governmental charge imposed in connection therewith. (Section 3.5.)
GLOBAL DEBT SECURITIES
Unless otherwise specified in the applicable Prospectus Supplement, the Debt
Securities of a series may be issued in whole or in part in the form of one or
more fully registered global securities (a "Registered Global Security") that
will be deposited with a depositary (the "Depositary") or with a nominee for
the Depositary identified in the applicable Prospectus Supplement. In such a
case, one or more Registered Global Securities will be issued in a
denomination or aggregate denominations equal to the portion of the aggregate
principal amount of outstanding Debt Securities of the series to be
represented by such Registered Global Security or Securities. (Section 3.3.)
Unless and until it is exchanged in whole or in part for Debt Securities in
definitive certificated form, a Registered Global Security may not be
transferred except as a whole by the Depositary for such Registered Global
Security to a nominee of such Depositary or by a nominee of such Depositary to
such Depositary or another nominee of such Depositary or by such Depositary or
any such nominee to a successor Depositary for such series or a nominee of
such successor Depositary and except in the circumstances described in the
applicable Prospectus Supplement. (Section 3.5.)
The specific terms of the depositary arrangement with respect to any portion
of a series of Debt Securities to be represented by a Registered Global
Security will be described in the applicable Prospectus Supplement. Unless
otherwise specified in the applicable Prospectus Supplement, Federal-Mogul
expects that the following provisions will apply to such depositary
arrangements.
Ownership of beneficial interests in a Registered Global Security will be
limited to participants or persons that may hold interests through
participants (as such term is defined below). Upon the issuance of any
Registered Global Security, and the deposit of such Registered Global Security
with or on behalf of the Depositary for such Registered Global Security, the
Depositary will credit, on its book-entry registration and transfer system,
the respective principal amounts of the Debt Securities represented by such
Registered Global Security to the accounts of institutions ("participants")
that have accounts with the Depositary or its nominee. The accounts to be
credited will be designated by the underwriters or agents engaging in the
distribution of such Debt Securities or by Federal-Mogul, if such Debt
Securities are offered and sold directly by Federal-Mogul. Ownership of
beneficial interests by participants in such Registered Global Security will
be shown on, and the transfer of such beneficial interests will be effected
only through, records maintained by the Depositary for such Registered Global
Security or by its nominee. Ownership of beneficial interests in such
Registered Global Security by persons that hold through participants will be
shown on, and the transfer of such beneficial interests within such
participants will be effected only through, records maintained by such
participants. The laws of some jurisdictions require that certain purchasers
of securities take physical delivery of such securities in certificated form.
The foregoing limitations and such laws may impair the ability to transfer
beneficial interests in such Registered Global Security.
So long as the Depositary for a Registered Global Security, or its nominee,
is the registered owner of such Registered Global Security, such Depositary or
such nominee, as the case may be, will be considered the sole owner or holder
of the Debt Securities represented by such Registered Global Security for all
purposes under the applicable Indenture. Unless otherwise specified in the
applicable Prospectus Supplement and except as specified below, owners of
beneficial interests in such Registered Global Security will not be entitled
to have Debt
7
<PAGE>
Securities of the series represented by such Registered Global Security
registered in their names, will not receive or be entitled to receive physical
delivery of Debt Securities of such series in certificated form and will not
be considered the holders thereof for any purposes under the relevant
Indenture. (Section 3.8.) Accordingly, each person owning a beneficial
interest in such Registered Global Security must rely on the procedures of the
Depositary and, if such person is not a participant, on the procedures of the
participant through which such person owns its interest, to exercise any
rights of a holder under the relevant Indenture. The Depositary may grant
proxies and otherwise authorize participants to give or take any request,
demand, authorization, direction, notice, consent, waiver or other action
which a holder is entitled to give or take under the relevant Indenture.
Federal-Mogul understands that, under existing industry practices, if Federal-
Mogul requests any action of holders or if any owner of a beneficial interest
in such Registered Global Security desires to give any notice or take any
action which a holder is entitled to give or take under the relevant
Indenture, the Depositary would authorize the participants to give such notice
or take such action, and such participants would authorize beneficial owners
owning through such participants to give such notice or take such action or
would otherwise act upon the instructions of beneficial owners owning through
them.
Unless otherwise specified in the applicable Prospectus Supplement, payments
with respect to principal, premium, if any, and interest, if any, on Debt
Securities represented by a Registered Global Security registered in the name
of a Depositary or its nominee will be made to such Depositary or its nominee,
as the case may be, as the registered owner of such Registered Global
Security. (Section 3.8.)
Federal-Mogul expects that the Depositary for any Debt Securities
represented by a Registered Global Security, upon receipt of any payment of
principal, premium or interest, will immediately credit participants' accounts
with payments in amounts proportionate to their respective beneficial
interests in the principal amount of such Registered Global Security as shown
on the records of such Depositary. Federal-Mogul also expects that payments by
participants to owners of beneficial interests in such Registered Global
Security held through such participants will be governed by standing
instructions and customary practices, as is now the case with the securities
held for the accounts of customers registered in "street names," and will be
the responsibility of such participants. None of Federal-Mogul, the respective
Trustees or any agent of Federal-Mogul or the respective Trustees shall have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests of a Registered
Global Security, or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests. (Section 3.8.)
Unless otherwise specified in the applicable Prospectus Supplement, if the
Depositary for any Debt Securities represented by a Registered Global Security
is at any time unwilling or unable to continue as Depositary or ceases to be a
clearing agency registered under the Exchange Act and any other applicable
statute or regulation and a duly registered successor Depositary is not
appointed by Federal-Mogul within 90 days, Federal-Mogul will issue such Debt
Securities in definitive certificated form in exchange for such Registered
Global Security. In addition, Federal-Mogul may at any time in its sole
discretion determine not to have any of the Debt Securities of a series
represented by one or more Registered Global Securities and, in such event,
will issue Debt Securities of such series in definitive certificated form in
exchange for all of the Registered Global Security or Securities representing
such Debt Securities. (Section 3.5.)
The Debt Securities of a series may also be issued in whole or in part in
the form of one or more bearer global securities (a "Bearer Global Security")
that will be deposited with a depositary, or with a nominee for such
depositary, identified in the applicable Prospectus Supplement. Any such
Bearer Global Security may be issued in temporary or permanent form. (Section
3.4.) The specific terms and procedures, including the specific terms of the
depositary arrangement, with respect to any portion of a series of Debt
Securities to be represented by one or more Bearer Global Securities will be
described in the applicable Prospectus Supplement.
CONSOLIDATION, MERGER OR SALE BY FEDERAL-MOGUL
Unless otherwise specified in the applicable Prospectus Supplement, Federal-
Mogul shall not consolidate with or merge into any other corporation or
transfer or lease all or substantially all of its assets, unless: (i) the
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<PAGE>
corporation formed by such consolidation or into which Federal-Mogul is merged
or the corporation which acquires its assets is organized in the United
States; (ii) the corporation formed by such consolidation or into which
Federal-Mogul is merged or which acquires Federal-Mogul's assets expressly
assumes all of the obligations of Federal-Mogul under each Indenture; (iii)
immediately after giving effect to such transaction, no Default (as
hereinafter defined) or Event of Default exists; and (iv) if, as a result of
such transaction, properties or assets of Federal-Mogul would become subject
to an encumbrance which would not be permitted by the terms of any series of
Debt Securities, Federal-Mogul or the successor corporation, as the case may
be, shall take such steps as are necessary to secure such Debt Securities
equally and ratably with all indebtedness secured thereunder. Upon any such
consolidation, merger or sale, the successor corporation formed by such
consolidation, or into which Federal-Mogul is merged or to which such sale is
made, shall succeed to, and be substituted for Federal-Mogul under each
Indenture. (Section 7.1.)
EVENTS OF DEFAULT, NOTICE AND CERTAIN RIGHTS ON DEFAULT
Each Indenture provides that, if an Event of Default specified therein
occurs with respect to the Debt Securities of any series and is continuing,
the Trustee for such series or the holders of at least 25% in aggregate
principal amount of all of the outstanding Debt Securities of that series, by
written notice to Federal-Mogul (and to the Trustee for such series, if notice
is given by such holders of Debt Securities), may declare the principal of
(or, if the Debt Securities of that series are Original Issue Discount
Securities or Indexed Securities, such portion of the original principal
amount specified in the Prospectus Supplement) and accrued interest, if any,
on all the Debt Securities of that series to be due and payable (provided,
with respect to any Debt Securities issued under the Subordinated Indenture,
that the payment of principal, premium, if any, and interest, if any, on such
Debt Securities shall remain subordinated to the extent provided in Article 12
of the Subordinated Indenture). (Section 5.2.)
Unless otherwise specified in the applicable Prospectus Supplement, Events
of Default with respect to Debt Securities of any series are defined in each
Indenture as being: (a) default for 30 days in payment of any interest on any
Debt Security of that series or any coupon appertaining thereto or any
additional amount payable with respect to Debt Securities of such series as
specified in the applicable Prospectus Supplement when due and payable; (b)
default in payment of principal, or premium, if any, at maturity or on
redemption or otherwise, or in the making of a mandatory sinking fund payment
of any Debt Securities of that series when due; (c) default for 60 days after
notice to Federal-Mogul by the Trustee for such series, or to Federal-Mogul
and the Trustee for such series by the holders of at least 25% in aggregate
principal amount of the Debt Securities of such series then outstanding, in
the performance of any covenant with respect to the Debt Securities of that
series; (d) with respect to the Senior Indenture, default with respect to
other indebtedness of Federal-Mogul for borrowed money in an aggregate
principal amount of at least $25 million, which default shall constitute a
failure to pay any portion of the principal when due and payable after the
expiration of an applicable grace period with respect thereto or shall result
in an acceleration thereof and such acceleration is not rescinded or annulled
or such debt shall not be paid in full within 30 days after the written notice
thereof to Federal-Mogul by the Trustee or to Federal-Mogul and the Trustee by
the holders of 25% in aggregate principal amount of the Debt Securities of
such series then outstanding, provided that such Event of Default will be
remedied, cured or waived if such default under such other agreement is
remedied, cured or waived; and (e) certain events of bankruptcy, insolvency or
reorganization of Federal-Mogul. (Section 5.1.) The definition of "Event of
Default" in each Indenture specifically excludes a default under a secured
debt under which the obligee has recourse (exclusive of recourse for ancillary
matters such as environmental indemnities, misapplication of funds, costs of
enforcement, etc.) only to the collateral pledged for repayment, and where the
fair market value of such collateral does not exceed two percent of Total
Assets (as defined in the Indenture) at the time of the default. Events of
Default with respect to a specified series of Debt Securities may be added to
the Indenture and, if so added, will be described in the applicable Prospectus
Supplement. (Sections 3.1 and 5.1(7).)
Each Indenture provides that the Trustee will, if it is known to a
Responsible Officer of the Trustee, within 90 days after the occurrence of a
Default with respect to the Debt Securities of any series, give to the holders
of the Debt Securities of that series notice of all Defaults known to it
unless such Default shall have been cured or
9
<PAGE>
waived; provided, that except in the case of a Default in payment on the Debt
Securities of that series, the Trustee may withhold the notice if and so long
as the board of directors, the executive committee or a committee of its
Responsible Officers in good faith determines that withholding such notice is
in the interests of the holders of the Debt Securities of that series.
(Section 6.6.) "Default" means any event which is, or after notice or passage
of time or both, would be, an Event of Default. (Section 1.1.)
Each Indenture provides that the holders of a majority in aggregate
principal amount of the Debt Securities of each series affected (with each
such series voting as a class) may, subject to certain limited conditions,
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee for such series, or exercising any trust or power
conferred on such Trustee. (Section 5.8.)
Each Indenture includes a covenant that Federal-Mogul will file annually
with the Trustee a certificate as to Federal-Mogul's compliance with all
conditions and covenants of such Indenture. (Section 9.6.)
The holders of a majority in aggregate principal amount of any series of
Debt Securities then outstanding by notice to the Trustee for such series may
waive, on behalf of the holders of all Debt Securities of such series, any
past Default or Event of Default with respect to that series and its
consequences except a Default or Event of Default in the payment of the
principal of, premium, if any, or interest, if any, on any Debt Security of
such series, or except in respect of an Event of Default resulting from the
breach of a covenant or provision of either Indenture which, pursuant to the
applicable Indenture, cannot be amended or modified without the consent of the
holders of each outstanding Debt Security of such series affected. (Section
5.7.)
OPTION TO DEFER INTEREST PAYMENTS
If provided in the applicable Prospectus Supplement, Federal-Mogul shall
have the right at any time and from time to time during the term of the series
of Debt Securities to defer the payment of interest for such number of
consecutive interest payment periods as may be specified in the applicable
Prospectus Supplement (each, an "Extension Period"), subject to the terms,
conditions and covenants, if any, specified in such Prospectus Supplement,
provided that such Extension Period may not extend beyond the stated maturity
of the Debt Securities. Certain material United States Federal income tax
consequences and special considerations applicable to any such Debt Securities
will be described in the applicable Prospectus Supplement.
Unless otherwise specified in the applicable Prospectus Supplement, at the
end of such Extension Period, Federal-Mogul shall pay all interest then
accrued and unpaid together with interest thereon compounded semiannually at
the rate specified for the Debt Securities to the extent permitted by
applicable law ("Compound Interest"); provided, that during any such Extension
Period, (a) Federal-Mogul shall not declare or pay dividends on, make
distributions with respect to, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of its capital stock (other than (i)
purchases or acquisitions of capital stock of Federal-Mogul in connection with
the satisfaction by Federal-Mogul of its obligations under any employee or
agent benefit plans or the satisfaction by Federal-Mogul of its obligations
pursuant to any contract or security outstanding on the date of such event
requiring Federal-Mogul to purchase capital stock of Federal-Mogul, (ii) as a
result of a reclassification of Federal-Mogul's capital stock or the exchange
or conversion of one class or series of Federal-Mogul's capital stock for
another class or series of Federal-Mogul's capital stock, (iii) the purchase
of fractional interests in shares of Federal-Mogul's capital stock pursuant to
the conversion of exchange provisions of such capital stock or the security
being conversed or exchanged, (iv) dividends or distributions in capital stock
of Federal-Mogul (or rights to acquire capital stock) or repurchases or
redemptions of capital stock solely from the issuance or exchange of capital
stock or (v) redemptions or repurchases of any rights outstanding under a
shareholder rights plan), (b) Federal-Mogul shall not make any payment of
interest, principal or premium, if any, on or repay, repurchase or redeem any
debt securities issued by Federal-Mogul that rank junior to the Debt
Securities, and (c) Federal-Mogul shall not make any guarantee payments with
respect to the foregoing. Prior to the termination of any such Extension
Period, Federal-Mogul may further defer payments of interest by extending the
interest payment period; provided, however, that, such Extension Period,
including all such previous and further extensions, may not extend beyond the
maturity of the Debt Securities. Upon the termination of any Extension Period
and the payment of all amounts then due, Federal-Mogul may commence a new
10
<PAGE>
Extension Period, subject to the terms set forth in this section. No interest
during an Extension Period, except at the end thereof, shall be due and
payable, but Federal-Mogul may prepay at any time all or any portion of the
interest accrued during an Extension Period. Federal-Mogul has no present
intention of exercising its right to defer payments of interest by extending
the interest payment period on the Debt Securities. Federal-Mogul shall give
the holders of the Debt Securities notice of its selection of such Extension
Period ten Business Days prior to the earlier of (i) the Interest Payment Date
or (ii) the date upon which Federal-Mogul is required to give notice to the
New York Stock Exchange (or other applicable self-regulatory organization) or
to holders of the Debt Securities of the record or payment date of such
related interest payment.
MODIFICATION OF THE INDENTURES
Unless otherwise specified in the applicable Prospectus Supplement, each
Indenture contains provisions permitting Federal-Mogul and the Trustee to
enter into one or more supplemental indentures without the consent of the
holders of any of the Debt Securities in order (i) to evidence the succession
of another corporation to Federal-Mogul and the assumption of the covenants
and obligations of Federal-Mogul by a successor to Federal-Mogul; (ii) to add
to the covenants of Federal-Mogul or to surrender any right or power of
Federal-Mogul; (iii) to add additional Events of Default with respect to any
series of Debt Securities; (iv) to add or change any provisions to such extent
as necessary to facilitate the issuance of Debt Securities in bearer form or
to facilitate the issuance of Debt Securities in global form; (v) to add,
change or eliminate any provision affecting only Debt Securities not yet
issued; (vi) to secure the Debt Securities; (vii) to establish the form or
terms of Debt Securities; (viii) to evidence and provide for successor
Trustees; (ix) if allowed without penalty under applicable laws and
regulations, to permit payment in respect of Debt Securities in bearer form in
the United States; (x) to correct any defect or supplement any inconsistent
provisions or to make any other provisions with respect to matters or
questions arising under such Indenture, provided that such action does not
adversely affect the interests of the holders of Debt Securities of any
series; or (xi) to cure any ambiguity or correct any mistake. The Subordinated
Indenture also permits Federal-Mogul and the Trustee thereunder to enter into
such supplemental indentures to modify the subordination provisions contained
in the Subordinated Debenture except in a manner adverse to any outstanding
Debt Securities. (Section 8.1.)
Unless otherwise specified in the applicable Prospectus Supplement, each
Indenture also contains provisions permitting Federal-Mogul and the Trustee,
with the consent of the holders of a majority in aggregate principal amount of
the outstanding Debt Securities affected by such supplemental indenture (with
the Debt Securities of each series voting as a class), to execute supplemental
indentures adding any provisions to or changing or eliminating any of the
provisions of such Indenture or any supplemental indenture or modifying the
rights of the holders of Debt Securities of such series, except that, without
the consent of the holder of each Debt Security so affected, no such
supplemental indenture may: (i) change the time for payment of principal or
premium, if any, or interest, if any, on any Debt Security; (ii) reduce the
principal of, or the rate of interest, or premium, if any, on any Debt
Security, or change the manner in which the amount of any of the foregoing is
determined; (iii) reduce the amount of premium, if any, payable upon the
redemption of any Debt Security; (iv) reduce the amount of principal payable
upon acceleration of the maturity of any Original Issue Discount Security or
Indexed Security; (v) impair the right to institute suit for the enforcement
of any payment on or with respect to any Debt Security; (vi) reduce the
percentage in principal amount of the outstanding Debt Securities affected
thereby, the consent of whose holders is required for modification or
amendment of such Indenture or for waiver of compliance with certain
provisions of the Indenture or for waiver of certain defaults; (viii) change
the obligation of Federal-Mogul to maintain an office or agency in the places
and for the purposes specified in such Indenture; (ix) modify the provisions
relating to the subordination of outstanding Debt Securities of any series in
a manner adverse to the holders thereof; or (x) modify the provisions relating
to waiver of certain defaults or any of the foregoing provisions. (Section
8.2.)
SUBORDINATION UNDER THE SUBORDINATED INDENTURE
The Subordinated Indenture provides that any Subordinated Debt Securities
issued thereunder are subordinate and junior in right of payment to all Senior
Indebtedness to the extent provided in the Subordinated Indenture. (Section
12.1 of the Subordinated Indenture.) The Subordinated Indenture defines the
term "Senior
11
<PAGE>
Indebtedness" as: (i) all indebtedness of Federal-Mogul, whether outstanding
on the date of the Subordinated Indenture or thereafter created, incurred or
assumed, that is for money borrowed, or evidenced by a note or similar
instrument given in connection with the acquisition of any business,
properties or assets, including securities; (ii) any indebtedness of others of
the kinds described in the preceding clause (i) for the payment of which
Federal-Mogul is responsible or liable as guarantor or otherwise; and (iii)
amendments, renewals, extensions and refundings of any such indebtedness. The
Senior Indebtedness shall continue to be Senior Indebtedness and entitled to
the benefits of the subordination provisions irrespective of any amendment,
modification or waiver of any term of the Senior Indebtedness or extension or
renewal of the Senior Indebtedness. Senior Indebtedness does not include (A)
any indebtedness of Federal-Mogul to any of its subsidiaries, (B) indebtedness
incurred for the purchase of goods or materials or for services obtained in
the ordinary course of business, and (C) any indebtedness which by its terms
is expressly made pari passu with or subordinated to the Subordinated Debt
Securities. (Section 12.2 of the Subordinated Indenture.)
If (i) Federal-Mogul defaults in the payment of any principal, or premium,
if any, or interest, if any, on any Senior Indebtedness when the same becomes
due and payable, whether at maturity or at a date fixed for prepayment or
declaration or otherwise or (ii) an event of default occurs with respect to
any Senior Indebtedness permitting the holders thereof to accelerate the
maturity thereof and written notice of such event of default (requesting that
payments on Subordinated Debt Securities cease) is given to Federal-Mogul by
the holders of Senior Indebtedness, then unless and until such default in
payment or event of default shall have been cured or waived or shall have
ceased to exist, no direct or indirect payment (in cash, property or
securities, by set-off or otherwise) shall be made or agreed to be made on
account of the Subordinated Debt Securities or interest thereon or in respect
of any repayment, redemption, retirement, purchase or other acquisition of
Subordinated Debt Securities. (Section 12.4 of the Subordinated Indenture.)
In the event of (i) any insolvency, bankruptcy, receivership, liquidation,
reorganization, readjustment, composition or other similar proceeding relating
to Federal-Mogul, its creditors or its property, (ii) any proceeding for the
liquidation, dissolution or other winding-up of Federal-Mogul, voluntary or
involuntary, whether or not involving insolvency or bankruptcy proceedings,
(iii) any assignment by Federal-Mogul for the benefit of creditors, or (iv)
any other marshalling of the assets of Federal-Mogul, all Senior Indebtedness
(including, without limitation, interest accruing after the commencement of
any such proceeding, assignment or marshalling of assets) shall first be paid
in full before any payment or distribution, whether in cash, securities or
other property, shall be made by Federal-Mogul on account of Subordinated Debt
Securities. In any such event, any payment or distribution, whether in cash,
securities or other property (other than securities of Federal-Mogul or any
other corporation provided for by a plan of reorganization or readjustment,
the payment of which is subordinate, at least to the extent provided in the
subordination provisions of the Subordinated Indenture with respect to the
indebtedness evidenced by Subordinated Debt Securities, to the payment of all
Senior Indebtedness at the time outstanding and to any securities issued in
respect thereof under any such plan of reorganization or readjustment), which
would otherwise (but for the subordination provisions) be payable or
deliverable in respect of Subordinated Debt Securities (including any such
payment or distribution which may be payable or deliverable by reason of the
payment of any other indebtedness of Federal-Mogul being subordinated to the
payment of Subordinated Debt Securities) shall be paid or delivered directly
to the holders of Senior Indebtedness, or to their representative or trustee,
in accordance with the priorities then existing among such holders until all
Senior Indebtedness shall have been paid in full. (Section 12.3 of the
Subordinated Indenture.) No present or future holder of any Senior
Indebtedness shall be prejudiced in the right to enforce subordination of the
indebtedness evidenced by Subordinated Debt Securities by any act or failure
to act on the part of Federal-Mogul. (Section 12.9 of the Subordinated
Indenture.)
Senior Indebtedness shall not be deemed to have been paid in full unless the
holders thereof shall have received cash, securities or other property equal
to the amount of such Senior Indebtedness then outstanding. After all Senior
Indebtedness has been paid in full and until the Subordinated Debt Securities
are paid in full, the holders of Subordinated Debt Securities shall be
subrogated to the rights of the holders of Senior Indebtedness to receive
distributions applicable to the Senior Indebtedness to the extent that
distributions otherwise payable to the holders of Subordinated Debt Securities
have been applied to the payment of Senior Indebtedness, and such
12
<PAGE>
payments or distributions received by any holder of Subordinated Debt
Securities, by reason of such subrogation, of cash, securities or other
property which otherwise would be paid or distributed to the holders of Senior
Indebtedness, shall, as between Federal-Mogul and its creditors other than the
holders of Senior Indebtedness, on the one hand, and the holders of
Subordinated Debt Securities, on the other, be deemed to be a payment by
Federal-Mogul on account of Senior Indebtedness, and not on account of
Subordinated Debt Securities. (Section 12.7 of the Subordinated Indenture.)
The Subordinated Indenture provides that the foregoing subordination
provisions, insofar as they relate to any particular issue of Subordinated
Debt Securities, may be changed prior to such issuance. Any such change would
be described in the applicable Prospectus Supplement relating to such
Subordinated Debt Securities.
DEFEASANCE AND COVENANT DEFEASANCE
If indicated in the applicable Prospectus Supplement, Federal-Mogul may
elect either (i) to defease and be discharged from any and all obligations
with respect to the Debt Securities of or within any series (except as
otherwise provided in the relevant Indenture) ("defeasance") or (ii) to be
released from its obligations with respect to certain covenants applicable to
the Debt Securities of or within any series ("covenant defeasance"), upon the
deposit with the relevant Trustee (or other qualifying trustee), in trust for
such purpose, of money and/or Government Obligations which through the payment
of principal and interest in accordance with their terms will provide money in
an amount sufficient, without reinvestment, to pay the principal of and any
premium or interest on such Debt Securities to Maturity or redemption, as the
case may be, and any mandatory sinking fund or analogous payments thereon. As
a condition to defeasance or covenant defeasance, Federal-Mogul must deliver
to the Trustee an Opinion of Counsel to the effect that the Holders of such
Debt Securities will not recognize income, gain or loss for United States
Federal income tax purposes as a result of such defeasance or covenant
defeasance and will be subject to United States Federal income tax on the same
amounts and in the same manner and at the same times as would have been the
case if such deposit, defeasance and discharge had not occurred. Such Opinion
of Counsel, in the case of defeasance under clause (i) above, must refer to
and be based upon a ruling of the Internal Revenue Service or a change in
applicable Federal income tax law occurring after the date of the relevant
Indenture. (Article 4.) If indicated in the applicable Prospectus Supplement,
in addition to obligations of the United States or an agency or
instrumentality thereof, Government Obligations may include obligations of the
government or an agency or instrumentality of the government issuing the
currency or currency unit in which Debt Securities of such series are payable.
(Section 3.1.)
In addition, with respect to the Subordinated Indenture, in order to be
discharged, no event or condition shall exist that, pursuant to certain
provisions described under "--Subordination under the Subordinated Indenture"
above, would prevent Federal-Mogul from making payments of principal of (and
premium, if any) and interest, if any, on Subordinated Debt Securities at the
date of the irrevocable deposit referred to above. (Section 4.6(i) of the
Subordinated Indenture.)
Federal-Mogul may exercise its defeasance option with respect to such Debt
Securities notwithstanding its prior exercise of its covenant defeasance
option. If Federal-Mogul exercises its defeasance option, payment of such Debt
Securities may not be accelerated because of an Event of Default. (Section
4.4.) If Federal-Mogul exercises its covenant defeasance option, payment of
such Debt Securities may not be accelerated by reason of a Default or an Event
of Default with respect to the covenants to which such covenant defeasance is
applicable. However, if such acceleration were to occur by reason of another
Event of Default, the realizable value at the acceleration date of the money
and Government Obligations in the defeasance trust could be less than the
principal and interest then due on such Debt Securities, in that the required
deposit in the defeasance trust is based upon scheduled cash flow rather than
market value, which will vary depending upon interest rates and other factors.
THE TRUSTEES
Unless otherwise specified in the applicable Prospectus Supplement, The Bank
of New York will be the Trustee under the Senior Indenture and under the
Subordinated Indenture. Federal-Mogul may also maintain banking and other
commercial relationships with each of the Trustees and their affiliates in the
ordinary course of business.
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<PAGE>
DESCRIPTION OF PREFERRED STOCK AND COMMON STOCK
In general, the classes of authorized capital stock are afforded preferences
with respect to dividends and liquidation rights in the order listed above.
The Board of Directors of Federal-Mogul is empowered, without approval of the
shareholders, to cause the Preferred Stock to be issued in one or more series,
with the numbers of shares of each series and the rights, preferences and
limitations of each series to be determined by it including, without
limitation, the dividend rights, conversion rights, redemption rights and
liquidation preferences, if any, of any wholly unissued series of Preferred
Stock (or of the entire class of Preferred Stock if none of such shares have
been issued), the number of shares constituting each such series and the terms
and conditions of the issue thereof. The descriptions set forth below do not
purport to be complete and are qualified in their entirety by reference to the
Restated Articles of Incorporation.
The Prospectus Supplement relating to an offering of Common Stock will
describe terms relevant thereto, including the number of shares offered, the
initial offering price, market price and dividend information.
PREFERRED STOCK
The applicable Prospectus Supplement will describe the following terms of
any Preferred Stock in respect of which this Prospectus is being delivered (to
the extent applicable to such Preferred Stock): (i) the specific designation,
number of shares, seniority and purchase price; (ii) any liquidation
preference per share; (iii) any date of maturity; (iv) any redemption,
repayment or sinking fund provisions; (v) any dividend rate or rates (which
may be fixed or variable) and the dates on which any such dividends will be
payable and the dates from which such dividends shall accrue (or the method by
which such rates or dates will be determined); (vi) any voting rights; (vii)
if other than the currency of the United States of America, the currency or
currencies, including composite currencies, in which such Preferred Stock is
denominated and/or in which payments will or may be payable; (viii) the method
by which amounts in respect of such Preferred Stock may be calculated and any
commodities, currencies or indices, or value, rate or price, relevant to such
calculation; (ix) whether the Preferred Stock is convertible or exchangeable
and, if so, the securities or rights into which such Preferred Stock is
convertible or exchangeable (which may include other Preferred Stock, Debt
Securities, Common Stock or other securities or rights of Federal-Mogul
(including rights to receive payment in cash or securities based on the value,
rate or price of one or more specified commodities, currencies or indices) or
a combination of the foregoing), and the terms and conditions upon which such
conversions or exchanges will be effected, including the initial conversion or
exchange prices or rates, the conversion or exchange period and any other
related provisions; (x) the place or places where dividends and other payments
on the Preferred Stock will be payable; and (xi) any additional dividend,
liquidation, redemption and other rights, preferences, privileges, limitations
and restrictions.
All shares of Preferred Stock offered hereby, or issuable upon conversion,
exchange or exercise of Securities, will, when issued, be fully paid and non-
assessable.
COMMON STOCK
The holders of Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. The holders of Common Stock are entitled to one vote per
share on all matters submitted to a vote of shareholders and do not have
cumulative voting rights. Holders of Common Stock are entitled to receive,
upon any liquidation of Federal-Mogul, all remaining assets available for
distribution to shareholders after satisfaction of Federal-Mogul's liabilities
and the preferential rights of any preferred stock that may then be issued and
outstanding. All shares of Common Stock offered hereby, or issuable upon
conversion, exchange or exercise of Securities, will, when issued, be fully
paid and non-assessable. The Common Stock is listed on the NYSE. The holders
of Common Stock have no preemptive, conversion or redemption rights. The
registrar and transfer agent for the Common Stock is The Bank of New York.
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<PAGE>
CERTAIN PROVISIONS
The Restated Articles of Incorporation and Bylaws of Federal-Mogul and the
Rights Agreement contain provisions, summarized below, that could have the
effect of delaying, deterring or preventing a change of control of Federal-
Mogul. This summary does not purport to be complete and is subject to, and
qualified in its entirety by, the provisions of the Restated Articles of
Incorporation and Bylaws and the Rights Agreement.
Federal-Mogul's Articles of Incorporation
Federal-Mogul's Restated Articles of Incorporation provide that the approval
of a business combination (as hereinafter defined) requires (in addition to
any other vote that may be required) the affirmative vote of at least a
majority of the outstanding shares of preferred stock entitled to vote thereon
and Common Stock, voting as a single class. In addition, (a) where the
Restated Articles of Incorporation require the approval of the holder of the
preferred stock or one or more series thereof considered as a separate class,
such business combination shall also require the affirmative vote of at least
a majority of the outstanding shares of the preferred stock of such series
thereof considered as a separate class that are not owned by an Interested
Shareholder (as hereinafter defined) and (b) where applicable law requires
that a transaction be approved by any class or series of Federal-Mogul's stock
or any combination thereof considered as a single class, such transaction
shall also require the affirmative vote of at least a majority of the shares
of each such class or series or combination considered as a single class that
are not owned by the Interested Shareholder.
The voting requirements set forth in the previous paragraph shall not apply
to any business combination if (a) Federal-Mogul's Board of Directors includes
at least one member who was a duly elected and acting member of the Board of
Directors (each being a "Disinterested Director") prior to the time the
Interested Shareholder involved became an Interested Shareholder and such
business combination has been approved by a majority of the Disinterested
Directors and by a majority of the entire Board of Directors, (b) the
aggregate amount of the cash and the fair market value of consideration other
than cash to be received per share by holders of Common Stock in such business
combination shall be at least equal to the Specified Price (as hereinafter
defined) or (c) such business combination has been unanimously approved by the
Board of Directors and the Board has, in the faithful exercise of its
fiduciary duties to the holders of Common Stock, unanimously and expressly
determined that the aggregate amount of the cash and the fair market value of
the consideration other than cash to be received per share by holders of
Common Stock in such business combination, although less than the Specified
Price, is nonetheless fair to all holders of Common Stock.
As used above:
"business combination" means (a) any merger or consolidation of Federal-
Mogul and any subsidiary with or into any Interested Shareholder or any
corporation which after such merger or consolidation would be an affiliate
of an Interested Shareholder, (b) any sale lease exchange, mortgage,
pledge, transfer or other disposition to any Interested Shareholder or its
affiliate of assets of Federal-Mogul or any subsidiary having a fair market
value of $1 million or more (except in the ordinary course of business and
on an arm's-length basis), (c) the issuance or transfer by Federal-Mogul or
any subsidiary (in one transaction or a series of related transactions) of
any securities of Federal-Mogul or a subsidiary to any Interested
Shareholder or its affiliate for cash, securities or property having a fair
market value of $1 million or more, (d) the adoption of any plan or
proposal for the liquidation or dissolution of Federal-Mogul as a result of
which any Interested Shareholder or its affiliate would receive any assets
of Federal-Mogul other than cash or (e) any reclassification of securities
(including any reverse stock split) or recapitalization of Federal-Mogul or
merger or consolidation of Federal-Mogul with any subsidiary or any similar
transaction (whether or not with an Interested Shareholder) which has the
effect, directly or indirectly, of increasing the proportion of outstanding
shares of any equity security of Federal-Mogul or a subsidiary directly
owned by an Interested Shareholder or its affiliate.
"Interested Shareholder" means a person who on the record date for
determining the shareholders entitled to vote on a business combination is
(a) the beneficial owner of 10% or more of the outstanding shares of Common
Stock, (b) an affiliate of Federal-Mogul and within two years prior to such
record date
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<PAGE>
beneficially owned 10% or more of the then outstanding shares of Common
Stock or (c) an assignee or other successor to any shares of capital stock
of Federal-Mogul which were within two years prior thereto beneficially
owned by an Interested Shareholder and such assignment or succession shall
have occurred in one or more transactions not involving a public offering.
"Specified Price" means the highest of (a) the highest per share price
paid or agreed to be paid by such Interested Shareholder to acquire
beneficial ownership of any shares of Common Stock within the two-year
period prior to the consummation of the business combination; (b) the per
share book value of the Common Stock at the end of the fiscal month
immediately preceding the consummation of such business combination; and
(c) if the Common Stock of the Interested Shareholder is publicly traded,
the price per share equal to the earnings per share of Common Stock for the
four full consecutive fiscal quarters immediately preceding the record date
for solicitation of votes on such business combination (or, if votes are
not solicited on such business combination, immediately preceding the
consummation of such business combination) multiplied by the ratio (if any)
of the highest published sale price of the Interested Shareholder's common
stock during its four fiscal quarters immediately preceding such date, to
the earnings per share of common stock of the Interested Shareholder for
such four fiscal quarters.
Federal-Mogul's Bylaws
Federal-Mogul's Bylaws contain provisions that govern nominations of
directors by shareholders and presentation of business by shareholders for
consideration at the annual meeting of shareholders. Generally, a shareholder
must give notice of such nomination or business within 60 to 90 days prior to
such meeting, giving specified information as to the shareholder and as to the
person nominated and the business proposed to be brought before the meeting.
Preferred Share Purchase Rights
In 1988, Federal-Mogul's Board of Directors authorized the distribution of
one Preferred Share Purchase Right (a "Right") for each outstanding share of
Common Stock. Each Right entitles the holder thereof to buy one-half of one
one-hundredth of a share of Series B Junior Participating Preferred Stock at a
price of $70.00. The Rights are governed by the Rights Agreement.
As distributed, the Rights trade together with the Common Stock. They may be
exercised or traded separately only after the earlier to occur of: (i) 10 days
following a public announcement that a person or group of persons has obtained
the right to acquire 10% or more of the outstanding Common Stock (20% in the
case of certain institutional investors), or (ii) 10 business days (or such
later date as may be determined by action of the Board of Directors) following
the commencement or announcement of an intent to make a tender offer or
exchange offer which would result in beneficial ownership by a person or group
of persons of 10% or more of the outstanding Common Stock. If the acquiring
person or group of persons acquires 10% or more of the Common Stock, each
Right (other than those held by the acquirer) will entitle its holder to
purchase, at the Right's exercise price, shares of Common Stock having a
market value of twice the Right's exercise price. Additionally, if Federal-
Mogul is acquired in a merger or other business combination, each Right (other
than those held by the surviving or acquiring company) will entitle its holder
to purchase, at the Right's exercise price, shares of the acquiring company's
stock (or Common Stock of Federal-Mogul if it is the surviving corporation)
having a market value of twice the Right's exercise price.
Rights may be redeemed at the option of the Board of Directors for $0.005
per Right at any time before a person or group or persons acquires 10% or more
of Federal-Mogul's Common Stock. The Board may amend the Rights at any time
without shareholder approval. The Rights will expire by their terms on
November 14, 1998.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire Federal-
Mogul in a manner that causes the Rights to become exercisable. Federal-Mogul
believes, however, that the Rights would neither affect any prospective
offeror willing to negotiate with the Board of Directors of Federal-Mogul nor
interfere with any merger or other business combination approved by the Board
of Directors.
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SELLING SHAREHOLDERS
The following table sets forth certain information concerning the beneficial
ownership of Common Stock held by the Selling Shareholders, as of May 12,
1998. As of such date, none of the Selling Shareholders holds greater than 1%
of the shares of the Company's outstanding Common Stock.
<TABLE>
<CAPTION>
NUMBER OF
SHARES BENEFICIALLY
OWNED AS OF
NAME MAY 12, 1998(1)
---- -------------------
<S> <C>
Robert J. Morris Revocable Trust UAD 2/16/83................ 69,075
Ellen J. Morris............................................. 97,353
Bruce E. Morris............................................. 113,287
Richard A. Morris........................................... 85,927
Elliot Lehman Trust 5/87.................................... 57,930
Frances M. Lehman Trust 5/87................................ 99,372
E. Lehman 15 Year Income Trust.............................. 3,178
F. Lehman 15 Year Income Trust.............................. 4,104
Kenneth A. Lehman 1996 E. Family Trust 6/96................. 3,213
Kenneth A. Lehman 1996 F. Family Trust 6/96................. 3,213
Paul Lehman 1996 E. Family Trust 6/96....................... 3,213
Paul Lehman 1996 F. Family Trust 6/96....................... 3,213
Kay L. Schlozman 1996 E. Family Trust 6/96.................. 3,213
Kay L. Schlozman 1996 F. Family Trust 6/96.................. 3,213
Kenneth A. Lehman........................................... 106,407
Lucy G. Lehman.............................................. 11,405
Paul A. Lehman.............................................. 98,514
Ronna Stamm................................................. 5,973
Kay Schlozman Children's Trust 12/82........................ 7,690
Schlozman Family Gift Trust 9/85............................ 14,456
Kay L. Schlozman 1997 Children's Trust 11/97................ 3,845
Betsy G. Lehman Irrevocable Trust #1 12/83.................. 6,867
K. Lehman Children's Trust 12/82 FBO Betsy.................. 20,602
K. Lehman Children's Trust 9/85 FBO Betsy................... 4,819
Amy G. Lehman Irrevocable Trust #1 12/83.................... 6,867
K. Lehman Children's Trust 12/82 FBO Amy.................... 20,602
K. Lehman Children's Trust 9/85 FBO Amy..................... 4,819
Peter G. Lehman Irrevocable Trust #1 12/83.................. 6,867
K. Lehman Children's Trust 12/82 FBO Peter.................. 20,602
K. Lehman Children's Trust 9/85 FBO Peter................... 4,819
Daniel A. Schlozman Trust #1 12/81.......................... 61,265
Daniel A. Schlozman Trust #2 12/81.......................... 61,264
Schlozman 1994 Gift Trust for Julia......................... 5,922
Sylvia M. Radov............................................. 134,413
Lewis C. Weinberg Irrevocable Trust 8/76.................... 54,994
Sylvia 1996 Gift Trust for Barbara.......................... 2,216
Sylvia 1996 Gift Trust for David............................ 2,216
Sylvia 1996 Gift Trust for Daniel........................... 2,216
DAW Family Trust 9/85....................................... 45,382
Daniel C. Weinberg Revocable Trust 7/97..................... 72,382
Carol Jung.................................................. 35,685
Kessler 1996 Gift for David................................. 1,323
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF
SHARES BENEFICIALLY
OWNED AS OF
NAME MAY 12, 1998(1)
---- -------------------
<S> <C>
Kessler 1996 Gift Trust for Daniel.......................... 1,438
DCW Family Trust 9/85....................................... 123,028
Lewis Weinberg Grandchildrens Gift Trust 12/82--Keith....... 11,788
Keith A. Kessler............................................ 23,921
Lewis Weinberg Grandchildrens Gift Trust 12/82--Arthur...... 11,788
Arthur J. Kessler........................................... 33,025
Lewis Weinberg Grandchildrens Gift Trust 12/82--Eric........ 11,788
Eric J. Kessler Irrevocable Trust 12/77..................... 33,025
Lewis Weinberg Grandchildrens Gift Trust 12/82--Mindy....... 29,872
SMR-DAW Childrens Gift Trust for Mindy 12/82................ 6,319
Lewis Weinberg Grandchildrens Gift Trust 12/82--Brian....... 29,872
SMR-DAW Childrens Gift Trust for Brian 12/82................ 6,319
Sylvia MGP Trust for Daniel 06/96........................... 97,893
Weinberg 1992 Gift Trust for Barbara........................ 41,954
Weinberg 1992 Gift Trust for David.......................... 41,954
Weinberg 1992 Gift Trust for Daniel......................... 41,954
Sylvia 1992 Gift Trust for Barbara.......................... 102,185
Sylvia 1992 Gift Trust for David............................ 102,185
Sylvia 1992 Gift Trust for Daniel........................... 102,185
H&M Realty Corporation...................................... 216,584
McCormick Investments, Inc.................................. 81
McCormick Investments, LP................................... 7,926
</TABLE>
- --------
(1) Assumes conversion of Series E Stock.
The Selling Shareholders may from time to time offer and sell pursuant to
this Prospectus and a Prospectus Supplement providing therefor, shares of
Common Stock held by such Selling Shareholders.
The shares of Common Stock that may be offered and sold by the Selling
Shareholders will be acquired by such Selling Shareholders through conversion
of Series E Stock received as part of the consideration received by them in
the Federal-Mogul acquisition of Fel-Pro. Pursuant to the Registration Rights
Agreement among Federal-Mogul and the Selling Shareholders. Federal-Mogul
shall bear all expenses incident to Federal-Mogul's performance of or
compliance with the Registration Rights Agreement, except that the Selling
Shareholders will pay all underwriting discounts and commissions relating to
their shares of Common Stock, brokerage fees, transfer taxes, and the fees and
expenses of any counsel, accountants or other representatives retained by the
Selling Shareholders, if any. The Selling Shareholders will be indemnified by
Federal-Mogul against certain liabilities, including certain liabilities under
the Securities Act, or will be entitled to contribution in connection
therewith.
18
<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 1933,
of the Securities so offered and sold.
If Securities are sold by means of an underwritten offering, Federal-Mogul
will execute an underwriting agreement with an underwriter or underwriters at
the time an agreement for such sale is reached, and the names of the specific
managing underwriter or underwriters, as well as any other underwriters, and
the terms of the transaction, including commissions, discounts and any other
compensation of the underwriters and dealers, if any, will be set forth in the
Prospectus Supplement which will be used by the underwriters to make resales
of the Securities in respect of which this Prospectus is delivered to the
public. If underwriters are utilized in the sale of the Securities in respect
of which this Prospectus is delivered, the Securities will be acquired by the
underwriters for their own account and may be resold from time to time in one
or more transactions, including negotiated transactions, at fixed public
offering prices or at varying prices determined by the underwriter at the time
of sale. Securities may be offered to the public either through underwriting
syndicates represented by managing underwriters or directly by the managing
underwriters. If any underwriter or underwriters are utilized in the sale of
the Securities, unless otherwise indicated in the Prospectus Supplement, the
underwriting agreement will provide that the obligations of the underwriters
are subject to certain conditions precedent and that the underwriters with
respect to a sale of Securities will be obligated to purchase all such
Securities of a series if any are purchased.
If a dealer is utilized in the sales of the Securities in respect of which
this Prospectus is delivered, Federal-Mogul will sell such Securities to the
dealer as principal. The dealer may then resell such Securities to the public
at varying prices to be determined by such dealer at the time of resale. Any
such dealer may be deemed to be an underwriter, as such term is defined in the
Securities Act, of the Securities so offered and sold. The name of the dealer
and the terms of the transaction will be set forth in the Prospectus
Supplement relating thereto.
Offers to purchase Securities may be solicited directly by Federal-Mogul and
the sale thereof may be made by Federal-Mogul directly to institutional
investors or others, who may be deemed to be underwriters within the meaning
of the Securities Act with respect to any resale thereof. The terms of any
such sales will be described in the Prospectus Supplement relating thereto.
Agents, underwriters and dealers may be entitled under relevant agreements
to indemnification or contribution by Federal-Mogul against certain
liabilities, including liabilities under the Securities Act.
19
<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, April 17, 1998 and May 14,
1998; and
4. Federal-Mogul's Proxy Statement for the 1998 Annual Shareholders'
Meeting, filed on April 21, 1998.
All documents filed by Federal-Mogul with the Commission pursuant to
Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act after the date of this
Prospectus and prior to the termination of the offering made hereby shall be
deemed to be incorporated by reference into this Prospectus and made a part
hereof from the date of filing of such documents, except that the information
required by Item 402 (i), (k) and (l) of Regulation S-K under the Securities
Act and included in any such document is not incorporated herein. Any
statement contained
20
<PAGE>
in this Prospectus or in a document incorporated or deemed to be incorporated
by reference herein shall be deemed to be modified or superseded for purposes
of this Prospectus to the extent that a statement contained herein or therein
or in a subsequently filed document, that also is or is deemed to be
incorporated by reference herein or therein, modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus.
THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS (NOT INCLUDING EXHIBITS TO SUCH
DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE IN
SUCH DOCUMENTS) ARE AVAILABLE WITHOUT CHARGE UPON WRITTEN OR ORAL REQUEST
DIRECTED TO: EDWARD W. GRAY, JR., ESQ., SENIOR VICE PRESIDENT, GENERAL COUNSEL
AND SECRETARY, FEDERAL-MOGUL CORPORATION, 26555 NORTHWESTERN HIGHWAY,
SOUTHFIELD, MICHIGAN 48034 (TELEPHONE: (248) 354-7700).
LEGAL MATTERS
Unless otherwise indicated in the applicable Prospectus Supplement, the
validity of Securities being offered hereby will be passed upon for Federal-
Mogul by David M. Sherbin, Esq., Associate General Counsel of Federal-Mogul.
Mr. Sherbin owns and holds options to purchase approximately 1,550 shares of
Common Stock of Federal-Mogul.
EXPERTS
The consolidated financial statements and schedules of Federal-Mogul as of
December 31, 1997 and for each of the three years in the period ended December
31, 1997 incorporated by reference herein have been audited by Ernst & Young
LLP, independent auditors, as set forth in their reports thereon included
therein and incorporated herein by reference. Such consolidated financial
statements and schedules audited by Ernst & Young LLP are incorporated herein
by reference in reliance on such reports given upon the authority of such firm
as experts in accounting and auditing.
The consolidated financial statements of T&N as of December 31, 1997 and for
each of the three years in the period ended December 31, 1997 incorporated by
reference herein have been audited by KPMG Audit Plc, independent auditors, as
set forth in their reports thereon included therein and incorporated herein by
reference. Such consolidated financial statements audited by KPMG Audit Plc
are incorporated herein by reference in reliance on their report given on
their authority as experts in accounting and auditing.
The financial statements of Fel-Pro as of December 28, 1997 and December 29,
1996 for each of the three years in the period ended December 28, 1997
incorporated by reference herein have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports thereon included therein
and incorporated by reference herein. Such financial statements audited by
Ernst & Young LLP are incorporated herein by reference in reliance on such
report given upon the authority of such firm as experts in accounting and
auditing.
21
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Federal-Mogul Financial Statements:
Unaudited Consolidated Statements of Operations for the Three-Month
Periods Ended March 31,
1998 and 1997.......................................................... F-2
Consolidated Balance Sheets at March 31, 1998 (Unaudited) and December
31, 1997............................................................... F-3
Unaudited Consolidated Statements of Cash Flows for the Three-Month
Periods Ended March 31,
1998 and 1997.......................................................... F-4
Notes to Unaudited Consolidated Financial Statements.................... F-5
Report of Independent Auditors.......................................... F-13
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1996 and 1995.................................................... F-14
Consolidated Balance Sheets at December 31, 1997 and 1996............... F-15
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1996 and 1995.................................................... F-16
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 1997,
1996 and 1995.......................................................... F-17
Notes to Consolidated Financial Statements.............................. F-18
T&N Financial Statements:
Independent Auditor's Report............................................ F-41
Consolidated Profit and Loss Accounts for the Years Ended December 31,
1997, 1996 and 1995.................................................... F-42
Consolidated Balance Sheets at December 31, 1997 and 1996............... F-43
Consolidated Cash Flow Statements for the Years Ended December 31, 1997,
1996 and 1995.......................................................... F-44
Reconciliations of Movements in Shareholders' Funds for the Years Ended
December 31, 1997,
1996 and 1995.......................................................... F-48
Notes to Consolidated Financial Statements.............................. F-49
Fel-Pro Financial Statements:
Report of Independent Auditors.......................................... F-85
Consolidated Statements of Operations for the Years Ended December 28,
1997, December 29, 1996 and December 31, 1995.......................... F-86
Consolidated Balance Sheets at December 28, 1997 and December 29, 1996.. F-87
Consolidated Statements of Cash Flows for the Years Ended December 28,
1997, December 29, 1996 and December 31, 1995.......................... F-88
Notes to Consolidated Financial Statements.............................. F-89
</TABLE>
F-1
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
THREE-MONTH PERIODS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
--------------------
1998 1997
--------- ---------
(MILLIONS OF
DOLLARS, EXCEPT PER
SHARE AMOUNT)
<S> <C> <C>
Net sales................................................ $ 658.0 $ 485.6
Cost of products sold.................................... 496.7 373.5
--------- ---------
Gross margin........................................... 161.3 112.1
Selling, general and administrative expenses............. (98.1) (75.9)
Amortization............................................. (10.1) (2.5)
Purchased in-process research and development charge..... (18.6) --
Restructuring charges.................................... (10.5) --
Adjustment of assets held for sale to fair value......... (20.0) --
Interest expense......................................... (15.5) (9.8)
Interest income.......................................... 6.7 0.7
International currency exchange losses................... (1.1) (0.1)
Net gain on British pound currency option and forward
contract................................................ 13.3 --
Other expense, net....................................... (5.8) (2.0)
--------- ---------
Earnings Before Income Taxes........................... 1.6 22.5
Income tax expense....................................... 8.8 8.6
--------- ---------
Net Earnings (Loss).................................. (7.2) 13.9
Preferred stock dividends, net of related tax benefits... 0.8 2.1
--------- ---------
Net Earnings (Loss) Available for Common
Shareholders........................................ $ (8.0) $ 11.8
========= =========
Earnings Per Common Share................................
Net earnings (loss).................................... $ (.20) $ .34
========= =========
Net earnings (loss) assuming dilution.................. $ (.20) $ .32
========= =========
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
F-2
<PAGE>
CONSOLIDATED BALANCE SHEETS AT
MARCH 31, 1998 AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
UNAUDITED
MARCH 31 DECEMBER 31
1998 1997
--------- -----------
(MILLIONS OF DOLLARS)
ASSETS
------
<S> <C> <C>
Current assets:
Cash and equivalents........................................ $ 101.5 $ 541.4
Accounts receivable......................................... 728.6 158.9
Investment in accounts receivable securitization............ 86.0 48.7
Inventories................................................. 697.5 277.0
Prepaid expenses and income tax benefits.................... 261.0 113.2
Acquired businesses to be divested.......................... 443.8 --
-------- --------
Total current assets...................................... 2,318.4 1,139.2
Property, plant and equipment................................. 1,469.1 313.9
Goodwill...................................................... 2,675.9 143.8
Other intangible assets....................................... 379.4 48.4
Business investments and other assets......................... 555.9 156.8
-------- --------
Total Assets.............................................. $7,398.7 $1,802.1
======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities:
Short-term debt, including current portion of long-term
debt....................................................... $ 837.8 $ 28.6
Accounts payable............................................ 418.2 102.3
Accrued compensation........................................ 162.2 36.8
Restructuring and rationalization reserves.................. 188.6 31.5
Payable to T&N plc shareholders............................. 60.3 --
Current portion of asbestos liability....................... 100.0 --
Other accrued liabilities................................... 343.5 130.4
-------- --------
Total current liabilities................................. 2,110.6 329.6
Long-term debt................................................ 2,273.7 273.1
Long-term portion of asbestos liability....................... 1,251.4 --
Postemployment benefits....................................... 452.0 190.9
Other accrued liabilities..................................... 84.3 50.6
Minority interest in consolidated subsidiaries................ 65.7 13.6
Minority interest--preferred securities of affiliate.......... 575.0 575.0
<CAPTION>
SHAREHOLDERS' EQUITY
--------------------
<S> <C> <C>
Series C ESOP preferred stock................................. 48.1 49.0
Series E preferred stock...................................... 225.0 --
Common stock.................................................. 202.4 201.0
Additional paid-in capital.................................... 327.3 332.6
Accumulated deficit........................................... (130.8) (123.6)
Unearned ESOP compensation.................................... (21.7) (21.8)
Accumulated other comprehensive income........................ (61.5) (65.7)
Other......................................................... (2.8) (2.2)
-------- --------
Total Shareholders' Equity................................ 586.0 369.3
-------- --------
Total Liabilities and Shareholders' Equity.............. $7,398.7 $1,802.1
======== ========
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
F-3
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE-MONTH PERIODS ENDED MARCH 31, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31
-----------------
1998 1997
--------- ------
(MILLIONS OF
DOLLARS)
<S> <C> <C>
CASH PROVIDED FROM (USED BY) OPERATING ACTIVITIES
Net earnings (loss)....................................... $ (7.2) $ 13.9
Adjustments to reconcile net earnings (loss) to net cash
provided from operating activities
Depreciation and amortization........................... 29.8 14.0
Purchased in-process research and development charge.... 18.6 --
Restructuring charges................................... 10.5 --
Adjustment of assets held for sale to fair value........ 20.0 --
Deferred income taxes................................... (0.7) 4.6
Postemployment benefits................................. (0.1) (0.4)
Increase in accounts receivable......................... (57.1) (38.0)
Decrease in inventories................................. 36.8 17.1
Increase (decrease) in accounts payable................. 22.0 (2.4)
Increase in current liabilities and other............... 20.0 28.3
Payments against restructuring and reengineering
reserves............................................... (4.5) (9.0)
Payments against asbestos liability..................... (5.4) --
--------- ------
Net Cash Provided From Operating Activities............... 82.7 28.1
CASH PROVIDED FROM (USED BY) INVESTING ACTIVITIES
Expenditures for property, plant and equipment............ (19.5) (8.4)
Proceeds from sale of business investments................ 49.3 10.4
Proceeds from sale of options............................. 39.5 --
Business acquisitions, net of cash acquired............... (2,655.8) --
--------- ------
Net Cash Provided From (Used By) Investing Activities... (2,586.5) 2.0
CASH PROVIDED FROM (USED BY) FINANCING ACTIVITIES
Issuance of common stock.................................. 7.4 0.8
Net increase (decrease) in debt........................... 2,111.7 (23.3)
Fees paid for debt issuance............................... (33.3) --
Investment in accounts receivable securitization.......... (9.6) --
Dividends................................................. (5.4) (5.7)
Other..................................................... (6.9) (2.0)
--------- ------
Net Cash Provided From (Used By) Financing Activities... 2,063.9 (30.2)
Decrease in Cash and Equivalents........................ (439.9) (0.1)
Cash and Equivalents at Beginning of Period................. 541.4 33.1
--------- ------
Cash and Equivalents at End of Period..................... $ 101.5 $ 33.0
========= ======
</TABLE>
See accompanying Notes to Unaudited Consolidated Financial Statements.
F-4
<PAGE>
FEDERAL-MOGUL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with United States generally accepted accounting
principles (U.S. GAAP) for interim financial information and with instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three month period ended March 31, 1998 are not necessarily
indicative of the results that may be expected for the year ended December 31,
1998. For further information, refer to the consolidated financial statements
and footnotes thereto included in the Company's annual report on Form 10-K for
the year ended December 31, 1997. Certain items in the prior year condensed
consolidated financial statements have been reclassified to conform with the
presentation used in 1998.
2. ACQUISITIONS
The Company acquired Fel-Pro, Incorporated and certain affiliated entities,
which constitute the operating businesses of the Fel-Pro group of companies
(Fel-Pro), and acquired T&N plc (T&N) and Bimet S.A. (Bimet) during the first
quarter of 1998. In addition, the Company increased its ownership in the
Summerton, South Carolina gasket business (Summerton) and KFM Bearing Co.,
Ltd. (KFM) during the first quarter. Due to the complexity of valuing certain
assets and liabilities acquired and related valuation estimates that are in
process, the purchase allocation may subsequently be adjusted as further
information becomes available. Goodwill recognized in connection with these
transactions is being amortized on a straight-line basis over forty years.
Fel-Pro Transaction
On February 24, 1998, the Company acquired all the equity interests of Fel-
Pro, a privately owned manufacturer headquartered in Skokie, Illinois, for a
total consideration of approximately $717 million, which included 1,030,325.6
shares of Federal-Mogul Series E Mandatory Exchangeable preferred stock with
an imputed value of $225 million (refer also to Note 8) and approximately $492
million in cash. The acquisition has been accounted for as a purchase and,
accordingly, the total consideration was allocated to the acquired assets and
assumed liabilities based on estimated fair values as of the acquisition date.
The preliminary purchase price allocation of the total consideration exceeds
the estimated fair value of net assets acquired by $509.3 million which has
been recognized as goodwill.
The consolidated statement of operations includes the operating results of
the acquired business, exclusive of the Fel-Pro chemical business (refer to
the caption "Acquired Businesses to be Divested," described later in this
section), from the acquisition date.
T&N plc Transaction
On March 6, 1998, the Company satisfied all regulatory conditions relating
to the acquisition of T&N, a manufacturer based in Manchester, England, and
made its offer wholly unconditional. The Company paid for the outstanding T&N
shares on March 12, 1998.
As of March 31, 1998 the Company has paid total consideration (including
direct costs of the acquisition) of $2.356 billion. The Company also acquired
cash of approximately $222 million and debt of approximately $707 million. In
addition, the Company is required to pay 260 pence per share for certain T&N
options expected to be converted to T&N shares subsequent to March 31, 1998.
The Company has estimated the cost, net of cash to be received, of outstanding
T&N options at March 31, 1998 and included the amount ($60.3 million) as a
liability in the balance sheet caption "Payable to T&N plc shareholders." The
acquisition has been accounted
F-5
<PAGE>
FEDERAL-MOGUL CORPORATION
NOTES TO (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
for as a purchase and, accordingly, the total consideration was allocated to
the acquired assets and assumed liabilities based on estimated fair values as
of the acquisition date. The preliminary purchase price allocation of the
total consideration exceeds the estimated fair value of net assets acquired by
$2.035 billion which has been recognized as goodwill.
The consolidated statement of operations for the three months ended March
31, 1998 includes the operating results of T&N, exclusive of the T&N Bearings
Business (refer to the caption "Acquired Businesses to be Divested," described
later in this section), from the acquisition date. The Company recognized an
$18.6 million charge in the first quarter of 1998 associated with the
estimated fair value of purchased in process research and development costs
allocated in purchase accounting to a portion of the total consideration paid.
Acquired Businesses to be Divested
In connection with securing regulatory approvals for the acquisition of T&N,
the Company executed an Agreement Containing Consent Order with the FTC on
February 27, 1998. Pursuant to this agreement the Company must divest the T&N
Bearings Business, consisting of T&N's thinwall and dry bearings (polymer
bearings) operations within six months after the FTC declares the consent
order final and must provide for independent management of those assets
pending such divestiture. The agreement stipulates that the T&N Bearings
business is to be maintained as a viable, independent competitor of the
Company and that the Company shall not attempt to direct the activities of, or
exercise control over, the T&N Bearings business or have contact with the T&N
Bearings business outside of normal business activities.
In addition, the Company is holding the chemical business acquired in the
Fel-Pro transaction for sale. The Company expects to complete the divestiture
of the chemical business within one year.
The net assets of the T&N Bearings Business and chemical business have been
recorded at their fair value based on estimates of selling values less costs
to sell, calculated using multiples of earnings similar to recent comparable
industry transactions. The Company's investment in the T&N Bearings Business
and chemical business is included in the balance sheet caption "Acquired
businesses to be divested." In addition, the Company's preliminary purchase
price allocation for T&N includes an increase of $124 million to adjust the
acquired income tax liability related to the anticipated divestiture of the
T&N Bearings Business.
Operating results for the T&N Bearings and chemical businesses (which
includes amortization expense for goodwill allocated to the businesses and
interest expense relating to the holding costs of the businesses) have been
excluded from the condensed consolidated statement of operations for the three
months ended March 31, 1998.
Pro Forma Results
The following unaudited pro forma financial information for the three months
ended March 31, 1998 and 1997 assume the T&N and Fel-Pro acquisitions occurred
as of the beginning of the respective periods, after giving effect to certain
adjustments, including the amortization of intangible assets, interest expense
on acquisition debt, divestitures of the T&N Bearings business and Fel-Pro
chemical business, and income tax effects. The pro forma results (in millions
of dollars, except per share data) have been prepared for comparative purposes
only and are not necessarily indicative of the results of operations which may
occur in the future or that would have occurred had the acquisitions of T&N
and Fel-Pro been consummated on the dates indicated, nor are they necessarily
indicative of the Company's future results of operations (refer also to
Management's Discussion and Analysis of Financial Conditions and Results of
Operations--Pro Forma Results).
F-6
<PAGE>
FEDERAL-MOGUL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
THREE MONTHS ENDED MARCH 31,
------------------------------------------
1998 1997
-------------------- --------------------
<S> <C> <C>
Net sales.................... $ 1,193.6 $ 1,247.9
Net loss..................... $ (16.5) $ (7.0)
Loss per share............... $ (0.44) $ (0.28)
Loss per share assuming
dilution.................... $ (0.44) $ (0.28)
</TABLE>
Summerton, KFM and Bimet Transactions
In February 1998, the Company increased its ownership in Summerton in
connection with the Bruss Divestiture Agreement, described in Note 7. In March
1998, the Company increased its ownership from 30% to 87% in KFM, a Korean
joint venture formed in 1988 with Kukje Special Metal Co., Ltd. Also in March
1998, the Company acquired Bimet, a manufacturer of engine bearings, bushings
and related products located in Gdansk, Poland. The total cash consideration
paid for the Summerton, KFM and Bimet acquisitions approximated $32 million.
The Summerton, KFM and Bimet transactions have been accounted for as
purchases and, accordingly, the total consideration was allocated to the
acquired assets and assumed liabilities based on its estimated fair values as
of the acquisition dates. The preliminary purchase price allocation of total
consideration over the estimated fair value of net assets acquired of $16.4
million has been recognized as goodwill. The consolidated statement of
operations for the three months ended March 31, 1998 includes the operating
results of the acquired businesses from the applicable date of acquisition.
3. RESTRUCTURING AND RATIONALIZATION OF ACQUIRED BUSINESSES
Restructuring Charge
During the first quarter of 1998, the Company recognized a $10.5 million
restructuring charge related to operations in place prior to the acquisitions
of T&N and Fel-Pro. The restructuring charge included $10.2 million and $0.3
million for severance and exit costs, respectively. Employee severance costs
result from planned terminations in various business operations of the
Company. The severance costs were based on the estimated levels that will be
paid to the affected employees pursuant to the Company's workforce reduction
policies and certain foreign governmental regulations. The Company anticipates
that the actions related to the first quarter 1998 restructuring plan will be
completed primarily within one year.
Rationalization of Acquired Businesses
In connection with the previously discussed acquisitions, the Company
recognized approximately $151 million in reserves related to the
rationalization and integration of acquired businesses. The rationalization
reserves provide for approximately $125 million and $26 million in severance
and exit costs, respectively.
The components of the integration plan include: closure of four
manufacturing facilities worldwide; relocation of highly manual manufacturing
product lines to lower cost regions or more suitable locations; consolidation
of overlapping manufacturing, technical and sales facilities and joint
ventures; closure of two aftermarket central warehouses and five in-country
warehouses; consolidation of aftermarket marketing and customer support
functions; and streamlining of administrative, sales, marketing and product
engineering staffs worldwide. An anticipated result of the integration plan
and the restructuring will be a reduction of approximately 4,200 full-time
employees.
F-7
<PAGE>
FEDERAL-MOGUL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. ASBESTOS LIABILITY AND LEGAL PROCEEDINGS
T&N Asbestos
As of March 31, 1998, the Company has provided $1.351 billion as its
estimate for future costs related to resolving asbestos claims. In the United
States, the Company's subsidiary, T&N, and two of T&N's U.S. subsidiaries (the
T&N Companies) are among many defendants named in numerous court actions
alleging personal injury resulting from exposure to asbestos or asbestos-
containing products. T&N is also subject to asbestos-disease litigation, to a
lesser extent, in the United Kingdom and to property damage litigation based
upon asbestos in the United States. Because of the slow onset of asbestos-
related diseases, management anticipates that similar claims will be made in
the future. It is not known how many such claims may be made nor the
expenditure which may arise therefrom. T&N has appointed the Center for Claims
Resolution (CCR) as its exclusive representative in relation to all asbestos-
related personal injury claims made against the T&N Companies in the United
States.
Prior to its acquisition, T&N secured a 500 million pound sterling
(approximately $838 million at the March 31, 1998 exchange rate of 1.6758 U.S.
dollars to 1 pound sterling) layer of insurance which will be triggered should
the aggregate number of claims notified after June 30, 1996, where the
exposure occurred prior to that date, exceed 690 million pound sterling
(approximately $1,156 million at the March 31, 1998 exchange rate). At March
31, 1998 the Company has recorded reserves for incurred but not reported
claims up to the insurance level, 690 million pound sterling.
While management believes that estimated reserves, which have not been
reduced by any potential insurance proceeds, are appropriate for anticipated
losses arising from T&N's asbestos related claims, no assurance can be given
that T&N will not be subject to material additional liabilities and
significant additional litigation relating to asbestos. Any such liabilities
or litigation could have a material adverse effect on the Company's results of
operations, business, liquidity and financial condition.
Federal-Mogul and Fel-Pro Asbestos
Federal-Mogul Corporation also is one of a large number of defendants in a
number of lawsuits brought by claimants alleging injury due to exposure to
asbestos. In addition, Fel-Pro has been named as a defendant in approximately
18,000 product liability cases involving asbestos, primarily involving gasket
or packing products sold to ship owners. The Company is defending all such
claims vigorously and believes that it and Fel-Pro have substantial defenses
to liability and adequate insurance coverage for defense and indemnity costs
(though Fel-Pro has agreed with its insurers to pay 20% of defense costs, in
exchange for the right to a significant role in decisions regarding
litigation). While the outcome of litigation can't be predicted with
certainty, management believes that asbestos claims pending against Federal-
Mogul Corporation and Fel-Pro as of March 31, 1998 will not have a material
effect on the Company's financial position. No related reserves, or payments,
have been provided, or paid to date, related to asbestos claims pending
against Federal-Mogul Corporation and Fel-Pro.
Other
The Company is involved in various other legal actions and claims, directly
and through its subsidiaries (including T&N and Fel-Pro). After taking into
consideration legal counsel's evaluation of such actions, management is of the
opinion that its outcomes are not reasonably likely to have a material adverse
affect on the Company's financial position, operating results, or cash flows.
F-8
<PAGE>
FEDERAL-MOGUL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. BRITISH POUND CURRENCY OPTION AND FORWARD CONTRACT
In the fourth quarter of 1997, in anticipation of the then pending T&N
acquisition, the Company purchased a British pound currency option for $28.1
million with a notional amount of $2.5 billion. In January 1998, the Company
settled the option and recognized a loss of $17.3 million.
Also in January 1998, in anticipation of the then pending T&N acquisition,
the Company entered into a forward contract to purchase 1.5 billion pounds
sterling for a notional amount of approximately $2.45 billion. As a result of
favorable exchange fluctuations in the British pound/U.S. dollar exchange rate
experienced during the contract period, the Company recognized a $30.6 million
gain.
The Company entered into the above transactions to effectively serve as
economic hedges for the purchase of T&N. Such transactions, however, do not
qualify for "hedge accounting" under GAAP, and therefore the loss on the
British pound currency option and the gain on the British pound forward
contract are reflected in the statement of operations caption "Net gain on
British pound currency option and forward contract."
6. ISSUANCE OF DEBT
In connection with the acquisition of T&N, the Company entered into a $2.675
billion floating rate Senior Credit Agreement (consisting of a $2.275 billion
term loan facility, and a $400 million revolving loan facility) and a $500
million floating rate Senior Subordinated Credit Agreement, each with Chase
Manhattan Bank as agent and lender.
As of March 31, 1998, the Company had $2.5 billion outstanding related to
the Senior Credit Agreement and Senior Subordinated Credit Agreement. The
Senior Credit Agreement has maturities ranging from March of 1999 through the
year 2005. The Senior Subordinated Credit Agreement matures in March of 1999.
In addition, the Company funded a portion of the T&N acquisition through the
December 1997 sale of 7% Trust Convertible Preferred Securities (generating
gross proceeds of $575 million) by Federal-Mogul Financing Trust, a subsidiary
of the Company.
On April 17, 1998, in connection with the Company's efforts to put into
place a permanent capital structure with an appropriate combination of debt
and equity to partially replace the Senior Credit Agreement and Senior
Subordinated Credit Agreement debt. The Company filed a registration statement
with the Securities and Exchange Commission for the offering from time to time
of up to an aggregate $2.5 billion of debt or equity securities (including
shares of common stock registered for the account of certain securityholders).
On May 14, 1998 the Company filed an amendment to such registration statement
relating to a proposed offering of 9,712.093 shares of common stock by the
Company (exclusive of 1,287,907 shares of common stock for the account of
certain securityholders). The net proceeds to the Company of such offering of
common stock are expected to be used to repay certain existing indebtedness.
The Company is also evaluating the possibility of issuing debt securities
pursuant to such registration statement, all or a significant portion of the
net proceeds, of which the Company would use to refinance certain additional
indebtedness of the Company. There can be no assurance that any such offering
of common stock or debt securities will be consummated.
The accelerated payment, if any, of certain portions of the Senior Credit
Agreement and Senior Subordinated Credit Agreement debt would result in a
significant extraordinary charge due to the write-off of the issuance costs
associated with the early retirement of debt. The total unamortized issuance
costs related to the Senior Credit Agreement and Senior Subordinated Credit
Agreement was approximately $56 million at March 31, 1998.
F-9
<PAGE>
FEDERAL-MOGUL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pursuant to the Senior Credit Agreement, the stock of Felt Products Mfg. Co.
(Felt), a wholly owned subsidiary of the Company, is pledged as collateral for
borrowings outstanding thereunder. Such pledge also secures the Company's ESOP
obligation, Medium-term notes and Senior Notes. The following presents certain
unaudited financial information of Felt as of March 31, 1998 and the period
February 24, 1998 to March 31, 1998 (in millions):
<TABLE>
<CAPTION>
FINANCIAL POSITION
- ------------------
<S> <C>
Current assets.......... $115.3
Noncurrent assets....... 661.6
Current liabilities..... 78.0
Noncurrent liabilities.. 547.7
</TABLE>
<TABLE>
<CAPTION>
OPERATING RESULTS
- -----------------
<S> <C>
Net Sales............... $36.2
Costs and expenses...... 35.0
Net earnings............ 1.2
</TABLE>
Subsequent Event
In April 1998, the Company retired $251 million in private placement debt
assumed in connection with the acquisition of T&N. The early retirement of the
debt required a make whole payment of approximately $27 million, which will be
recognized as an extraordinary loss in the second quarter of 1998 of
approximately $19 million, net of the related tax benefit.
7. ASSETS HELD FOR SALE AND DIVESTITURES
In addition to the T&N Bearings Business and Fel-Pro chemical businesses
held for sale, during the first quarter of 1998, the Company decided to sell
its subsidiary, Bertolotti Pietro e Figli, S.r.l. (Bertolotti), conducting
aftermarket operations in Italy. The carrying value of Bertolotti's assets
have been reduced to its fair value based on estimates of selling values less
costs to sell, calculated using multiples of earnings similar to recent
automotive industry transactions in Italy. The Company recognized a $20.0
million first quarter charge primarily associated with the write-down of
Bertolotti's assets to the estimated fair value. The Company expects to
complete the sale of Bertolotti within one year.
As part of its 1996 restructuring plan, the Company continued to close or
sell certain retail aftermarket operations during the first quarter of 1998.
As of March 31, 1998, retail aftermarket operations that continue to be held
for sale include those in Puerto Rico. Net cash proceeds received for those
retail aftermarket locations sold in the first quarter approximated $2
million. No gain or loss was recognized on the dispositions of those retail
aftermarket locations, as the related assets had been previously adjusted to
fair value.
Bruss Divestiture Agreement
In February 1998, the Company divested its minority interest in G. Bruss
GmbH & Co. KG, a German manufacturer of seals and gaskets. As part of the
divestiture agreement the Company also increased its ownership to 100% in
Summerton. The Company received net proceeds of approximately $47 million
related to the divestiture agreement and recognized a gain on the divestiture
of $4.8 million. The gain on the divestiture is included as a component of
other expense.
Sale of Acquired Options
In addition, the Company received proceeds from the sale of options which
were acquired with the acquisition of T&N. No gain or loss was recognized in
connection with the sale of the options acquired.
F-10
<PAGE>
FEDERAL-MOGUL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. EARNINGS PER SHARE, NON-CASH TRANSACTION AND COMPREHENSIVE INCOME
Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share for the three months ended March 31, 1998 and 1997 (in millions,
except per share data):
<TABLE>
<CAPTION>
1998 1997
------ -----
<S> <C> <C>
Numerator:
Net earnings (loss)..................................... $ (7.2) $13.9
Series C preferred dividend requirement................. (0.6) (0.6)
Series D preferred dividend requirement................. -- (1.5)
Series E preferred dividend requirement................. (0.2) --
------ -----
Numerator for basic earnings per share--income (loss)
available to common shareholders....................... $ (8.0) $11.8
Effect of dilutive securities:
Series C preferred dividend requirement............... -- 0.6
Additional required ESOP contribution................. -- (0.5)
------ -----
Numerator for diluted earnings per share--income (loss)
available to common shareholders after assumed
conversions............................................ $ (8.0) $11.9
====== =====
Denominator:
Denominator for basic earnings per share--weighted
average shares outstanding............................. 40.1 34.7
Effect of dilutive securities:
Dilutive stock options outstanding...................... -- 0.2
Nonvested stock......................................... -- 0.4
Conversion of Series C preferred stock.................. -- 1.6
Contingent issuance of common stock to satisfy Series C
redemption price guarantee............................. -- 0.3
------ -----
Denominator for dilutive earnings per share adjusted
weighted average after assumed conversions............. 40.1 37.2
====== =====
Basic earnings (loss) per share........................... $(0.20) $0.34
====== =====
Diluted earnings (loss) per share......................... $(0.20) $0.32
====== =====
</TABLE>
Convertible preferred securities redeemable for 11.2 million shares of
common stock were outstanding during the first quarter of 1998. In addition,
1,030,325.6 shares of Series E Stock approximating 5.2 million shares of
common stock were outstanding during a portion of the first quarter of 1998.
The convertible preferred securities and Series E stock were not included in
the computation of diluted earnings per share for the three months ended March
31, 1998 because the effect would be antidilutive.
Quarterly dividends of $0.12 per common share were declared for both the
first quarters of 1998 and 1997.
Non-cash Transaction
In connection with the Fel-Pro acquisition, the Company issued 1,030,325.6
million shares of Series E Mandatory Exchangeable Preferred Stock (Series E
Stock) with an imputed value of $225 million. The shares of Series E Stock are
exchangeable into shares of the Company's common stock at a rate of five
shares of common stock per share of Series E Stock. The Series E Stock are
required to be exchanged no later than February 24, 1999, subject to certain
conditions and pay quarterly dividends at a rate of $0.12 per common stock
equivalent.
F-11
<PAGE>
FEDERAL-MOGUL CORPORATION
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Comprehensive Income
During 1997, the Financial Accounting Standards Board issued Statement No.
130, Reporting Comprehensive Income. This Statement establishes standards for
the reporting and display of comprehensive income and its components in a full
set of general purpose financial statements. The Company adopted Statement 130
as of January 1, 1998. The adoption of this Statement had no impact on the
Company's net earnings (loss) or shareholders' equity. Statement 130 requires
foreign currency translation adjustments and unrealized gains or losses on
investments and certain derivative instruments, which prior to the adoption of
Statement 130 were reported as a component of shareholders' equity, to be
included in other comprehensive income.
Total comprehensive income (loss), net of the related estimated tax, was
$(4.6) million and $5.3 million for the three months ended March 31, 1998 and
1997, respectively.
9. INVENTORIES
At March 31, 1998 and December 31, 1997, inventories consisted of the
following (in millions of dollars):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Finished products......................................... $515.8 $254.6
Work-in-process........................................... 84.9 21.8
Raw materials............................................. 139.9 15.7
------ ------
740.6 292.1
Reserve for inventory valuation........................... (43.1) (15.1)
------ ------
$697.5 $277.0
====== ======
</TABLE>
The significant increase in inventory was primarily due to the previously
described acquisitions in Note 2.
10. INCOME TAXES
During the first quarter of 1998, the Company recognized charges for
adjustment of assets held for sale to fair value and purchased in-process
research and development and recognized a net gain on the British pound
currency option and forward contract. These transactions resulted in a pre-tax
net charge of $25.3 million. The net income tax benefit related to these
transactions totaled $2.1 million.
F-12
<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-13
<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-14
<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-15
<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-16
<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-17
<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-18
<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-19
<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-20
<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-21
<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-22
<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-23
<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-24
<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-25
<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-26
<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-27
<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-28
<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-29
<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-30
<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-31
<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-32
<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-33
<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-34
<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-35
<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-36
<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-37
<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-38
<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-39
<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-40
<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-41
<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-42
<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-43
<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-44
<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-45
<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-46
<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-47
<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-48
<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-49
<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-50
<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-51
<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-52
<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-53
<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-54
<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-55
<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-56
<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-57
<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-58
<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-59
<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-60
<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-61
<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-62
<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-63
<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-64
<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-65
<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-66
<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-67
<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-68
<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-69
<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-70
<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-71
<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-72
<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-73
<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-74
<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-75
<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-76
<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-77
<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-78
<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-79
<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-80
<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-81
<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-82
<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-83
<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-84
<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-85
<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-86
<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-87
<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-88
<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-89
<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-90
<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-91
<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-92
<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-93
<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-94
<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-95
<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
Prospectus Summary........................................................ S-3
Risk Factors.............................................................. S-11
Forward-Looking Statements................................................ S-14
Use of Proceeds........................................................... S-15
Exchange Rates............................................................ S-15
T&N and Fel-Pro Acquisitions.............................................. S-16
Price Range of Common Stock and Dividends................................. S-18
Capitalization............................................................ S-19
Unaudited Pro Forma Financial Data........................................ S-20
Selected Consolidated Financial Data--
Federal-Mogul............................................................ S-27
Selected Consolidated Financial Data--T&N................................. S-28
Selected Consolidated Financial Data--Fel-Pro............................. S-30
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... S-31
Description of Certain Indebtedness....................................... S-52
Business.................................................................. S-55
Management................................................................ S-66
Principal Shareholders.................................................... S-70
Selling Shareholders...................................................... S-71
Description of Capital Stock.............................................. S-73
Certain United States Tax Consequences to
Non-United States Holders................................................ S-78
Underwriting.............................................................. S-79
Presentation of Financial Information..................................... S-82
Legal Matters............................................................. S-82
Experts................................................................... S-82
PROSPECTUS
Available Information..................................................... 2
The Company............................................................... 3
Ratio Of Earnings To Fixed Charges And Ratio Of Earnings To Combined Fixed
Charges And Preferred Stock Dividends.................................... 4
Use of Proceeds........................................................... 4
Description of Debt Securities............................................ 4
Description of Preferred Stock and Common Stock........................... 14
Selling Shareholders...................................................... 17
Plan of Distribution...................................................... 19
Incorporation of Certain Information by Reference......................... 20
Legal Matters............................................................. 21
Experts................................................................... 21
FINANCIAL STATEMENTS
Index to Financial Statements............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
11,000,000 SHARES
LOGO
COMMON STOCK
----------------
PROSPECTUS SUPPLEMENT
----------------
MERRILL LYNCH & CO.
BEAR, STEARNS & CO. INC.
MORGAN STANLEY DEAN WITTER
SALOMON SMITH BARNEY
DONALDSON, LUFKIN & JENRETTE
SECURITIES
CORPORATION
SCHRODER & CO. INC.
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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 MAY 14, 1998
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED , 1998)
11,000,000 SHARES
LOGO
COMMON STOCK
-----------
Of the 11,000,000 shares of Common Stock, without par value (the "Common
Stock"), of Federal-Mogul Corporation (the "Company" or "Federal-Mogul") being
offered hereby, 9,712,093 shares are being offered by Federal-Mogul and
1,287,907 shares are being offered by certain shareholders of Federal-Mogul
(the "Selling Shareholders"). Federal-Mogul will not receive any of the
proceeds from the sale of shares of Common Stock by the Selling Shareholders.
See "Selling Shareholders" and "Underwriting."
Of the 11,000,000 shares of Common Stock offered hereby, 2,200,000 are being
offered initially outside the United States and Canada (the "International
Offering") and 8,800,000 shares are being offered initially in a concurrent
offering inside the United States and Canada (the "U.S. Offering," and together
with the International Offering, the "Offerings"). The public offering price
and the underwriting discount per share are identical for both Offerings. See
"Underwriting."
The Common Stock is listed on the New York Stock Exchange, Inc. (the "NYSE")
under the trading symbol "FMO." On May 12, 1998, the last reported sale price
of Common Stock on the NYSE was $63 15/16 per share. See "Price Range of Common
Stock and Dividends."
SEE "RISK FACTORS" BEGINNING ON PAGE S-11 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO
WHICH IT RELATES. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROCEEDS TO PROCEEDS TO
PRICE TO UNDERWRITING FEDERAL- SELLING
PUBLIC DISCOUNT(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 $2,000,000.
(3) Federal-Mogul and the Selling Shareholders have granted options to the U.S.
Underwriters, exercisable within 30 days of the date hereof, to purchase up
to an aggregate of 1,320,000 additional shares of Common Stock and options
to the International Managers, exercisable within 30 days of the date
hereof, to purchase up to an aggregate of 330,000 additional shares of
Common Stock, solely to cover over-allotments, if any. If such options are
exercised in full, the total Price to Public, Underwriting Discounts,
Proceeds to Federal-Mogul and Proceeds to Selling Shareholders will be
$ , $ , $ and $ , respectively. See "Underwriting."
-----------
The shares of Common Stock are being offered by the several Underwriters,
subject to prior sale, when, as and if delivered to and accepted by them,
subject to approval of certain legal matters by counsel to the Underwriters and
to certain other conditions. The Underwriters reserve the right to withdraw,
cancel or modify such offer and to reject orders in whole or in part. It is
expected that delivery of Common Stock will be made in New York, New York on or
about , 1998.
-----------
MERRILL LYNCH INTERNATIONAL
BEAR, STEARNS INTERNATIONAL LIMITED
MORGAN STANLEY DEAN WITTER
SALOMON SMITH BARNEY INTERNATIONAL
DONALDSON, LUFKIN & JENRETTE
INTERNATIONAL
SCHRODERS
ABN AMRO ROTHSCHIL___CREDITDLYONNAIS SECURITIE____DRESDNERSKLEINWORT BENSON
-----------
The date of this Prospectus Supplement is , 1998.
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the International Purchase
Agreement (the "International Purchase Agreement") among Federal-Mogul, the
Selling Shareholders and each of the underwriters named below (the
"International Managers"), and concurrently with the sale of 8,800,000 shares
of Common Stock to the U.S. Underwriters (as defined below), Federal-Mogul and
the Selling Shareholders severally have agreed to sell to each of the
International Managers, and each of the International Managers severally has
agreed to purchase, the aggregate number of shares of Common Stock set forth
opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
INTERNATIONAL MANAGERS ---------
<S> <C>
Merrill Lynch International.....................................
Bear, Stearns International Limited.............................
Morgan Stanley & Co. International Limited......................
Smith Barney Inc................................................
Donaldson, Lufkin & Jenrette International......................
J. Henry Schroder & Co. Limited.................................
ABN AMRO Rothschild.............................................
Credit Lyonnais Securities .....................................
Kleinwort Benson Limited........................................
---------
Total....................................................... 2,200,000
=========
</TABLE>
Merrill Lynch International ("Merrill Lynch"), Bear, Stearns International
Limited, Morgan Stanley & Co. International Limited, Smith Barney Inc.,
Donaldson, Lufkin & Jenrette International, J. Henry Schroder & Co. Limited,
ABN AMRO Rothschild, Credit Lyonnais Securities and Kleinwort Benson Limited
are acting as representatives (the "International Managers") of the
International Managers.
Federal-Mogul and the Selling Shareholders have also entered into a Purchase
Agreement (the "U.S. Purchase Agreement" and, together with the International
Purchase Agreement, the "Purchase Agreements") with certain underwriters in
the United States and Canada (collectively, the "U.S. Underwriters" and,
together with the International Managers, the "Underwriters"). Subject to the
terms and conditions set forth in the U.S. Purchase Agreement, and
concurrently with the sale of 2,200,000 shares of Common Stock to the
International Managers pursuant to the International Purchase Agreement,
Federal-Mogul and the Selling Shareholders severally have agreed to sell to
the U.S. Underwriters, and the U.S. Underwriters severally have agreed to
purchase from Federal-Mogul and the Selling Shareholders, an aggregate of
8,800,000 shares of Common Stock. The offering price per share and the total
underwriting discount per share are identical under the U.S. Purchase
Agreement and the International Purchase Agreement.
In each Purchase Agreement, the several International Managers and the
several U.S. Underwriters, respectively, have agreed, subject to the terms and
conditions set forth in such Purchase Agreement, to purchase all of the shares
of Common Stock being sold pursuant to such Purchase Agreement if any of such
shares of Common Stock being sold pursuant to such Purchase Agreement are
purchased. Under certain circumstances, the commitments of non-defaulting
International Managers or U.S. Underwriters (as the case may be) may be
increased. The sale of Common Stock to the International Managers is
conditioned upon the sale of shares of Common Stock to the U.S. Underwriters,
and vice versa.
S-79
<PAGE>
The International Managers and the U.S. Underwriters have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for
the coordination of their activities. Pursuant to the Intersyndicate
Agreement, the Underwriters are permitted to sell shares of Common Stock to
each other for purposes of resale at the public offering price set forth on
the cover page of this Prospectus Supplement, less an amount not greater than
the selling concession. Under the terms of the Intersyndicate Agreement, the
International Managers and any dealer to whom they sell shares of Common Stock
will not offer to sell or sell shares of Common Stock to persons who are U.S.
or Canadian persons or to persons they believe intend to resell to persons who
are U.S. or Canadian persons, and the U.S. Underwriters and any dealer to whom
they sell shares of Common Stock will not offer to sell or sell shares of
Common Stock to non-U.S. persons or non-Canadian persons or to persons they
believe intend to resell to non-U.S. persons or non-Canadian persons, except,
in each case, for transactions pursuant to the Intersyndicate Agreement.
The International Managers have advised Federal-Mogul and the Selling
Shareholders that the International Managers propose initially to offer the
shares of Common Stock to the public at the public offering price set forth on
the cover page of this Prospectus Supplement and to certain dealers at such
price less a concession not in excess of $ per share of Common Stock. The
International Managers may allow, and such dealers may reallow, a discount not
in excess of $ per share of Common Stock on sales to certain other
dealers. After the public offering, the public offering price, concession and
discount may be changed.
Each International Manager has agreed that (i) it has not offered or sold,
and will not for a period of six months following consummation of the
Offerings offer or sell, in the United Kingdom by means of any document, any
shares of Common Stock offered hereby, other than to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances that do not constitute an offer to the public
within the meaning of the Public Offers of Securities Regulations of 1995;
(ii) it has complied with and will comply with all applicable provisions of
the Financial Services Act of 1986 with respect to anything done by it in
relation to the Common Stock in form or otherwise involving the United Kingdom
and (iii) it has only issued or passed on and will only issue the Common Stock
if that person is a kind described in Article 11(3) of the Financial Services
Act of 1986 (Investment Advertisements) (Exemptions) Order 1996, as amended,
or is a person to whom the document may otherwise lawfully be issued or passed
on.
Purchasers of the shares of Common Stock offered hereby may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase, in addition to the offering price set forth on the
cover page hereof.
Federal-Mogul, certain of its executive officers and the Selling
Shareholders have granted options to the International Managers, exercisable
during the 30-day period after the date of this Prospectus Supplement, to
purchase up to an additional 165,000 shares and 165,000 shares, respectively,
of Common Stock at the public offering price set forth on the cover page
hereof, less the underwriting discount. The International Managers may
exercise this option only to cover over-allotments, if any, made on the sale
of shares of Common Stock offered hereby. To the extent that the International
Managers exercise this option, each International Manager will be obligated,
subject to certain conditions, to purchase approximately the number of
additional shares of Common Stock proportionate to such International
Managers' initial amount reflected in the foregoing table. Federal-Mogul and
the Selling Shareholders have also granted options to the U.S. Underwriters,
exercisable during the 30-day period after the date of this Prospectus
Supplement, to purchase up to an additional 660,000 shares and 660,000 shares,
respectively, of Common Stock to cover over-allotments, if any, on terms
similar to those granted to the International Managers.
Federal-Mogul, certain of its executive officers and the Selling
Shareholders have agreed that, except under certain circumstances (including
issuances of securities in connection with acquisitions), they will not,
directly or indirectly, for a period of 90 days following the date of the
Prospectus Supplement, except with the prior consent of Merrill Lynch, on
behalf of the Underwriters, sell, offer to sell, grant any option for the sale
of, or otherwise dispose of, any Common Stock, except that Federal-Mogul may
issue Common Stock or options for shares of Common Stock issued pursuant to or
sold in connection with any employee benefit plan.
S-80
<PAGE>
Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the International Managers and certain
selling group members to bid for and purchase the Common Stock. As an
exception to these rules, the International Managers are permitted to engage
in certain transactions that stabilize the price of the Common Stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing
or maintaining the price of the Common Stock.
If the International Managers create a short position in the Common Stock in
connection with the Offerings (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus Supplement), the
International Managers may reduce that short position by purchasing Common
Stock in the open market. The International Managers may also elect to reduce
any short position through the exercise of all or part of the over-allotment
option described above. In general, purchases of a security for the purpose of
stabilization or to reduce a short position could cause the price of the
security to be higher than it might be in the absence of such purchases.
Neither Federal-Mogul nor the International Managers make any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither Federal-Mogul nor the Underwriters make any representation
that the Underwriters will engage in such transactions or that such
transactions, once commenced, will not be discontinued without notice.
Federal-Mogul and the Selling Shareholders have agreed to indemnify the
International Managers and the U.S. Underwriters, Federal-Mogul has agreed to
indemnify certain Selling Shareholders, and such Selling Shareholders have
agreed to indemnify Federal-Mogul, in each case against certain liabilities,
including liabilities under the Securities Act of 1933.
S-81
<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
----
PROSPECTUS SUPPLEMENT
<S> <C>
Prospectus Summary........................................................ S-3
Risk Factors.............................................................. S-11
Forward-Looking Statements................................................ S-14
Use of Proceeds........................................................... S-15
Exchange Rates............................................................ S-15
T&N and Fel-Pro Acquisitions.............................................. S-16
Price Range of Common Stock and Dividends................................. S-18
Capitalization............................................................ S-19
Unaudited Pro Forma Financial Data........................................ S-20
Selected Consolidated Financial Data--Federal-Mogul....................... S-27
Selected Consolidated Financial Data--T&N................................. S-28
Selected Consolidated Financial Data--Fel-Pro............................. S-30
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... S-31
Description of Certain Indebtedness....................................... S-52
Business.................................................................. S-55
Management................................................................ S-66
Principal Shareholders.................................................... S-70
Selling Shareholders...................................................... S-71
Description of Capital Stock.............................................. S-73
Certain United States Tax Consequences to Non-United States Holders....... S-78
Underwriting.............................................................. S-79
Presentation of Financial Information..................................... S-82
Legal Matters............................................................. S-82
Experts................................................................... S-82
PROSPECTUS
Available Information..................................................... 2
The Company............................................................... 3
Ratio Of Earnings To Fixed Charges And Ratio Of Earnings To Combined Fixed
Charges And Preferred Stock Dividends.................................... 4
Use of Proceeds........................................................... 4
Description of Debt Securities............................................ 4
Description of Preferred Stock and Common Stock........................... 14
Selling Shareholders...................................................... 17
Plan of Distribution...................................................... 19
Incorporation of Certain Information by Reference......................... 20
Legal Matters............................................................. 21
Experts................................................................... 21
FINANCIAL STATEMENTS
Index to Financial Statements............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
11,000,000 SHARES
LOGO
COMMON STOCK
----------------
PROSPECTUS SUPPLEMENT
----------------
MERRILL LYNCH INTERNATIONAL
BEAR, STEARNS INTERNATIONAL
LIMITED
MORGAN STANLEY DEAN WITTER
SALOMON SMITH BARNEY
INTERNATIONAL
DONALDSON, LUFKIN & JENRETTE
INTERNATIONAL
SCHRODERS
ABN AMRO ROTHSCHILD
CREDIT LYONNAIS SECURITIES
DRESDNER KLEINWORT BENSON
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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.............. 450,000
Fee of accountants........................................... 100,000
Printing expenses............................................ 700,000
Miscellaneous................................................ 12,500
----------
Total.................................................... $2,000,000
==========
</TABLE>
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 Shelf Underwriting Agreement relating to Debt and Equity
Securities
**1.2 Form of U.S. Purchase Agreement
**1.3 Form of International Purchase Agreement
*3.1 Federal-Mogul's Second Restated Articles of Incorporation, as
amended (Incorporated by reference to Exhibit 3.1 to Federal-
Mogul's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1992)
**3.2 Amendment to Federal-Mogul's Second Restated Articles of
Incorporation, as amended
*3.3 Federal-Mogul's Bylaws, as amended (filed as Exhibit 3.2 to
Federal-Mogul's Form 10-K for the year ended December 31, 1997)
*4.1 Form of Senior Indenture
*4.2 Form of Subordinated Indenture
4.3 Form of Debt Security. The form or forms of such Debt Securities
with respect to each particular offering will be filed as an
exhibit subsequently included or incorporated by reference
herein.
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
4.4 Form of Preferred Stock. Any amendment to the Company's Articles
of Incorporation authorizing the creation of any series of
Preferred Stock and setting forth the rights, preferences and
designations thereof will be filed as an exhibit subsequently
included or incorporated by reference herein.
**5 Opinion of David M. Sherbin, Esq.
**12.1 Computation of Ratio of Earnings to Fixed Charges
**12.2 Computation of Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends
*23.1 Consent of Ernst & Young LLP
*23.2 Consent of KPMG Audit Plc
**23.3 Consent of David M. Sherbin, Esq. (included in his opinion filed
as Exhibit 5)
*23.4 Consent of Paul S. Lewis
*23.5 Consent of Sir Geoffrey Whalen
*24 Power of Attorney (included on the signature page of the
original filing)
*25.1 Statement of Eligibility on Form T-1 under the Trust Indenture
Act of 1939, as amended, of The Bank of New York, as Trustee
under the Indentures
</TABLE>
- --------
*Previously filed.
**Filed herewith.
ITEM 17. UNDERTAKINGS
The Undersigned registrant hereby undertakes:
A. to file, during any period in which offers or sales are being made of
the securities registered hereby, a post-effective amendment to this
registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) to reflect in the prospectus any fact or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in "Calculation of
Registration Fee" table in the effective registration statement;
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in this registration statement or
any material change to such information in the registration statement;
provided, however, that the undertakings set forth in the paragraphs (i)
and (ii) above do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic
reports filed by the registrant pursuant to Section 13 or Section 15(d) of
the Securities Exchange Act of 1934 that are incorporated by reference in
this registration statement.
B. that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-3
<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 foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
F. that, for purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
G. that, for purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
H. to file an application for the purpose of determining the eligibility
of the trustee to act under subsection (a) of Section 310 of the Trust
Indenture Act in accordance with the rules and regulations prescribed by
the Commission under Section 305(b)(2) of such Act.
II-4
<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 3RD DAY OF JUNE, 1998.
Federal-Mogul Corporation
/s/ David M. Sherbin
By: _________________________________
David M. Sherbin
Associate General Counsel
II-5
<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, STATE OF MICHIGAN, ON THE 3RD DAY OF
JUNE, 1998.
Federal-Mogul Corporation
/s/ David M. Sherbin
By: _________________________________
David M. Sherbin
Associate General Counsel
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the 3rd day of June, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Chairman of the Board, President, Chief
___________________________________________ Executive Officer and Director (Principal
Richard A. Snell Executive Officer)
* Executive Vice President and Chief
___________________________________________ Financial Officer (Principal Financial
Thomas W. Ryan Officer)
* Vice President and Controller (Principal
___________________________________________ Accounting Officer)
Kenneth P. Slaby
* Director
___________________________________________
John J. Fannon
* Director
___________________________________________
Roderick M. Hills
* Director
___________________________________________
Antonio Madero
* Director
___________________________________________
Robert S. Miller, Jr.
* Director
___________________________________________
John C. Pope
* Director
___________________________________________
Dr. Hugo Michael Sekyra
</TABLE>
/s/ David M. Sherbin
*By: ________________________________
David M. Sherbin,
Attorney-in-fact
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S> <C>
1.1 Form of Shelf Underwriting Agreement relating to Debt and Eq-
uity Securities
1.2 Form of U.S. Purchase Agreement
1.3 Form of International Purchase Agreement
3.1 Federal-Mogul's Second Restated Articles of Incorporation, as
amended (incorporated by reference to Exhibit 3.1 to Federal-
Mogul's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1992)
3.2 Amendment to Federal-Mogul's Second Restated Articles of In-
corporation, as amended
3.3 Federal-Mogul's Bylaws, as amended (filed as Exhibit 3.2 to
Federal-Mogul's Form 10-K for the year ended December 31,
1997)
4.1 Form of Senior Indenture
4.2 Form of Subordinated Indenture
4.3 Form of Debt Security. The form or forms of such Debt Securi-
ties with respect to each particular offering will be filed as
an exhibit subsequently included or incorporated by reference
herein.
4.4 Form of Preferred Stock. Any amendment to the Company's Arti-
cles of Incorporation authorizing the creation of any series
of Preferred Stock and setting forth the rights, preferences
and designations thereof will be filed as an exhibit subse-
quently included or incorporated by reference herein.
5 Opinion of David M. Sherbin, Esq.
12.1 Computation of Ratio of Earnings to Fixed Charges
12.2 Computation of Ratio of Earnings to Combined Fixed Changes and
Preferred Stock Dividends
23.1 Consent of Ernst & Young LLP
23.2 Consent of KPMG Audit Plc
23.3 Consent of David M. Sherbin, Esq. (included in his opinion
filed as Exhibit 5)
23.4 Consent of Paul S. Lewis
23.5 Consent of Sir Geoffrey Whalen
24 Power of Attorney (included on the signature page of the orig-
inal filing)
25.1 Statement of Eligibility on Form T-1 under the Trust Indenture
Act of 1939, as amended, of The Bank of New York, as Trustee
under the Indentures
</TABLE>
<PAGE>
EXHIBIT 1.1
________________________________________________________________________________
________________________________________________________________________________
FEDERAL-MOGUL CORPORATION
(a Michigan corporation)
Common Stock, Preferred Stock and Debt Securities
UNIVERSAL SHELF UNDERWRITING AGREEMENT
Dated: June ., 1998
________________________________________________________________________________
________________________________________________________________________________
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
UNDERWRITING AGREEMENT............................................................................................ 1
- ----------------------
SECTION 1. Representations and Warranties............................................................... 4
------------------------------
(a) Representations and Warranties by the Company................................................... 4
(1) Compliance with Registration Requirements............................................... 4
(2) Incorporated Documents.................................................................. 5
(3) Independent Accountants................................................................. 5
(4) Financial Statements.................................................................... 5
(5) No Material Adverse Change in Business.................................................. 6
(6) Good Standing of the Company............................................................ 6
(7) Good Standing of Subsidiaries........................................................... 6
(8) Capitalization.......................................................................... 7
(9) Authorization of this Underwriting Agreement and Terms Agreement........................ 7
(10) Authorization of Common Stock........................................................... 7
(11) Authorization of Preferred Stock........................................................ 7
(12) Authorization of Senior Debt Securities and/or Subordinated Debt Securities............. 8
(13) Authorization of the Indentures......................................................... 8
(14) Authorization of Underlying Securities.................................................. 8
(15) Descriptions of the Underwritten Securities, Underlying Securities and Indentures ...... 9
(16) Absence of Defaults and Conflicts....................................................... 9
(17) Absence of Labor Dispute................................................................ 10
(18) Absence of Proceedings.................................................................. 10
(19) Accuracy of Exhibits.................................................................... 11
(20) Absence of Further Requirements......................................................... 11
(21) Possession of Intellectual Property..................................................... 11
(22) Possession of Licenses and Permits...................................................... 11
(23) Title to Property....................................................................... 11
(24) Commodity Exchange Act.................................................................. 12
(25) Investment Company Act.................................................................. 12
(26) Environmental Laws...................................................................... 12
(b) Officers' Certificates.......................................................................... 13
SECTION 2. Sale and Delivery to Underwriters; Closing................................................... 13
------------------------------------------
(a) Underwritten Securities......................................................................... 13
(b) Option Underwritten Securities.................................................................. 13
(c) Payment......................................................................................... 14
(d) Denominations; Registration..................................................................... 14
SECTION 3. Covenants of the Company..................................................................... 15
------------------------
(a) Compliance with Securities Regulations and Commission Requests.................................. 15
</TABLE>
i
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<TABLE>
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PAGE
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<S> <C>
(b) Filing of Amendments............................................................................ 15
(c) Delivery of Registration Statements............................................................. 15
(d) Delivery of Prospectuses........................................................................ 16
(e) Continued Compliance with Securities Laws....................................................... 16
(f) Blue Sky Qualifications......................................................................... 16
(g) Earnings Statement.............................................................................. 17
(h) Reservation of Securities....................................................................... 17
(i) Use of Proceeds................................................................................. 17
(j) Listing......................................................................................... 17
(k) Restriction on Sale of Securities............................................................... 17
(l) Reporting Requirements.......................................................................... 17
SECTION 4. Payment of Expenses.......................................................................... 18
-------------------
(a) Expenses........................................................................................ 18
(b) Termination of Agreement........................................................................ 18
SECTION 5. Conditions of Underwriters' Obligations...................................................... 18
---------------------------------------
(a) Effectiveness of Registration Statement......................................................... 19
(b) Opinion of Counsel for Company.................................................................. 19
(c) Opinion of Counsel for Underwriters............................................................. 19
(d) Officers' Certificate........................................................................... 19
(e) Accountant's Comfort Letter..................................................................... 20
(f) Bring-down Comfort Letter....................................................................... 20
(g) Ratings......................................................................................... 20
(h) Approval of Listing............................................................................. 20
(i) No Objection.................................................................................... 21
(j) Lock-up Agreements.............................................................................. 21
(k) Over-Allotment Option........................................................................... 21
(l) Additional Documents............................................................................ 22
(m) Termination of Terms Agreement.................................................................. 22
SECTION 6. Indemnification.............................................................................. 22
---------------
(a) Indemnification of Underwriters................................................................. 22
(b) Indemnification of Company, Directors and Officers.............................................. 23
(c) Actions against Parties; Notification........................................................... 23
(d) Settlement without Consent if Failure to Reimburse.............................................. 24
SECTION 7. Contribution................................................................................. 24
------------
SECTION 8. Representations, Warranties and Agreements to Survive Delivery............................... 26
--------------------------------------------------------------
SECTION 9. Termination.................................................................................. 26
-----------
(a) Underwriting Agreement.......................................................................... 26
(b) Terms Agreement................................................................................. 26
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
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<S> <C>
(c) Liabilities..................................................................................... 27
SECTION 10. Default by One or More of the Underwriters.................................................. 27
------------------------------------------
SECTION 11. Notices..................................................................................... 28
-------
SECTION 12. Parties..................................................................................... 28
-------
SECTION 13. Governing Law and Time..................................................................... 28
-----------------------
SECTION 14. Effect of Headings.......................................................................... 28
------------------
</TABLE>
iii
<PAGE>
Draft of June 1, 1998
FEDERAL-MOGUL CORPORATION
(a Michigan corporation)
Common Stock, Preferred Stock and Debt Securities
UNDERWRITING AGREEMENT
----------------------
June ., 199__
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
Federal-Mogul Corporation, a Michigan corporation (the "Company"), proposes
to issue and sell up to $2,500,000,000 aggregate initial public offering price
of its (i) shares of common stock, no par value per share (the "Common Stock"),
(ii) shares of preferred stock, without par value (the "Preferred Stock"), or
(iii) senior or subordinated debt securities (the "Debt Securities"), or any
combination thereof, from time to time, in or pursuant to one or more offerings
on terms to be determined at the time of sale.
The Preferred Stock will be issued in one or more series and each series of
Preferred Stock may vary, as applicable, as to the title, specific number of
shares, rank, stated value, liquidation preference, dividend rate or rates (or
method of calculation), dividend payment dates, redemption provisions, sinking
fund requirements, conversion provisions (and terms of the related Underlying
Securities (as defined below)) and any other variable terms as set forth in the
applicable certificate of designations (each, the "Certificate of Designations")
relating to such series of Preferred Stock.
The Debt Securities will be issued in one or more series as senior
indebtedness (the "Senior Debt Securities") under an indenture, dated as of .
(the "Senior Indenture"), between the Company and The Bank of New York, as
trustee (the "Senior Trustee"), or as subordinated indebtedness (the
"Subordinated Debt Securities") under an indenture, dated as of . (the
<PAGE>
"Subordinated Indenture", and collectively with the Senior Indenture, the
"Indentures", and each, an "Indenture"), between the Company and The Bank of New
York, as trustee (the "Subordinated Trustee", and collectively with the Senior
Trustee, the "Trustees", and each, a "Trustee"). Each series of Debt Securities
may vary, as applicable, as to title, aggregate principal amount, rank, interest
rate or formula and timing of payments thereof, stated maturity date, redemption
and/or repayment provisions, sinking fund requirements, conversion provisions
(and terms of the related Underlying Securities) and any other variable terms
established by or pursuant to the applicable Indenture.
As used herein, "Securities" shall mean the Common Stock, Preferred Stock,
Senior Debt Securities or Subordinated Debt Securities, or any combination
thereof, initially issuable by the Company and "Underlying Securities" shall
mean the Common Stock, Preferred Stock, Senior Debt Securities or Subordinated
Debt Securities issuable upon conversion of the Preferred Stock, Senior Debt
Securities or Subordinated Debt Securities, as applicable.
Whenever the Company determines to make an offering of Securities through
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch"), or through an underwriting syndicate managed by Merrill
Lynch, the Company will enter into an agreement (each, a "Terms Agreement")
providing for the sale of such Securities to, and the purchase and offering
thereof by, Merrill Lynch and such other underwriters, if any, selected by
Merrill Lynch (the "Underwriters", which term shall include Merrill Lynch,
whether acting as sole Underwriter or as a member of an underwriting syndicate,
as well as any Underwriter substituted pursuant to Section 10 hereof). The
Terms Agreement relating to the offering of Securities shall specify the number
or aggregate principal amount, as the case may be, of Securities to be initially
issued (the "Initial Underwritten Securities"), the name of each Underwriter
participating in such offering (subject to substitution as provided in Section
10 hereof) and the name of any Underwriter other than Merrill Lynch acting as
co-manager in connection with such offering, the number or aggregate principal
amount, as the case may be, of Initial Underwritten Securities which each such
Underwriter severally agrees to purchase, whether such offering is on a fixed or
variable price basis and, if on a fixed price basis, the initial offering price,
the price at which the Initial Underwritten Securities are to be purchased by
the Underwriters, the form, time, date and place of delivery and payment of the
Initial Underwritten Securities and any other material variable terms of the
Initial Underwritten Securities, as well as the material variable terms of any
related Underlying Securities. In addition, if applicable, such Terms Agreement
shall specify whether the Company has agreed to grant to the Underwriters an
option to purchase additional Securities to cover over-allotments, if any, and
the number or aggregate principal amount, as the case may be, of Securities
subject to such option (the "Option Underwritten Securities"). As used herein,
the term "Underwritten Securities" shall include the Initial Underwritten
Securities and all or any portion of any Option Underwritten Securities. The
Terms Agreement, which shall be substantially in the form of Exhibit A hereto,
may take the form of an exchange of any standard form of written
telecommunication between the Company and Merrill Lynch, acting for itself and,
if applicable, as representative of any other Underwriters. Each offering of
Underwritten Securities through Merrill Lynch as sole Underwriter or through an
underwriting syndicate
2
<PAGE>
managed by Merrill Lynch will be governed by this Underwriting Agreement, as
supplemented by the applicable Terms Agreement.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-3 (No. 333-50413) and pre-
effective amendments nos. 1 and 2 thereto for the registration of the Securities
and the Underlying Securities under the Securities Act of 1933, as amended (the
"1933 Act"), and the offering thereof from time to time in accordance with Rule
415 of the rules and regulations of the Commission under the 1933 Act (the "1933
Act Regulations"), and the Company has filed such post-effective amendments
thereto as may be required prior to the execution of the applicable Terms
Agreement. Such registration statement (as so amended, if applicable) has been
declared effective by the Commission and each Indenture has been duly qualified
under the Trust Indenture Act of 1939, as amended (the "1939 Act"). Such
registration statement (as so amended, if applicable), including the
information, if any, deemed to be a part thereof pursuant to Rule 430A(b) of the
1933 Act Regulations (the "Rule 430A Information") or Rule 434(d) of the 1933
Act Regulations (the "Rule 434 Information"), is referred to herein as the
"Registration Statement"; and the final prospectus and the final prospectus
supplement relating to the offering of the Underwritten Securities, in the form
first furnished to the Underwriters by the Company for use in connection with
the offering of the Underwritten Securities, are collectively referred to herein
as the "Prospectus"; provided, however, that all references to the "Registration
Statement" and the "Prospectus" shall also be deemed to include all documents
incorporated therein by reference pursuant to the Securities Exchange Act of
1934, as amended (the "1934 Act"), prior to the execution of the applicable
Terms Agreement; provided, further, that if the Company files a registration
statement with the Commission pursuant to Rule 462(b) of the 1933 Act
Regulations (the "Rule 462 Registration Statement"), then, after such filing,
all references to "Registration Statement" shall also be deemed to include the
Rule 462 Registration Statement; and provided, further, that if the Company
elects to rely upon Rule 434 of the 1933 Act Regulations, then all references to
"Prospectus" shall also be deemed to include the final or preliminary prospectus
and the applicable term sheet or abbreviated term sheet (the "Term Sheet"), as
the case may be, in the form first furnished to the Underwriters by the Company
in reliance upon Rule 434 of the 1933 Act Regulations, and all references in
this Underwriting Agreement to the date of the Prospectus shall mean the date of
the Term Sheet. A "preliminary prospectus" shall be deemed to refer to any
prospectus used before the registration statement became effective and any
prospectus that omitted, as applicable, the Rule 430A Information, the Rule 434
Information or other information to be included upon pricing in a form of
prospectus filed with the Commission pursuant to Rule 424(b) of the 1933 Act
Regulations, that was used after such effectiveness and prior to the execution
and delivery of the applicable Terms Agreement. For purposes of this
Underwriting Agreement, all references to the Registration Statement,
Prospectus, Term Sheet or preliminary prospectus or to any amendment or
supplement to any of the foregoing shall be deemed to include any copy filed
with the Commission pursuant to its Electronic Data Gathering, Analysis and
Retrieval system ("EDGAR").
3
<PAGE>
All references in this Underwriting Agreement to financial statements and
schedules and other information which is "contained," "included" or "stated" (or
other references of like import) in the Registration Statement, Prospectus or
preliminary prospectus shall be deemed to mean and include all such financial
statements and schedules and other information which is incorporated by
reference in the Registration Statement, Prospectus or preliminary prospectus,
as the case may be; and all references in this Underwriting Agreement to
amendments or supplements to the Registration Statement, Prospectus or
preliminary prospectus shall be deemed to mean and include the filing of any
document under the 1934 Act which is incorporated by reference in the
Registration Statement, Prospectus or preliminary prospectus, as the case may
be.
SECTION 1. Representations and Warranties.
------------------------------
(a) Representations and Warranties by the Company. The Company represents
and warrants to Merrill Lynch, as of the date hereof, and to each Underwriter
named in the applicable Terms Agreement, as of the date thereof, as of the
Closing Time (as defined below) and, if applicable, as of each Date of Delivery
(as defined below) (in each case, a "Representation Date"), as follows:
(1) Compliance with Registration Requirements. The Company meets the
-----------------------------------------
requirements for use of Form S-3 under the 1933 Act. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement has been issued under the 1933 Act and no proceedings for that
purpose have been instituted or are pending or, to the knowledge of the
Company, are contemplated by the Commission, and any request on the part of
the Commission for additional information has been complied with. In
addition, each Indenture has been duly qualified under the 1939 Act.
At the respective times the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendments thereto (including
the filing of the Company's most recent Annual Report on Form 10-K with the
Commission (the "Annual Report on Form 10-K")) became effective and at each
Representation Date, the Registration Statement, any Rule 462(b)
Registration Statement and any amendments and supplements thereto complied
and will comply in all material respects with the requirements of the 1933
Act and the 1933 Act Regulations and the 1939 Act and the rules and
regulations of the Commission under the 1939 Act (the "1939 Act
Regulations") and did not and will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading. At the
date of the Prospectus, at the Closing Time and at each Date of Delivery,
if any, the Prospectus and any amendments and supplements thereto did not
and will not include an untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
If the Company elects to rely upon Rule 434 of
4
<PAGE>
the 1933 Act Regulations, the Company will comply with the requirements of
Rule 434. Notwithstanding the foregoing, the representations and warranties
in this subsection shall not apply to statements in or omissions from the
Registration Statement or the Prospectus made in reliance upon and in
conformity with information furnished to the Company in writing by any
Underwriter through Merrill Lynch expressly for use in the Registration
Statement or the Prospectus.
Each preliminary prospectus and prospectus filed as part of the
Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so
filed in all material respects with the 1933 Act Regulations and each
preliminary prospectus and the Prospectus delivered to the Underwriters for
use in connection with the offering of Underwritten Securities will, at the
time of such delivery, be identical to any electronically transmitted
copies thereof filed with the Commission pursuant to EDGAR, except to the
extent permitted by Regulation S-T.
(2) Incorporated Documents. The documents incorporated or deemed to
----------------------
be incorporated by reference in the Registration Statement and the
Prospectus, when they became effective or at the time they were or
hereafter are filed with the Commission, complied and will comply in all
material respects with the requirements of the 1934 Act and the rules and
regulations of the Commission thereunder (the "1934 Act Regulations") and,
when read together with the other information in the Prospectus, at the
date of the Prospectus, at the Closing Time and at each Date of Delivery,
if any, did not and will not include an untrue statement of a material fact
or omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading.
(3) Independent Accountants. The accountants who certified the
-----------------------
financial statements and any supporting schedules thereto included in the
Registration Statement and the Prospectus are independent public
accountants as required by the 1933 Act and the 1933 Act Regulations.
(4) Financial Statements. The financial statements of the Company
--------------------
and its consolidated subsidiaries included in the Registration Statement
and the Prospectus, together with the related schedules and notes, as well
as those financial statements, schedules and notes of any other entity
included therein, present fairly the financial position of the Company and
its consolidated subsidiaries, or such other entity, as the case may be, at
the dates indicated and the statement of operations, stockholders' equity
and cash flows of the Company and its consolidated subsidiaries, or such
other entity, as the case may be, for the periods specified. Such financial
statements have been prepared in conformity with generally accepted
accounting principles ("GAAP") applied on a consistent basis throughout the
periods involved except as disclosed therein, except that financial
statements of T & N plc ("T & N") have been prepared in accordance with
U.K. GAAP applied on a consistent basis throughout the periods involved
except as disclosed therein. The supporting schedules, if any, included in
the Registration Statement and the Prospectus present fairly in accordance
with GAAP the
5
<PAGE>
information required to be stated therein. The selected financial data and
the summary financial information included in the Prospectus present fairly
the information shown therein and have been compiled on a basis consistent
with that of the audited financial statements included in the Registration
Statement and the Prospectus. In addition, any pro forma financial
statements of the Company and its subsidiaries and the related notes
thereto included in the Registration Statement and the Prospectus present
fairly the information shown therein, have been prepared in accordance with
the Commission's rules and guidelines with respect to pro forma financial
statements and have been properly compiled on the bases described therein,
and the assumptions used in the preparation thereof are reasonable and the
adjustments used therein are appropriate to give effect to the transactions
and circumstances referred to therein.
(5) No Material Adverse Change in Business. Since the respective
--------------------------------------
dates as of which information is given in the Registration Statement and
the Prospectus, except as otherwise stated therein, (A) there has been no
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business (a "Material Adverse Effect"), (B) there have
been no transactions entered into by the Company or any of its
subsidiaries, other than those arising in the ordinary course of business,
which are material with respect to the Company and its subsidiaries
considered as one enterprise and (C) except for regular dividends on the
Company's common stock or preferred stock, in amounts per share that are
consistent with past practice or the applicable charter document or
supplement thereto, respectively, there has been no dividend or
distribution of any kind declared, paid or made by the Company on any class
of its capital stock.
(6) Good Standing of the Company. The Company has been duly
----------------------------
organized and is validly existing as a corporation in good standing under
the laws of the State of Michigan and has corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectus and to enter into and perform its obligations
under, or as contemplated under, this Underwriting Agreement and the
applicable Terms Agreement. The Company is duly qualified as a foreign
corporation to transact business and is in good standing in each other
jurisdiction in which such qualification is required, whether by reason of
the ownership or leasing of property or the conduct of business, except
where the failure to so qualify or be in good standing would not result in
a Material Adverse Effect.
(7) Good Standing of Subsidiaries. Each "significant subsidiary" of
-----------------------------
the Company (as such term is defined in Rule 1-02 of Regulation S-X
promulgated under the 1933 Act) and (each, a "Subsidiary" and,
collectively, the "Subsidiaries"), if any, has been duly organized and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectus and is
6
<PAGE>
duly qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the conduct of
business, except where the failure to so qualify or be in good standing
would not result in a Material Adverse Effect. Except as otherwise stated
in the Registration Statement and the Prospectus, all of the issued and
outstanding capital stock of each Subsidiary has been duly authorized and
is validly issued, fully paid and non-assessable and is owned by the
Company, directly or through subsidiaries, free and clear of any security
interest, mortgage, pledge, lien, encumbrance, claim or equity. None of the
outstanding shares of capital stock of any Subsidiary was issued in
violation of preemptive or other similar rights of any securityholder of
such Subsidiary.
(8) Capitalization. If the Prospectus contains a "Capitalization"
--------------
section, the authorized, issued and outstanding shares of capital stock of
the Company is as set forth in the column entitled "Actual" under such
section (except for subsequent issuances thereof, if any, contemplated
under this Underwriting Agreement, pursuant to reservations, agreements or
employee benefit plans referred to in the Prospectus or pursuant to the
exercise of convertible securities or options referred to in the
Prospectus). Such shares of capital stock have been duly authorized and
validly issued by the Company and are fully paid and non-assessable, and
none of such shares of capital stock was issued in violation of preemptive
or other similar rights of any securityholder of the Company.
(9) Authorization of this Underwriting Agreement and Terms Agreement.
----------------------------------------------------------------
This Underwriting Agreement has been, and the applicable Terms Agreement as
of the date thereof will have been, duly authorized, executed and delivered
by the Company.
(10) Authorization of Common Stock. If the Underwritten Securities
-----------------------------
being sold pursuant to the applicable Terms Agreement include Common Stock,
such Underwritten Securities have been, or as of the date of such Terms
Agreement will have been, duly authorized by the Company for issuance and
sale pursuant to this Underwriting Agreement and such Terms Agreement.
Such Underwritten Securities, when issued and delivered by the Company
pursuant to this Underwriting Agreement and such Terms Agreement against
payment of the consideration therefor specified in such Terms Agreement,
will be validly issued, fully paid and non-assessable and will not be
subject to preemptive or other similar rights of any securityholder of the
Company. No holder of such Underwritten Securities is or will be subject
to personal liability by reason of being such a holder.
(11) Authorization of Preferred Stock. If the Underwritten Securities
--------------------------------
being sold pursuant to the applicable Terms Agreement include Preferred
Stock, such Underwritten Securities have been, or as of the date of such
Terms Agreement will have been, duly authorized by the Company for issuance
and sale pursuant to this Underwriting Agreement and such Terms Agreement.
The applicable Preferred Stock, when issued and delivered by the Company
pursuant to this Underwriting Agreement and such Terms Agreement against
payment of the consideration therefor specified in such Terms
7
<PAGE>
Agreement will be validly issued, fully paid and non-assessable and will
not be subject to preemptive or other similar rights of any securityholder
of the Company. No holder of such Preferred Stock is or will be subject to
personal liability by reason of being such a holder. The applicable
Certificate of Designations will be in full force and effect prior to the
Closing Time.
(12) Authorization of Senior Debt Securities and/or Subordinated Debt
----------------------------------------------------------------
Securities. If the Underwritten Securities being sold pursuant to the
----------
applicable Terms Agreement include Senior Debt Securities and/or
Subordinated Debt Securities, such Underwritten Securities have been, or as
of the date of such Terms Agreement will have been, duly authorized by the
Company for issuance and sale pursuant to this Underwriting Agreement and
such Terms Agreement. Such Underwritten Securities, when issued and
authenticated in the manner provided for in the applicable Indenture and
delivered against payment of the consideration therefor specified in such
Terms Agreement, will constitute valid and legally binding obligations of
the Company, enforceable against the Company in accordance with their
terms, except as the enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles,
and except further as enforcement thereof may be limited by (A)
requirements that a claim with respect to any Debt Securities denominated
other than in U.S. dollars (or a foreign or composite currency judgment in
respect of such claim) be converted into U.S. dollars at a rate of exchange
prevailing on a date determined pursuant to applicable law or (B)
governmental authority to limit, delay or prohibit the making of payments
outside the United States. Such Underwritten Securities will be in the form
contemplated by, and each registered holder thereof is entitled to the
benefits of, the applicable Indenture.
(13) Authorization of the Indentures. If the Underwritten Securities
-------------------------------
being sold pursuant to the applicable Terms Agreement include Senior Debt
Securities and/or Subordinated Debt Securities or if Preferred Stock is
convertible into Debt Securities, each applicable Indenture has been, or
prior to the issuance of the Debt Securities thereunder will have been,
duly authorized, executed and delivered by the Company and, upon such
authorization, execution and delivery, will constitute a valid and legally
binding agreement of the Company, enforceable against the Company in
accordance with its terms, except as the enforcement thereof may be limited
by bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general
equitable principles.
(14) Authorization of Underlying Securities. If the Underlying
--------------------------------------
Securities related to the Underwritten Securities being sold pursuant to
the applicable Terms Agreement include Common Stock or Preferred Stock,
such Underlying Securities have been, or as of the date of such Terms
Agreement will have been, duly authorized and reserved for issuance by the
Company upon conversion of the related Preferred Stock, Senior Debt
Securities or Subordinated Debt Securities, as applicable. If the
Underlying
8
<PAGE>
Securities include Common Stock or Preferred Stock, such Underlying
Securities, when issued upon such conversion, will be validly issued, fully
paid and non-assessable and will not be subject to preemptive or other
similar rights of any securityholder of the Company. No holder of such
Common Stock or Preferred Stock is or will be subject to personal liability
by reason of being such a holder. If the Underlying Securities related to
the Underwritten Securities being sold pursuant to the applicable Terms
Agreement include Senior Debt Securities and/or Subordinated Debt
Securities, such Underlying Securities have been, or as of the date of such
Terms Agreement will have been, duly authorized for issuance by the Company
upon conversion of the related Preferred Stock. Such Underlying
Securities, when issued and authenticated in the manner provided for in the
applicable Indenture and delivered in accordance with the terms of the
related Preferred Stock, will constitute valid and legally binding
obligations of the Company, enforceable against the Company in accordance
with their terms, except as the enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general
equitable principles, and except further as enforcement thereof may be
limited by (A) requirements that a claim with respect to any Debt
Securities denominated other than in U.S. dollars (or a foreign or
composite currency judgment in respect of such claim) be converted into
U.S. dollars at a rate of exchange prevailing on a date determined pursuant
to applicable law or (B) governmental authority to limit, delay or prohibit
the making of payments outside the United States.
(15) Descriptions of the Underwritten Securities, Underlying
-------------------------------------------------------
Securities and Indentures. The Underwritten Securities being sold pursuant
-------------------------
to the applicable Terms Agreement and each applicable Indenture, as of the
date of the Prospectus, and any Underlying Securities, when issued and
delivered in accordance with the terms of the related Underwritten
Securities, will conform in all material respects to the statements
relating thereto contained in the Prospectus and will be in substantially
the form filed or incorporated by reference, as the case may be, as an
exhibit to the Registration Statement.
(16) Absence of Defaults and Conflicts. Neither the Company nor any
---------------------------------
of its subsidiaries is in violation of its charter or by-laws or in default
in the performance or observance of any obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, deed of trust,
loan or credit agreement, note, lease or other agreement or instrument to
which the Company or any of its subsidiaries is a party or by which it or
any of them may be bound, or to which any of the property or assets of the
Company or any of its subsidiaries is subject (collectively, "Agreements
and Instruments"), except for such defaults that would not result in a
Material Adverse Effect. The execution, delivery and performance of this
Underwriting Agreement, the applicable Terms Agreement and each applicable
Indenture and any other agreement or instrument entered into or issued or
to be entered into or issued by the Company in connection with the
transactions contemplated hereby or thereby or in the Registration
Statement and the Prospectus and the consummation of the transactions
contemplated herein and in the
9
<PAGE>
Registration Statement and the Prospectus (including the issuance and sale
of the Underwritten Securities and the use of the proceeds from the sale of
the Underwritten Securities as described under the caption "Use of Proceeds
") and compliance by the Company with its obligations hereunder and
thereunder have been duly authorized by all necessary corporate action and
do not and will not, whether with or without the giving of notice or
passage of time or both, conflict with or constitute a breach of, or
default or Repayment Event (as defined below) under, or result in the
creation or imposition of any lien, charge or encumbrance upon any assets,
properties or operations of the Company or any of its subsidiaries pursuant
to, any Agreements and Instruments (except for such conflicts, breaches,
defaults, events or liens, charges or encumbrances that would not result in
a Material Adverse Effect) nor will such action result in any violation of
the provisions of the charter or by-laws of the Company or any of its
subsidiaries or any applicable law, statute, rule, regulation, judgment,
order, writ or decree of any government, government instrumentality or
court, domestic or foreign, having jurisdiction over the Company or any of
its subsidiaries or any of their assets, properties or operations. As used
herein, a "Repayment Event" means any event or condition which gives the
holder of any note, debenture or other evidence of indebtedness (or any
person acting on such holder's behalf) the right to require the repurchase,
redemption or repayment of all or a portion of such indebtedness by the
Company or any of its subsidiaries.
(17) Absence of Labor Dispute. No labor dispute with the employees
------------------------
of the Company or any of its subsidiaries exists or, to the knowledge of
the Company, is imminent which may reasonably be expected to result in a
Material Adverse Effect.
(18) Absence of Proceedings. There is no action, suit, proceeding,
----------------------
inquiry or investigation before or brought by any court or governmental
agency or body, domestic or foreign, now pending, or to the knowledge of
the Company, threatened, against or affecting the Company or any of its
subsidiaries which is required to be disclosed in the Registration
Statement and the Prospectus (other than as stated therein), or which might
reasonably be expected to result in a Material Adverse Effect, or which
might reasonably be expected to materially and adversely affect the
consummation of the transactions contemplated by this Underwriting
Agreement, the applicable Terms Agreement or any applicable Indenture, or
the performance by the Company of its obligations hereunder and thereunder.
The aggregate of all pending legal or governmental proceedings to which the
Company or any of its subsidiaries is a parry or of which any of their
respective assets, properties or operations is the subject which are not
described in the Registration Statement and the Prospectus, including
ordinary routine litigation incidental to the business, could not
reasonably be expected to result in a Material Adverse Effect.
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<PAGE>
(19) Accuracy of Exhibits. There are no contracts or documents which
--------------------
are required to be described in the Registration Statement, the Prospectus
or the documents incorporated by reference therein or to be filed as
exhibits thereto which have not been so described and filed as required.
(20) Absence of Further Requirements. No filing with, or
-------------------------------
authorization, approval, consent, license, order registration,
qualification or decree of, any court or governmental authority or agency,
domestic or foreign, is necessary or required for the performance by the
Company of its obligations under this Underwriting Agreement or the
applicable Terms Agreement or in connection with the actions contemplated
under this Underwriting Agreement, such Terms Agreement or any applicable
Indenture, except such as have been already obtained or as may be required
under state securities laws.
(21) Possession of Intellectual Property. The Company and its
-----------------------------------
subsidiaries own or possess, or can acquire on reasonable terms, adequate
patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
trademarks, service marks, trade names or other intellectual property
(collectively, "Intellectual Property") necessary to carry on the business
now operated by them, except where the failure to own or possess or
otherwise be able to acquire such Intellectual Property would not result in
a Material Adverse Effect, and neither the Company nor any of its
subsidiaries has received any notice or is otherwise aware of any
infringement of or conflict with asserted rights of others with respect to
any Intellectual Property or of any facts or circumstances which would
render any Intellectual Property invalid or inadequate to protect the
interest of the Company or any of its subsidiaries therein, and which
infringement or conflict (if the subject of any unfavorable decision,
ruling or finding) or invalidity or inadequacy, singly or in the aggregate,
would result in a Material Adverse Effect.
(22) Possession of Licenses and Permits. The Company and its
----------------------------------
subsidiaries possess such permits, licenses, approvals, consents and other
authorizations (collectively, "Governmental Licenses") issued by the
appropriate federal, state, local or foreign regulatory agencies or bodies
necessary to conduct the business now operated by them. The Company and its
subsidiaries are in compliance with the terms and conditions of all such
Governmental Licenses, except where the failure so to comply would not,
singly or in the aggregate, result in a Material Adverse Effect. All of
the Governmental Licenses are valid and in full force and effect, except
where the invalidity of such Governmental Licenses or the failure of such
Governmental Licenses to be in full force and effect would not result in a
Material Adverse Effect. Neither the Company nor any of its subsidiaries
has received any notice of proceedings relating to the revocation or
modification of any such Governmental Licenses which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding,
would result in a Material Adverse Effect.
11
<PAGE>
(23) Title to Property. The Company and its subsidiaries have good
-----------------
and marketable title to all real property owned by the Company and its
subsidiaries which is material to the business of the Company and its
subsidiaries taken as a whole and good title to all other properties owned
by them which is material to the business of the Company and its
subsidiaries taken as a whole, in each case, free and clear of all
mortgages, pledges, liens, security interests, claims, restrictions or
encumbrances of any kind, except (A) as otherwise stated in the
Registration Statement and the Prospectus or (B) those which do not, singly
or in the aggregate, materially affect the value of such property and do
not interfere with the use made and proposed to be made of such property by
the Company or any of its subsidiaries. All of the leases and subleases
material to the business of the Company and its subsidiaries considered as
one enterprise, and under which the Company or any of its subsidiaries
holds properties described in the Prospectus, are in full force and effect,
and neither the Company nor any of its subsidiaries has received any notice
of any material claim of any sort that has been asserted by anyone adverse
to the rights of the Company or any of its subsidiaries under any of the
leases or subleases mentioned above, or affecting or questioning the rights
of the Company or such subsidiary of the continued possession of the leased
or subleased premises under any such lease or sublease.
(24) Commodity Exchange Act. If the Underwritten Securities being
----------------------
sold pursuant to the applicable Terms Agreement include Debt Securities or
if any related Underlying Securities include Debt Securities, as the case
may be, such Debt Securities, upon issuance, will be excluded or exempted
under, or beyond the purview of, the Commodity Exchange Act, as amended
(the "Commodity Exchange Act"), and the rules and regulations of the
Commodity Futures Trading Commission under the Commodity Exchange Act (the
"Commodity Exchange Act Regulations").
(25) Investment Company Act. The Company is not, and upon the
----------------------
issuance and sale of the Underwritten Securities as herein contemplated and
the application of the net proceeds therefrom as described in the
Prospectus will not be, an "investment company" within the meaning of the
Investment Company Act of 1940, as amended (the "1940 Act").
(26) Environmental Laws. Except as otherwise stated in the
------------------
Registration Statement and the Prospectus and except as would not, singly
or in the aggregate, result in a Material Adverse Effect, (A) neither the
Company nor any of its subsidiaries is in violation of any federal, state,
local or foreign statute, law, rule, regulation, ordinance, code, policy or
rule of common law or any judicial or administrative interpretation thereof
including any judicial or administrative order, consent, decree or
judgment, relating to pollution or protection of human health, the
environment (including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata) or wildlife, including,
without limitation, laws and regulations relating to the release or
threatened release of chemicals, pollutants, contaminants, wastes, toxic
substances, hazardous substances, petroleum or petroleum products
(collectively, "Hazardous Materials") or to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport or
12
<PAGE>
handling of Hazardous Materials (collectively, "Environmental Laws"), (B)
the Company and its subsidiaries have all permits, authorizations and
approvals required under any applicable Environmental Laws and are each in
compliance with their requirements, (C) there are no pending or, to the
Company's knowledge, threatened administrative, regulatory or judicial
actions, suits, demands, demand letters, claims, liens, notices of
noncompliance or violation, investigation or proceedings relating to any
Environmental Law against the Company or any of its subsidiaries and (D)
there are no events or circumstances that might reasonably be expected to
form the basis of an order for clean-up or remediation, or an action, suit
or proceeding by any private party or governmental body or agency, against
or affecting the Company or any of its subsidiaries relating to Hazardous
Materials or any Environmental Laws.
(b) Officers' Certificates. Any certificate signed by any officer of the
Company or any of its subsidiaries and delivered to any Underwriter or to
counsel for the Underwriters in connection with the offering of the Underwritten
Securities shall be deemed a representation and warranty by the Company to each
Underwriter as to the matters covered thereby on the date of such certificate
and, unless subsequently amended or supplemented, at each Representation Date
subsequent thereto.
SECTION 2. Sale and Delivery to Underwriters; Closing.
------------------------------------------
(a) Underwritten Securities. The several commitments of the Underwriters
to purchase the Underwritten Securities pursuant to the applicable Terms
Agreement shall be deemed to have been made on the basis of the representations
and warranties herein contained and shall be subject to the terms and conditions
herein set forth.
(b) Option Underwritten Securities. In addition, subject to the terms and
conditions herein set forth, the Company may grant, if so provided in the
applicable Terms Agreement, an option to the Underwriters, severally and not
jointly, to purchase up to the number or aggregate principal amount, as the case
may be, of the Option Underwritten Securities set forth therein at a price per
Option Underwritten Security equal to the price per Initial Underwritten
Security, less an amount equal to any dividends or distributions declared by the
Company and paid or payable on the Initial Underwritten Securities but not
payable on the Option Underwritten Securities. Such option, if granted, will
expire 30 days after the date of such Terms Agreement, and may be exercised in
whole or in part from time to time only for the purpose of covering over-
allotments which may be made in connection with the offering and distribution of
the Initial Underwritten Securities upon notice by Merrill Lynch to the Company
setting forth the number or aggregate principal amount, as the case may be, of
Option Underwritten Securities as to which the several Underwriters are then
exercising the option and the time, date and place of payment and delivery for
such Option Underwritten Securities. Any such time and date of payment and
delivery (each, a "Date of Delivery") shall be determined by Merrill Lynch, but
shall not be later than seven full business days after the exercise of said
option, nor in any event prior to the Closing Time, unless otherwise agreed upon
by Merrill Lynch and the Company. If the option is exercised as to all or
13
<PAGE>
any portion of the Option Underwritten Securities, each of the Underwriters,
severally and not jointly, will purchase that proportion of the total number or
aggregate principal amount, as the case may be, of Option Underwritten
Securities then being purchased which the number or aggregate principal amount,
as the case may be, of Initial Underwritten Securities each such Underwriter has
severally agreed to purchase as set forth in such Terms Agreement bears to the
total number or aggregate principal amount, as the case may be, of Initial
Underwritten Securities, subject to such adjustments as Merrill Lynch in its
discretion shall make to eliminate any sales or purchases of a fractional number
or aggregate principal amount, as the case may be, of Option Underwritten
Securities.
(c) Payment. Payment of the purchase price for, and delivery of, the
Initial Underwritten Securities shall be made at the offices of counsel for the
Underwriters, or at such other place as shall be agreed upon by Merrill Lynch
and the Company, at 10:00 A.M. (Eastern time) on the third (fourth, if the
pricing occurs after 4:30 P.M. (Eastern time) on any given day) business day
after the date of the applicable Terms Agreement (unless postponed in accordance
with the provisions of Section 10 hereof), or such other time not later than ten
business days after such date as shall be agreed upon by Merrill Lynch and the
Company (such time and date of payment and delivery being herein called "Closing
Time"). In addition, in the event that the Underwriters have exercised their
option, if any, to purchase any or all of the Option Underwritten Securities,
payment of the purchase price for, and delivery of such Option Underwritten
Securities, shall, be made at the above-mentioned offices of counsel for the
Underwriters, or at such other place as shall be agreed upon by Merrill Lynch
and the Company, on the relevant Date of Delivery as specified in the notice
from Merrill Lynch to the Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery to
Merrill Lynch for the respective accounts of the Underwriters of the
Underwritten Securities to be purchased by them. It is understood that each
Underwriter has authorized Merrill Lynch, for its account, to accept delivery
of, receipt for, and make payment of the purchase price for, the Underwritten
Securities which it has severally agreed to purchase. Merrill Lynch,
individually and not as representative of the Underwriters, may (but shall not
be obligated to) make payment of the purchase price for the Underwritten
Securities to be purchased by any Underwriter whose funds have not been received
by the Closing Time or the relevant Date of Delivery, as the case may be, but
such payment shall not relieve such Underwriter from its obligations hereunder.
(d) Denominations; Registration. The Underwritten Securities or
certificates for the Underwritten Securities, as applicable, shall be in such
denominations and registered in such names as Merrill Lynch may request in
writing at least one full business day prior to the Closing Time or the relevant
Date of Delivery, as the case may be. The Underwritten Securities or
certificates for the Underwritten Securities, as applicable, will be made
available for examination and packaging by Merrill Lynch in The City of New York
not later than 10:00 A.M. (Eastern time) on the business day prior to the
Closing Time or the relevant Date of Delivery, as the case may be.
14
<PAGE>
SECTION 3. Covenants of the Company. The Company covenants with Merrill
------------------------
Lynch and with each Underwriter participating in the offering of Underwritten
Securities, as follows:
(a) Compliance with Securities Regulations and Commission Requests.
The Company, subject to Section 3(b), will comply with the requirements of
Rule 430A of the 1933 Act Regulations and/or Rule 434 of the 1933 Act
Regulations, if and as applicable, and, during the period in which the
Prospectus is required to be delivered in connection with the sales of
Underwritten Securities purchased pursuant to this Agreement, will notify
the Representative(s) immediately, and confirm the notice in writing, of
(i) the effectiveness of any post-effective amendment to the Registration
Statement or the filing of any supplement or amendment to the Prospectus,
(ii) the receipt of any comments from the Commission, (iii) any request by
the Commission for any amendment to the Registration Statement or any
amendment or supplement to the Prospectus or for additional information,
and (iv) the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of any order preventing or
suspending the use of any preliminary prospectus, or of the suspension of
the qualification of the Underwritten Securities for offering or sale in
any jurisdiction, or of the initiation or threatening of any proceedings
for any of such purposes. The Company will promptly effect the filings
necessary pursuant to Rule 424 and will take such steps as it deems
necessary to ascertain promptly whether the Prospectus transmitted for
filing under Rule 424 was received for filing by the Commission and, in the
event that it was not, it will promptly file the Prospectus. The Company
will make every reasonable effort to prevent the issuance of any stop order
and, if any stop order is issued, to obtain the lifting thereof at the
earliest possible moment.
(b) Filing of Amendments. The Company will, during the period in
which the Prospectus is required by the 1933 Act to be delivered in
connection with sales of Underwritten Securities purchased pursuant to this
Agreement, give Merrill Lynch notice of its intention to file or prepare
any amendment to the Registration Statement (including any filing under
Rule 462(b) of the 1933 Act Regulations), any Term Sheet or any amendment,
supplement or revision to either the prospectus included in the
Registration Statement at the time it became effective or to the
Prospectus, whether pursuant to the 1933 Act, the 1934 Act or otherwise,
will furnish Merrill Lynch with copies of any such documents a reasonable
amount of time prior to such proposed filing or use, as the case may be,
and will not file or use any such document to which Merrill Lynch or
counsel for the Underwriters shall reasonably object.
(c) Delivery of Registration Statements. The Company has furnished
or will deliver to Merrill Lynch and counsel for the Underwriters, without
charge, signed copies of the Registration Statement as originally filed and
of each amendment thereto (including exhibits filed therewith or
incorporated by reference therein and documents incorporated or deemed to
be incorporated by reference therein) and signed copies of all consents and
certificates of experts, and will also deliver to Merrill Lynch, without
charge, a conformed
15
<PAGE>
copy of the Registration Statement as originally filed and of each
amendment thereto (without exhibits) for each of the Underwriters. Copies
of the Registration Statement and each amendment thereto furnished to the
Underwriters will be identical to any electronically transmitted copies
thereof filed with the Commission pursuant to EDGAR, except to the extent
permitted by Regulation S-T.
(d) Delivery of Prospectuses. The Company will deliver to each
Underwriter, without charge, as many copies of each preliminary prospectus
as such Underwriter may reasonably request, and the Company hereby consents
to the use of such copies for purposes permitted by the 1933 Act. The
Company will furnish to each Underwriter, without charge, during the period
when the Prospectus is required to be delivered under the 1933 Act or the
1934 Act, such number of copies of the Prospectus as such Underwriter may
reasonably request. The Prospectus and any amendments or supplements
thereto furnished to the Underwriters will be identical to any
electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company will
comply with the 1933 Act and the 1933 Act Regulations and the 1934 Act and
the 1934 Act Regulations so as to permit the completion of the distribution
of the Underwritten Securities as contemplated in this Underwriting
Agreement and the applicable Terms Agreement and in the Registration
Statement and the Prospectus. If at any time when the Prospectus is
required by the 1933 Act or the 1934 Act to be delivered in connection with
sales of the Securities, any event shall occur or condition shall exist as
a result of which it is necessary, in the opinion of counsel for the
Underwriters or for the Company, to amend the Registration Statement in
order that the Registration Statement will not contain an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or to
amend or supplement the Prospectus in order that the Prospectus will not
include an untrue statement of a material fact or omit to state a material
fact necessary in order to make the statements therein not misleading in
the light of the circumstances existing at the time it is delivered to a
purchaser, or if it shall be necessary, in the opinion of such counsel, at
any such time to amend the Registration Statement or amend or supplement
the Prospectus in order to comply with the requirements of the 1933 Act or
the 1933 Act Regulations, the Company will promptly prepare and file with
the Commission, subject to Section 3(b), such amendment or supplement as
may be necessary to correct such statement or omission or to make the
Registration Statement or the Prospectus comply with such requirements, and
the Company will furnish to the Underwriters, without charge, such number
of copies of such amendment or supplement as the Underwriters may
reasonably request.
(f) Blue Sky Qualifications. The Company will use its best efforts,
in cooperation with the Underwriters, to qualify the Underwritten
Securities and any related Underlying Securities for offering and sale
under the applicable securities laws of such states and other
16
<PAGE>
jurisdictions (domestic or foreign) as Merrill Lynch may designate and to
maintain such qualifications in effect for a period of not less than one
year from the date of the applicable Terms Agreement; provided, however,
that the Company shall not be obligated to file any general consent to
service of process or to qualify as a foreign corporation or as a dealer in
securities in any jurisdiction in which it is not so qualified or to
subject itself to taxation in respect of doing business in any jurisdiction
in which it is not otherwise so subject. In each jurisdiction in which the
Underwritten Securities or any related Underlying Securities have been so
qualified, the Company will file such statements and reports as may be
required by the laws of such jurisdiction to continue such qualification in
effect for a period of not less than one year from the date of such Terms
Agreement.
(g) Earnings Statement. The Company will timely file such reports
pursuant to the 1934 Act as are necessary in order to make generally
available to its security holders as soon as practicable an earnings
statement for the purposes of, and to provide the benefits contemplated by,
the last paragraph of Section 11 (a) of the 1933 Act.
(h) Reservation of Securities. If the applicable Terms Agreement
specifies that any related Underlying Securities include Common Stock
and/or Preferred Stock, the Company will reserve and keep available at all
times, free of preemptive or other similar rights, a sufficient number of
shares of Common Stock and/or Preferred Stock, as applicable, for the
purpose of enabling the Company to satisfy any obligations to issue such
Underlying Securities upon conversion of the Preferred Stock or Senior Debt
Securities or Subordinated Debt Securities, as applicable.
(i) Use of Proceeds. The Company will use the net proceeds received
by it from the sale of the Underwritten Securities in the manner specified
in the Prospectus under "Use of Proceeds".
(j) Listing. The Company will use its best efforts to effect the
listing of the Underwritten Securities and any related Underlying
Securities, prior to the Closing Time, on any national securities exchange
or quotation system if and as specified in the applicable Terms Agreement.
(k) Restriction on Sale of Securities. Between the date of the
applicable Terms Agreement and the Closing Time or such other date
specified in such Terms Agreement, the Company will not, without the prior
written consent of Merrill Lynch, directly or indirectly, issue, sell,
offer to sell, grant any option for the sale of, or otherwise dispose of,
the securities specified in such Terms Agreement.
(l) Reporting Requirements. The Company, during the period when the
prospectus is required to be delivered under the 1933 Act or the 1934 Act,
will file all documents required to be filed with the Commission pursuant
to the 1934 Act within the time periods required by the 1934 Act and the
1934 Act Regulations.
17
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SECTION 4. Payment of Expenses. (a) Expenses. The Company will pay all
-------------------
expenses incident to the performance of its obligations under this Underwriting
Agreement or the applicable Terms Agreement, including (i) the preparation,
printing and filing of the Registration Statement (including financial
statements and exhibits) as originally filed and of each amendment thereto, (ii)
the preparation, printing and delivery to the Underwriters of this Underwriting
Agreement, any Terms Agreement, any Agreement among Underwriters, the
Indentures, and such other documents as may be required in connection with the
offering, purchase, sale, issuance or delivery of the Underwritten Securities or
any related Underlying Securities, (iii) the preparation, issuance and delivery
of the Underwritten Securities and any related Underlying Securities, any
certificates for the Underwritten Securities or such Underlying Securities, as
applicable, to the Underwriters, including any transfer taxes and any stamp or
other duties payable upon the sale, issuance or delivery of the Underwritten
Securities to the Underwriters, (iv) the fees and disbursements of the Company's
counsel, accountants and other advisors or agents (including transfer agents and
registrars), as well as the fees and disbursements of the Trustees and their
respective counsel, (v) the qualification of the Underwritten Securities and any
related Underlying Securities under state securities laws in accordance with the
provisions of Section 3(f) hereof, including filing fees and the reasonable fees
and disbursements of counsel for the Underwriters in connection therewith and in
connection with the preparation, printing and delivery of the Blue Sky Survey
and any Legal Investment Survey, and any amendment thereto, (vi) the printing
and delivery to the Underwriters of copies of each preliminary prospectus, any
Term Sheet, and the Prospectus and any amendments or supplements thereto, (vii)
the fees charged by nationally recognized statistical rating organizations for
the rating of the Underwritten Securities and any related Underlying Securities,
if applicable, (viii) the fees and expenses incurred with respect to the listing
of the Underwritten Securities and any related Underlying Securities, if
applicable, (ix) the filing fees incident to, and the reasonable fees and
disbursements of counsel to the Underwriters in connection with, the review, if
any, by the National Association of Securities Dealers, Inc. (the "NASD") of the
terms of the sale of the Underwritten Securities and any related Underlying
Securities, and (x) the fees and expenses of any Underwriter acting in the
capacity of a "qualified independent underwriter" (as defined in Section 2(l) of
Schedule E of the bylaws of the NASD), if applicable.
(b) Termination of Agreement. If the applicable Terms Agreement is
terminated by Merrill Lynch in accordance with the provisions of Section 5 or
Section 9(b)(i) hereof, the Company shall reimburse the Underwriters for all of
their out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the Underwriters.
SECTION 5. Conditions of Underwriters' Obligations. The obligations of
---------------------------------------
the Underwriters to purchase and pay for the Underwritten Securities pursuant to
the applicable Terms Agreement are subject to the accuracy of the
representations and warranties of the Company contained in Section 1 hereof or
in certificates of any officer of the Company or any of its subsidiaries
delivered pursuant to the provisions hereof, to the performance by the Company
of its covenants and other obligations hereunder, and to the following further
conditions:
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(a) Effectiveness of Registration Statement. The Registration
Statement, including any Rule 462(b) Registration Statement, has become
effective under the 1933 Act and no stop order suspending the effectiveness
of the Registration Statement shall have been issued under the 1933 Act and
no proceedings for that purpose shall have been initiated or be pending or
threatened by the Commission, and any request on the part of the Commission
for additional information shall have been complied with to the reasonable
satisfaction of counsel to the Underwriters. A prospectus containing
information relating to the description of the Underwritten Securities and
any related Underlying Securities, the specific method of distribution and
similar matters shall have been filed with the Commission in accordance
with Rule 424(b)(1), (2), (3), (4) or (5), as applicable (or any required
post-effective amendment providing such information shall have been filed
and declared effective in accordance with the requirements of Rule 430A),
or, if the Company has elected to rely upon Rule 434 of the 1933 Act
Regulations, a Term Sheet including the Rule 434 Information shall have
been filed with the Commission in accordance with Rule 424(b)(7).
(b) Opinion of Counsel for Company. At Closing Time, Merrill Lynch
shall have received the favorable opinion, dated as of Closing Time, of
counsel for the Company, in form and substance satisfactory to counsel for
the Underwriters, together with signed or reproduced copies of such letter
for each of the other Underwriters, to the effect set forth in Exhibit B
hereto and to such further effect as counsel to the Underwriters may
reasonably request.
(c) Opinion of Counsel for Underwriters. At Closing Time, Merrill
Lynch shall have received the favorable opinion, dated as of Closing Time,
of counsel for the Underwriters, together with signed or reproduced copies
of such letter for each of the other Underwriters, with respect to the
matters set forth in (1), (6), (7) to (14), as applicable, (15), (16)
(solely as to the information in the Prospectus under "Description of the
Underwritten Securities" and "Description of the Underlying Securities", if
any, or any caption purporting to describe any such Securities), (22), (23)
and the penultimate paragraph of Exhibit B hereto. In giving such opinion,
such counsel may rely, as to all matters governed by the laws of
jurisdictions other than the law of the State of New York, the federal law
of the United States and the General Corporation Law of the State of
Delaware, upon the opinions of counsel satisfactory to Merrill Lynch. Such
counsel may also state that, insofar as such opinion involves factual
matters, they have relied, to the extent they deem proper, upon
certificates of officers of the Company and its subsidiaries and
certificates of public officials.
(d) Officers' Certificate. At Closing Time, there shall not have
been, since the date of the applicable Terms Agreement or since the
respective dates as of which information is given in the Prospectus, any
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
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ordinary course of business, and Merrill Lynch shall have received a
certificate of the President or a Vice President of the Company and of the
chief financial officer or chief accounting officer of the Company, dated
as of Closing Time, to the effect that (i) there has been no such material
adverse change, (h) the representations and warranties in Section 1 are
true and correct with the same force and effect as though expressly made at
and as of the Closing Time, (iii) the Company has complied with all
agreements and satisfied all conditions on its part to be performed or
satisfied at or prior to the Closing Time, and (iv) no stop order
suspending the effectiveness of the Registration Statement has been issued
and no proceedings for that purpose have been initiated or threatened by
the Commission.
(e) Accountant's Comfort Letter. At the time of the execution of
the applicable Terms Agreement, Merrill Lynch shall have received from each
firm of independent certified public accountants that have certified
financial statements contained in or incorporated by reference into the
Registration Statement a letter dated such date, in form and substance
satisfactory to Merrill Lynch, together with signed or reproduced copies of
such letter for each of the other Underwriters, containing statements and
information of the type ordinarily included in accountants' "comfort
letters" to underwriters with respect to the financial statements and
certain financial information contained in the Registration Statement and
the Prospectus.
(f) Bring-down Comfort Letter. At Closing Time, Merrill Lynch shall
have received from each firm of independent certified public accountants
that have certified financial statements contained in or incorporated by
reference into the Registration Statement a letter, dated as of Closing
Time, to the effect that they reaffirm the statements made in the letter
finished pursuant to subsection (e) of this Section 5, except that the
specified date referred to shall be a date not more than three business
days prior to the Closing Time.
(g) Ratings. At Closing Time and at any relevant Date of Delivery,
the Underwritten Securities shall have the ratings accorded by any
"nationally recognized statistical rating organization", as defined by the
Commission for purposes of Rule 436(g)(2) of the 1933 Act Regulations, if
and as specified in the applicable Terms Agreement, and the Company shall
have delivered to Merrill Lynch a letter, dated as of such date, from each
such rating organization, or other evidence satisfactory to Merrill Lynch,
confirming that the Underwritten Securities have such ratings. Since the
time of execution of such Terms Agreement, there shall not have occurred a
downgrading in the rating assigned to the Underwritten Securities or any of
the Company's other securities by any such rating organization, and no such
rating organization shall have publicly announced that it has under
surveillance or review its rating of the Underwritten Securities or any of
the Company's other securities.
20
<PAGE>
(h) Approval of Listing. At Closing Time, the Underwritten
Securities shall have been approved for listing, subject only to official
notice of issuance, if and as specified in the applicable Terms Agreement.
(i) No Objection. If the Registration Statement or an offering of
Underwritten Securities has been filed with the NASD for review, the NASD
shall not have raised any objection with respect to the fairness and
reasonableness of the underwriting terms and arrangements.
(j) Lock-up Agreements. On the date of the applicable Terms
Agreement, Merrill Lynch shall have received, in form and substance
satisfactory to it, each lock-up agreement, if any, specified in such Terms
Agreement as being required to be delivered by the persons listed therein.
(k) Over-Allotment Option. In the event that the Underwriters are
granted an overallotment option by the Company in the applicable Terms
Agreement and the Underwriters exercise their option to purchase all or any
portion of the Option Underwritten Securities, the representations and
warranties of the Company contained herein and the statements in any
certificates furnished by the Company or any of its subsidiaries hereunder
shall be true and correct as of each Date of Delivery, and, at the relevant
Date of Delivery, Merrill Lynch shall have received:
(1) A certificate, dated such Date of Delivery, of the
President or a Vice President of the Company and the chief
financial officer or chief accounting officer of the Company,
confirming that the certificate delivered at the Closing Time
pursuant to Section 5(d) hereof remains true and correct as of
such Date of Delivery.
(2) The favorable opinion of counsel for the Company, in
form and substance satisfactory to, counsel for the Underwriters,
dated such Date of Delivery, relating to the Option Underwritten
Securities and otherwise to the same effect as the opinion
required by Section 5(b) hereof.
(3) The favorable opinion of counsel for the Underwriters,
dated such Date of Delivery, relating to the Option Underwritten
Securities and otherwise to the same effect as the opinion
required by Section 5(c) hereof.
(4) A letter from each firm of independent certified public
accountants that have certified financial statements contained in
or incorporated by reference into the Registration Statement, in
form and substance satisfactory to Merrill Lynch and dated such
Date of Delivery, substantially in the same form and substance as
the letter furnished to
21
<PAGE>
Merrill Lynch pursuant to Section 5(f) hereof, except that the
"specified date" on the letter furnished pursuant to this
paragraph shall be a date not more than three business days prior
to such Date of Delivery.
(l) Additional Documents. At Closing Time and at each Date of
Delivery, counsel for the Under writers shall have been furnished with such
documents and opinions as they may require for the purpose of enabling them
to pass upon the issuance and sale of the Underwritten Securities as herein
contemplated, or in order to evidence the accuracy of any of the
representations or warranties, or the fulfillment of any of the conditions,
herein contained; and all proceedings taken by the Company in connection
with the issuance and sale of the Underwritten Securities as herein
contemplated shall be satisfactory in form and substance to Merrill Lynch
and counsel for the Underwriters.
(m) Termination of Terms Agreement. If any condition specified in
this Section 5 shall not have been fulfilled when and as required to be
fulfilled, the applicable Terms Agreement (or, with respect to the
Underwriters' exercise of any applicable over-allotment option for the
purchase of Option Underwritten Securities on a Date of Delivery after the
Closing Time, the obligations of the Underwriters to purchase the Option
Underwritten Securities on such Date of Delivery) may be terminated by
Merrill Lynch by notice to the Company at any time at or prior to the
Closing Time (or such Date of Delivery, as applicable), and such
termination shall be without liability of any party to any other party
except as provided in Section 4 and except that Sections 1, 6, 7 and 8
shall survive any such termination and remain in full force and effect.
SECTION 6. Indemnification.
---------------
(a) Indemnification of Underwriters. The Company agrees to indemnify and
hold harmless each Underwriter and each person, if any, who controls any
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act as follows:
(1) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(or any amendment thereto), including the Rule 430A Information and the
Rule 434 Information deemed to be a part thereof, if applicable, or the
omission or alleged omission therefrom of a material fact required to be
stated therein or necessary to make the statements therein not misleading
or arising out of any untrue statement or alleged untrue statement of a
material fact included in any preliminary prospectus or the Prospectus (or
any amendment or supplement thereto), or the omission or alleged omission
therefrom of a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading;
22
<PAGE>
(2) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission; provided that (subject to Section
6(d) below) any such settlement is effected with the written consent of the
Company; and
(3) against any and all expense whatsoever, as incurred (including
the fees and disbursements of counsel chosen by Merrill Lynch), reasonably
incurred in investigating, preparing or defending against any litigation,
or any investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or omission, to
the extent that any such expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
Underwriter through Merrill Lynch expressly for use in the Registration
Statement (or any amendment thereto), including the Rule 430A Information and
the Rule 434 Information deemed to be a part thereof, if applicable, or any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto); and provided further that the Company will not be liable to an
Underwriter with respect to any preliminary prospectus to the extent that the
Company shall sustain the burden of proving that any such loss, liability,
claim, damage or expense resulted from the fact that such Underwriter failed to
send or give, at or prior to the Closing Date, a copy of the Prospectus, as then
amended or supplemented if: (i) the Company has previously furnished copies
thereof (sufficiently in advance of the Closing Date to allow for distribution
by the Closing Date) to the Underwriters and the loss, liability, claim, damage
or expense of such Underwriter resulted from an untrue statement or omission of
a material fact contained in or omitted from the preliminary prospectus which
was corrected in the Prospectus as, if applicable, amended or supplemented prior
to the Closing Date and such Prospectus was required by law to be delivered at
or prior to the written confirmation of sale to such person and (ii) such
failure to give or send such Prospectus by the Closing Date to the party or
parties asserting such loss, liability, claim, damage or expense would have
constituted the sole defense to the claim asserted by such person.
Insofar as this indemnity agreement may permit indemnification for
liabilities under the 1933 Act of any person who is a partner of an Underwriter
or who controls an Underwriter within the meaning of Section 15 of the 1933 Act
or Section 20 of the 1934 Act and who is a director or officer of the Company or
controls the Company within the meaning of Section 15 of the 1933 Act or Section
20 of the 1934 Act, such indemnity agreement is subject to the undertaking of
the Company in the Registration Statement under Item 13 of Form S-3.
23
<PAGE>
(b) Indemnification of Company, Directors and Officers. Each Underwriter
severally agrees to indemnify and hold harmless the Company, its directors, each
of its officers who signed the Registration Statement, and each person, if any,
who controls the Company within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act against any and all loss, liability, claim, damage
and expense described in the indemnity contained in subsection (a) of this
Section, as incurred, but only with respect to untrue statements or omissions,
or alleged untrue statements or omissions, made in the Registration Statement
(or any amendment thereto), including the Rule 430A Information and the Rule 434
Information deemed to be a part thereof, if applicable, or any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto) in
reliance upon and in conformity with written information furnished to the
Company by such Underwriter through Merrill Lynch expressly for use in the
Registration Statement (or any amendment thereto) or such preliminary prospectus
or the Prospectus (or any amendment or supplement thereto).
(c) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise Om on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a) above,
counsel to the indemnified parties shall be selected by Merrill Lynch, and, in
the case of parties indemnified pursuant to Section 6(b) above, counsel to the
indemnified parties shall be selected by the Company. An indemnifying party may
participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnifying party shall not (except with the
consent of the indemnified party) also be counsel to the indemnified party. In
no event shall the indemnifying parties be liable for fees and expenses of more
than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances. No indemnifying party shall,
without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section 6 or Section
7 hereof (whether or not the indemnified parties are actual or potential parties
thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation, proceeding or claim and (ii) does not include
a statement as to or an admission of fault, culpability or a failure to act by
or on behalf of any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(ii) effected without its written consent if (i) such settlement
24
<PAGE>
is entered into more than 45 days after receipt by such indemnifying party of
the aforesaid request, (ii) such indemnifying party shall have received notice
of the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
SECTION 7. Contribution. If the indemnification provided for in Section
------------
6 hereof is for any reason unavailable to or insufficient to hold harmless an
indemnified party in respect of any losses, liabilities, claims, damages or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount of such losses, liabilities, claims, damages and expenses
incurred by such indemnified party, as incurred, (i) in such proportion as is
appropriate to reflect the relative benefits received by the Company, on the one
hand, and the Underwriters, on the other hand, from the offering of the
Underwritten Securities pursuant to the applicable Terms Agreement or (ii) if
the allocation provided by clause (i) is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company, on
the one hand, and of the Underwriters, on the other hand, in connection with the
statements or omissions which resulted in such losses, liabilities, claims,
damages or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company, on the one hand, and the
Underwriters, on the other hand, in connection with the offering of the
Underwritten Securities pursuant to the applicable Terms Agreement shall be
deemed to be in the same respective proportions as the total net proceeds from
the offering of such Underwritten Securities (before deducting expenses)
received by the Company and the total underwriting discount received by the
Underwriters, in each case as set forth on the cover of the Prospectus, or, if
Rule 434 is used, the corresponding location on the Term Sheet bear to the
aggregate initial public offering price of such Underwritten Securities as set
forth on such cover.
The relative fault of the Company, on the one hand, and the Underwriters,
on the other hand, shall be determined by reference to, among other things,
whether any such untrue or alleged untrue statement of a material fact or
omission or alleged omission to state a material fact relates to information
supplied by the Company or by the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company and the Underwriters agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 7. The aggregate
amount of losses, liabilities, claims, damages and expenses incurred by an
indemnified party and referred to above in this Section 7 shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in investigating, preparing or defending against any litigation, or any
investigation or proceeding by any governmental agency
25
<PAGE>
or body, commenced or threatened, or any claim whatsoever based upon any such
untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Underwritten Securities underwritten by it and distributed to
the public were offered to the public exceeds the amount of any damages which
such Underwriter has otherwise been required to pay by reason of any such untrue
or alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such Underwriter, and
each director of the Company, each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall
have the same rights to contribution as the Company. The Underwriters'
respective obligations to contribute pursuant to this Section 7 are several in
proportion to the number or aggregate principal amount, as the case may be, of
Initial Underwritten Securities set forth opposite their respective names in the
applicable Terms Agreement, and not joint.
SECTION 8. Representations, Warranties and Agreements to Survive Delivery.
--------------------------------------------------------------
All representations, warranties and agreements contained in this Underwriting
Agreement or the applicable Terms Agreement or in certificates of officers of
the Company submitted, pursuant hereto or thereto shall remain operative and in
full force and effect, regardless of any investigation made by or on behalf of
any Underwriter or controlling person, or by or on behalf of the Company, and
shall survive delivery of and payment for the Underwritten Securities.
SECTION 9. Termination.
-----------
(a) Underwriting Agreement. This Underwriting Agreement (excluding the
applicable Terms Agreement) may be terminated for any reason at any time by the
Company or by Merrill Lynch upon the giving of 30 days' prior written notice of
such termination to the other party hereto.
(b) Terms Agreement. Merrill Lynch may terminate the applicable Terms
Agreement, by notice to the Company, at any time at or prior to the Closing Time
or any relevant Date of Delivery, if (i) there has been, since the time of
execution of such Terms Agreement or since the respective dates as of which
information is given in the Prospectus, any material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company and its subsidiaries considered as one
enterprise, whether or not arising in the
26
<PAGE>
ordinary course of business, or (ii) there has occurred any material adverse
change in the financial markets in the United States or, if the Underwritten
Securities or any related Underlying Securities include Debt Securities
denominated or payable in, or indexed to, one or more foreign or composite
currencies, in the international financial markets, or any outbreak of
hostilities or escalation thereof or other calamity or crisis or any change or
development involving a prospective change in national or international
political, financial or economic conditions, in each case the effect of which is
such as to make it, in the judgment of Merrill Lynch, impracticable to market
the Underwritten Securities or to enforce contracts for the sale of the
Underwritten Securities, or (iii) trading in any securities of the Company has
been suspended or limited by the Commission or the New York Stock Exchange, or
if trading generally on the New York Stock Exchange has been suspended or
limited, or minimum or maximum prices for trading have been fixed, or maximum
ranges for prices have been required, by either of said exchanges or by such
system or by order of the Commission, the NASD or any other governmental
authority, or (iv) a banking moratorium has been declared by either Federal or
New York authorities or, if the Underwritten Securities or any related
Underlying Securities include Debt Securities denominated or payable in, or
indexed to, one or more foreign or composite currencies, by the relevant
authorities in the related foreign country or countries.
(c) Liabilities. If this Underwriting Agreement or the applicable Terms
Agreement is terminated pursuant to this Section 9, such termination shall be
without liability of any party to any other party except as provided in Section
4 hereof, and provided further that Sections 1, 6, 7 and 8 shall survive such
termination and remain in full force and effect.
SECTION 10. Default by One or More of the Underwriters. If one or more of
------------------------------------------
the Underwriters shall fail at the Closing Time or the relevant Date of
Delivery, as the case may be, to purchase the Underwritten Securities which it
or they are obligated to purchase under the applicable Terms Agreement (the
"Defaulted Securities"), then Merrill Lynch shall have the right, within 24
hours thereafter, to make arrangements for one or more of the non-defaulting
Underwriters, or any other underwriters, to purchase all, but not less than all,
of the Defaulted Securities in such amounts as may be agreed upon and upon the
terms herein set forth; if, however, Merrill Lynch shall not have completed such
arrangements within such 24-hour period, then:
(a) if the number or aggregate principal amount, as the case may be,
of Defaulted Securities does not exceed 10% of the number or aggregate
principal amount, as the case may be, of Underwritten Securities to be
purchased on such date pursuant to such Terms Agreement, the non-defaulting
Underwriters shall be obligated, severally and not jointly, to purchase the
full amount thereof in the proportions that their respective underwriting
obligations under such Terms Agreement bear to the underwriting obligations
of all non-defaulting Underwriters, or
27
<PAGE>
(b) if the number or aggregate principal amount, as the case may be,
of Defaulted Securities exceeds 10% of the number or aggregate principal
amount, as the case may be, of Underwritten Securities to be purchased on
such date pursuant to such Terms Agreement, such Terms Agreement (or, with
respect to the Underwriters' exercise of any applicable over-allotment
option for the purchase of Option Underwritten Securities on a Date of
Delivery after the Closing Time, the obligations of the Underwriters to
purchase, and the Company to sell, such Option Underwritten Securities on
such Date of Delivery) shall terminate without liability on the part of any
non-defaulting Underwriter.
No action taken pursuant to this Section 10 shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in (i) a termination
of the applicable Terms Agreement or (ii) in the case of a Date of Delivery
after the Closing Time, a termination of the obligations of the Underwriters and
the Company with respect to the related Option Underwritten Securities, as the
case may be, either Merrill Lynch or the Company shall have the right to
postpone the Closing Time or the relevant Date of Delivery, as the case may be,
for a period not exceeding seven days in order to effect any required changes in
the Registration Statement or the Prospectus or in any other documents or
arrangements.
SECTION 11. Notices. All notices and other communications hereunder
-------
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriters shall be directed to Merrill Lynch at World Financial Center, North
Tower, New York, New York 10281-1201, attention of .; and notices to the Company
shall be directed to it at 26555 Northwestern Highway, Southfield, Michigan
48034, attention of General Counsel.
SECTION 12. Parties. This Underwriting Agreement and the applicable
-------
Terms Agreement shall each inure to the benefit of and be binding upon the
Company, Merrill Lynch and, upon execution of such Terms Agreement, any other
Underwriters and their respective successors. Nothing expressed or mentioned in
this Underwriting Agreement or such Terms Agreement is intended or shall be
construed to give any person, firm or corporation, other than the Underwriters
and the Company and their respective successors and the controlling persons and
officers and directors referred to in Sections 6 and 7 and their heirs and legal
representatives, any legal or equitable right, remedy or claim under or in
respect of this Underwriting Agreement or such Terms Agreement or any provision
herein or therein contained. This Underwriting Agreement and such Terms
Agreement and all conditions and provisions hereof and thereof are intended to
be for the sole and exclusive benefit of the parties hereto and thereto and
their respective successors, and said controlling persons and officers and
directors and their heirs and legal representatives, and for the benefit of no
other person, firm or corporation. No purchaser of Underwritten Securities from
any Underwriter shall be deemed to be a successor by reason merely of such
purchase.
28
<PAGE>
SECTION 13. GOVERNING LAW AND TIME. THIS UNDERWRITING AGREEMENT AND ANY
----------------------
APPLICABLE TERMS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK. SPECIFIED TIMES OF DAY REFER TO NEW YORK
CITY TIME.
SECTION 14. Effect of Headings. The Article and Section headings herein
------------------
and the Table of Contents are for convenience only and shall not affect the
construction hereof.
29
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company a counterpart hereof, whereupon this
Underwriting Agreement, along with all counterparts, will become a binding
agreement between Merrill Lynch and the Company in accordance with its terms.
Very truly yours,
FEDERAL-MOGUL CORPORATION
By:_____________________________
Name:
Title:
CONFIRMED AND ACCEPTED,
as of the date first
above written:
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:_________________________________
Authorized Signatory
30
<PAGE>
Exhibit A
FEDERAL-MOGUL CORPORATION
(a Michigan)
Common Stock, Debt Securities, Preferred Stock
TERMS AGREEMENT
---------------
., 199__
To: Federal-Mogul Corporation
[address of Issuer]
Ladies and Gentlemen:
We understand that Federal-Mogul Corporation, a Michigan corporation
(the "Company"), proposes to issue and sell [ shares of its common
stock, no par value per share (the "Common Stock")] [ shares of its
preferred stock, no par value per share (the "Preferred Stock")] [$
aggregate principal amount of its [senior] [subordinated] debt securities (the
"Debt Securities")] ([such securities also being hereinafter referred to as] the
"[Initial] Underwritten Securities"). Subject to the terms and conditions set
forth or incorporated by reference herein, we [the underwriters named below (the
"Underwriters")] offer to purchase [, severally and not jointly,] the [[number]
[principal] [amount] of] Underwritten Securities [opposite their names set forth
below] at the purchase price set forth below [, and a proportionate share of
Option Underwritten Securities set forth below, to the extent any are
purchased].
A-1
<PAGE>
[Number]
[Principal Amount]
Underwriter of [Initial] Underwritten Securities
- ----------- ------------------------------------
Total [$]
===
The Underwritten Securities shall have the following terms:
[Common Stock]
------------
Title:
Number of shares:
Number of Option Underwritten Securities:
Initial public offering price per share: $
Purchase price per share: $
Listing requirements:
Black-out provisions:
Lock-up provisions:
Other terms and conditions:
Closing date and location:
[Preferred Stock]
---------------
Title:
Rank:
Ratings:
Number of shares:
Number of Option Underwritten Securities:
Dividend rate (or formula) per share: $
Dividend payment dates:
Stated value: $
Liquidation preference per share: $
Redemption provisions:
Sinking fund requirements:
Conversion provisions:
Listing requirements:
Black-out provisions:
A-2
<PAGE>
Lock-up provisions:
Initial public offering price per share: $____ plus accumulated dividends, if
any, from ____
Purchase price per share: $____ plus accumulated dividends, if any, from ____
Other terms and conditions:
Closing date and location:
[Debt Securities]
---------------
Title:
Rank:
Ratings:
Aggregate principal amount:
Denominations:
Currency of payment:
Interest rate or formula:
Interest payment dates:
Regular record dates:
Stated maturity date:
Redemption provisions:
Sinking fund requirements:
Conversion provisions:
Listing requirements:
Black-out provisions:
Fixed or Variable Price Offering: [Fixed] [Variable] Price Offering
If Fixed Price Offering, initial public offering price per share: % of
the principal amount, plus accrued interest [amortized original issue
discount], if any, from _______________________.
Purchase price per share: ___% of principal amount, plus accrued interest
[amortized original issue discount], if any, from ________________.
Form:
Other terms and conditions:
Closing date and location:
All of the provisions contained in the document attached as Annex I hereto
entitled "Federal-Mogul Corporation--Common Stock, Preferred Stock and Debt
Securities--Underwriting Agreement" are hereby incorporated by reference in
their entirety herein and shall be deemed to be a part of this Terms Agreement
to the same extent as if such provisions had been set forth in full herein.
Terms defined in such document are used herein as therein defined.
A-3
<PAGE>
Please accept this offer no later than ___ o'clock P.M. (New York City
time) on ________________ by signing a copy of this Terms Agreement in the space
set forth below and returning the signed copy to us.
Very truly yours,
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By_____________________________
Authorized Signatory
[Acting on behalf of itself and the other named
Underwriters.]
Accepted:
FEDERAL-MOGUL CORPORATION
By_______________________
Name:
Title:
A-4
<PAGE>
EXHIBIT 1.2
________________________________________________________________________________
________________________________________________________________________________
FEDERAL-MOGUL CORPORATION
(a Michigan corporation)
____________ Shares of Common Stock
U.S. PURCHASE AGREEMENT
Dated: June ., 1998
________________________________________________________________________________
________________________________________________________________________________
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
U.S. PURCHASE AGREEMENT.............................................................................. 1
SECTION 1. Representations and Warranties...................................................... 4
(a) Representations and Warranties by the Company....................................... 4
(i) Compliance with Registration Requirements....................................... 4
(ii) Incorporated Documents......................................................... 5
(iii) Independent Accountants....................................................... 5
(iv) Financial Statements........................................................... 5
(v) No Material Adverse Change in Business.......................................... 6
(vi) Good Standing of the Company................................................... 6
(vii) Good Standing of Subsidiaries................................................. 6
(viii) Capitalization............................................................... 7
(ix) Authorization of Agreement..................................................... 7
(x) Authorization and Description of Securities..................................... 7
(xi) Absence of Defaults and Conflicts.............................................. 7
(xii) Absence of Labor Dispute...................................................... 8
(xiii) Absence of Proceedings....................................................... 8
(xiv) Accuracy of Exhibits.......................................................... 9
(xv) Possession of Intellectual Property............................................ 9
(xvi) Absence of Further Requirements............................................... 9
(xvii) Possession of Licenses and Permits........................................... 9
(xviii) Title to Property........................................................... 10
(xix) [Intentionally omitted]....................................................... 10
(xx) Investment Company Act......................................................... 10
(xxi) Environmental Laws............................................................ 10
(b) Representations and Warranties by the Selling Shareholders and Covenants
of the Selling Shareholders......................................................... 11
(i) Accurate Disclosure............................................................. 11
(ii) Authorization of Agreements.................................................... 11
(iii) Good and Marketable Title..................................................... 12
(iv) Due Execution of Power of Attorney and Custody Agreement....................... 12
(v) Absence of Manipulation......................................................... 13
(vi) Absence of Further Requirements................................................ 13
(vii) Restriction on Sale of Securities............................................. 13
(viii) Certificates Suitable for Transfer........................................... 13
(ix) No Association with NASD....................................................... 14
(c) Officer's Certificates.............................................................. 14
(d) Selling Shareholder's Certificates.................................................. 14
SECTION 2. Sale and Delivery to U.S. Underwriters; Closing..................................... 14
(a) Initial Securities.................................................................. 14
(b) Option Securities................................................................... 14
</TABLE>
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<TABLE>
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<S> <C>
(c) Payment............................................................................. 15
(d) Denominations; Registration......................................................... 16
SECTION 3. Covenants of the Company............................................................ 16
(a) Compliance with Securities Regulations and Commission Requests...................... 16
(b) Filing of Amendments................................................................ 16
(c) Delivery of Registration Statements................................................. 17
(d) Delivery of Prospectuses............................................................ 17
(e) Continued Compliance with Securities Laws........................................... 17
(f) Blue Sky Qualifications............................................................. 17
(g) Earnings Statement.................................................................. 18
(h) Use of Proceeds..................................................................... 18
(i) Listing............................................................................. 18
(j) Restriction on Sale of Securities................................................... 18
(k) Reporting Requirements.............................................................. 18
SECTION 4. Payment of Expenses. ............................................................... 19
(a) Expenses............................................................................ 19
(b) Termination of Agreement............................................................ 19
SECTION 5. Conditions of U.S. Underwriters' Obligations........................................ 19
(a) Effectiveness of Registration Statement............................................. 19
(b) Opinion of Counsel for Company...................................................... 20
(c) Opinion of Counsel for the Selling Shareholders..................................... 20
(d) Opinion of Counsel for U.S. Underwriters............................................ 20
(e) Officers' Certificate............................................................... 20
(f) Certificate of Selling Shareholders................................................. 21
(g) Accountant's Comfort Letter......................................................... 21
(h) Bring-down Comfort Letter........................................................... 21
(i) Approval of Listing................................................................. 21
(j) Lock-up Agreements.................................................................. 21
(k) Purchase of Initial International Securities........................................ 21
(l) Conditions to Purchase of U.S. Option Securities.................................... 21
(i) Officers' Certificate...................................................... 22
(ii) Certificate of Selling Shareholders........................................ 22
(iii) Opinion of Counsel for the Company......................................... 22
(iv) Opinion of Counsel for the Selling Shareholders............................ 22
(m) Additional Documents................................................................ 23
(n) Termination of Agreement............................................................ 23
SECTION 6. Indemnification..................................................................... 23
(a) Indemnification of U.S. Underwriters............................................... 23
(b) Indemnification of Company, Directors and Officers.................................. 24
(c) Actions against Parties; Notification............................................... 25
(d) Settlement without Consent if Failure to Reimburse.................................. 25
(e) Limitation on Selling Shareholders' Indemnification................................. 25
</TABLE>
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SECTION 7. Contribution.......................................................................... 26
SECTION 8. Representations, Warranties and Agreements to Survive Delivery........................ 27
SECTION 9. Termination of Agreement.............................................................. 27
(a) Termination; General.................................................................. 27
(b) Liabilities........................................................................... 28
SECTION 10. Default by One or More of the U.S. Underwriters....................................... 28
SECTION 11. Default by One or More of the Selling Shareholder(s) or the Company................... 29
SECTION 12. Notices............................................................................... 29
SECTION 13. Parties............................................................................... 29
SECTION 14. Governing Law and Time................................................................ 30
SECTION 15. Effect of Headings.................................................................... 30
SCHEDULES
Schedule A-1 - List of Underwriters...................................................... Sch A-1
Schedule A-2 - Initial U.S. Securities and U.S. Option Securities........................ Sch A-2
Schedule B - Pricing Information....................................................... Sch B-1
Schedule C - List of Subsidiaries...................................................... Sch C-1
Schedule D - List of persons and entities subject to Lock-up........................... Sch D-1
EXHIBITS
Exhibit A - Form of Opinion of Company's Counsel................................................ A-1
Exhibit A-2 - Form of Opinion of Selling Shareholders' Counsel.................................. A-2
Exhibit B - Form of Lock-up Letter.............................................................. B-1
</TABLE>
-iii-
<PAGE>
Draft of June 1, 1998
FEDERAL-MOGUL CORPORATION
(a Michigan corporation)
____________ Shares of Common Stock
(Without Par Value)
U.S. PURCHASE AGREEMENT
------------------------
June ., 1998
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Bear, Stearns & Co. Inc.
Donaldson, Lufkin & Jenrette
Securities Corporation
Morgan Stanley & Co., Inc.
Smith Barney Inc.
Schroder & Co. Inc.
as U.S. Representatives of the several U.S. Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
Federal-Mogul Corporation, a Michigan corporation (the "Company"), and the
shareholders listed on Schedule A-2 hereto (the "Selling Shareholders"), confirm
their respective agreements with Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch") and each of the other U.S.
Underwriters named in Schedule A hereto (collectively, the "U.S. Underwriters",
which term shall also include any underwriter substituted as hereinafter
provided in Section 10 hereof), for whom Merrill Lynch, Bear, Stearns & Co.
Inc., Donaldson, Lufkin & Jenrette Securities Corporation, Morgan Stanley & Co.,
Inc., Smith Barney Inc. and Schroder & Co. Inc. are acting as representatives
(in such capacity, the "U.S. Representatives"), with respect to (i) the sale by
the Company and the Selling Shareholders, acting severally and not jointly, and
the purchase by the U.S. Underwriters, acting severally and not jointly, of the
respective numbers of shares of Common Stock,
<PAGE>
without par value, of the Company ("Common Stock") as set forth in said
Schedules A and A-1 (which, with respect to the Selling Shareholders, reflect
shares of Common Stock to be issued upon conversion of shares of Series E
Mandatory Exchangeable Preferred Stock ("Series E Stock")), and (ii) the grant
by the Company and the Selling Shareholders to the U.S. Underwriters, acting
severally and not jointly, of the option described in Section 2(b) hereof to
purchase all or any part of ____________ additional shares of Common Stock to
cover over-allotments, if any. The aforesaid ____________ shares of Common
Stock (the "Initial U.S. Securities") to be purchased by the U.S. Underwriters
and all or any part of the ____________ shares of Common Stock subject to the
option described in Section 2(b) hereof (the "U.S. Option Securities") are
hereinafter called, collectively, the "U.S. Securities".
It is understood that the Company and the Selling Shareholders are
concurrently entering into an agreement dated the date hereof (the
"International Purchase Agreement") providing for the offering by the Company
and the Selling Shareholders of an aggregate of ____________ shares of Common
Stock (the "Initial International Securities") through arrangements with certain
underwriters outside the United States and Canada (the "International Managers")
for which Merrill Lynch International, Bear, Stearns International Limited,
Morgan Stanley & Co. International Limited, Smith Barney Inc., Donaldson, Lufkin
& Jenrette International, J. Henry Schroder & Co. Limited, ABN AMRO Rothschild,
Credit Lyonnais Securities and Kleinwort Benson Limited are acting as lead
managers) (the "Lead Managers") and the grant by the Company and the Selling
Shareholders to the International Managers, acting severally and not jointly, of
an option to purchase all or any part of the International Managers' pro rata
portion of up to ____________ additional shares of Common Stock solely to cover
overallotments, if any (the "International Option Securities" and, together with
the U.S. Option Securities, the "Option Securities"). The Initial International
Securities and the International Option Securities are hereinafter called the
"International Securities". It is understood that the Company and the Selling
Shareholders are not obligated to sell and the U.S. Underwriters are not
obligated to purchase, any Initial U.S. Securities unless all of the Initial
International Securities are contemporaneously purchased by the International
Managers.
The U.S. Underwriters and the International Managers are hereinafter
collectively called the "Underwriters", the Initial U.S. Securities and the
Initial International Securities are hereinafter collectively called the
"Initial Securities", and the U.S. Securities, and the International Securities
are hereinafter collectively called the "Securities".
The Underwriters will concurrently enter into an Intersyndicate Agreement
of even date herewith (the "Intersyndicate Agreement") providing for the
coordination of certain transactions among the Underwriters under the direction
of Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (in
such capacity, the "Global Coordinator").
The Company and the Selling Shareholders understand that the U.S.
Underwriters propose to make a public offering of the U.S. Securities as soon as
the U.S. Representatives deem advisable after this Agreement has been executed
and delivered.
-2-
<PAGE>
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-3 (No. 333-50413) and pre-
effective amendment nos. 1 and 2 thereto covering the registration of the
Securities under the Securities Act of 1933, as amended (the "1933 Act"),
including the related preliminary prospectus or prospectuses. Promptly after
execution and delivery of this Agreement, the Company will either (i) prepare
and file a prospectus in accordance with the provisions of Rule 430A ("Rule
430A") of the rules and regulations of the Commission under the 1933 Act (the
"1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of the
1933 Act Regulations or (ii) if the Company has elected to rely upon Rule 434
("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a "Term
Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). Two
forms of prospectus are to be used in connection with the offering and sale of
the Securities: one relating to the U.S. Securities (the "Form of U.S.
Prospectus") and one relating to the International Securities (the "Form of
International Prospectus"). The Form of International Prospectus is identical to
the Form of U.S. Prospectus, except for the front cover and back cover pages and
the information under the caption "Underwriting." The information included in
any such prospectus or in any such Term Sheet, as the case may be, that was
omitted from such registration statement at the time it became effective but
that is deemed to be part of such registration statement at the time it became
effective (a) pursuant to paragraph (b) of Rule 430A is referred to as "Rule
430A Information" or (b) pursuant to paragraph (d) of Rule 434 is referred to as
"Rule 434 Information." Each Form of U.S. Prospectus and Form of International
Prospectus used before such registration statement became effective, and any
prospectus that omitted, as applicable, the Rule 430A Information or the Rule
434 Information, that was used after such effectiveness and prior to the
execution and delivery of this Agreement, is herein called a "preliminary
prospectus." Such registration statement, including the exhibits thereto,
schedules thereto, if any, and the documents incorporated by reference therein
pursuant to Item 12 of Form S-3 under the 1933 Act, at the time it became
effective and including the Rule 430A Information and the Rule 434 Information,
as applicable, is herein called the "Registration Statement." Any registration
statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein
referred to as the "Rule 462(b) Registration Statement," and after such filing
the term "Registration Statement" shall include the Rule 462(b) Registration
Statement. The final Form of U.S. Prospectus and the final Form of
International Prospectus, including the documents incorporated by reference
therein pursuant to Item 12 of Form S-3 under the 1933 Act, in the forms first
furnished to the Underwriters for use in connection with the offering of the
Securities are herein called the "U.S. Prospectus" and the "International
Prospectus," respectively, and collectively, the "Prospectuses." If Rule 434 is
relied on, the terms "U.S. Prospectus" and "International Prospectus" shall
refer to the preliminary U.S. Prospectus dated _____, 1998 and preliminary
International Prospectus dated ____, 1998, respectively, each together with the
applicable Term Sheet and all references in this Agreement to the date of such
Prospectuses shall mean the date of the applicable Term Sheet. For purposes of
this Agreement, all references to the Registration Statement, any preliminary
prospectus, the U.S. Prospectus, the International Prospectus or any Term Sheet
or any amendment or supplement to any of the foregoing shall be deemed to
include the copy filed with the Commission pursuant to its Electronic Data
Gathering, Analysis and Retrieval system ("EDGAR").
All references in this Agreement to financial statements and schedules and
other information which is "contained," "included" or "stated" in the
Registration Statement, any preliminary prospectus
-3-
<PAGE>
(including the Form of U.S. Prospectus and Form of International Prospectus) or
the Prospectuses (or other references of like import) shall be deemed to mean
and include all such financial statements and schedules and other information
which is incorporated by reference in the Registration Statement, any
preliminary prospectus (including the Form of U.S. Prospectus and Form of
International Prospectus) or the Prospectuses, as the case may be; and all
references in this Agreement to amendments or supplements to the Registration
Statement, any preliminary prospectus or the Prospectuses shall be deemed to
mean and include the filing of any document under the Securities Exchange Act of
1934 (the "1934 Act") which is incorporated by reference in the Registration
Statement, such preliminary prospectus or the Prospectuses, as the case may be.
SECTION 1. Representations and Warranties.
------------------------------
(a) Representations and Warranties by the Company. The Company represents
and warrants to each U.S. Underwriter as of the date hereof, as of the Closing
Time referred to in Section 2(c) hereof, and as of each Date of Delivery (if
any) referred to in Section 2(b) hereof, and agrees with each U.S. Underwriter,
as follows:
(i) Compliance with Registration Requirements. The Company meets
-----------------------------------------
the requirements for use of Form S-3 under the 1933 Act. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement has been issued under the 1933 Act and no proceedings for that
purpose have been instituted or are pending or, to the knowledge of the
Company, are contemplated by the Commission, and any request on the part of
the Commission for additional information has been complied with.
At the respective times the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendments thereto became
effective and at the Closing Time (and, if any U.S. Option Securities are
purchased, at the Date of Delivery), the Registration Statement, the Rule
462(b) Registration Statement and any amendments and supplements thereto
complied and will comply in all material respects with the requirements of
the 1933 Act and the 1933 Act Regulations and did not and will not contain
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading. Neither of the Prospectuses nor any amendments or
supplements thereto, at the time the Prospectuses or any amendments or
supplements thereto were issued and at the Closing Time (and, if any U.S.
Option Securities are purchased, at the Date of Delivery), included or will
include an untrue statement of a material fact or omitted or will omit to
state a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
If Rule 434 is used, the Company will comply with the requirements of Rule
434. The representations and warranties in this subsection shall not apply
to statements in or omissions from the Registration Statement or the U.S.
Prospectus made in reliance upon and in conformity with information
furnished to the Company in writing by any U.S. Underwriter
-4-
<PAGE>
through the U.S. Representatives expressly for use in the Registration
Statement or the U.S. Prospectus.
Each preliminary prospectus and the prospectuses filed as part of the
Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so
filed in all material respects with the 1933 Act Regulations and each
preliminary prospectus and the Prospectuses delivered to the Underwriters
for use in connection with this offering was identical to the
electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(ii) Incorporated Documents. The documents incorporated or deemed
----------------------
to be incorporated by reference in the Registration Statement and the
Prospectuses, at the time they were or hereafter are filed with the
Commission, complied and will comply in all material respects with the
requirements of the 1934 Act and the rules and regulations of the
Commission thereunder (the "1934 Act Regulations"), and, when read together
with the other information in the Prospectuses, at the time the
Registration Statement became effective, at the time the Prospectuses were
issued and at the Closing Time (and, if any U.S. Option Securities are
purchased, at the Date of Delivery), did not and will not contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein not
misleading.
(iii) Independent Accountants. The accountants who certified the
-----------------------
financial statements and supporting schedules included in the Registration
Statement are independent public accountants as required by the 1933 Act
and the 1933 Act Regulations.
(iv) Financial Statements. The financial statements of the Company
--------------------
and its consolidated subsidiaries included in the Registration Statement
and the Prospectuses, together with the related schedules and notes, as
well as those financial statements, schedules and notes of any other entity
included therein, present fairly the financial position of the Company and
its consolidated subsidiaries, or such other entity, as the case may be, at
the dates indicated and the statement of operations, shareholders' equity
and cash flows of the Company and its consolidated subsidiaries, or such
other entity, as the case may be, for the periods specified; said financial
statements have been prepared in conformity with generally accepted
accounting principles ("GAAP") applied on a consistent basis throughout the
periods involved except as disclosed therein, except that financial
statements of T&N plc ("T&N") have been prepared in conformity with U.K.
GAAP applied on a consistent basis throughout the periods involved except
as disclosed therein. The supporting schedules, if any, included in the
Registration Statement present fairly in accordance with GAAP, or U.K. GAAP
with respect to T&N supporting schedules, the information required to be
stated therein. The selected financial data and the summary financial
information included in the Prospectuses present fairly the information
shown therein and have been compiled on a basis consistent with that of the
audited financial statements included in the Registration Statement and the
Prospectuses. The pro forma financial statements and the related notes
thereto
-5-
<PAGE>
included in the Registration Statement and the Prospectuses present fairly
the information shown therein, have been prepared in accordance with the
Commission's rules and guidelines with respect to pro forma financial
statements and have been properly compiled on the bases described therein,
and the assumptions used in the preparation thereof are reasonable and the
adjustments used therein are appropriate to give effect to the transactions
and circumstances referred to therein.
(v) No Material Adverse Change in Business. Since the respective
--------------------------------------
dates as of which information is given in the Registration Statement and
the Prospectuses, except as otherwise stated therein, (A) there has been no
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business (a "Material Adverse Effect"), (B) there have
been no transactions entered into by the Company or any of its
subsidiaries, other than those in the ordinary course of business, which
are material with respect to the Company and its subsidiaries considered as
one enterprise, and (C) except for regular quarterly dividends on the
Common Stock in amounts per share that are consistent with past practice or
with the Company's new dividend policy summarized in the Prospectuses under
the caption "Price Range of Common Stock and Dividends" and dividends on
the Company's outstanding preferred stock in the ordinary course, there has
been no dividend or distribution of any kind declared, paid or made by the
Company on any class of its capital stock.
(vi) Good Standing of the Company. The Company has been duly
----------------------------
organized and is validly existing as a corporation in good standing under
the laws of the State of Michigan and has corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectuses and to enter into and perform its obligations
under this Agreement; and the Company is duly qualified as a foreign
corporation to transact business and is in good standing in each other
jurisdiction (including foreign jurisdictions) in which such qualification
is required, whether by reason of the ownership or leasing of property or
the conduct of business, except where the failure so to qualify or to be in
good standing would not result in a Material Adverse Effect.
(vii) Good Standing of Subsidiaries. Each "significant subsidiary"
-----------------------------
of the Company (as such term is defined in Rule 1-02 of Regulation S-X)
(each a "Subsidiary" and, collectively, the "Subsidiaries") has been duly
organized and is validly existing as a corporation in good standing under
the laws of the jurisdiction of its incorporation, has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectuses and is duly qualified as a
foreign corporation to transact business and is in good standing in each
jurisdiction (including foreign jurisdictions) in which such qualification
is required, whether by reason of the ownership or leasing of property or
the conduct of business, except where the failure so to qualify or to be in
good standing would not result in a Material Adverse Effect; except as
otherwise disclosed in the Registration Statement, all of the issued and
outstanding capital stock of each such Subsidiary has been duly authorized
and validly issued, is fully paid and non-assessable and greater than
-6-
<PAGE>
90% of such capital stock is owned by the Company, directly or through
subsidiaries, and to the extent such capital stock is owned by the Company
it is owned free and clear of any security interest, mortgage, pledge,
lien, encumbrance, claim or equity; none of the outstanding shares of
capital stock of any Subsidiary was issued in violation of the preemptive
or similar rights of any securityholder of such Subsidiary. The only
subsidiaries of the Company are (a) the subsidiaries listed on Schedule C
hereto and (b) certain other subsidiaries which, considered in the
aggregate as a single subsidiary, do not constitute a "significant
subsidiary" as defined in Rule 1-02 of Regulation S-X.
(viii) Capitalization. The authorized, issued and outstanding
--------------
capital stock of the Company is as set forth in the Prospectuses in the
column entitled "Actual" under the caption "Capitalization" (except for
subsequent issuances, if any, pursuant to this Agreement or the
International Purchase Agreement, pursuant to reservations, agreements or
employee benefit plans referred to in the Prospectuses or pursuant to the
exercise of convertible securities or options referred to in the
Prospectuses). The shares of issued and outstanding capital stock of the
Company have been duly authorized and validly issued and are fully paid and
non-assessable, and the Securities to be issued upon conversion of shares
of Series E Stock held by such Selling Shareholders and to be sold to the
Underwriters hereunder and under the International Purchase Agreement
("Conversion Shares") have been duly authorized and will be, prior to the
Closing Time and at each Time of Delivery (if any), as applicable, duly
authorized and validly issued and fully paid and non-assessable; none of
the outstanding shares of capital stock of the Company was issued, and none
of the Conversion Shares will be issued, in violation of the preemptive or
other similar rights of any securityholder of the Company; as of the
Closing Time and each Date of Delivery (if any), as applicable, shares of
Series E Stock shall have been duly and validly converted into the
appropriate number of Conversion Shares.
(ix) Authorization of Agreement. This Agreement and the
--------------------------
International Purchase Agreement have been duly authorized, executed and
delivered by the Company.
(x) Authorization and Description of Securities. The Securities
-------------------------------------------
to be purchased by the U.S. Underwriters and the International Managers
from the Company have been duly authorized for issuance and sale to the
U.S. Underwriters pursuant to this Agreement and the International Managers
pursuant to the International Purchase Agreement, respectively, and, when
issued and delivered by the Company pursuant to this Agreement and the
International Purchase Agreement, respectively, against payment of the
consideration set forth herein and in the International Purchase Agreement,
respectively, will be validly issued, fully paid and non-assessable; the
Common Stock conforms to all statements relating thereto contained in the
Prospectuses and such description conforms in all material respects to the
rights set forth in the instruments defining the same; no holder of the
Securities will be subject to personal liability by reason of being such a
holder; and the issuance of the Securities is not subject to the preemptive
or other similar rights of any securityholder of the Company.
-7-
<PAGE>
(xi) Absence of Defaults and Conflicts. Neither the Company nor
---------------------------------
any of its subsidiaries is in violation of its charter or by-laws or in
default in the performance or observance of any obligation, agreement,
covenant or condition contained in any contract, indenture, mortgage, deed
of trust, loan or credit agreement, note, lease or other agreement or
instrument to which the Company or any of its subsidiaries is a party or by
which it or any of them may be bound, or to which any of the property or
assets of the Company or any subsidiary is subject (collectively,
"Agreements and Instruments") except for such defaults that would not
result in a Material Adverse Effect; and the execution, delivery and
performance of this Agreement and the International Purchase Agreement and
the consummation of the transactions contemplated in this Agreement, in the
International Purchase Agreement and in the Registration Statement
(including the issuance and sale of the Securities and the use of the
proceeds from the sale of the Securities as described in the Prospectuses
under the caption "Use of Proceeds") and compliance by the Company with its
obligations under this Agreement and the International Purchase Agreement
have been duly authorized by all necessary corporate action and do not and
will not, whether with or without the giving of notice or passage of time
or both, conflict with or constitute a breach of, or default or Repayment
Event (as defined below) (except to the extent described in the
Prospectuses under the caption "Description of Certain Indebtedness--
Repayments and Refinancings") under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or assets
of the Company or any subsidiary pursuant to, the Agreements and
Instruments (except for such conflicts, breaches or defaults or liens,
charges or encumbrances that would not result in a Material Adverse
Effect), nor will such action result in any violation of the provisions of
the charter or by-laws of the Company or any subsidiary or any applicable
law, statute, rule, regulation, judgment, order, writ or decree of any
government, government instrumentality or court, domestic or foreign,
having jurisdiction over the Company or any subsidiary or any of their
assets, properties or operations. As used herein, a "Repayment Event" means
any event or condition which gives the holder of any note, debenture or
other evidence of indebtedness (or any person acting on such holder's
behalf) the right to require the repurchase, redemption or repayment of all
or a portion of such indebtedness by the Company or any subsidiary.
(xii) Absence of Labor Dispute. No labor dispute with the employees
------------------------
of the Company or any subsidiary exists or, to the knowledge of the
Company, is imminent which may reasonably be expected to result in a
Material Adverse Effect.
(xiii) Absence of Proceedings. There is no action, suit,
----------------------
proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, domestic or foreign, now pending, or, to the
knowledge of the Company, threatened, against or affecting the Company or
any subsidiary, which is required to be disclosed in the Registration
Statement (other than as disclosed therein), or which might reasonably be
expected to result in a Material Adverse Effect, or which might reasonably
be expected to materially and adversely affect the consummation of the
transactions contemplated by this Agreement and the International Purchase
Agreement or the performance by the Company of its obligations hereunder or
thereunder; the aggregate of all pending legal or governmental proceedings
to
-8-
<PAGE>
which the Company or any subsidiary is a party or of which any of their
respective properties, assets or operations is the subject which are not
described in the Registration Statement and the Prospectuses, including
ordinary routine litigation incidental to the business, could not
reasonably be expected to result in a Material Adverse Effect.
(xiv) Accuracy of Exhibits. There are no contracts or documents
--------------------
which are required to be described in the Registration Statement, the
Prospectuses or the documents incorporated by reference therein or to be
filed as exhibits thereto which have not been so described and filed as
required.
(xv) Possession of Intellectual Property. The Company and its
-----------------------------------
subsidiaries own or possess, or can acquire on reasonable terms, adequate
patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
trademarks, service marks, trade names or other intellectual property
(collectively, "Intellectual Property") necessary to carry on the business
now operated by them, except where the failure to own or possess or
otherwise be able to acquire such Intellectual Property would not result in
a Material Adverse Effect, and neither the Company nor any of its
subsidiaries has received any notice or is otherwise aware of any
infringement of or conflict with asserted rights of others with respect to
any Intellectual Property or of any facts or circumstances which would
render any Intellectual Property invalid or inadequate to protect the
interest of the Company or any of its subsidiaries therein, and which
infringement or conflict (if the subject of any unfavorable decision,
ruling or finding) or invalidity or inadequacy, singly or in the aggregate,
would result in a Material Adverse Effect.
(xvi) Absence of Further Requirements. No filing with, or
-------------------------------
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency,
domestic or foreign, is necessary or required for the performance by the
Company of its obligations hereunder, in connection with the offering,
issuance or sale of the Securities by the Company under this Agreement and
the International Purchase Agreement or the consummation by the Company of
the transactions contemplated by this Agreement and the International
Purchase Agreement, except such as have been already obtained or as may be
required under the 1933 Act or the 1933 Act Regulations and foreign or
state securities or blue sky laws.
(xvii) Possession of Licenses and Permits. The Company and its
----------------------------------
subsidiaries possess such permits, licenses, approvals, consents and other
authorizations (collectively, "Governmental Licenses") issued by the
appropriate federal, state, local or foreign regulatory agencies or bodies
necessary to conduct the business now operated by them; the Company and its
subsidiaries are in compliance with the terms and conditions of all such
Governmental Licenses, except where the failure so to comply would not,
singly or in the aggregate, have a Material Adverse Effect; all of the
Governmental Licenses are valid and in full force and effect, except when
the invalidity of such Governmental Licenses or the failure of such
Governmental Licenses to be in full force and effect would not have a
Material Adverse
-9-
<PAGE>
Effect; and neither the Company nor any of its subsidiaries has received
any notice of proceedings relating to the revocation or modification of any
such Governmental Licenses which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would result in a
Material Adverse Effect.
(xviii) Title to Property. The Company and its subsidiaries have
-----------------
good and marketable title to all real property owned by the Company and its
subsidiaries which is material to the business of the Company and its
subsidiaries taken as a whole and good title to all other properties owned
by them which is material to the business of the Company and its
subsidiaries taken as a whole, in each case, free and clear of all
mortgages, pledges, liens, security interests, claims, restrictions or
encumbrances of any kind except such as (a) are described in the
Prospectuses or (b) do not, singly or in the aggregate, materially affect
the value of such property and do not interfere with the use made and
proposed to be made of such property by the Company or any of its
subsidiaries; and all of the leases and subleases material to the business
of the Company and its subsidiaries, considered as one enterprise, and
under which the Company or any of its subsidiaries holds properties
described in the Prospectuses, are in full force and effect, and neither
the Company nor any subsidiary has any notice of any material claim of any
sort that has been asserted by anyone adverse to the rights of the Company
or any subsidiary under any of the leases or subleases mentioned above, or
affecting or questioning the rights of the Company or such subsidiary to
the continued possession of the leased or subleased premises under any such
lease or sublease.
(xix) [Intentionally omitted.]
(xx) Investment Company Act. The Company is not, and upon the
----------------------
issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the Prospectuses
will not be, an "investment company" or an entity "controlled" by an
"investment company" as such terms are defined in the Investment Company
Act of 1940, as amended (the "1940 Act").
(xxi) Environmental Laws. Except as described in the Registration
------------------
Statement and except as would not, singly or in the aggregate, result in a
Material Adverse Effect, (A) neither the Company nor any of its
subsidiaries is in violation of any federal, state, local or foreign
statute, law, rule, regulation, ordinance, code, policy or rule of common
law or any judicial or administrative interpretation thereof, including any
judicial or administrative order, consent, decree or judgment, relating to
pollution or protection of human health, the environment (including,
without limitation, ambient air, surface water, groundwater, land surface
or subsurface strata) or wildlife, including, without limitation, laws and
regulations relating to the release or threatened release of chemicals,
pollutants, contaminants, wastes, toxic substances, hazardous substances,
petroleum or petroleum products (collectively, "Hazardous Materials") or to
the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials (collectively,
"Environmental Laws"), (B) the Company and its subsidiaries have all
permits, authorizations and approvals required under any applicable
Environmental Laws and are each in compliance with their
-10-
<PAGE>
requirements, (C) there are no pending or, to the Company's knowledge,
threatened administrative, regulatory or judicial actions, suits, demands,
demand letters, claims, liens, notices of noncompliance or violation,
investigation or proceedings relating to any Environmental Law against the
Company or any of its subsidiaries and (D) there are no events or
circumstances that might reasonably be expected to form the basis of an
order for clean-up or remediation, or an action, suit or proceeding by any
private party or governmental body or agency, against or affecting the
Company or any of its subsidiaries relating to Hazardous Materials or any
Environmental Laws.
(xxii) Registration Rights. There are no persons with registration
-------------------
rights or other similar rights to have any securities registered pursuant
to the Registration Statement or otherwise registered by the Company under
the 1933 Act, except for persons who are Selling Shareholders or other
shareholders described in the Prospectus as having registration rights.
Each Selling Shareholder has validly and effectively exercised such Selling
Shareholder's rights to require registration of Conversion Shares because
of the filing of the Registration Statement and the consummation of the
transactions contemplated by this Agreement and the International Purchase
Agreement and each Selling Shareholder, with respect to any securities of
the Company other than Conversion Shares, and each other holder of any
security of the Company that has any right to require registration of
shares of Common Stock or any other security of the Company because of the
filing of the Registration Statement or consummation of the transactions
contemplated by this Agreement or the International Purchase Agreement, has
validly and effectively waived such rights.
(b) Representations and Warranties by the Selling Shareholders and
Covenants of the Selling Shareholders. Each Selling Shareholder severally and
not jointly represents and warrants to each U.S. Underwriter as of the date
hereof, as of the Closing Time, and as of each Date of Delivery (if any)
referred to in Section 2(b) hereof, and agrees with each U.S. Underwriter, as
follows:
(i) Accurate Disclosure. [With respect to Kenneth Lehman and
-------------------
David Weinberg: the representations and warranties of the Company contained
in Section 1(a) hereof, insofar as they relate to Fel-Pro Incorporated and
the affiliated companies purchased together with Fel-Pro Incorporated by
Federal-Mogul (collectively, "Fel-Pro") or information about Fel-Pro at or
prior to the Company's acquisition thereof, are true and correct.] Each
Selling Shareholder has reviewed and is familiar with the Registration
Statement and the Prospectuses and neither the Prospectuses nor any
amendments or supplements thereto include any untrue statement of a
material fact with respect to such Selling Shareholder [and, with respect
to Kenneth Lehman and David Weinberg, Fel-Pro] or omits to state a
material fact with respect to such Selling Shareholder [and, with respect
to Kenneth Lehman and David Weinberg, Fel-Pro] necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading.
(ii) Authorization of Agreements. Such Selling Shareholder has the
---------------------------
full right, power and authority to enter into this Agreement, the
International Purchase Agreement and a Power of Attorney and Custody
Agreement (in each case, a "Power of Attorney and Custody
-11-
<PAGE>
Agreement") and to sell and cause to be delivered the Securities to be sold
by such Selling Shareholder hereunder and thereunder. The execution and
delivery of this Agreement, the International Purchase Agreement and the
Power of Attorney and Custody Agreement and the sale and delivery of the
Securities to be sold by such Selling Shareholder and the consummation of
the transactions contemplated herein and therein and compliance by such
Selling Shareholder with its obligations hereunder and thereunder have been
duly authorized, if necessary, by such Selling Shareholder and do not and
will not, whether with or without the giving of notice or passage of time
or both, conflict with or constitute a breach of, or default under, or
result in the creation or imposition of any lien, charge or encumbrance
upon the Securities to be sold by such Selling Shareholder nor will such
action result in any violation of the provisions of the charter or by-laws
or other organizational or governing instrument of such Selling
Shareholder, if applicable, or any applicable law, statute, rule,
regulation, judgment, order, writ or decree of any government, government
instrumentality or court, domestic or foreign, having jurisdiction over
such Selling Shareholder or any of its properties.
(iii) Good and Marketable Title. Such Selling Shareholder has good
-------------------------
and marketable title to the shares of Series E Stock to be converted into
Conversion Shares and sold by such Selling Shareholder pursuant hereto and
the International Purchase Agreement, free and clear of any security
interest, mortgage pledge, lien, claim, equity or encumbrance, and at the
Closing Time and at each applicable Time of Delivery (if any), as
applicable, and upon delivery of such Securities and payment of the
purchase price therefor as herein contemplated, assuming due authorization
and valid issuance of the Conversion Shares by the Company and assuming
each such Underwriter has no notice of any adverse claim, each of the
Underwriters will receive good and marketable title to the Securities
purchased by it from such Selling Shareholder, free and clear of any
security interest, mortgage, pledge, lien, encumbrance, claim or equity,
except for any lien created by such Underwriter.
(iv) Due Execution of Power of Attorney and Custody Agreement. Such
--------------------------------------------------------
Selling Shareholder has duly executed and delivered, in the form heretofore
furnished to the Representatives, the Power of Attorney and Custody
Agreement with ________________, _______________ or ________________ as
attorney-in-fact and custodian (each a "Shareholder Representatives"); the
Shareholder Representatives are authorized to take such actions as are
necessary to validly and effectively exercise such Selling Shareholder's
rights to require registration of Conversion Shares and to waive any such
rights with respect to any other securities of the Company, to take such
actions as are necessary to validly effectuate the conversion of shares of
Series E Stock held by such Selling Shareholder into Conversion Shares, to
direct the Company to deliver the Securities to be sold by such Selling
Shareholder hereunder and under the International Purchase Agreement and to
accept payment therefor; and each Shareholder Representative is authorized
to execute and deliver this Agreement and the International Purchase
Agreement and the certificate referred to in Section 5(f) or that may be
required pursuant to Section 5(l) on behalf of such Selling Shareholder, to
sell to the Underwriters the Securities to be sold by such Selling
Shareholder hereunder and under the International Purchase Agreement, to
determine the purchase price to be paid by the
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<PAGE>
Underwriters to such Selling Shareholder, as provided in Section 2(a)
hereof, to authorize the delivery of the Securities to be sold by such
Selling Shareholder hereunder and under the International Purchase
Agreement, to accept payment therefor, and otherwise to act on behalf of
such Selling Shareholder in connection with this Agreement and under the
International Purchase Agreement.
(v) Absence of Manipulation. Such Selling Shareholder has not
-----------------------
taken, and will not take, directly or indirectly, any action which is
designed to or which has constituted or which might reasonably be expected
to cause or result in stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Securities.
(vi) Absence of Further Requirements. No filing with, or
-------------------------------
authorization, approval, consent, order, registration, qualification or
decree of, any court or governmental authority or agency, domestic or
foreign, is necessary or required for the performance by such Selling
Shareholder of its obligations hereunder, under the International Purchase
Agreement or in the Power of Attorney and Custody Agreement, or in
connection with the offering or sale of the Securities hereunder or under
the International Purchase Agreement or the consummation of the
transactions contemplated by this Agreement except such as may have been
previously been made or obtained or as may be required under the 1933 Act
or the 1933 Act Regulations or state securities laws.
(vii) Restriction on Sale of Securities. During a period of 90 days
---------------------------------
from the date of the Prospectuses, such Selling Shareholder will not,
without the prior written consent of the Global Coordinator, (i) directly
or indirectly offer, pledge, sell, contract to sell, sell any options or
contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase or otherwise transfer or dispose of
any share of Common Stock or any securities convertible into or exercisable
or exchangeable for Common Stock or file any registration statement under
the 1933 Act with respect to any of the foregoing or (ii) enter into any
swap or any other agreement or any transaction that transfers, in whole or
in part, directly or indirectly, the economic consequences of ownership of
the Common Stock, whether any such swap or transaction described in clause
(i) or (ii) above is to be settled by delivery of Common Stock or such
other securities, in cash or otherwise. The foregoing sentence shall not
apply to the Securities to be sold under this Agreement of the
International Purchase Agreement.
(viii) Certificates Suitable for Transfer. Certificates
----------------------------------
representing shares of Series E Stock to be converted into at least the
maximum number of Conversion Shares to be sold by such Selling Shareholder
to the Underwriters hereunder and under the International Purchase
Agreement, in suitable form for transfer by delivery or accompanied by duly
executed instruments of transfer or assignment in blank with signatures
guaranteed, have been placed in custody with such Selling Shareholder's
Shareholder Representative with irrevocable conditional instructions to
deliver such certificates to the Company for conversion into Conversion
Shares to be delivered to the Underwriters pursuant to this Agreement and
the International Purchase Agreement.
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<PAGE>
(ix) No Association with NASD. Neither such Selling Shareholder nor
------------------------
any of its affiliates directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control
with, or has any other association with (within the meaning of Article I,
Section 1(m) of the By-laws of the National Association of Securities
Dealers, Inc.), any member firm of the National Association of Securities
Dealers, Inc.
(x) Registration Rights. Such Selling Shareholder has validly and
-------------------
effectively exercised such Selling Shareholder's rights to require
registration of Conversion Shares because of the filing of the Registration
Statement and the consummation of the transaction contemplated by the
Agreement and the International Purchase Agreement and such Selling
Shareholder has not, and will not, exercise any other right to require
registration of shares of Common Stock or any other security of the Company
(other than Conversion Shares) because of the filing of the Registration
Statement or consummation of the transactions contemplated by this
Agreement or the International Purchase Agreement.
(c) Officer's Certificates. Any certificate signed by any officer of the
Company or any of its subsidiaries delivered to the Global Coordinator, the U.S.
Representatives or to counsel for the U.S. Underwriters shall be deemed a
representation and warranty by the Company to each U.S. Underwriter as to the
matters covered thereby.
(d) Selling Shareholder's Certificates. Any certificate signed by or on
behalf of a Selling Shareholder delivered to the Global Coordinator, the U.S.
Representatives or to counsel for the U.S. Underwriters shall be deemed a
representation and warranty by such Selling Shareholder to each U.S. Underwriter
as to the matters covered thereby.
SECTION 2. Sale and Delivery to U.S. Underwriters; Closing.
-----------------------------------------------
(a) Initial Securities. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company and each Selling Shareholder, severally and not jointly,
agree to sell to each U.S. Underwriter, severally and not jointly, and each U.S.
Underwriter, severally and not jointly, agrees to purchase from the Company and
each Selling Shareholder, at the price per share set forth in Schedule B, that
proportion of the number of Initial U.S. Securities set forth in Schedule A-2
opposite the name of the Company or such Selling Shareholder, as the case may
be, which the number of Initial U.S. Securities set forth in Schedule A opposite
the name of such U.S. Underwriter, plus any additional number of Initial U.S.
Securities which such U.S. Underwriter may become obligated to purchase pursuant
to the provisions of Section 10 hereof, bears to the total number of Initial
U.S. Securities, subject, in each case to such adjustments among the U.S.
Underwriters as the U.S. Representatives in their sole discretion shall make to
eliminate any sales or purchases of fractional securities.
(b) Option Securities. In addition, on the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, the Company and the Selling Shareholders, acting severally and not
jointly, hereby grant an option to the U.S. Underwriters, severally and not
jointly, to purchase up to an additional ____________ shares of Common Stock
-14-
<PAGE>
at the price per share set forth in Schedule B, less an amount per share equal
to any dividends or distributions declared by the Company and payable on the
Initial U.S. Securities but not payable on the U.S. Option Securities. The
option hereby granted will expire 30 days after the date hereof and may be
exercised in whole or in part from time to time only for the purpose of covering
over-allotments which may be made in connection with the offering and
distribution of the Initial U.S. Securities upon notice by the Global
Coordinator to the Company and the Selling Shareholders setting forth the number
of U.S. Option Securities as to which the several U.S. Underwriters are then
exercising the option and the time and date of payment and delivery for such
U.S. Option Securities. Any such time and date of delivery for the U.S. Option
Securities (a "Date of Delivery") shall be determined by the Global Coordinator,
but shall not be later than seven full business days after the exercise of said
option, nor in any event prior to the Closing Time, as hereinafter defined. If
the option is exercised as to all or any portion of the U.S. Option Securities,
each of the U.S. Underwriters, acting severally and not jointly, will purchase
that proportion of the total number of U.S. Option Securities then being
purchased which the number of Initial U.S. Securities set forth in Schedule A
opposite the name of such U.S. Underwriter bears to the total number of Initial
U.S. Securities, subject in each case to such adjustments as the Global
Coordinator in its discretion shall make to eliminate any sales or purchases of
fractional shares.
(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of Sidley
& Austin, One First National Plaza, Chicago, Illinois 60603, or at such other
place as shall be agreed upon by the Global Coordinator and the Company, at 9:00
A.M. (Eastern time) on the third (fourth, if the pricing occurs after 4:30 P.M.
(Eastern time) on any given day) business day after the date hereof (unless
postponed in accordance with the provisions of Section 10), or such other time
not later than ten business days after such date as shall be agreed upon by the
Global Coordinator and the Company (such time and date of payment and delivery
being herein called "Closing Time").
In addition, in the event that any or all of the U.S. Option Securities are
purchased by the U.S. Underwriters, payment of the purchase price for, and
delivery of certificates for, such U.S. Option Securities shall be made at the
above-mentioned offices, or at such other place as shall be agreed upon by the
Global Coordinator and the Company, on each Date of Delivery as specified in the
notice from the Global Coordinator to the Company.
Payment shall be made to the Company and the Selling Shareholders by wire
transfer of immediately available funds to bank accounts designated by the
Company and the Shareholder Representatives Custodian pursuant to each Selling
Shareholder's Power of Attorney and Custody Agreement, as the case may be,
against delivery to the U.S. Representatives for the respective accounts of the
U.S. Underwriters of certificates for the U.S. Securities to be purchased by
them. It is understood that each U.S. Underwriter has authorized the U.S.
Representatives, for its account, to accept delivery of, receipt for, and make
payment of the purchase price for, the Initial U.S. Securities and the U.S.
Option Securities, if any, which it has agreed to purchase. Merrill Lynch,
individually and not as representative of the U.S. Underwriters, may (but shall
not be obligated to) make payment of the purchase price for the Initial U.S.
Securities or the U.S. Option Securities, if any, to be purchased by any U.S.
Underwriter whose funds have not been received by the Closing
-15-
<PAGE>
Time or the relevant Date of Delivery, as the case may be, but such payment
shall not relieve such U.S. Underwriter from its obligations hereunder.
(d) Denominations; Registration. Certificates for the Initial U.S.
Securities and the U.S. Option Securities, if any, shall be in such
denominations and registered in such names as the U.S. Representatives may
request in writing at least one full business day before the Closing Time or the
relevant Date of Delivery, as the case may be. The certificates for the Initial
U.S. Securities and the U.S. Option Securities, if any, will be made available
for examination and packaging by the U.S. Representatives in The City of New
York not later than 10:00 A.M. (Eastern time) on the business day prior to the
Closing Time or the relevant Date of Delivery, as the case may be.
SECTION 3. Covenants of the Company. The Company covenants with each
------------------------
U.S. Underwriter as follows:
(a) Compliance with Securities Regulations and Commission Requests. The
Company, subject to Section 3(b), will comply with the requirements of Rule 430A
or Rule 434, as applicable, and, during the period in which the Prospectuses are
required to be delivered in connection with the sales of the Common Stock
purchased pursuant to this Agreement, will notify the Global Coordinator
immediately, and confirm the notice in writing, (i) when any post-effective
amendment to the Registration Statement shall become effective, or any
supplement to the Prospectuses or any amended Prospectuses shall have been
filed, (ii) of the receipt of any comments from the Commission, (iii) of any
request by the Commission for any amendment to the Registration Statement or any
amendment or supplement to the Prospectuses or for additional information, and
(iv) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of any order preventing or
suspending the use of any preliminary prospectus, or of the suspension of the
qualification of the Securities for offering or sale in any jurisdiction, or of
the initiation or threatening of any proceedings for any of such purposes. The
Company will promptly effect the filings necessary pursuant to Rule 424(b) and
will take such steps as it deems necessary to ascertain promptly whether the
form of prospectus transmitted for filing under Rule 424(b) was received for
filing by the Commission and, in the event that it was not, it will promptly
file such prospectus. The Company will make every reasonable effort to prevent
the issuance of any stop order and, if any stop order is issued, to obtain the
lifting thereof at the earliest possible moment.
(b) Filing of Amendments. The Company will, during the period in which
the Prospectuses are required by the 1933 Act to be delivered in connection with
sales of the Common Stock purchased pursuant to this Agreement, give the Global
Coordinator notice of its intention to file or prepare any amendment to the
Registration Statement (including any filing under Rule 462(b)), any Term Sheet
or any amendment, supplement or revision to either the prospectus included in
the Registration Statement at the time it became effective or to the
Prospectuses, whether pursuant to the 1933 Act, the 1934 Act or otherwise, will
furnish the Global Coordinator with copies of any such documents a reasonable
amount of time prior to such proposed filing or use, as the case may be, and
will not file or use any such document to which the Global Coordinator or
counsel for the U.S. Underwriters shall reasonably object.
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<PAGE>
(c) Delivery of Registration Statements. The Company has furnished or
will deliver to the U.S. Representatives and counsel for the U.S. Underwriters,
without charge, signed copies of the Registration Statement as originally filed
and of each amendment thereto (including exhibits filed therewith or
incorporated by reference therein and documents incorporated or deemed to be
incorporated by reference therein) and signed copies of all consents and
certificates of experts, and will also deliver to the U.S. Representatives,
without charge, a conformed copy of the Registration Statement as originally
filed and of each amendment thereto (without exhibits) for each of the U.S.
Underwriters. The copies of the Registration Statement and each amendment
thereto furnished to the U.S. Underwriters will be identical to the
electronically transmitted copies thereof filed with the Commission pursuant to
EDGAR, except to the extent permitted by Regulation S-T.
(d) Delivery of Prospectuses. The Company has delivered to each U.S.
Underwriter, without charge, as many copies of each preliminary prospectus as
such U.S. Underwriter reasonably requested, and the Company hereby consents to
the use of such copies for purposes permitted by the 1933 Act. The Company will
furnish to each U.S. Underwriter, without charge, during the period when the
U.S. Prospectus is required to be delivered under the 1933 Act or the 1934 Act,
such number of copies of the U.S. Prospectus (as amended or supplemented) as
such U.S. Underwriter may reasonably request. The U.S. Prospectus and any
amendments or supplements thereto furnished to the U.S. Underwriters will be
identical to the electronically transmitted copies thereof filed with the
Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company will comply
with the 1933 Act and the 1933 Act Regulations and the 1934 Act and the 1934 Act
Regulations so as to permit the completion of the distribution of the Securities
as contemplated in this Agreement, the International Purchase Agreement and in
the Prospectuses. If at any time when a prospectus is required by the 1933 Act
to be delivered in connection with sales of the Securities, any event shall
occur or condition shall exist as a result of which it is necessary, in the
opinion of counsel for the U.S. Underwriters or for the Company, to amend the
Registration Statement or amend or supplement any Prospectus in order that the
Prospectuses will not include any untrue statements of a material fact or omit
to state a material fact necessary in order to make the statements therein not
misleading in the light of the circumstances existing at the time it is
delivered to a purchaser, or if it shall be necessary, in the opinion of such
counsel, at any such time to amend the Registration Statement or amend or
supplement any Prospectus in order to comply with the requirements of the 1933
Act or the 1933 Act Regulations, the Company will promptly prepare and file with
the Commission, subject to Section 3(b), such amendment or supplement as may be
necessary to correct such statement or omission or to make the Registration
Statement or the Prospectuses comply with such requirements, and the Company
will furnish to the U.S. Underwriters such number of copies of such amendment or
supplement as the U.S. Underwriters may reasonably request.
(f) Blue Sky Qualifications. The Company will use its best efforts, in
cooperation with the U.S. Underwriters, to qualify the Securities for offering
and sale under the applicable securities laws of such states and other
jurisdictions (domestic or foreign) as the Global Coordinator may designate and
to maintain such qualifications in effect for a period of not less than one year
from the
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<PAGE>
later of the effective date of the Registration Statement and any Rule 462(b)
Registration Statement; provided, however, that the Company shall not be
obligated to file any general consent to service of process or to qualify as a
foreign corporation or as a dealer in securities in any jurisdiction in which it
is not so qualified or to subject itself to taxation in respect of doing
business in any jurisdiction in which it is not otherwise so subject. In each
jurisdiction in which the Securities have been so qualified, the Company will
file such statements and reports as may be required by the laws of such
jurisdiction to continue such qualification in effect for a period of not less
than one year from the effective date of the Registration Statement and any Rule
462(b) Registration Statement.
(g) Earnings Statement. The Company will timely file such reports
pursuant to the 1934 Act as are necessary in order to make generally available
to its securityholders as soon as practicable an earnings statement for the
purposes of, and to provide the benefits contemplated by, the last paragraph of
Section 11(a) of the 1933 Act.
(h) Use of Proceeds. The Company will use the net proceeds received by it
from the sale of the Securities in the manner specified in the Prospectuses
under "Use of Proceeds".
(i) Listing. The Company will use its best efforts to effect the listing
of the Securities on the New York Stock Exchange.
(j) Restriction on Sale of Securities. During a period of 90 days from
the date of the Prospectuses, the Company will not, without the prior written
consent of the Global Coordinator, (i) directly or indirectly, offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of any share of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or file any
registration statement under the 1933 Act with respect to any of the foregoing
or (ii) enter into any swap or any other agreement or any transaction that
transfers, in whole or in part, directly or indirectly, the economic consequence
of ownership of the Common Stock, whether any such swap or transaction described
in clause (i) or (ii) above is to be settled by delivery of Common Stock or such
other securities, in cash or otherwise. The foregoing sentence shall not apply
to (A) the Securities to be sold hereunder or under the International Purchase
Agreement, (B) any shares of Common Stock issued by the Company upon the
exercise of an option or warrant or the conversion of a security outstanding on
the date hereof and referred to in the Prospectuses or the documents
incorporated therein by reference (as of the date of the Prospectuses), (C) any
shares of Common Stock issued or options to purchase Common Stock granted
pursuant to existing employee benefit plans of the Company referred to in the
Prospectuses or the documents incorporated therein by reference (as of the date
of the Prospectuses), (D) any shares of Common Stock issued pursuant to any non-
employee director stock plan or dividend reinvestment plan, (E) any securities
issued as consideration for or to otherwise finance an acquisition of capital
stock or assets of a business, provided that the recipient of any such
-------- ----
securities agrees in writing to be bound by the restrictions set forth in this
Section 3(j) or (F) [cover trust preferred securities and Series E Stock]
(k) Reporting Requirements. The Company, during the period when the
Prospectuses are required to be delivered under the 1933 Act or the 1934 Act,
will file all documents required to
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be filed with the Commission pursuant to the 1934 Act within the time periods
required by the 1934 Act and the 1934 Act Regulations.
SECTION 4. Payment of Expenses. (a) Expenses. The Company will pay
-------------------
all expenses incident to the performance of its obligations under this
Agreement, including (i) the preparation, printing and filing of the
Registration Statement (including financial statements and exhibits) as
originally filed and of each amendment thereto, (ii) the preparation, printing
and delivery to the Underwriters of this Agreement, any Agreement among
Underwriters and such other documents as may be required in connection with the
offering, purchase, sale, issuance or delivery of the Securities, (iii) the
preparation, issuance and delivery of the certificates for the Securities to the
Underwriters, including any stock or other transfer taxes and any stamp or other
duties payable upon the sale, issuance or delivery of the Securities to the
Underwriters and the transfer of the Securities between the U.S. Underwriters
and the International Managers, (iv) the fees and disbursements of the Company's
counsel, accountants and other advisors, (v) the qualification of the Securities
under securities laws in accordance with the provisions of Section 3(f) hereof,
including filing fees and the reasonable fees and disbursements of counsel for
the Underwriters in connection therewith and in connection with the preparation
of the Blue Sky Survey and any supplement thereto, (vi) the printing and
delivery to the Underwriters of copies of each preliminary prospectus, any Term
Sheets and of the Prospectuses and any amendments or supplements thereto, (vii)
the preparation, printing and delivery to the Underwriters of copies of the Blue
Sky Survey and any supplement thereto, (viii) the fees and expenses of any
transfer agent or registrar for the Securities, (ix) the filing fees incident
to, and the reasonable fees and disbursements of counsel to the Underwriters in
connection with, the review by the National Association of Securities Dealers,
Inc. (the "NASD") of the terms of the sale of the Securities and (x) the fees
and expenses incurred in connection with the listing of the Securities on the
New York Stock Exchange.
(b) Termination of Agreement. If this Agreement is terminated by the
U.S. Representatives in accordance with the provisions of Section 5 or Section
9(a)(i) hereof, the Company shall reimburse the U.S. Underwriters for all of
their out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the U.S. Underwriters.
SECTION 5. Conditions of U.S. Underwriters' Obligations. The
--------------------------------------------
obligations of the several U.S. Underwriters hereunder are subject to the
accuracy of the representations and warranties of the Company and the Selling
Shareholders contained in Section 1 hereof or in certificates of any officer of
the Company or any subsidiary of the Company or on behalf of any Selling
Shareholder delivered pursuant to the provisions hereof, to the performance by
the Company of its covenants and other obligations hereunder, and to the
following further conditions:
(a) Effectiveness of Registration Statement. The Registration Statement,
including any Rule 462(b) Registration Statement, has become effective and at
Closing Time no stop order suspending the effectiveness of the Registration
Statement shall have been issued under the 1933 Act or proceedings therefor
initiated or threatened by the Commission, and any request on the part of the
Commission for additional information shall have been complied with to the
reasonable satisfaction of counsel to the U.S. Underwriters. A prospectus
containing the Rule 430A Information shall have
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been filed with the Commission in accordance with Rule 424(b) (or a post-
effective amendment providing such information shall have been filed and
declared effective in accordance with the requirements of Rule 430A) or, if the
Company has elected to rely upon Rule 434, a Term Sheet shall have been filed
with the Commission in accordance with Rule 424(b).
(b) Opinion of Counsel for Company. At Closing Time, the U.S.
Representatives shall have received the favorable opinion, dated as of Closing
Time, of each of David M. Sherbin, Associate General Counsel of the Company and
Cleary, Gottlieb, Steen & Hamilton, counsel for the Company, each in form and
substance satisfactory to counsel for the U.S. Underwriters, together with
signed or reproduced copies of such letter for each of the other U.S.
Underwriters to the effect set forth in Exhibit A hereto and to such further
effect as counsel to the U.S. Underwriters may reasonably request.
(c) Opinion of Counsel for the Selling Shareholders. At Closing Time, the
Representatives shall have received the favorable opinion, dated as of Closing
Time, of Katten Muchin & Zavis, counsel for the Selling Shareholders, in form
and substance satisfactory to counsel for the U.S. Underwriters, together with
signed or reproduced copies of such letter for each of the other U.S.
Underwriters to the effect set forth in Exhibit A-2 hereto and to such further
effect as counsel to the U.S. Underwriters may reasonably request.
(d) Opinion of Counsel for U.S. Underwriters. At Closing Time, the U.S.
Representatives shall have received the favorable opinion, dated as of Closing
Time, of each of (A) Sidley & Austin, counsel for the U.S. Underwriters,
together with signed or reproduced copies of such letter for each of the other
U.S. Underwriters with respect to the matters set forth in clauses (i), (ii),
(v), (vi) (solely as to preemptive or other similar rights arising by operation
of law or under the charter or by-laws of the Company), (viii) through (x),
inclusive, (xiii), (xv) (solely as to the information in the Prospectus under
"Description of Capital Stock--Common Stock") and the penultimate paragraph of
Exhibit A hereto and (B) Sachnoff & Weaver, Ltd., special counsel to the U.S.
Underwriters, together with signed or reproduced copies of such letter for each
of the other U.S. Underwriters with respect to matters set forth in the
penultimate paragraph of Exhibit A hereto. In giving such opinion such counsel
may rely, as to all matters governed by the laws of jurisdictions other than the
law of the State of New York, the federal law of the United States and the
General Corporation Law of the State of Delaware, upon the opinions of counsel
satisfactory to the U.S. Representatives. Such counsel may also state that,
insofar as such opinion involves factual matters, they have relied, to the
extent they deem proper, upon certificates of officers of the Company and its
subsidiaries and certificates of public officials.
(e) Officers' Certificate. At Closing Time, there shall not have been,
since the date hereof or since the respective dates as of which information is
given in the Prospectuses, any material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business, and the U.S.
Representatives shall have received a certificate of the President or a Vice
President of the Company and of the chief financial or chief accounting officer
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of the Company, dated as of Closing Time, to the effect that (i) there has been
no such material adverse change, (ii) the representations and warranties in
Section 1(a) hereof are true and correct with the same force and effect as
though expressly made at and as of Closing Time, (iii) the Company has complied
with all agreements and satisfied all conditions on its part to be performed or
satisfied at or prior to Closing Time, and (iv) no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceedings
for that purpose have been instituted or are pending or, to the Company's,
knowledge are contemplated by the Commission.
(f) Certificate of Selling Shareholders. At Closing Time, the U.S.
Representatives shall have received a certificate of each of the Shareholder
Representatives Attorney-in-Fact on behalf of the Selling Shareholders, dated as
of Closing Time, to the effect that (i) the representations and warranties of
each Selling Shareholder contained in Section 1(b) hereof are true and correct
in all respects with the same force and effect as though expressly made at and
as of Closing Time and (ii) each Selling Shareholder has complied in all
material respects with all agreements and all conditions on its part to be
performed under this Agreement at or prior to Closing Time.
(g) Accountant's Comfort Letter. At the time of the execution of this
Agreement, the U.S. Representatives shall have received from each of Ernst &
Young LLP and KPMG Audit Plc a letter dated such date, in form and substance
satisfactory to the U.S. Representatives, together with signed or reproduced
copies of such letters for each of the other U.S. Underwriters containing
statements and information of the type ordinarily included in accountants'
"comfort letters" to underwriters with respect to the financial statements and
certain financial information contained in the Registration Statement and the
Prospectuses.
(h) Bring-down Comfort Letter. At Closing Time, the Representatives shall
have received from each of Ernst & Young LLP and KPMG Audit Plc a letter, dated
as of Closing Time, to the effect that they reaffirm the statements made in the
letters furnished pursuant to subsection (e) of this Section, except that the
specified date referred to shall be a date not more than three business days
prior to Closing Time.
(i) Approval of Listing. At Closing Time, the Securities shall have been
approved for listing on the New York Stock Exchange, subject only to official
notice of issuance.
(j) Lock-up Agreements. At the date of this Agreement, the U.S.
Representatives shall have received an agreement substantially in the form of
Exhibit B hereto signed by the persons listed on Schedule D hereto.
(k) Purchase of Initial International Securities. Contemporaneously with
the purchase by the U.S. Underwriters of the Initial U.S. Securities under this
Agreement, the International Managers shall have purchased the Initial
International Securities under the International Purchase Agreement.
(l) Conditions to Purchase of U.S. Option Securities. In the event that
the U.S. Underwriters exercise their option provided in Section 2(b) hereof to
purchase all or any portion of
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the U.S. Option Securities, the representations and warranties of the Company
contained herein and the statements in any certificates furnished by the Company
or any subsidiary of the Company hereunder shall be true and correct as of each
Date of Delivery and, at the relevant Date of Delivery, the U.S. Representatives
shall have received:
(i) Officers' Certificate. A certificate, dated such Date of
---------------------
Delivery, of the President or a Vice President of the Company and of
the chief financial or chief accounting officer of the Company
confirming that the certificate delivered at the Closing Time pursuant
to Section 5(d) hereof remains true and correct as of such Date of
Delivery.
(ii) Certificate of Selling Shareholders. A certificate, dated
-----------------------------------
such Date of Delivery, of the Shareholder Representatives on behalf of
each Selling Shareholder confirming that the certificate delivered at
Closing Time pursuant to Section 5(f) remains true and correct as of
such Date of Delivery.
(iii) Opinion of Counsel for Company. The favorable opinion of
------------------------------
each of Edward W. Gray, Jr., Senior Vice President and General Counsel
of the Company, David M. Sherbin, Associate General Counsel of the
Company, and Cleary, Gottlieb, Steen & Hamilton, counsel for the
Company, each in form and substance satisfactory to counsel for the
U.S. Underwriters, dated such Date of Delivery, relating to the U.S.
Option Securities to be purchased on such Date of Delivery and
otherwise to the same effect as the opinion required by Section 5(b)
hereof.
(iv) Opinion of Counsel for the Selling Shareholders. The
-----------------------------------------------
favorable opinion of Katten Muchin & Zavis, counsel for the Selling
Shareholders, in form and substance satisfactory to counsel for the
U.S. Underwriters, dated such Date of Delivery, relating to the Option
Securities to be purchased on such Date of Delivery and otherwise to
the same effect as the opinion required by Section 5(c) hereof.
(v) Opinion of Counsel for U.S. Underwriters. The favorable
----------------------------------------
opinion of each of Sidley & Austin, counsel for the U.S. Underwriters,
and Sachnoff & Weaver, Ltd., special counsel for the U.S.
Underwriters, dated such Date of Delivery, relating to the U.S. Option
Securities to be purchased on such Date of Delivery and otherwise to
the same effect as the opinion required by Section 5(c) hereof.
(vi) Bring-down Comfort Letter. A letter from Ernst & Young LLP
-------------------------
and from KPMG Audit plc, each, in form and substance satisfactory to
the U.S. Representatives and dated such Date of Delivery,
substantially in the same form and substance as the letter furnished
to the U.S. Representatives pursuant to Section 5(f) hereof, except
that the "specified date" in the letter furnished pursuant to this
paragraph shall be a date not more than five days prior to such Date
of Delivery.
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<PAGE>
(m) Additional Documents. At Closing Time and at each Date of Delivery,
counsel for the U.S. Underwriters shall have been furnished with such documents
and opinions as they may require for the purpose of enabling them to pass upon
the issuance and sale of the Securities as herein contemplated, or in order to
evidence the accuracy of any of the representations or warranties, or the
fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Company in connection with the issuance and sale of the Securities
as herein contemplated shall be satisfactory in form and substance to the U.S.
Representatives and counsel for the U.S. Underwriters.
(n) Termination of Agreement. If any condition specified in this Section
shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of U.S. Option
Securities on a Date of Delivery which is after the Closing Time, the
obligations of the several U.S. Underwriters to purchase the relevant Option
Securities, may be terminated by the U.S. Representatives by notice to the
Company and to the Selling Shareholders at any time at or prior to Closing Time
or such Date of Delivery, as the case may be, and such termination shall be
without liability of any party to any other party except as provided in Section
4 and except that Sections 1, 6, 7 and 8 shall survive any such termination and
remain in full force and effect.
SECTION 6. Indemnification.
---------------
(a) Indemnification of U.S. Underwriters. The Company agrees to indemnify
and hold harmless each U.S. Underwriter and each person, if any, who controls
any U.S. Underwriter within the meaning of Section 15 of the 1933 Act or Section
20 of the 1934 Act to the extent and in the manner set forth in clauses (i),
(ii) and (iii) below. In addition, each Selling Shareholder, severally and not
jointly, agrees to indemnify and hold harmless each Underwriter and each
person, if any, who controls any Underwriter within the meaning of Section 15 of
the 1933 Act or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(or any amendment thereto), including the Rule 430A Information and the
Rule 434 Information, if applicable, or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to
make the statements therein not misleading or arising out of any untrue
statement or alleged untrue statement of a material fact included in any
preliminary prospectus or the Prospectuses (or any amendment or supplement
thereto), or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
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<PAGE>
alleged untrue statement or omission; provided that (subject to Section
6(d) below) any such settlement is effected with the written consent of the
Company; and
(iii) against any and all expense whatsoever, as incurred (including
the fees and disbursements of counsel chosen by Merrill Lynch), reasonably
incurred in investigating, preparing or defending against any litigation,
or any investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or omission, to
the extent that any such expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
- -------- -------
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
U.S. Underwriter through the U.S. Representatives expressly for use in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or any preliminary
prospectus or the U.S. Prospectus (or any amendment or supplement thereto); and
provided further that the Company will not be liable to an U.S. Underwriter with
- -------- -------
respect to any preliminary prospectus to the extent that the Company shall
sustain the burden of proving that any such loss, liability, claim, damage or
expense resulted from the fact that such U.S. Underwriter failed to send or
give, at or prior to the Closing Date, a copy of the U.S. Prospectus, as then
amended or supplemented if: (i) the Company has previously furnished copies
thereof (sufficiently in advance of the Closing Date to allow for distribution
by the Closing Date) to the U.S. Underwriters and the loss, liability, claim,
damage or expense of such Underwriter resulted from an untrue statement or
omission of a material fact contained in or omitted from the preliminary
prospectus which was corrected in the U.S. Prospectus as, if applicable, amended
or supplemented prior to the Closing Date and such U.S. Prospectus was required
by law to be delivered at or prior to the written confirmation of sale to such
person and (ii) such failure to give or send such U.S. Prospectus by the Closing
Date to the party or parties asserting such loss, liability, claim, damage or
expense would have constituted the sole defense to the claim asserted by such
person; and provided further, that this indemnity agreement, in so far as it
-------- -------
relates to indemnification by Selling Shareholders, shall not apply to any loss,
liability, claim, damage or expense arising out of any untrue statement or
omission or alleged untrue statement or omission except to the extent such
untrue statement or omission or alleged untrue statement or omission relates (A)
to written information furnished to the Company by or on behalf of any Selling
Shareholder expressly for use in the Registration Statement (or any amendment
thereto) or any preliminary prospectus or U.S. Prospectus (or any amendment or
supplement thereto) or (B) to information relating to Fel-Pro.
(b) Indemnification of Company, Directors and Officers and Selling
Shareholders. Each U.S. Underwriter severally agrees to indemnify and hold
harmless the Company, its directors, each of its officers who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, and
each Selling Shareholder, against any and all loss, liability, claim, damage and
expense described in the indemnity contained in subsection (a) of this Section,
as incurred, but only with respect to untrue statements or omissions, or alleged
untrue statements or omissions, made in the Registration
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<PAGE>
Statement (or any amendment thereto), including the Rule 430A Information and
the Rule 434 Information, if applicable, or any preliminary U.S. prospectus or
the U.S. Prospectus (or any amendment or supplement thereto) in reliance upon
and in conformity with written information furnished to the Company by such U.S.
Underwriter through the U.S. Representatives expressly for use in the
Registration Statement (or any amendment thereto) or such preliminary prospectus
or the U.S. Prospectus (or any amendment or supplement thereto).
(c) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party shall not relieve such
indemnifying party from any liability hereunder to the extent it is not
materially prejudiced as a result thereof and in any event shall not relieve it
from any liability which it may have otherwise than on account of this indemnity
agreement. In the case of parties indemnified pursuant to Section 6(a) above,
counsel to the indemnified parties shall be selected by Merrill Lynch, and, in
the case of parties indemnified pursuant to Section 6(b) above, counsel to the
indemnified parties shall be selected by the Company. An indemnifying party may
participate at its own expense in the defense of any such action; provided,
however, that counsel to the indemnifying party shall not (except with the
consent of the indemnified party) also be counsel to the indemnified party. In
no event shall the indemnifying parties be liable for fees and expenses of more
than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances. No indemnifying party shall,
without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever in respect of which
indemnification or contribution could be sought under this Section 6 or Section
7 hereof (whether or not the indemnified parties are actual or potential parties
thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising out
of such litigation, investigation, proceeding or claim and (ii) does not include
a statement as to or an admission of fault, culpability or a failure to act by
or on behalf of any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(ii) effected without its written consent if (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying party shall have received notice of
the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
(e) Limitation on Selling Shareholders' Indemnification. Without limiting
the full extent of (i) the Company's agreement to indemnify each U.S.
Underwriter (and controlling persons thereof, if any) as herein provided, (ii)
the liability of the Company with respect to the breach by the Company of any
representation, warranty or covenant contained in this Agreement (or in any
certificate of the
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<PAGE>
Company delivered pursuant hereto) and (iii) the liability for any Selling
Shareholder with respect to the breach by such Selling Shareholder of any
representation, warranty or covenant contained in Section 1 of this Agreement
(or in any certificate of such Selling Shareholder delivered pursuant hereto),
notwithstanding anything contained in this Agreement to the contrary, each
Selling Shareholder shall be liable under (A) the indemnification agreement
contained in Section 6(a) of this Agreement or (B) the contribution provisions
contained in Section 7 of this Agreement, only for an amount not exceeding, in
the aggregate, the net proceeds received by such Selling Shareholder from the
sale of Securities hereunder. The Company and the Selling Shareholders may
agree, as among themselves and without limiting the rights of the U.S.
Underwriters and controlling persons under this Agreement, as to the respective
amounts of such liability for which each of them shall be responsible.
SECTION 7. Contribution. If the indemnification provided for in
------------
Section 6 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of any losses, liabilities, claims,
damages or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate amount of such losses, liabilities, claims, damages
and expenses incurred by such indemnified party, as incurred, (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Selling Shareholders on the one hand and the U.S. Underwriters
on the other hand from the offering of the Securities pursuant to this Agreement
or (ii) if the allocation provided by clause (i) is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of the
Company and the Selling Shareholders on the one hand and of the U.S.
Underwriters on the other hand in connection with the statements or omissions
which resulted in such losses, liabilities, claims, damages or expenses, as well
as any other relevant equitable considerations.
The relative benefits received by the Company and the Selling Shareholders
on the one hand and the U.S. Underwriters on the other hand in connection with
the offering of the U.S. Securities pursuant to this Agreement shall be deemed
to be in the same respective proportions as the total net proceeds from the
offering of the U.S. Securities pursuant to this Agreement (before deducting
expenses) received by the Company and the Selling Shareholders and the total
underwriting discount received by the U.S. Underwriters, in each case as set
forth on the cover of the U.S. Prospectus, or, if Rule 434 is used, the
corresponding location on the Term Sheet, bear to the aggregate initial public
offering price of the U.S. Securities as set forth on such cover.
The relative fault of the Company and the Selling Shareholders on the one
hand and the U.S. Underwriters on the other hand shall be determined by
reference to, among other things, whether any such untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a material
fact relates to information supplied by the Company or the Selling Shareholders
or by the U.S. Underwriters and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such statement or omission.
The Company, the Selling Shareholders and the U.S. Underwriters agree that
it would not be just and equitable if contribution pursuant to this Section 7
were determined by pro rata allocation (even if the U.S. Underwriters were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to above in
this
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<PAGE>
Section 7. The aggregate amount of losses, liabilities, claims, damages and
expenses incurred by an indemnified party and referred to above in this Section
7 shall be deemed to include any legal or other expenses reasonably incurred by
such indemnified party in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever based upon any such
untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no U.S. Underwriter shall
be required to contribute any amount in excess of the amount by which the total
price at which the U.S. Securities underwritten by it and distributed to the
public were offered to the public exceeds the amount of any damages which such
U.S. Underwriter has otherwise been required to pay by reason of any such untrue
or alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls a U.S.
Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of
the 1934 Act shall have the same rights to contribution as such U.S.
Underwriter, and each director of the Company, each officer of the Company who
signed the Registration Statement, and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act or Section 20 of the
1934 Act shall have the same rights to contribution as the Company. The U.S.
Underwriters' respective obligations to contribute pursuant to this Section 7
are several in proportion to the number of Initial U.S. Securities set forth
opposite their respective names in Schedule A hereto and not joint.
SECTION 8. Representations, Warranties and Agreements to Survive
-----------------------------------------------------
Delivery. All representations, warranties and agreements contained in this
- --------
Agreement or in certificates of officers of the Company or any of its
subsidiaries or the Selling Shareholders submitted pursuant hereto, shall remain
operative and in full force and effect, regardless of any investigation made by
or on behalf of any U.S. Underwriter or controlling person, or by or on behalf
of the Company or the Selling Shareholders, and shall survive delivery of the
Securities to the U.S. Underwriters.
SECTION 9. Termination of Agreement.
------------------------
(a) Termination; General. The U.S. Representatives may terminate this
Agreement, by notice to the Company and the Selling Shareholders, at any time at
or prior to Closing Time (i) if there has been, since the time of execution of
this Agreement or since the respective dates as of which information is given in
the U.S. Prospectus, any material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, or (ii) if there has occurred any
material adverse change in the financial markets in the United States or the
international financial markets, any outbreak of hostilities or escalation
thereof or other calamity or crisis or any change or development involving a
prospective change in national or
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<PAGE>
international political, financial or economic conditions, in each case the
effect of which is such as to make it, in the judgment of the U.S.
Representatives, impracticable to market the Securities or to enforce contracts
for the sale of the Securities, or (iii) if trading in any securities of the
Company has been suspended or materially limited by the Commission or the New
York Stock Exchange, or if trading generally on the New York Stock Exchange has
been suspended or materially limited, or minimum or maximum prices for trading
have been fixed, or maximum ranges for prices have been required, by any of said
exchanges or by such system or by order of the Commission, the National
Association of Securities Dealers, Inc. or any other governmental authority, or
(iv) if a banking moratorium has been declared by either Federal or New York
authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1, 6, 7 and 8 shall survive such termination and remain in full force and
effect.
SECTION 10. Default by One or More of the U.S. Underwriters. If one
-----------------------------------------------
or more of the U.S. Underwriters shall fail at Closing Time or a Date of
Delivery to purchase the Securities which it or they are obligated to purchase
under this Agreement (the "Defaulted Securities"), the U.S. Representatives
shall have the right, within 24 hours thereafter, to make arrangements for one
or more of the non-defaulting U.S. Underwriters, or any other underwriters, to
purchase all, but not less than all, of the Defaulted Securities in such amounts
as may be agreed upon and upon the terms herein set forth; if, however, the U.S.
Representatives shall not have completed such arrangements within such 24-hour
period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the
number of U.S. Securities to be purchased on such date, each of the non-
defaulting U.S. Underwriters shall be obligated, severally and not jointly,
to purchase the full amount thereof in the proportions that their
respective underwriting obligations hereunder bear to the underwriting
obligations of all non-defaulting U.S. Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the number of
U.S. Securities to be purchased on such date, this Agreement or, with
respect to any Date of Delivery which occurs after the Closing Time, the
obligation of the U.S. Underwriters to purchase and of the Company to sell
the Option Securities to be purchased and sold on such Date of Delivery
shall terminate without liability on the part of any non-defaulting U.S.
Underwriter.
No action taken pursuant to this Section shall relieve any defaulting U.S.
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination of
this Agreement or, in the case of a Date of Delivery which is after the Closing
Time, which does not result in a termination of the obligation of the U.S.
Underwriters to purchase and the Company to sell the relevant U.S. Option
Securities, as the case may be, either the U.S. Representatives or the Company
-28-
<PAGE>
shall have the right to postpone Closing Time or the relevant Date of Delivery,
as the case may be, for a period not exceeding seven days in order to effect any
required changes in the Registration Statement or Prospectus or in any other
documents or arrangements. As used herein, the term "U.S. Underwriter" includes
any person substituted for a U.S. Underwriter under this Section 10.
SECTION 11. Default by One or More of the Selling Shareholder(s) or
-------------------------------------------------------
the Company. (a) If a Selling Shareholder shall fail at Closing Time to sell and
- -----------
deliver the number of Securities which such Selling Shareholder or Selling
Shareholders are obligated to sell hereunder, and the remaining Selling
Shareholder(s) do not exercise the right hereby granted to increase, pro rata or
otherwise, the number of Securities to be sold by them hereunder to the total
number to be sold by all Selling Shareholders as set forth in Schedule A-2
hereto, then the U.S. Underwriters may, at the option of the U.S.
Representatives, by notice from the U.S. Representatives to the Company and the
non-defaulting Selling Shareholder(s), either (a) terminate this Agreement
without any liability on the fault of any non-defaulting party except that the
provisions of Sections 1, 4, 6, 7 and 8 shall remain in full force and effect or
(b) elect to purchase the Securities which the non-defaulting Selling
Shareholder(s) and the Company have agreed to sell hereunder. No action taken
pursuant to this Section 11 shall relieve any Selling Shareholder so defaulting
from liability, if any, in respect of such default.
In the event of a default by any Selling Shareholder as referred to in this
Section 11, each of the U.S. Representatives, the Company and the non-defaulting
Selling Shareholder(s) shall have the right to postpone Closing Time or Date of
Delivery for a period not exceeding seven days in order to effect any required
change in the Registration Statement or Prospectus or in any other documents or
arrangements.
(b) If the Company shall fail at Closing Time to sell and deliver the
number of Securities that it is obligated to sell hereunder, then this Agreement
shall terminate without any liability on the part of any non-defaulting party
except that the provisions of Sections 1, 4, 6, 7 and 8 shall remain in full
force and effect. No action taken pursuant to this Section 11 shall relieve the
Company from liability, if any, in respect of such default.
SECTION 12. Notices. All notices and other communications hereunder
-------
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the U.S.
Underwriters shall be directed to the U.S. Representatives at North Tower, World
Financial Center, New York, New York 10281-1201, attention of .; and notices to
the Company shall be directed to it at 26555 Northwestern Highway, Southfield,
Michigan 48034, attention of General Counsel; and notices to the Selling
Shareholder(s) shall be directed to ., attention of ..
SECTION 13. Parties. This Agreement shall each inure to the benefit of
-------
and be binding upon the U.S. Underwriters, the Company and the Selling
Shareholders and their respective successors. Nothing expressed or mentioned in
this Agreement is intended or shall be construed to give any person, firm or
corporation, other than the U.S. Underwriters, the Company and the Selling
Shareholders and their respective successors and the controlling persons and
officers and directors
-29-
<PAGE>
referred to in Sections 6 and 7 and their heirs and legal representatives, any
legal or equitable right, remedy or claim under or in respect of this Agreement
or any provision herein contained. This Agreement and all conditions and
provisions hereof are intended to be for the sole and exclusive benefit of the
U.S. Underwriters, the Company and the Selling Shareholders and their respective
successors, and said controlling persons and officers and directors and their
heirs and legal representatives, and for the benefit of no other person, firm or
corporation. No purchaser of Securities from any U.S. Underwriter shall be
deemed to be a successor by reason merely of such purchase.
SECTION 14. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY
----------------------
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. SPECIFIED
TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 15. Effect of Headings. The Article and Section headings herein
------------------
and the Table of Contents are for convenience only and shall not affect the
construction hereof.
-30-
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company and the Shareholder Representatives for
the Selling Shareholders a counterpart hereof, whereupon this instrument, along
with all counterparts, will become a binding agreement between the U.S.
Underwriters and the Company and the Selling Shareholders in accordance with its
terms.
Very truly yours,
FEDERAL-MOGUL CORPORATION
By _________________________________
Name:
Title:
[Selling Shareholders]
By:________________________________________
[Name]
As Shareholder Representative acting on behalf of
the Selling Shareholders listed above
[Selling Shareholders]
By:________________________________________
[Name]
As Shareholder Representative acting on behalf of
the Selling Shareholders listed above
[Selling Shareholders]
By:________________________________________
[Name]
As Shareholder Representative acting on behalf of
the Selling Shareholders listed above
-31-
<PAGE>
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
BEAR, STEARNS & CO., INC.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MORGAN STANLEY & CO., INC.
SMITH BARNEY INC.
SCHRODER & CO. INC.
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By _________________________________
Authorized Signatory
For themselves and as U.S. Representatives of the
other U.S. Underwriters named in Schedule A hereto.
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Name of U.S. Underwriter Number of
------------------------
Initial U.S.
Securities
------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated......................................
Bear, Stearns & Co., Inc..................................
Donaldson, Lufkin & Jenrette
Securities Corporation............................
Morgan Stanley & Co., Inc.................................
Smith Barney Inc..........................................
Schroder & Co. Inc........................................
------------
Total.....................................................
============
</TABLE>
Sch A-1
<PAGE>
SCHEDULE A-2
<TABLE>
<CAPTION>
Number of Initial U.S. Maximum Number of U.S.
Securities to be Sold Option Securities to be Sold
---------------------- ----------------------------
<S> <C> <C>
Federal-Mogul Corporation
[Selling Shareholders] --------- ---------
Total..................... =============== ===============
</TABLE>
Sch A-2
<PAGE>
SCHEDULE B
FEDERAL-MOGUL CORPORATION
____________ Shares of Common Stock
(Without Par Value)
1. The initial public offering price per share for the Securities,
determined as provided in said Section 2, shall be $..
2. The purchase price per share for the U.S. Securities to be paid by the
several U.S. Underwriters shall be $., being an amount equal to the initial
public offering price set forth above less $. per share; provided that the
purchase price per share for any U.S. Option Securities purchased upon the
exercise of the over-allotment option described in Section 2(b) shall be reduced
by an amount per share equal to any dividends or distributions declared by the
Company and payable on the Initial U.S. Securities but not payable on the U.S.
Option Securities.
Sch B-1
<PAGE>
SCHEDULE C
[List of subsidiaries to come.]
Sch C-1
<PAGE>
[SCHEDULE D]
[List of persons and entities
subject to lock-up]
Federal-Mogul Corporation
Richard A. Snell
Alan C. Johnson
Paul R. Lederer
Thomas W. Ryan
Wilhelm A. Schmelzer
Frank Tomes
Sch D-1
<PAGE>
Exhibit A
FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
[To be agreed]
A-1
<PAGE>
Exhibit A-2
FORM OF OPINION OF COUNSEL FOR THE SELLING SHAREHOLDER(S)
TO BE DELIVERED PURSUANT TO SECTION 5(c)
i. No filing with, or authorization, approval, consent,
license, order, registration, qualification or decree of, any
court or governmental authority or agency, domestic or foreign
(other than under the 1933 Act and the 1933 Act Regulations,
which have been obtained, or as may be required under the
securities or blue sky laws of the various states, as to which
we need express no opinion) is necessary or required to be
obtained by the Selling Shareholders for the performance by
the Selling Shareholders of their obligations under the U.S.
Purchase Agreement, the International Purchase Agreement or
the Power of Attorney and Custody Argeement, or in connection
with the offer, sale and delivery of the Securities.
ii. Each Power of Attorney and Custody Agreement has been
duly executed and delivered by the respective Selling
Shareholder(s) named therein and constitutes the legal, valid
and binding agreement of such Selling Shareholder.
iii. Each of the U.S. Purchase Agreement and the International
Purchase Agreement has been duly authorized, executed and
delivered by or on behalf of each Selling Shareholder.
iv. The Shareholder Representatives have been duly authorized
by the Selling Shareholders to deliver shares of Series E
Preferred Stock for conversion into Conversion Shares and
direct the Company to deliver the Conversion Shares on behalf
of the Selling Shareholders in accordance with the terms of
the U.S. Purchase Agreement and the International Purchase
Agreement.
v. The execution, delivery and performance of the U.S.
Purchase Agreement, the International Purchase Agreement and
the Power of Attorney and Custody Agreement and the sale and
delivery of the Securities and the consummation of the
transactions contemplated in the U.S. Purchase Agreement, the
International Purchase Agreement and in the Registration
Statement and compliance by the Selling Shareholder(s) with
its obligations under the U.S. Purchase Agreement and the
International Purchase Agreement have been duly authorized by
all necessary action on the part of the Selling Shareholder(s)
and do not and will not, whether with or without
A-2
<PAGE>
the giving of notice or passage of time or both, conflict with
or constitute a breach of, or default under or result in the
creation or imposition of any tax, lien, charge or encumbrance
upon the Securities nor will such action result in any
violation of the provisions of the charter or by-laws or other
organizational or governing instrucments of the Selling
Shareholders, if applicable, or any law, administrative
regulation, judgment or order of any government, government
instrumentality or court or any administrative or court decree
having jurisdiction over such Selling Shareholder or any of its
properties.
vi. To the best of our knowledge, each Selling Shareholder has
valid and marketable title to the shares of Series E Stock to
be converted into Conversion Shares to be sold by such Selling
Shareholder pursuant to the U.S. Purchase Agreement and the
International Purchase Agreement, free and clear of any pledge,
lien, security interest, claim, equity or encumbrance of any
kind, and has full right, power and authority to sell, transfer
and deliver such Securities pursuant to the U.S. Purchase
Agreement and the International Purchase Agreement. By delivery
of a certificate or certificates therefor such Selling
Shareholder will transfer to the Underwriters who have
purchased such Securities pursuant to the U.S. Purchase
Agreement and the International Purchase Agreement (without
notice of any defect in the title of such Selling Shareholder
and who are otherwise bona fide purchasers for purposes of the
Uniform Commercial Code) valid and marketable title to such
Securities, free and clear of any pledge, lien, security
interest, charge, claim, equity or encumbrance of any kind.
A-3
<PAGE>
[FORM OF LOCK-UP FROM DIRECTORS, OFFICERS OR OTHER STOCKHOLDERS PURSUANT TO
SECTION 5(J)]
Exhibit B
., 1998
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated,
Bear, Stearns & Co., Inc.
Donaldson, Lufkin & Jenrette
Securities Corporation
Morgan Stanley & Co., Inc.
Smith Barney Inc.
Schroder & Co. Inc.
as U.S. Representatives of the several
U.S. Underwriters to be named in the
within-mentioned U.S. Purchase Agreement
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Re: Proposed Public Offering by Federal-Mogul Corporation
-----------------------------------------------------
Dear Sirs:
The undersigned, a stockholder and an officer and/or director of Federal-
Mogul Corporation, a Michigan corporation (the "Company"), understands that
Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") and Bear, Stearns & Co., Inc., Donaldson, Lufkin & Jenrette
Securities Corporation, Morgan Stanley & Co., Inc., Smith Barney Inc. and
Schroder & Co. Inc. proposes to enter into a U.S. Purchase Agreement (the "U.S.
Purchase Agreement") with the Company providing for the public offering of
shares (the "Securities") of the Company's common stock, without par value (the
"Common Stock"). In recognition of the benefit that such an offering will
confer upon the undersigned as a stockholder and an officer and/or director of
the Company, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the undersigned agrees with each
underwriter to be named in the U.S. Purchase Agreement that, during a period of
. days from the date of the U.S. Purchase Agreement, the undersigned will not,
without the prior written consent of Merrill Lynch, directly or indirectly, (i)
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant for
the sale of, or otherwise dispose of or transfer any shares of the Company's
Common Stock or any securities convertible into or exchangeable or
B-1
<PAGE>
exercisable for Common Stock, whether now owned or hereafter acquired by the
undersigned or with respect to which the undersigned has or hereafter acquires
the power of disposition, or file any registration statement under the
Securities Act of 1933, as amended, with respect to any of the foregoing or (ii)
enter into any swap or any other agreement or any transaction that transfers, in
whole or in part, directly or indirectly, the economic consequences of ownership
of the Common Stock, whether any such swap or transaction is to be settled by
delivery of Common Stock or other securities, in cash or otherwise.
Very truly yours,
Signature:___________________________
Name:________________________________
<PAGE>
EXHIBIT 1.3
________________________________________________________________________________
________________________________________________________________________________
FEDERAL-MOGUL CORPORATION
(a Michigan corporation)
_________ Shares of Common Stock
INTERNATIONAL PURCHASE AGREEMENT
Dated: June ., 1998
________________________________________________________________________________
________________________________________________________________________________
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SECTION 1. Representations and Warranties.................................................................. 4
(a) Representations and Warranties by the Company................................................... 4
(i) Compliance with Registration Requirements....................................................... 4
(ii) Incorporated Documents.......................................................................... 5
(iii) Independent Accountants......................................................................... 5
(iv) Financial Statements............................................................................ 5
(v) No Material Adverse Change in Business.......................................................... 6
(vi) Good Standing of the Company.................................................................... 6
(vii) Good Standing of Subsidiaries................................................................... 6
(viii) Capitalization.................................................................................. 7
(ix) Authorization of Agreement............................................................. 7
(x) Authorization and Description of Securities............................................ 7
(xi) Absence of Defaults and Conflicts...................................................... 7
(xii) Absence of Labor Dispute............................................................... 8
(xiii) Absence of Proceedings................................................................. 8
(xiv) Accuracy of Exhibits................................................................... 8
(xv) Possession of Intellectual Property.................................................... 9
(xvi) Absence of Further Requirements........................................................ 9
(xvii) Possession of Licenses and Permits..................................................... 9
(xviii) Title to Property...................................................................... 9
(xix) [Intentionally Omitted.] ...................................................................... 10
(xx) Investment Company Act................................................................. 10
(xxi) Environmental Laws..................................................................... 10
(b) Representations and Warranties by the Selling Shareholders...................................... 11
(i) Accurate Disclosure............................................................ 11
(ii) Authorization of Agreements.................................................... 11
(iii) Good and Marketable Title...................................................... 12
(iv) Due Execution of Power of Attorney and Custody Agreement....................... 12
(v) Absence of Manipulation........................................................ 12
(vi) Absence of Further Requirements................................................ 13
(vii) Restriction on Sale of Securities.............................................. 13
(viii) Certificates Suitable for Transfer............................................. 13
(ix) No Association with NASD....................................................... 13
(c) Officer's Certificates.......................................................................... 14
(d) Selling Shareholders' Certificates.............................................................. 14
SECTION 2. Sale and Delivery to International Managers; Closing............................................ 14
(a) Initial Securities..................................................................... 14
(b) Option Securities...................................................................... 14
(c) Payment................................................................................ 15
(d) Denominations; Registration............................................................ 15
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SECTION 3. Covenants of the Company....................................................................... 16
(a) Compliance with Securities Regulations and Commission Requests........................ 16
(b) Filing of Amendments.................................................................. 16
(c) Delivery of Registration Statements................................................... 16
(d) Delivery of Prospectuses.............................................................. 17
(e) Continued Compliance with Securities Laws............................................. 17
(f) Blue Sky Qualifications............................................................... 17
(g) Earnings Statement.................................................................... 18
(h) Use of Proceeds....................................................................... 18
(i) Listing............................................................................... 18
(j) Restriction on Sale of Securities..................................................... 18
(k) Reporting Requirements................................................................ 18
SECTION 4. Payment of Expenses............................................................................ 18
(a) Expenses.......................................................................................... 18
(b) Termination of Agreement.............................................................. 19
SECTION 5. Conditions of International Managers' Obligations.............................................. 19
(a) Effectiveness of Registration Statement........................................................ 19
(b) Opinion of Counsel for Company................................................................. 20
(c) Opinion of Counsel for the Selling Shareholders....................................... 20
(d) Opinion of Counsel for International Managers......................................... 20
(e) Officers' Certificate................................................................. 20
(f) Certificate of Selling Shareholders................................................... 21
(g) Accountant's Comfort Letter........................................................... 21
(h) Bring-down Comfort Letter............................................................. 21
(i) Approval of Listing................................................................... 21
(j) Lock-up Agreements.................................................................... 21
(k) Purchase of Initial U.S. Securities................................................... 21
(l) Conditions to Purchase of International Option Securities............................. 21
(i) Officers' Certificate................................................................. 22
(ii) Certificate of Selling Shareholders................................................... 22
(iii) Opinion of Counsel for Company........................................................ 22
(iv) Opinion of Counsel for the Selling Shareholders....................................... 22
(v) Opinion of Counsel for International Managers......................................... 22
(vi) Bring-down Comfort Letter............................................................. 22
(m) Additional Documents.................................................................. 22
(n) Termination of Agreement.............................................................. 23
SECTION 6. Indemnification................................................................................ 23
(a) Indemnification of International Managers............................................. 23
(b) Indemnification of Company, Directors and Officers and Selling
Shareholders.......................................................................... 24
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
(c) Actions against Parties; Notification.......................................................... 25
(d) Settlement without Consent if Failure to Reimburse............................................. 25
(e) Limitation on Selling Shareholders Indemnification............................................. 25
SECTION 7. Contribution................................................................................... 26
SECTION 8. Representations, Warranties and Agreements to Survive Delivery................................. 27
SECTION 9. Termination of Agreement....................................................................... 27
(a) Termination; General........................................................................... 27
(b) Liabilities. ................................................................................. 28
SECTION 10. Default by One or More of the International Managers........................................... 28
SECTION 11. Default by One or More of the Selling Shareholder(s) or the Company............................ 28
SECTION 12. Notices........................................................................................ 29
SECTION 13. Parties........................................................................................ 29
SECTION 14. GOVERNING LAW AND TIME......................................................................... 30
SECTION 15. Effect of Headings............................................................................. 30
SCHEDULES
Schedule A - List of Underwriters......................................................... Sch A-1
Schedule A-2 - Initial International Securities and International
Option Securities..................................................................... Sch A-2-1
Schedule B - Federal-Mogul................................................................ Sch B-1
Schedule C - List of Subsidiaries......................................................... Sch C-1
Schedule D - List of Persons subject to Lock-up........................................... Sch D-1
EXHIBITS
Exhibit A - Form of Opinion of Company's Counsel.......................................... A-1
Exhibit A-2 - Form of Opinion of Selling Shareholders' Counsel............................ A 2-1
Exhibit B - Form of Lock-up Letter........................................................ B-1
</TABLE>
iii
<PAGE>
Draft of June 1, 1998
FEDERAL-MOGUL Corporation
(a Michigan corporation)
_________ Shares of Common Stock
(Without Par Value)
INTERNATIONAL PURCHASE AGREEMENT
--------------------------------
June ., 1998
MERRILL LYNCH INTERNATIONAL
Bear, Stearns International Limited
Morgan Stanley & Co. International Limited
Smith Barney Inc.
Donaldson, Lufkin & Jenrette International
J. Henry Schroder & Co. Limited
ABN AMRO Rothschild
Credit Lyonnais Securities
Kleinwort Benson Limited
as Lead Managers of the several International Managers
c/o Merrill Lynch International
Ropemaker Place
25 Ropemaker Street
London EC2Y 9LY
England
Ladies and Gentlemen:
Federal-Mogul Corporation, a Michigan corporation (the "Company"), and the
shareholders listed on Schedule A-2 hereto (the "Selling Shareholders"), confirm
their respective agreements with Merrill Lynch International ("Merrill Lynch")
and each of the other international underwriters named in Schedule A hereto
(collectively, the "International Managers", which term shall also include any
underwriter substituted as hereinafter provided in Section 10 hereof), for whom
Merrill Lynch, Bear, Stearns International Limited, Morgan Stanley & Co.
International Limited, Smith Barney Inc., Donaldson, Lufkin & Jenrette
International, J. Henry Schroder & Co. Limited, ABN AMRO Rothschild, Credit
Lyonnais Securities and Kleinwort Benson Limited are acting as representatives
(in such capacity, the "Lead Managers"), with respect to (i) the sale by the
Company and the Selling
1
<PAGE>
Shareholders, severally and not jointly, and the purchase by the International
Managers, acting severally and not jointly, of the respective numbers of shares
of Common Stock, without par value, of the Company ("Common Stock") as set forth
in said Schedules A and A-1 (which, with respect to the Selling Shareholders,
reflect shares of Common Stock to be issued upon conversion of shares of Series
E Mandatory Exchangeable Preferred Stock ("Series E Stock")), and (ii) the grant
by the Company and the Selling Shareholders to the International Managers,
acting severally and not jointly, of the option described in Section 2(b) hereof
to purchase all or any part of _________ additional shares of Common Stock to
cover over-allotments, if any. The aforesaid _________ shares of Common Stock
(the "Initial International Securities") to be purchased by the International
Managers and all or any part of the _________ shares of Common Stock subject to
the option described in Section 2(b) hereof (the "International Option
Securities") are hereinafter called, collectively, the "International
Securities".
It is understood that the Company and the Selling Shareholders are
concurrently entering into an agreement dated the date hereof (the "U.S.
Purchase Agreement") providing for the offering by the Company of an aggregate
of _________ shares of Common Stock (the "Initial U.S. Securities") through
arrangements with certain underwriters in the United States and Canada (the
"U.S. Underwriters") for which Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Bear, Stearns International Limited, Morgan Stanley & Co.
International Limited, Smith Barney Inc., Donaldson, Lufkin & Jenrette
International. J. Henry Schroder & Co. Limited, ABN AMRO Rothschild, Credit
Lyonnais Securities and Kleinwort Benson Limited are acting as representatives
(the "U.S. Representatives") and the grant by the Company and the Selling
Shareholders to the U.S. Underwriters, acting severally and not jointly, of an
option to purchase all or any part of the U.S. Underwriters' pro rata portion of
up to _________ additional shares of Common Stock solely to cover
overallotments, if any (the "U.S. Option Securities" and, together with the
International Option Securities, the "Option Securities"). The Initial U.S.
Securities and the U.S. Option Securities are hereinafter called the "U.S.
Securities". It is understood that the Company and the Selling Shareholders are
not obligated to sell and the International Managers are not obligated to
purchase, any Initial International Securities unless all of the Initial U.S.
Securities are contemporaneously purchased by the U.S. Underwriters.
The International Managers and the U.S. Underwriters are hereinafter
collectively called the "Underwriters", the Initial International Securities and
the Initial U.S. Securities are hereinafter collectively called the "Initial
Securities", and the International Securities, and the U.S. Securities are
hereinafter collectively called the "Securities".
The Underwriters will concurrently enter into an Intersyndicate Agreement
of even date herewith (the "Intersyndicate Agreement") providing for the
coordination of certain transactions among the Underwriters under the direction
of Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (in
such capacity, the "Global Coordinator").
The Company and the Selling Shareholders understand that the International
Managers propose to make a public offering of the International Securities as
soon as the Lead Managers deem advisable after this Agreement has been executed
and delivered.
2
<PAGE>
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-3 (No. 333-50413) and pre-
effective amendments nos. 1 and 2 thereto covering the registration of the
Securities under the Securities Act of 1933, as amended (the "1933 Act"),
including the related preliminary prospectus or prospectuses. Promptly after
execution and delivery of this Agreement, the Company will either (i) prepare
and file a prospectus in accordance with the provisions of Rule 430A ("Rule
430A") of the rules and regulations of the Commission under the 1933 Act (the
"1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of the
1933 Act Regulations or (ii) if the Company has elected to rely upon Rule 434
("Rule 434") of the 1933 Act Regulations, prepare and file a term sheet (a "Term
Sheet") in accordance with the provisions of Rule 434 and Rule 424(b). Two forms
of prospectus are to be used in connection with the offering and sale of the
Securities: one relating to the International Securities (the "Form of
International Prospectus") and one relating to the U.S. Securities (the "Form of
U.S. Prospectus"). The Form of International Prospectus is identical to the Form
of U.S. Prospectus, except for the front cover and back cover pages and the
information under the caption "Underwriting". The information included in any
such prospectus or in any such Term Sheet, as the case may be, that was omitted
from such registration statement at the time it became effective but that is
deemed to be part of such registration statement at the time it became effective
(a) pursuant to paragraph (b) of Rule 430A is referred to as "Rule 430A
Information" or (b) pursuant to paragraph (d) of Rule 434 is referred to as
"Rule 434 Information." Each Form of International Prospectus and Form of U.S.
Prospectus used before such registration statement became effective, and any
prospectus that omitted, as applicable, the Rule 430A Information or the Rule
434 Information, that was used after such effectiveness and prior to the
execution and delivery of this Agreement, is herein called a "preliminary
prospectus." Such registration statement, including the exhibits thereto,
schedules thereto, if any, and the documents incorporated by reference therein
pursuant to Item 12 of Form S-3 under the 1933 Act, at the time it became
effective and including the Rule 430A Information and the Rule 434 Information,
as applicable, is herein called the "Registration Statement." Any registration
statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein
referred to as the "Rule 462(b) Registration Statement," and after such filing
the term "Registration Statement" shall include the Rule 462(b) Registration
Statement. The final Form of International Prospectus and the final Form of U.S.
Prospectus, including the documents incorporated by reference therein pursuant
to Item 12 of Form S-3 under the 1933 Act, in the forms first furnished to the
Underwriters for use in connection with the offering of the Securities are
herein called the "International Prospectus" and the "U.S. Prospectus,"
respectively, and collectively, the "Prospectuses." If Rule 434 is relied on,
the terms "International Prospectus" and "U.S. Prospectus" shall refer to the
preliminary International Prospectus dated _____, 1998 and preliminary U.S.
Prospectus dated ____, 1998, respectively, each together with the applicable
Term Sheet and all references in this Agreement to the date of such Prospectuses
shall mean the date of the applicable Term Sheet. For purposes of this
Agreement, all references to the Registration Statement, any preliminary
prospectus, the International Prospectus, the U.S. Prospectus or any Term Sheet
or any amendment or supplement to any of the foregoing shall be deemed to
include the copy filed with the Commission pursuant to its Electronic Data
Gathering, Analysis and Retrieval system ("EDGAR").
All references in this Agreement to financial statements and schedules and
other information which is "contained," "included" or "stated" in the
Registration Statement, any preliminary prospectus (including the Form of U.S.
Prospectus and Form of International Prospectus) or the Prospectuses
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<PAGE>
(or other references of like import) shall be deemed to mean and include all
such financial statements and schedules and other information which is
incorporated by reference in the Registration Statement, any preliminary
prospectus (including the Form of U.S. Prospectus and Form of International
Prospectus) or the Prospectuses, as the case may be; and all references in this
Agreement to amendments or supplements to the Registration Statement, any
preliminary prospectus or the Prospectuses shall be deemed to mean and include
the filing of any document under the Securities Exchange Act of 1934 (the "1934
Act") which is incorporated by reference in the Registration Statement, such
preliminary prospectus or the Prospectuses, as the case may be.
SECTION 1. Representations and Warranties.
------------------------------
(a) Representations and Warranties by the Company. The Company represents
and warrants to each International Manager as of the date hereof, as of the
Closing Time referred to in Section 2(c) hereof, and as of each Date of Delivery
(if any) referred to in Section 2(b) hereof, and agrees with each International
Manager, as follows:
(i) Compliance with Registration Requirements. The Company meets the
-----------------------------------------
requirements for use of Form S-3 under the 1933 Act. Each of the
Registration Statement and any Rule 462(b) Registration Statement has
become effective under the 1933 Act and no stop order suspending the
effectiveness of the Registration Statement or any Rule 462(b) Registration
Statement has been issued under the 1933 Act and no proceedings for that
purpose have been instituted or are pending or, to the knowledge of the
Company, are contemplated by the Commission, and any request on the part of
the Commission for additional information has been complied with.
At the respective times the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendments thereto became
effective and at the Closing Time (and, if any International Option
Securities are purchased, at the Date of Delivery), the Registration
Statement, the Rule 462(b) Registration Statement and any amendments and
supplements thereto complied and will comply in all material respects with
the requirements of the 1933 Act and the 1933 Act Regulations and did not
and will not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading. Neither of the Prospectuses nor any
amendments or supplements thereto, at the time the Prospectuses or any
amendments or supplements thereto were issued and at the Closing Time (and,
if any International Option Securities are purchased, at the Date of
Delivery), included or will include an untrue statement of a material fact
or omitted or will omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading. If Rule 434 is used, the Company will comply
with the requirements of Rule 434. The representations and warranties in
this subsection shall not apply to statements in or omissions from the
Registration Statement or the International Prospectus made in reliance
upon and in conformity with information furnished to the Company in writing
by any International Manager through the Lead Managers expressly for use in
the Registration Statement or the International Prospectus.
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<PAGE>
Each preliminary prospectus and the prospectuses filed as part of the
Registration Statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the 1933 Act, complied when so
filed in all material respects with the 1933 Act Regulations and each
preliminary prospectus and the Prospectuses delivered to the Underwriters
for use in connection with this offering was identical to the
electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(ii) Incorporated Documents. The documents incorporated or deemed to
----------------------
be incorporated by reference in the Registration Statement and the
Prospectuses, at the time they were or hereafter are filed with the
Commission, complied and will comply in all material respects with the
requirements of the 1934 Act and the rules and regulations of the
Commission thereunder (the "1934 Act Regulations"), and, when read together
with the other information in the Prospectuses, at the time the
Registration Statement became effective, at the time the Prospectuses were
issued and at the Closing Time (and, if any International Option Securities
are purchased, at the Date of Delivery), did not and will not contain an
untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading.
(iii) Independent Accountants. The accountants who certified the
-----------------------
financial statements and supporting schedules included in the Registration
Statement are independent public accountants as required by the 1933 Act
and the 1933 Act Regulations.
(iv) Financial Statements. The financial statements of the Company
--------------------
and its consolidated subsidiaries included in the Registration Statement
and the Prospectuses, together with the related schedules and notes, as
well as those financial statements, schedules and notes of any other entity
included therein, present fairly the financial position of the Company and
its consolidated subsidiaries, or such other entity, as the case may be, at
the dates indicated and the statement of operations, shareholders' equity
and cash flows of the Company and its consolidated subsidiaries, or such
other entity, as the case may be, for the periods specified; said financial
statements have been prepared in conformity with generally accepted
accounting principles ("GAAP") applied on a consistent basis throughout the
periods involved except as disclosed therein, except that financial
statements of T&N plc ("T&N") have been prepared in conformity with U.K.
GAAP applied on a consistent basis throughout the periods involved except
as disclosed therein. The supporting schedules, if any, included in the
Registration Statement present fairly in accordance with GAAP, or U.K. GAAP
with respect to T&N supporting schedules, the information required to be
stated therein. The selected financial data and the summary financial
information included in the Prospectuses present fairly the information
shown therein and have been compiled on a basis consistent with that of the
audited financial statements included in the Registration Statement and the
Prospectuses. The pro forma financial statements and the related notes
thereto included in the Registration Statement and the Prospectuses present
fairly the information shown therein, have been prepared in accordance with
the Commission's rules and guidelines with respect to pro forma financial
statements and have been properly compiled on the bases described therein,
and the assumptions used in the preparation thereof are reasonable and the
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<PAGE>
adjustments used therein are appropriate to give effect to the transactions
and circumstances referred to therein.
(v) No Material Adverse Change in Business. Since the respective
--------------------------------------
dates as of which information is given in the Registration Statement and
the Prospectuses, except as otherwise stated therein, (A) there has been no
material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business (a "Material Adverse Effect"), (B) there have
been no transactions entered into by the Company or any of its
subsidiaries, other than those in the ordinary course of business, which
are material with respect to the Company and its subsidiaries considered as
one enterprise, and (C) except for regular quarterly dividends on the
Common Stock in amounts per share that are consistent with past practice or
with the Company's new dividend policy summarized in the Prospectuses under
the caption "Price Range of Common Stock and Dividends" and dividends on
the Company's outstanding preferred stock in the ordinary course, there has
been no dividend or distribution of any kind declared, paid or made by the
Company on any class of its capital stock.
(vi) Good Standing of the Company. The Company has been duly
----------------------------
organized and is validly existing as a corporation in good standing under
the laws of the state of Michigan and has corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectuses and to enter into and perform its obligations
under this Agreement; and the Company is duly qualified as a foreign
corporation to transact business and is in good standing in each other
jurisdiction (including foreign jurisdictions) in which such qualification
is required, whether by reason of the ownership or leasing of property or
the conduct of business, except where the failure so to qualify or to be in
good standing would not result in a Material Adverse Effect.
(vii) Good Standing of Subsidiaries. Each "significant subsidiary"
-----------------------------
of the Company (as such term is defined in Rule 1-02 of Regulation S-X)
(each a "Subsidiary" and, collectively, the "Subsidiaries") has been duly
organized and is validly existing as a corporation in good standing under
the laws of the jurisdiction of its incorporation, has corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectuses and is duly qualified as a
foreign corporation to transact business and is in good standing in each
jurisdiction (including foreign jurisdictions) in which such qualification
is required, whether by reason of the ownership or leasing of property or
the conduct of business, except where the failure so to qualify or to be in
good standing would not result in a Material Adverse Effect; except as
otherwise disclosed in the Registration Statement, all of the issued and
outstanding capital stock of each such Subsidiary has been duly authorized
and validly issued, is fully paid and non-assessable and greater than 90%
of such capital stock is owned by the Company, directly or through
subsidiaries, and to the extent such capital stock is owned by the Company
it is owned free and clear of any security interest, mortgage, pledge,
lien, encumbrance, claim or equity; none of the outstanding shares of
capital stock of any Subsidiary was issued in violation of the preemptive
or similar rights of any securityholder of such Subsidiary. The only
subsidiaries of the
6
<PAGE>
Company are (a) the subsidiaries listed on Schedule C hereto and (b)
certain other subsidiaries which, considered in the aggregate as a single
subsidiary, do not constitute a "significant subsidiary" as defined in Rule
1-02 of Regulation S-X.
(viii) Capitalization. The authorized, issued and outstanding capital
--------------
stock of the Company is as set forth in the Prospectuses in the column
entitled "Actual" under the caption "Capitalization" (except for subsequent
issuances, if any, pursuant to this Agreement or the U.S. Purchase
Agreement, pursuant to reservations, agreements or employee benefit plans
referred to in the Prospectuses or pursuant to the exercise of convertible
securities or options referred to in the Prospectuses). The shares of
issued and outstanding capital stock of the Company have been duly
authorized and validly issued and are fully paid and non-assessable, and
the Securities to be issued upon conversion of shares of Series E Stock
held by such Selling Shareholders and to be sold to the Underwriters
hereunder and under the International Purchase Agreement ("Conversion
Shares") have been duly authorized and will be, prior to the Closing Time
and at each Time of Delivery (if any), as applicable, duly authorized and
validly issued and fully paid and non-assessable; none of the outstanding
shares of capital stock of the Company was issued, and none of the
Conversion Shares will be issued, in violation of the preemptive or other
similar rights of any securityholder of the Company; as of the Closing Time
and each Date of Delivery (if any), as applicable, shares of Series E Stock
shall have been duly and validly converted into the appropriate number of
Conversion Shares.
(ix) Authorization of Agreement. This Agreement and the U.S.
--------------------------
Purchase Agreement have been duly authorized, executed and delivered by the
Company.
(x) Authorization and Description of Securities. The Securities to
-------------------------------------------
be purchased by the International Managers and the U.S. Underwriters from
the Company have been duly authorized for issuance and sale to the
International Managers pursuant to this Agreement and the U.S. Underwriters
pursuant to the U.S. Purchase Agreement, respectively, and, when issued and
delivered by the Company pursuant to this Agreement and the U.S. Purchase
Agreement, respectively, against payment of the consideration set forth
herein and in the U.S. Purchase Agreement, respectively, will be validly
issued, fully paid and non-assessable; the Common Stock conforms to all
statements relating thereto contained in the Prospectuses and such
description conforms in all material respects to the rights set forth in
the instruments defining the same; no holder of the Securities will be
subject to personal liability by reason of being such a holder; and the
issuance of the Securities is not subject to the preemptive or other
similar rights of any securityholder of the Company.
(xi) Absence of Defaults and Conflicts. Neither the Company nor any
---------------------------------
of its subsidiaries is in violation of its charter or by-laws or in default
in the performance or observance of any obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, deed of trust,
loan or credit agreement, note, lease or other agreement or instrument to
which the Company or any of its subsidiaries is a party or by which it or
any of them may be bound, or to which any of the property or assets of the
Company or any subsidiary is subject (collectively, "Agreements and
Instruments") except for such defaults that would not result in a Material
Adverse Effect; and the execution, delivery and
7
<PAGE>
performance of this Agreement and the U.S. Purchase Agreement and the
consummation of the transactions contemplated in this Agreement, in the
U.S. Purchase Agreement and in the Registration Statement (including the
issuance and sale of the Securities and the use of the proceeds from the
sale of the Securities as described in the Prospectuses under the caption
"Use of Proceeds") and compliance by the Company with its obligations under
this Agreement and the U.S. Purchase Agreement have been duly authorized by
all necessary corporate action and do not and will not, whether with or
without the giving of notice or passage of time or both, conflict with or
constitute a breach of, or default or Repayment Event (as defined below)
(except to the extent described in the Prospectuses under the caption
"Description of Certain Indebtedness--Repayments and Refinancings") under,
or result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company or any subsidiary pursuant to,
the Agreements and Instruments (except for such conflicts, breaches or
defaults or liens, charges or encumbrances that would not result in a
Material Adverse Effect), nor will such action result in any violation of
the provisions of the charter or by-laws of the Company or any subsidiary
or any applicable law, statute, rule, regulation, judgment, order, writ or
decree of any government, government instrumentality or court, domestic or
foreign, having jurisdiction over the Company or any subsidiary or any of
their assets, properties or operations. As used herein, a "Repayment Event"
means any event or condition which gives the holder of any note, debenture
or other evidence of indebtedness (or any person acting on such holder's
behalf) the right to require the repurchase, redemption or repayment of all
or a portion of such indebtedness by the Company or any subsidiary.
(xii) Absence of Labor Dispute. No labor dispute with the employees
------------------------
of the Company or any subsidiary exists or, to the knowledge of the
Company, is imminent which may reasonably be expected to result in a
Material Adverse Effect.
(xiii) Absence of Proceedings. There is no action, suit, proceeding,
----------------------
inquiry or investigation before or brought by any court or governmental
agency or body, domestic or foreign, now pending, or, to the knowledge of
the Company, threatened, against or affecting the Company or any
subsidiary, which is required to be disclosed in the Registration Statement
(other than as disclosed therein), or which might reasonably be expected to
result in a Material Adverse Effect, or which might reasonably be expected
to materially and adversely affect the consummation of the transactions
contemplated by this Agreement and the U.S. Purchase Agreement or the
performance by the Company of its obligations hereunder or thereunder; the
aggregate of all pending legal or governmental proceedings to which the
Company or any subsidiary is a party or of which any of their respective
properties, assets or operations is the subject which are not described in
the Registration Statement, including ordinary routine litigation
incidental to the business, could not reasonably be expected to result in a
Material Adverse Effect.
(xiv) Accuracy of Exhibits. There are no contracts or documents
--------------------
which are required to be described in the Registration Statement, the
Prospectuses or the documents incorporated by reference therein or to be
filed as exhibits thereto which have not been so described and filed as
required.
8
<PAGE>
(xv) Possession of Intellectual Property. The Company and its
-----------------------------------
subsidiaries own or possess, or can acquire on reasonable terms, adequate
patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
trademarks, service marks, trade names or other intellectual property
(collectively, "Intellectual Property") necessary to carry on the business
now operated by them, except where the failure to own or possess or
otherwise be able to acquire such Intellectual Property would not result in
a Material Adverse Effect, and neither the Company nor any of its
subsidiaries has received any notice or is otherwise aware of any
infringement of or conflict with asserted rights of others with respect to
any Intellectual Property or of any facts or circumstances which would
render any Intellectual Property invalid or inadequate to protect the
interest of the Company or any of its subsidiaries therein, and which
infringement or conflict (if the subject of any unfavorable decision,
ruling or finding) or invalidity or inadequacy, singly or in the aggregate,
would result in a Material Adverse Effect.
(xvi) Absence of Further Requirements. No filing with, or
-------------------------------
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or agency,
domestic or foreign, is necessary or required for the performance by the
Company of its obligations hereunder, in connection with the offering,
issuance or sale of the Securities by the Company under this Agreement and
the U.S. Purchase Agreement or the consummation by the Company of the
transactions contemplated by this Agreement and the U.S. Purchase
Agreement, except such as have been already obtained or as may be required
under the 1933 Act or the 1933 Act Regulations and foreign or state
securities or blue sky laws.
(xvii) Possession of Licenses and Permits. The Company and its
----------------------------------
subsidiaries possess such permits, licenses, approvals, consents and other
authorizations (collectively, "Governmental Licenses") issued by the
appropriate federal, state, local or foreign regulatory agencies or bodies
necessary to conduct the business now operated by them; the Company and its
subsidiaries are in compliance with the terms and conditions of all such
Governmental Licenses, except where the failure so to comply would not,
singly or in the aggregate, have a Material Adverse Effect; all of the
Governmental Licenses are valid and in full force and effect, except when
the invalidity of such Governmental Licenses or the failure of such
Governmental Licenses to be in full force and effect would not have a
Material Adverse Effect; and neither the Company nor any of its
subsidiaries has received any notice of proceedings relating to the
revocation or modification of any such Governmental Licenses which, singly
or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would result in a Material Adverse Effect.
(xviii) Title to Property. The Company and its subsidiaries have
-----------------
good and marketable title to all real property owned by the Company and its
subsidiaries which is material to the business of the Company and its
subsidiaries taken as a whole and good title to all other properties owned
by them which is material to the business of the Company and its
subsidiaries taken as a whole , in each case, free and clear of all
mortgages, pledges, liens, security interests, claims, restrictions or
encumbrances of any kind except such as (a) are
9
<PAGE>
described in the Prospectuses or (b) do not, singly or in the aggregate,
materially affect the value of such property and do not interfere with the
use made and proposed to be made of such property by the Company or any of
its subsidiaries; and all of the leases and subleases material to the
business of the Company and its subsidiaries, considered as one enterprise,
and under which the Company or any of its subsidiaries holds properties
described in the Prospectuses, are in full force and effect, and neither
the Company nor any subsidiary has any notice of any material claim of any
sort that has been asserted by anyone adverse to the rights of the Company
or any subsidiary under any of the leases or subleases mentioned above, or
affecting or questioning the rights of the Company or such subsidiary to
the continued possession of the leased or subleased premises under any such
lease or sublease.
(xix) [Intentionally Omitted.]
(xx) Investment Company Act. The Company is not, and upon the
----------------------
issuance and sale of the Securities as herein contemplated and the
application of the net proceeds therefrom as described in the Prospectuses
will not be, an "investment company" or an entity "controlled" by an
"investment company" as such terms are defined in the Investment Company
Act of 1940, as amended (the "1940 Act").
(xxi) Environmental Laws. Except as described in the Registration
------------------
Statement and except as would not, singly or in the aggregate, result in a
Material Adverse Effect, (A) neither the Company nor any of its
subsidiaries is in violation of any federal, state, local or foreign
statute, law, rule, regulation, ordinance, code, policy or rule of common
law or any judicial or administrative interpretation thereof, including any
judicial or administrative order, consent, decree or judgment, relating to
pollution or protection of human health, the environment (including,
without limitation, ambient air, surface water, groundwater, land surface
or subsurface strata) or wildlife, including, without limitation, laws and
regulations relating to the release or threatened release of chemicals,
pollutants, contaminants, wastes, toxic substances, hazardous substances,
petroleum or petroleum products (collectively, "Hazardous Materials") or to
the manufacture, processing, distribution, use, treatment, storage,
disposal, transport or handling of Hazardous Materials (collectively,
"Environmental Laws"), (B) the Company and its subsidiaries have all
permits, authorizations and approvals required under any applicable
Environmental Laws and are each in compliance with their requirements, (C)
there are no pending or, to the Company's knowledge, threatened
administrative, regulatory or judicial actions, suits, demands, demand
letters, claims, liens, notices of noncompliance or violation,
investigation or proceedings relating to any Environmental Law against the
Company or any of its subsidiaries and (D) there are no events or
circumstances that might reasonably be expected to form the basis of an
order for clean-up or remediation, or an action, suit or proceeding by any
private party or governmental body or agency, against or affecting the
Company or any of its subsidiaries relating to Hazardous Materials or any
Environmental Laws.
(xxii) Registration Rights. There are no persons with registration
-------------------
rights or other similar rights to have any securities registered pursuant
to the Registration Statement or otherwise registered by the Company under
the 1933 Act, except for persons who are Selling
10
<PAGE>
Shareholders or other shareholders described in the Prospectus as having
registration rights. Each Selling Shareholder has validly and effectively
exercised such Selling Shareholder's rights to require registration of
Conversion Shares because of the filing of the Registration Statement and
the consummation of the transactions contemplated by this Agreement and the
U.S. Purchase Agreement and each Selling Shareholder, with respect to any
securities of the Company other than Conversion Shares, and each other
holder of any security of the Company that has any right to require
registration of shares of Common Stock or any other security of the Company
because of the filing of the Registration Statement or consummation of the
transactions contemplated by this Agreement or the U.S. Purchase Agreement,
has validly and effectively waived such rights.
(b) Representations and Warranties by the Selling Shareholders and
Covenants of the Selling Shareholders. Each Selling Shareholder severally and
not jointly represents and warrants to each International Manager as of the date
hereof, as of the Closing Time, and as of each Date of Delivery (if any)
referred to in Section 2(b) hereof, and agrees with each International Manager,
as follows:
(i) Accurate Disclosure. [With respect to Kenneth Lehman and David
-------------------
Weinberg: the representations and warranties of the Company contained in
Section 1(a) hereof, insofar as they relate to Fel-Pro, Incorporated and
the affiliated companies purchased together with Fel-Pro Incorporated by
Federal-Mogul (collectively "Fel-Pro") or information about Fel-Pro at or
prior to the Company's acquisition thereof, are true and correct.] Each
Selling Shareholder has reviewed and is familiar with the Registration
Statement and the Prospectuses and neither the Prospectuses nor any
amendments or supplements thereto include any untrue statement of a
material fact with respect to such Selling Shareholder [and, with respect
to Kenneth Lehman and David Weinberg, Fel-Pro] or omits to state a
material fact with respect to such Selling Shareholder [and, with respect
to Kenneth Lehman and David Weinberg, Fel-Pro] necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading.
(ii) Authorization of Agreements. Such Selling Shareholder has the
---------------------------
full right, power and authority to enter into this Agreement, the U.S.
Purchase Agreement and a Power of Attorney and Custody Agreement (in each
case, a "Power of Attorney and Custody Agreement") and to sell and cause to
be delivered the Securities to be sold by such Selling Shareholder
hereunder and thereunder. The execution and delivery of this Agreement,
the U.S. Purchase Agreement and the Power of Attorney and Custody Agreement
and the sale and delivery of the Securities to be sold by such Selling
Shareholder and the consummation of the transactions contemplated herein
and therein and compliance by such Selling Shareholder with its obligations
hereunder and thereunder have been duly authorized, if necessary, by such
Selling Shareholder and do not and will not, whether with or without the
giving of notice or passage of time or both, conflict with or constitute a
breach of, or default under, or result in the creation or imposition of any
lien, charge or encumbrance upon the Securities to be sold by such Selling
Shareholder nor will such action result in any violation of the provisions
of the charter or by-laws or other organizational or governing instrument
of such Selling Shareholder, if applicable, or any applicable law, statute,
rule, regulation,
11
<PAGE>
judgment, order, writ or decree of any government, government
instrumentality or court, domestic or foreign, having jurisdiction over
such Selling Shareholder or any of its properties.
(iii) Good and Marketable Title. Such Selling Shareholder has good
-------------------------
and marketable title to the shares of Series E Stock to be converted into
Conversion Shares and sold by such Selling Shareholder pursuant hereto and
the U.S. Purchase Agreement, free and clear of any security interest,
mortgage pledge, lien, claim, equity or encumbrance, and at the Closing
Time and at each applicable Time of Delivery (if any), upon delivery of
such Securities and payment of the purchase price therefor as herein
contemplated, assuming due authorization and valid issuance of the
Conversion Shares by the Company and assuming each such International
Manager has no notice of any adverse claim, each of the International
Managers will receive good and marketable title to the Securities purchased
by it from such Selling Shareholder, free and clear of any security
interest, mortgage, pledge, lien, encumbrance, claim or equity, except for
any lien created by such International Manager.
(iv) Due Execution of Power of Attorney and Custody Agreement. Such
--------------------------------------------------------
Selling Shareholder has duly executed and delivered, in the form heretofore
furnished to the Representatives, the Power of Attorney and Custody
Agreement with ________________, _______________ or _______________ as
attorney-in-fact and custodian (each a "Shareholder Representative"); the
Shareholder Representatives are authorized to take such actions as are
necessary to validly and effectively exercise such Selling Shareholder's
rights to require registration of Conversion Shares and to waive any such
rights with respect to any other securities of the Company, to take such
actions as are necessary to validly effectuate the conversion of shares of
Series E Stock held by such Selling Shareholder into Conversion Shares, to
direct the Company to deliver the Securities to be sold by such Selling
Shareholder hereunder and under the U.S. Purchase Agreement and to accept
payment therefor; and each Shareholder Representative is authorized to
execute and deliver this Agreement and the U.S. Purchase Agreement and the
certificate referred to in Section 5(f) or that may be required pursuant to
Section 5(l) on behalf of such Selling Shareholder, to sell to the
Underwriters the Securities to be sold by such Selling Shareholder
hereunder and under the U.S. Purchase Agreement, to determine the purchase
price to be paid by the International Managers to such Selling Shareholder,
as provided in Section 2(a) hereof, to authorize the delivery of the
Securities to be sold by such Selling Shareholder hereunder and under the
U.S. Purchase Agreement, to accept payment therefor, and otherwise to act
on behalf of such Selling Shareholder in connection with this Agreement and
under the U.S. Purchase Agreement.
(v) Absence of Manipulation. Such Selling Shareholder has not
-----------------------
taken, and will not take, directly or indirectly, any action which is
designed to or which has constituted or which might reasonably be expected
to cause or result in stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Securities.
(vi) Absence of Further Requirements. No filing with, or
-------------------------------
authorization, approval, consent, order, registration, qualification or
decree of, any court or governmental authority or agency, domestic or
foreign, is necessary or required for the performance by such Selling
Shareholder of its obligations hereunder, under the U.S. Purchase Agreement
or in the Power
12
<PAGE>
of Attorney and Custody Agreement, or in connection with the offering or
sale of the Securities hereunder or under the U.S. Purchase Agreement or
the consummation of the transactions contemplated by this Agreement except
such as may have been previously been made or obtained or as may be
required under the 1933 Act or the 1933 Act Regulations or state securities
laws.
(vii) Restriction on Sale of Securities. During a period of 90 days
---------------------------------
from the date of the Prospectuses, such Selling Shareholder will not,
without the prior written consent of the Global Coordinator, (i) directly
or indirectly offer, pledge, sell, contract to sell, sell any options or
contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase or otherwise transfer or dispose of
any share of Common Stock or any securities convertible into or exercisable
or exchangeable for Common Stock or file any registration statement under
the 1933 Act with respect to any of the foregoing or (ii) enter into any
swap or any other agreement or any transaction that transfers, in whole or
in part, directly or indirectly, the economic consequences of ownership of
the Common Stock, whether any such swap or transaction described in clause
(i) or (ii) above is to be settled by delivery of Common Stock or such
other securities, in cash or otherwise. The foregoing sentence shall not
apply to the Securities to be sold under this Agreement of the U.S.
Purchase Agreement.
(viii) Certificates Suitable for Transfer. Certificates representing
----------------------------------
shares of Series E Stock to be converted into at least the maximum number
of Conversion Shares to be sold by such Selling Shareholder to the
Underwriters hereunder and under the U.S. Purchase Agreement, in suitable
form for transfer by delivery or accompanied by duly executed instruments
of transfer or assignment in blank with signatures guaranteed, have been
placed in custody with such Selling Shareholder's Shareholder
Representative with irrevocable conditional instructions to deliver such
certificates to the Company for conversion into Conversion Shares to be
delivered to the Underwriters pursuant to this Agreement and the U.S.
Purchase Agreement.
(ix) No Association with NASD. Neither such Selling Shareholder nor
------------------------
any of its affiliates directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control
with, or has any other association with (within the meaning of Article I,
Section 1(m) of the By-laws of the National Association of Securities
Dealers, Inc.), any member firm of the National Association of Securities
Dealers, Inc.
(x) Registration Rights. Such Selling Shareholder has validly and
-------------------
effectively exercised such Selling Shareholder's rights to require
registration of Conversion Shares because of the filing of the Registration
Statement and the consummation of the transaction contemplated by this
Agreement and the U.S. Purchase Agreement and such Selling Shareholder has
not, and will not, exercise any other right to require registration of
shares of Common Stock or any other security of the Company (other than
Conversion Shares) because of the filing of the Registration Statement or
consummation of the transactions contemplated by this Agreement or the U.S.
Purchase Agreement.
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(c) Officer's Certificates. Any certificate signed by any officer of the
Company or any of its subsidiaries delivered to the Global Coordinator, the Lead
Managers or to counsel for the International Managers shall be deemed a
representation and warranty by the Company to each International Manager as to
the matters covered thereby.
(d) Selling Shareholders' Certificates. Any certificate signed by or on
behalf of a Selling Shareholder delivered to the Global Coordinator, the Lead
Managers or to counsel for the International Managers shall be deemed a
representation and warranty by such Selling Shareholder to each International
Manager as to the matters covered thereby.
SECTION 2. Sale and Delivery to International Managers; Closing.
----------------------------------------------------
(a) Initial Securities. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company and each Selling Shareholder, severally and not jointly,
agree to sell to each International Manager, severally and not jointly, and each
International Manager, severally and not jointly, agrees to purchase from the
Company and each Selling Shareholder, at the price per share set forth in
Schedule B, that proportion of the number of Initial International Securities
set forth in Schedule A-2 opposite the name of the Company or such Selling
Shareholder, as the case may be, which the number of Initial International
Securities set forth in Schedule A opposite the name of such International
Manager, plus any additional number of Initial International Securities which
such International Manager may become obligated to purchase pursuant to the
provisions of Section 10 hereof, bears to the total number of Initial
International Securities, subject, in each case, to such adjustments among the
International Managers as the Lead Managers in their sole discretion shall make
to eliminate any sales or purchases of fractional securities.
(b) Option Securities. In addition, on the basis of the representations
and warranties herein contained and subject to the terms and conditions herein
set forth, the Company and the Selling Shareholders, acting severally and not
jointly, hereby grant an option to the International Managers, severally and not
jointly, to purchase up to an additional _________ shares of Common Stock at the
price per share set forth in Schedule B, less an amount per share equal to any
dividends or distributions declared by the Company and payable on the Initial
International Securities but not payable on the International Option Securities.
The option hereby granted will expire 30 days after the date hereof and may be
exercised in whole or in part from time to time only for the purpose of covering
over-allotments which may be made in connection with the offering and
distribution of the Initial International Securities upon notice by the Global
Coordinator to the Company and the Selling Shareholders setting forth the number
of International Option Securities as to which the several International
Managers are then exercising the option and the time and date of payment and
delivery for such International Option Securities. Any such time and date of
delivery for the International Option Securities (a "Date of Delivery") shall be
determined by the Global Coordinator, but shall not be later than seven full
business days after the exercise of said option, nor in any event prior to the
Closing Time, as hereinafter defined. If the option is exercised as to all or
any portion of the International Option Securities, each of the International
Managers, acting severally and not jointly, will purchase that proportion of the
total number of International Option Securities then being
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<PAGE>
purchased which the number of Initial International Securities set forth in
Schedule A opposite the name of such International Manager bears to the total
number of Initial International Securities, subject in each case to such
adjustments as the Global Coordinator in its discretion shall make to eliminate
any sales or purchases of fractional shares.
(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of Sidley
& Austin, One First National Plaza, Chicago, IL 60603, or at such other place as
shall be agreed upon by the Global Coordinator and the Company, at 9:00 A.M.
(Eastern time) on the third (fourth, if the pricing occurs after 4:30 P.M.
(Eastern time) on any given day) business day after the date hereof (unless
postponed in accordance with the provisions of Section 10), or such other time
not later than ten business days after such date as shall be agreed upon by the
Global Coordinator and the Company (such time and date of payment and delivery
being herein called "Closing Time").
In addition, in the event that any or all of the International Option
Securities are purchased by the International Managers, payment of the purchase
price for, and delivery of certificates for, such International Option
Securities shall be made at the above-mentioned offices, or at such other place
as shall be agreed upon by the Global Coordinator and the Company, on each Date
of Delivery as specified in the notice from the Global Coordinator to the
Company.
Payment shall be made to the Company and the Selling Shareholders by wire
transfer of immediately available funds to bank accounts designated by the
Company and the Shareholder Representatives pursuant to each Selling
Shareholder's Power of Attorney and Custody Agreement, as the case may be,
against delivery to the Lead Managers for the respective accounts of the
International Managers of certificates for the International Securities to be
purchased by them. It is understood that each International Manager has
authorized the Lead Managers, for its account, to accept delivery of, receipt
for, and make payment of the purchase price for, the Initial International
Securities and the International Option Securities, if any, which it has agreed
to purchase. Merrill Lynch, individually and not as representative of the
International Managers, may (but shall not be obligated to) make payment of the
purchase price for the Initial International Securities or the International
Option Securities, if any, to be purchased by any International Manager whose
funds have not been receive by the Closing Time or the relevant Date of
Delivery, as the case may be, but such payment shall not relieve such
International Manager from its obligations hereunder.
(d) Denominations; Registration. Certificates for the Initial
International Securities and the International Option Securities, if any, shall
be in such denominations and registered in such names as the Lead Managers may
request in writing at least one full business day before the Closing Time or the
relevant Date of Delivery, as the case may be. The certificates for the Initial
International Securities and the International Option Securities, if any, will
be made available for examination and packaging by the Lead Managers in The City
of New York not later than 10:00 A.M. (Eastern time) on the business day prior
to the Closing Time or the relevant Date of Delivery, as the case may be.
SECTION 3. Covenants of the Company. The Company covenants with each
------------------------
International Manager as follows:
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(a) Compliance with Securities Regulations and Commission Requests.
The Company, subject to Section 3(b), will comply with the requirements of
Rule 430A or Rule 434, as applicable, and, during the period in which the
Prospectuses are required to be delivered in connection with the sales of
the Common Stock purchased pursuant to this Agreement, will notify the
Global Coordinator immediately, and confirm the notice in writing, (i) when
any post-effective amendment to the Registration Statement shall become
effective, or any supplement to the Prospectuses or any amended
Prospectuses shall have been filed, (ii) of the receipt of any comments
from the Commission, (iii) of any request by the Commission for any
amendment to the Registration Statement or any amendment or supplement to
the Prospectuses or for additional information, and (iv) of the issuance by
the Commission of any stop order suspending the effectiveness of the
Registration Statement or of any order preventing or suspending the use of
any preliminary prospectus, or of the suspension of the qualification of
the Securities for offering or sale in any jurisdiction, or of the
initiation or threatening of any proceedings for any of such purposes. The
Company will promptly effect the filings necessary pursuant to Rule 424(b)
and will take such steps as it deems necessary to ascertain promptly
whether the form of prospectus transmitted for filing under Rule 424(b) was
received for filing by the Commission and, in the event that it was not, it
will promptly file such prospectus. The Company will make every reasonable
effort to prevent the issuance of any stop order and, if any stop order is
issued, to obtain the lifting thereof at the earliest possible moment.
(b) Filing of Amendments. The Company will, during the period in
which the Prospectuses are required by the 1933 Act to be delivered in
connection with sales of the Common Stock purchased pursuant to this
Agreement, give the Global Coordinator notice of its intention to file or
prepare any amendment to the Registration Statement (including any filing
under Rule 462(b)), any Term Sheet or any amendment, supplement or revision
to either the prospectus included in the Registration Statement at the time
it became effective or to the Prospectuses, whether pursuant to the 1933
Act, the 1934 Act or otherwise, will furnish the Global Coordinator with
copies of any such documents a reasonable amount of time prior to such
proposed filing or use, as the case may be, and will not file or use any
such document to which the Global Coordinator or counsel for the
International Managers shall reasonably object.
(c) Delivery of Registration Statements. The Company has furnished or
will deliver to the Lead Managers and counsel for the International
Managers, without charge, signed copies of the Registration Statement as
originally filed and of each amendment thereto (including exhibits filed
therewith or incorporated by reference therein and documents incorporated
or deemed to be incorporated by reference therein) and signed copies of all
consents and certificates of experts, and will also deliver to the Lead
Managers, without charge, a conformed copy of the Registration Statement as
originally filed and of each amendment thereto (without exhibits) for each
of the International Managers. The copies of the Registration Statement and
each amendment thereto furnished to the International Managers will be
identical to the electronically transmitted copies thereof filed with the
Commission pursuant to EDGAR, except to the extent permitted by Regulation
S-T.
16
<PAGE>
(d) Delivery of Prospectuses. The Company has delivered to each
International Manager, without charge, as many copies of each preliminary
prospectus as such International Manager reasonably requested, and the
Company hereby consents to the use of such copies for purposes permitted by
the 1933 Act. The Company will furnish to each International Manager,
without charge, during the period when the International Prospectus is
required to be delivered under the 1933 Act or the 1934 Act, such number of
copies of the International Prospectus (as amended or supplemented) as such
International Manager may reasonably request. The International Prospectus
and any amendments or supplements thereto furnished to the International
Managers will be identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent permitted
by Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company will
comply with the 1933 Act and the 1933 Act Regulations and the 1934 Act and
the 1934 Act Regulations so as to permit the completion of the distribution
of the Securities as contemplated in this Agreement, the U.S. Purchase
Agreement and in the Prospectuses. If at any time when a prospectus is
required by the 1933 Act to be delivered in connection with sales of the
Securities, any event shall occur or condition shall exist as a result of
which it is necessary, in the opinion of counsel for the International
Managers or for the Company, to amend the Registration Statement or amend
or supplement any Prospectus in order that the Prospectuses will not
include any untrue statements of a material fact or omit to state a
material fact necessary in order to make the statements therein not
misleading in the light of the circumstances existing at the time it is
delivered to a purchaser, or if it shall be necessary, in the opinion of
such counsel, at any such time to amend the Registration Statement or amend
or supplement any Prospectus in order to comply with the requirements of
the 1933 Act or the 1933 Act Regulations, the Company will promptly prepare
and file with the Commission, subject to Section 3(b), such amendment or
supplement as may be necessary to correct such statement or omission or to
make the Registration Statement or the Prospectuses comply with such
requirements, and the Company will furnish to the International Managers
such number of copies of such amendment or supplement as the International
Managers may reasonably request.
(f) Blue Sky Qualifications. The Company will use its best efforts,
in cooperation with the International Managers, to qualify the Securities
for offering and sale under the applicable securities laws of such states
and other jurisdictions (domestic or foreign) as the Global Coordinator may
designate and to maintain such qualifications in effect for a period of not
less than one year from the later of the effective date of the Registration
Statement and any Rule 462(b) Registration Statement; provided, however,
that the Company shall not be obligated to file any general consent to
service of process or to qualify as a foreign corporation or as a dealer in
securities in any jurisdiction in which it is not so qualified or to
subject itself to taxation in respect of doing business in any jurisdiction
in which it is not otherwise so subject. In each jurisdiction in which the
Securities have been so qualified, the Company will file such statements
and reports as may be required by the laws of such jurisdiction to continue
such qualification in effect for a period of not less than one year from
the effective date of the Registration Statement and any Rule 462(b)
Registration Statement.
17
<PAGE>
(g) Earnings Statement. The Company will timely file such reports
pursuant to the 1934 Act as are necessary in order to make generally
available to its securityholders as soon as practicable an earnings
statement for the purposes of, and to provide the benefits contemplated by,
the last paragraph of Section 11(a) of the 1933 Act.
(h) Use of Proceeds. The Company will use the net proceeds received
by it from the sale of the Securities in the manner specified in the
Prospectuses under "Use of Proceeds".
(i) Listing. The Company will use its best efforts to effect the
listing of the Securities on the New York Stock Exchange.
(j) Restriction on Sale of Securities. During a period of 90 days
from the date of the Prospectuses, the Company will not, without the prior
written consent of the Global Coordinator, (i) directly or indirectly,
offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant to purchase or otherwise transfer or dispose of any share of
Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock or file any registration statement under the
1933 Act with respect to any of the foregoing or (ii) enter into any swap
or any other agreement or any transaction that transfers, in whole or in
part, directly or indirectly, the economic consequence of ownership of the
Common Stock, whether any such swap or transaction described in clause (i)
or (ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise. The foregoing sentence shall not apply
to (A) the Securities to be sold hereunder or under the U.S. Purchase
Agreement, (B) any shares of Common Stock issued by the Company upon the
exercise of an option or warrant or the conversion of a security
outstanding on the date hereof and referred to in the Prospectuses or the
documents incorporated therein by reference (as of the date of the
Prospectuses), (C) any shares of Common Stock issued or options to purchase
Common Stock granted pursuant to existing employee benefit plans of the
Company referred to in the Prospectuses or the documents incorporated
therein by reference (as of the date of the Prospectuses), (D) any shares
of Common Stock issued pursuant to any non-employee director stock plan or
dividend reinvestment plan, (E) any securities issued as consideration for
or to otherwise finance an acquisition of capital stock or assets of a
business, provided that the recipient of any such securities agrees in
-------- ----
writing to be bound by the restrictions set forth in this Section 3(j) or
(F) [cover trust preferred securities and Series E Stock].
(k) Reporting Requirements. The Company, during the period when the
Prospectuses are required to be delivered under the 1933 Act or the 1934
Act, will file all documents required to be filed with the Commission
pursuant to the 1934 Act within the time periods required by the 1934 Act
and the 1934 Act Regulations.
SECTION 4. Payment of Expenses. (a) Expenses. The Company will pay all
-------------------
expenses incident to the performance of its obligations under this Agreement,
including (i) the preparation, printing and filing of the Registration Statement
(including financial statements and exhibits) as originally filed and of each
amendment thereto, (ii) the preparation, printing and delivery to the
Underwriters of this Agreement, any Agreement among Underwriters and such other
documents as
18
<PAGE>
may be required in connection with the offering, purchase, sale, issuance or
delivery of the Securities, (iii) the preparation, issuance and delivery of the
certificates for the Securities to the Underwriters, including any stock or
other transfer taxes and any stamp or other duties payable upon the sale,
issuance or delivery of the Securities to the Underwriters and the transfer of
the Securities between the U.S. Underwriters and the International Managers,
(iv) the fees and disbursements of the Company's counsel, accountants and other
advisors, (v) the qualification of the Securities under securities laws in
accordance with the provisions of Section 3(f) hereof, including filing fees and
the reasonable fees and disbursements of counsel for the Underwriters in
connection therewith and in connection with the preparation of the Blue Sky
Survey and any supplement thereto, (vi) the printing and delivery to the
Underwriters of copies of each preliminary prospectus, any Term Sheets and of
the Prospectuses and any amendments or supplements thereto, (vii) the
preparation, printing and delivery to the Underwriters of copies of the Blue Sky
Survey and any supplement thereto, (viii) the fees and expenses of any transfer
agent or registrar for the Securities (ix) the filing fees incident to, and the
reasonable fees and disbursements of counsel to the Underwriters in connection
with, the review by the National Association of Securities Dealers, Inc. (the
"NASD") of the terms of the sale of the Securities and (x) the fees and expenses
incurred in connection with the listing of the Securities on the New York Stock
Exchange.
(b) Termination of Agreement. If this Agreement is terminated by the Lead
Managers in accordance with the provisions of Section 5 or Section 9(a)(i)
hereof, the Company shall reimburse the International Managers for all of their
out-of-pocket expenses, including the reasonable fees and disbursements of
counsel for the International Managers.
SECTION 5. Conditions of International Managers' Obligations. The
obligations of the several International Managers hereunder are subject to the
accuracy of the representations and warranties of the Company and the Selling
Shareholders contained in Section 1 hereof or in certificates of any officer of
the Company or any subsidiary of the Company or on behalf of any Selling
Shareholder delivered pursuant to the provisions hereof, to the performance by
the Company of its covenants and other obligations hereunder, and to the
following further conditions:
(a) Effectiveness of Registration Statement. The Registration
Statement, including any Rule 462(b) Registration Statement, has become
effective and at Closing Time no stop order suspending the effectiveness of
the Registration Statement shall have been issued under the 1933 Act or
proceedings therefor initiated or threatened by the Commission, and any
request on the part of the Commission for additional information shall have
been complied with to the reasonable satisfaction of counsel to the
International Managers. A prospectus containing the Rule 430A Information
shall have been filed with the Commission in accordance with Rule 424(b)
(or a post-effective amendment providing such information shall have been
filed and declared effective in accordance with the requirements of Rule
430A) or, if the Company has elected to rely upon Rule 434, a Term Sheet
shall have been filed with the Commission in accordance with Rule 424(b).
(b) Opinion of Counsel for Company. At Closing Time, the Lead
Managers shall have received the favorable opinion, dated as of Closing
Time, of each of David M. Sherbin, Associate
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<PAGE>
General Counsel of the Company and Cleary, Gottlieb, Steen & Hamilton,
counsel for the Company, each in form and substance satisfactory to counsel
for the International Managers, together with signed or reproduced copies
of such letter for each of the other International Managers to the effect
set forth in Exhibit A hereto and to such further effect as counsel to the
International Managers may reasonably request.
(c) Opinion of Counsel for the Selling Shareholders. At Closing
Time, the Lead Managers shall have received the favorable opinion, dated as
of Closing Time, of Katten Muchin & Zavis, counsel for the Selling
Shareholders, in form and substance satisfactory to counsel for the
International Managers, together with signed or reproduced copies of such
letter for each of the other International Managers to the effect set forth
in Exhibit A-2 hereto and to such effect as counsel to the International
Managers may reasonably request.
(d) Opinion of Counsel for International Managers. At Closing Time,
the Lead Managers shall have received the favorable opinion, dated as of
Closing Time, of each of (A) Sidley & Austin, counsel for the International
Managers, together with signed or reproduced copies of such letter for each
of the other International Managers with respect to the matters set forth
in clauses (i), (ii), (v), (vi) (solely as to preemptive or other similar
rights arising by operation of law or under the charter or by-laws of the
Company), (viii) through (x), inclusive, (xiii), (xv) (solely as to the
information in the Prospectus under "Description of Capital Stock--Common
Stock") and the penultimate paragraph of Exhibit A hereto and (B) Sachnoff
& Weaver, Ltd., special counsel to the International Managers, together
with signed or reproduced copies of such letter for each of the other
International Managers with respect to the matters set forth in the
penultimate paragraph of Exhibit A hereto. In giving such opinion such
counsel may rely, as to all matters governed by the laws of jurisdictions
other than the law of the State of New York, the federal law of the United
States and the General Corporation Law of the State of Delaware, upon the
opinions of counsel satisfactory to the Lead Managers. Such counsel may
also state that, insofar as such opinion involves factual matters, they
have relied, to the extent they deem proper, upon certificates of officers
of the Company and its subsidiaries and certificates of public officials.
(e) Officers' Certificate. At Closing Time, there shall not have
been, since the date hereof or since the respective dates as of which
information is given in the Prospectuses, any material adverse change in
the condition, financial or otherwise, or in the earnings, business affairs
or business prospects of the Company and its subsidiaries considered as one
enterprise, whether or not arising in the ordinary course of business, and
the Lead Managers shall have received a certificate of the President or a
Vice President of the Company and of the chief financial or chief
accounting officer of the Company, dated as of Closing Time, to the effect
that (i) there has been no such material adverse change, (ii) the
representations and warranties in Section 1(a) hereof are true and correct
with the same force and effect as though expressly made at and as of
Closing Time, (iii) the Company has complied with all agreements and
satisfied all conditions on its part to be performed or satisfied at or
prior to Closing Time, and (iv) no stop order suspending the effectiveness
of the Registration Statement has been issued and no proceedings for that
purpose have been instituted or are pending or, to the Company's knowledge,
are contemplated by the Commission.
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(f) Certificate of Selling Shareholders. At Closing Time, the Lead
Managers shall have received a certificate of each of the Shareholder
Representatives on behalf of the Selling Shareholders, dated as of Closing
Time, to the effect that (i) the representations and warranties of each
Selling Shareholder contained in Section 1(b) hereof are true and correct
with the same force and effect as though expressly made at and as of
Closing Time and (ii) each Selling Shareholder has complied with all
agreements and all conditions on its part to be performed under this
Agreement at or prior to Closing Time.
(g) Accountant's Comfort Letter. At the time of the execution of
this Agreement, the Lead Managers shall have received from each of Ernst &
Young LLP and KPMG Audit Plc a letter dated such date in form and substance
satisfactory to the Lead Managers, together with signed or reproduced
copies of such letters for each of the other International Managers
containing statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information contained in the
Registration Statement and the Prospectuses.
(h) Bring-down Comfort Letter. At Closing Time, the Lead Managers
shall have received from each of Ernst & Young LLP and KPMG Audit Plc a
letter, dated as of Closing Time, to the effect that they reaffirm the
statements made in the letter furnished pursuant to subsection (e) of this
Section, except that the specified date referred to shall be a date not
more than three business days prior to Closing Time.
(i) Approval of Listing. At Closing Time, the Securities shall have
been approved for listing on the New York Stock Exchange, subject only to
official notice of issuance.
(j) Lock-up Agreements. At the date of this Agreement, the Lead
Managers shall have received an agreement substantially in the form of
Exhibit B hereto signed by the persons listed on Schedule D hereto.
(k) Purchase of Initial U.S. Securities. Contemporaneously with the
purchase by the International Managers of the Initial International
Securities under this Agreement, the U.S. Underwriters shall have purchased
the Initial U.S. Securities under the U.S. Purchase Agreement.
(l) Conditions to Purchase of International Option Securities. In
the event that the International Managers exercise their option provided in
Section 2(b) hereof to purchase all or any portion of the International
Option Securities, the representations and warranties of the Company
contained herein and the statements in any certificates furnished by the
Company or any subsidiary of the Company hereunder shall be true and
correct as of each Date of Delivery and, at the relevant Date of Delivery,
the Lead Managers shall have received:
(i) Officers' Certificate. A certificate, dated such Date of
---------------------
Delivery, of the President or a Vice President of the Company and of
the chief financial or chief accounting officer of the Company
confirming that the certificate delivered at the
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Closing Time pursuant to Section 5(d) hereof remains true and correct
as of such Date of Delivery.
(ii) Certificate of Selling Shareholders. A certificate, dated
-----------------------------------
such Date of Delivery, of the Shareholder Representatives on behalf
of each Selling Shareholder confirming that the certificate delivered
at Closing Time pursuant to Section 5(f) remains true and correct as
of such Date of Delivery.
(iii) Opinion of Counsel for Company. The favorable opinion of
------------------------------
each of Edward W. Gray, Jr., Senior Vice President and General
Counsel of the Company, David M. Sherbin, Associate General Counsel
of the Company, and Cleary, Gottlieb, Steen & Hamilton, counsel for
the Company, each in form and substance satisfactory to counsel for
the International Managers, dated such Date of Delivery, relating to
the International Option Securities to be purchased on such Date of
Delivery and otherwise to the same effect as the opinion required by
Section 5(b) hereof.
(iv) Opinion of Counsel for the Selling Shareholders. The favorable
-----------------------------------------------
opinion of Katten Muchin & Zavis, counsel for the Selling
Shareholders, in form and substance satisfactory to counsel for the
International Managers, dated such Date of Delivery, relating to the
Option Securities to be purchased on such Date of Delivery and
otherwise to the same effect as the opinion required by Section 5(c)
hereof.
(v) Opinion of Counsel for International Managers. The favorable
---------------------------------------------
opinion of each of Sidley & Austin, counsel for the International
Managers, and Sachnoff & Weaver Ltd., Special Counsel for the
International Managers dated such Date of Delivery, relating to the
International Option Securities to be purchased on such Date of
Delivery and otherwise to the same effect as the opinion required by
Section 5(c) hereof.
(vi) Bring-down Comfort Letter. A letter from Ernst & Young LLP
-------------------------
and from KPMG Audit Plc, each in form and substance satisfactory to
the Lead Managers and dated such Date of Delivery, substantially in
the same form and substance as the letter furnished to the Lead
Managers pursuant to Section 5(f) hereof, except that the "specified
date" in the letter furnished pursuant to this paragraph shall be a
date not more than five days prior to such Date of Delivery.
(m) Additional Documents. At Closing Time and at each Date of
Delivery counsel for the International Managers shall have been furnished
with such documents and opinions as they may require for the purpose of
enabling them to pass upon the issuance and sale of the Securities as
herein contemplated, or in order to evidence the accuracy of any of the
representations or warranties, or the fulfillment of any of the conditions,
herein contained; and all proceedings taken by the Company in connection
with the issuance and sale of the Securities as herein contemplated shall
be satisfactory in form and substance to the Lead Managers and counsel for
the International Managers.
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(n) Termination of Agreement. If any condition specified in this
Section shall not have been fulfilled when and as required to be fulfilled,
this Agreement, or, in the case of any condition to the purchase of
International Option Securities on a Date of Delivery which is after the
Closing Time, the obligations of the several International Managers to
purchase the relevant Option Securities may be terminated by the Lead
Managers by notice to the Company and to the Selling Shareholders at any
time at or prior to Closing Time or such Date of Delivery, as the case may
be, and such termination shall be without liability of any party to any
other party except as provided in Section 4 and except that Sections 1, 6,
7 and 8 shall survive any such termination and remain in full force and
effect.
SECTION 6. Indemnification.
---------------
(a) Indemnification of International Managers. The Company agrees to
indemnify and hold harmless each International Manager and each person, if any,
who controls any International Manager within the meaning of Section 15 of the
1933 Act or Section 20 of the 1934 Act to the extent and in the manner set forth
in clauses (i), (ii) and (iii) below. In addition, each Selling Shareholder,
severally and not jointly, agrees to indemnify and hold harmless each
International Manager and each person, if any, who controls any International
Manager within the meaning of Section 15 of the 1933 Act or Section 20 of the
1934 Act:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(or any amendment thereto), including the Rule 430A Information and the
Rule 434 Information, if applicable, or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to
make the statements therein not misleading or arising out of any untrue
statement or alleged untrue statement of a material fact included in any
preliminary prospectus or the Prospectuses (or any amendment or supplement
thereto), or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or of any claim
whatsoever based upon any such untrue statement or omission, or any such
alleged untrue statement or omission; provided that (subject to Section
6(d) below) any such settlement is effected with the written consent of the
Company; and
(iii) against any and all expense whatsoever, as incurred (including
the fees and disbursements of counsel chosen by Merrill Lynch), reasonably
incurred in investigating, preparing or defending against any litigation,
or any investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or omission, to
the extent that any such expense is not paid under (i) or (ii) above;
23
<PAGE>
provided, however, that this indemnity agreement shall not apply to any loss,
- -------- -------
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
International Manager through the Lead Managers expressly for use in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or any preliminary
prospectus or the International Prospectus (or any amendment or supplement
thereto); and provided further that the Company will not be liable to an
-------- -------
International Manager with respect to any preliminary prospectus to the extent
that the Company shall sustain the burden of proving that any such loss,
liability, claim, damage or expense resulted from the fact that such
International Manager failed to send or give, at or prior to the Closing Date, a
copy of the International Prospectus, as then amended or supplemented if: (i)
the Company has previously furnished copies thereof (sufficiently in advance of
the Closing Date to allow for distribution by the Closing Date) to the
International Managers and the loss, liability, claim, damage or expense of such
International Manager resulted from an untrue statement or omission of a
material fact contained in or omitted from the preliminary prospectus which was
corrected in the International Prospectus as, if applicable, amended or
supplemented prior to the Closing Date and such International Prospectus was
required by law to be delivered at or prior to the written confirmation of sale
to such person and (ii) such failure to give or send such International
Prospectus by the Closing Date to the party or parties asserting such loss,
liability, claim, damage or expense would have constituted the sole defense to
the claim asserted by such person; and provided further, that this indemnity
-------- -------
agreement, in so far as it relates to indemnification by Selling Shareholders,
shall not apply to any loss, liability, claim, damage or expense arising out of
any untrue statement or omission or alleged untrue statement or omission except
to the extent that said untrue statement or omission or alleged untrue statement
or omission relates (A) to written information furnished to the Company by or on
behalf of any Selling Shareholder expressly for use in the Registration
Statement (or any amendment thereto) or any preliminary prospectus or
International Prospectus (or any amendment or supplement thereto) or (B) to
information relating to Fel-Pro.
(b) Indemnification of Company, Directors and Officers and Selling
Shareholders. Each International Manager severally agrees to indemnify and hold
harmless the Company, its directors, each of its officers who signed the
Registration Statement, and each person, if any, who controls the Company within
the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act, and
each Selling Shareholder, against any and all loss, liability, claim, damage and
expense described in the indemnity contained in subsection (a) of this Section,
as incurred, but only with respect to untrue statements or omissions, or alleged
untrue statements or omissions, made in the Registration Statement (or any
amendment thereto), including the Rule 430A Information and the Rule 434
Information, if applicable, or any preliminary international prospectus or the
International Prospectus (or any amendment or supplement thereto) in reliance
upon and in conformity with written information furnished to the Company by such
International Manager through the Lead Managers expressly for use in the
Registration Statement (or any amendment thereto) or such preliminary prospectus
or the International Prospectus (or any amendment or supplement thereto).
(c) Actions against Parties; Notification. Each indemnified party shall
give notice as promptly as reasonably practicable to each indemnifying party of
any action commenced against it in respect of which indemnity may be sought
hereunder, but failure to so notify an indemnifying party
24
<PAGE>
shall not relieve such indemnifying party from any liability hereunder to the
extent it is not materially prejudiced as a result thereof and in any event
shall not relieve it from any liability which it may have otherwise than on
account of this indemnity agreement. In the case of parties indemnified
pursuant to Section 6(a) above, counsel to the indemnified parties shall be
selected by Merrill Lynch, and, in the case of parties indemnified pursuant to
Section 6(b) above, counsel to the indemnified parties shall be selected by the
Company. An indemnifying party may participate at its own expense in the
defense of any such action; provided, however, that counsel to the indemnifying
party shall not (except with the consent of the indemnified party) also be
counsel to the indemnified party. In no event shall the indemnifying parties be
liable for fees and expenses of more than one counsel (in addition to any local
counsel) separate from their own counsel for all indemnified parties in
connection with any one action or separate but similar or related actions in the
same jurisdiction arising out of the same general allegations or circumstances.
No indemnifying party shall, without the prior written consent of the
indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any litigation, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, or any claim
whatsoever in respect of which indemnification or contribution could be sought
under this Section 6 or Section 7 hereof (whether or not the indemnified parties
are actual or potential parties thereto), unless such settlement, compromise or
consent (i) includes an unconditional release of each indemnified party from all
liability arising out of such litigation, investigation, proceeding or claim and
(ii) does not include a statement as to or an admission of fault, culpability or
a failure to act by or on behalf of any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(ii) effected without its written consent if (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying party shall have received notice of
the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
(e) Limitation on Selling Shareholders Indemnification. Without limiting
the full extent of (i) the Company's agreement to indemnify each International
Manager (and controlling persons thereof, if any) as herein provided, (ii) the
liability of the Company with respect to the breach by the Company of any
representation, warranty or covenant contained in this Agreement (or in any
certificate of the Company delivered pursuant hereto) and (iii) the liability
for any Selling Shareholder with respect to the breach by such Selling
Shareholder of any representation, warranty or covenant contained in Section 1
of this Agreement (or in any certificate of such Selling Shareholder delivered
pursuant hereto), notwithstanding anything contained in this Agreement to the
contrary, each Selling Shareholder shall be liable under (A) the indemnification
agreement contained in Section 6(a) of this Agreement or (B) the contribution
provisions contained in Section 7 of this Agreement, only for an amount not
exceeding, in the aggregate, the net proceeds received by such Selling
Shareholder from the sale of Securities hereunder. The Company and the Selling
Shareholders may agree, as among themselves and without limiting the rights of
the International Managers and controlling persons under this Agreement, as to
the respective amounts of such liability for which each of them shall be
responsible.
25
<PAGE>
SECTION 7. Contribution. If the indemnification provided for in
------------
Section 6 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of any losses, liabilities, claims,
damages or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate amount of such losses, liabilities, claims, damages
and expenses incurred by such indemnified party, as incurred, (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Selling Shareholders on the one hand and the International
Managers on the other hand from the offering of the Securities pursuant to this
Agreement or (ii) if the allocation provided by clause (i) is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company and the Selling Shareholders on the one hand and of the
International Managers on the other hand in connection with the statements or
omissions which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company and the Selling Shareholders
on the one hand and the International Managers on the other hand in connection
with the offering of the International Securities pursuant to this Agreement
shall be deemed to be in the same respective proportions as the total net
proceeds from the offering of the International Securities pursuant to this
Agreement (before deducting expenses) received by the Company and the Selling
Shareholders and the total underwriting discount received by the International
Managers, in each case as set forth on the cover of the International
Prospectus, or, if Rule 434 is used, the corresponding location on the Term
Sheet, bear to the aggregate initial public offering price of the International
Securities as set forth on such cover.
The relative fault of the Company and the Selling Shareholders on the one
hand and the International Managers on the other hand shall be determined by
reference to, among other things, whether any such untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a material
fact relates to information supplied by the Company or the Selling Shareholders
or by the International Managers and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
The Company, the Selling Shareholders and the International Managers agree
that it would not be just and equitable if contributions pursuant to this
Section 7 were determined by pro rata allocation (even if the International
Managers were treated as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations referred
to above in this Section 7. The aggregate amount of losses, liabilities, claims,
damages and expenses incurred by an indemnified party and referred to above in
this Section 7 shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified party in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any governmental
agency or body, commenced or threatened, or any claim whatsoever based upon any
such untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no International Manager
shall be required to contribute any amount in excess of the amount by which the
total price at which the International Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such International Managers has otherwise been required to pay by
reason of any such untrue or alleged untrue statement or omission or alleged
omission.
26
<PAGE>
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
International Manager within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act shall have the same rights to contribution as such
International Manager, and each director of the Company, each officer of the
Company who signed the Registration Statement, and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act or Section
20 of the 1934 Act shall have the same rights to contribution as the Company.
The International Managers' respective obligations to contribute pursuant to
this Section 7 are several in proportion to the number of Initial International
Securities set forth opposite their respective names in Schedule A hereto and
not joint.
SECTION 8. Representations, Warranties and Agreements to Survive
-----------------------------------------------------
Delivery. All representations, warranties and agreements contained in this
- --------
Agreement or in certificates of officers of the Company or any of its
subsidiaries or the Selling Shareholders submitted pursuant hereto, shall remain
operative and in full force and effect, regardless of any investigation made by
or on behalf of any International Manager or controlling person, or by or on
behalf of the Company or the Selling Shareholders, and shall survive delivery of
the Securities to the International Managers.
SECTION 9. Termination of Agreement.
------------------------
(a) Termination; General. The Lead Managers may terminate this Agreement,
by notice to the Company and the Selling Shareholders, at any time at or prior
to Closing Time (i) if there has been, since the time of execution of this
Agreement or since the respective dates as of which information is given in the
International Prospectus, any material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business, or (ii) if there has
occurred any material adverse change in the financial markets in the United
States or the international financial markets, any outbreak of hostilities or
escalation thereof or other calamity or crisis or any change or development
involving a prospective change in national or international political, financial
or economic conditions, in each case the effect of which is such as to make it,
in the judgment of the Lead Managers, impracticable to market the Securities or
to enforce contracts for the sale of the Securities, or (iii) if trading in any
securities of the Company has been suspended or materially limited by the
Commission or the New York Stock Exchange, or if trading generally on the New
York Stock Exchange has been suspended or materially limited, or minimum or
maximum prices for trading have been fixed, or maximum ranges for prices have
been required, by any of said exchanges or by such system or by order of the
Commission, the National Association of Securities Dealers, Inc. or any other
governmental authority, or (iv) if a banking moratorium has been declared by
either Federal or New York authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that Sections
1, 6, 7 and 8 shall survive such termination and remain in full force and
effect.
27
<PAGE>
SECTION 10. Default by One or More of the International Managers. If one
----------------------------------------------------
or more of the International Managers shall fail at Closing Time or a Date of
Delivery to purchase the Securities which it or they are obligated to purchase
under this Agreement (the "Defaulted Securities"), the Lead Managers shall have
the right, within 24 hours thereafter, to make arrangements for one or more of
the non-defaulting International Managers, or any other underwriters, to
purchase all, but not less than all, of the Defaulted Securities in such amounts
as may be agreed upon and upon the terms herein set forth; if, however, the Lead
Managers shall not have completed such arrangements within such 24-hour period,
then:
(a) if the number of Defaulted Securities does not exceed 10% of
the number of International Securities to be purchased on such date, each
of the non-defaulting International Managers shall be obligated, severally
and not jointly, to purchase the full amount thereof in the proportions
that their respective underwriting obligations hereunder bear to the
underwriting obligations of all non-defaulting International Managers, or
(b) if the number of Defaulted Securities exceeds 10% of the
number of International Securities to be purchased on such date, this
Agreement or, with respect to any Date of Delivery which occurs after the
Closing Time, the obligation of the International Managers to purchase and
of the Company to sell the Option Securities to be purchased and sold on
such Date of Delivery shall terminate without liability on the part of any
non-defaulting International Manager.
No action taken pursuant to this Section shall relieve any defaulting
International Manager from liability in respect of its default.
In the event of any such default which does not result in a termination of
this Agreement or, in the case of a Date of Delivery which is after the Closing
Time, which does not result in a termination of the obligation of the
International Managers to purchase and the Company to sell the relevant
International Option Securities, as the case may be, either the Lead Managers or
the Company shall have the right to postpone Closing Time or the relevant Date
of Delivery, as the case may be, for a period not exceeding seven days in order
to effect any required changes in the Registration Statement or Prospectus or in
any other documents or arrangements. As used herein, the term "International
Manager" includes any person substituted for an International Manager under this
Section 10.
SECTION 11. Default by One or More of the Selling Shareholder(s) or the
-----------------------------------------------------------
Company. (a) If any Selling Shareholder shall fail at Closing Time to sell and
- -------
deliver the number of Securities which such Selling Shareholder or Selling
Shareholders are obligated to sell hereunder, and the remaining Selling
Shareholder(s) do not exercise the right hereby granted to increase, pro rata or
otherwise, the number of Securities to be sold by them hereunder to the total
number to be sold by all Selling Shareholders as set forth in Schedule A-2
hereto, then the International Managers may, at the option of the Lead Managers,
by notice from the Lead Managers to the Company and the non-defaulting Selling
Shareholder(s), either (a) terminate this Agreement without any liability on the
fault of any non-defaulting party except that the provisions of Section 1, 4, 6,
7 and 8 shall remain in full force and effect or (b) elect to purchase the
Securities which the non-defaulting Selling Shareholder(s) and
28
<PAGE>
the Company have agreed to sell hereunder. No action taken pursuant to this
Section 11 shall relieve any Selling Shareholder so defaulting from liability,
if any, in respect of such default.
In the event of default by any Selling Shareholder as referred to in this
Section 11, each of the Lead Managers, the Company and the non-defaulting
Selling Shareholder(s) shall have the right to postpone Closing Time or Date of
Delivery for a period not exceeding seven days in order to effect any required
change in the Registration Statement or Prospectus or in any other documents or
arrangements.
(b) If the Company shall fail at Closing Time to sell and deliver the
number of Securities that it is obligated to sell hereunder, then this Agreement
shall terminate without any liability on the part of any non-defaulting party
except that the provisions of Sections 1, 4, 6, 7 and 8 shall remain in full
force and effect. No action taken pursuant to this Section 11 shall relieve the
Company from liability, if any, in respect of such default.
SECTION 12. Notices. All notices and other communications hereunder
-------
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
International Managers shall be directed to the Lead Managers at North Tower,
World Financial Center, New York, New York 10281-1201, attention of .; and
notices to the Company shall be directed to it at 26555 Northwestern Highway,
Southfield, Michigan 48034, attention of General Counsel; and notices to the
Selling Shareholder(s) shall be directed to ., attention ..
SECTION 13. Parties. This Agreement shall each inure to the benefit of
-------
and be binding upon the International Managers, the Company and the Selling
Shareholders and their respective successors. Nothing expressed or mentioned in
this Agreement is intended or shall be construed to give any person, firm or
corporation, other than the International Managers, the Company and the Selling
Shareholders and their respective successors and the controlling persons and
officers and directors referred to in Sections 6 and 7 and their heirs and legal
representatives, any legal or equitable right, remedy or claim under or in
respect of this Agreement or any provision herein contained. This Agreement and
all conditions and provisions hereof are intended to be for the sole and
exclusive benefit of the International Managers, the Company and the Selling
Shareholders and their respective successors, and said controlling persons and
officers and directors and their heirs and legal representatives, and for the
benefit of no other person, firm or corporation. No purchaser of Securities
from any International Manager shall be deemed to be a successor by reason
merely of such purchase.
SECTION 14. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED BY
----------------------
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. EXCEPT AS
SPECIFIED TIMES OF DAY REFER TO NEW YORK CITY TIME.
SECTION 15. Effect of Headings. The Article and Section headings herein
------------------
and the Table of Contents are for convenience only and shall not affect the
construction hereof.
29
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company and the Shareholder Representatives for
the Selling Shareholders a counterpart hereof, whereupon this instrument, along
with all counterparts, will become a binding agreement between the International
Managers and the Company and the Selling Shareholders in accordance with its
terms.
Very truly yours,
FEDERAL-MOGUL
By_________________________________________
Name:
Title:
[Selling Shareholders]
By:________________________________________
[Name]
As Shareholder Representative acting on
behalf of the Selling Shareholders listed
above
[Selling Shareholders]
By:________________________________________
[Name]
As Shareholder Representative acting on
behalf of the Selling Shareholders listed
above
[Selling Shareholders]
By:________________________________________
[Name]
As Shareholder Representative acting on
behalf of the Selling Shareholders listed
above
30
<PAGE>
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH INTERNATIONAL
Bear, Stearns International Limited.
Morgan Stanley & Co. International Limited
Smith Barney Inc.
Donaldson, Lufkin & Jenrette International
J. Henry Schroder & Co. Limited
ABN AMRO Rothschild
Credit Lyonnais Securities
Kleinwort Benson Limited
By: MERRILL LYNCH INTERNATIONAL
By ________________________________
Authorized Signatory
For themselves and as Lead Managers of the
other International Managers named in Schedule A hereto.
31
<PAGE>
SCHEDULE A
Number of
Initial
International
Name of International Manager Securities
----------------------------- ----------
Merrill Lynch International.........................
Bear, Stearns International Limited
Morgan Stanley & Co. International Limited
Smith Barney Inc.
Donaldson, Lufkin & Jenrette International
J. Henry Schroder & Co. Limited & Co................
ABN AMRO Rothschild
Credit Lyonnais Securities
Kleinwort Benson Limited
-----------
Total...............................................
==============
Sch A-1
<PAGE>
SCHEDULE A-2
<TABLE>
<CAPTION>
Number of Initial International Maximum Number of International
Securities to be Sold Option Securities to Be Sold
------------------------------- -------------------------------
<S> <C> <C>
Federal-Mogul Corporation
[Selling Shareholders] ------- -------
Total...................... ============ ===========
</TABLE>
Sch A-2-1
<PAGE>
SCHEDULE B
FEDERAL-MOGUL
_________ Shares of Common Stock
(Without Par Value)
1. The initial public offering price per share for the Securities,
determined as provided in said Section 2, shall be $..
2. The purchase price per share for the International Securities to
be paid by the several International Managers shall be $., being an amount
equal to the initial public offering price set forth above less $. per
share; provided that the purchase price per share for any International
Option Securities purchased upon the exercise of the over-allotment option
described in Section 2(b) shall be reduced by an amount per share equal to
any dividends or distributions declared by the Company and payable on the
Initial International Securities but not payable on the International
Option Securities.
Sch B-1
<PAGE>
SCHEDULE C
[List of subsidiaries to come.]
Sch C-1
<PAGE>
SCHEDULE D
List of persons and entities
subject to lock-up
Federal-Mogul Corporation
Richard A. Snell
Alan C. Johnson
Paul R. Lederer
Thomas W. Ryan
Wilhelm A. Schmelzer
Frank Tomes
Sch D-1
<PAGE>
Exhibit A
FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)
[To be agreed]
A-1
<PAGE>
Exhibit A-2
FORM OF OPINION OF COUNSEL FOR THE SELLING SHAREHOLDER(S)
TO BE DELIVERED PURSUANT TO SECTION 5(c)
i No filing with, or authorization, approval, consent, license,
order, registration, qualification or decree of, any court or governmental
authority or agency, domestic or foreign (other than under the 1933 Act and
the 1933 Act Regulations, which have been obtained, or as may be required
under the securities or blue sky laws of the various states, as to which we
need express no opinion) is necessary or required to be obtained by the
Selling Shareholders for the performance by the Selling Shareholders of
their obligations under the U.S. Purchase Agreement, the International
Purchase Agreement or the Power of Attorney and Custody Agreement, or in
connection with the offer, sale and delivery of the Securities.
ii Each Power of Attorney and Custody Agreement has been duly
executed and delivered by the respective Selling Shareholder(s) named
therein and constitutes the legal, valid and binding agreement of such
Selling Shareholder.
iii Each of the U.S. Purchase Agreement and the International
Purchase Agreement has been duly authorized, executed and delivered by or
on behalf of each Selling Shareholder.
iv The Shareholder Representatives have been duly authorized by
the Selling Shareholders to deliver shares of Series E Preferred Stock for
conversion into Conversion Shares and direct the Company to deliver the
Conversion Shares on behalf of the Selling Shareholders in accordance with
the terms of the U.S. Purchase Agreement and the International Purchase
Agreement.
v The execution, delivery and performance of the U.S. Purchase
Agreement, the International Purchase Agreement and the Power of Attorney
and Custody Agreement and the sale and delivery of the Securities and the
consummation of the transactions contemplated in the U.S. Purchase
Agreement, the International Purchase Agreement and in the Registration
Statement and compliance by the Selling Shareholder(s) with its obligations
under the U.S. Purchase Agreement and the International Purchase Agreement
have been duly authorized by all necessary action on the part of the
Selling Shareholder(s) and do not and will not, whether with or without the
giving of notice or passage of time or both, conflict with or constitute a
breach of, or default under or result in the creation or imposition of any
tax, lien, charge or encumbrance upon the Securities nor will such action
result in any violation of the provisions of the charter or by-laws or
other organizational or governing instrument of the Selling Shareholders,
if applicable, or any law, administrative regulation, judgment or
A-2-1
<PAGE>
order of any government, government instrumentality or court or any
administrative or court decree having jurisdiction over such Selling
Shareholder or any of its properties.
vi To the best of our knowledge, each Selling Shareholder has
valid and marketable title to the shares of Series E Stock to be converted
into Conversion Shares to be sold by such Selling Shareholder pursuant to
the U.S. Purchase Agreement and the International Purchase Agreement, free
and clear of any pledge, lien, security interest, claim, equity or
encumbrance of any kind, and has full right, power and authority to sell,
transfer and deliver such Securities pursuant to the U.S. Purchase
Agreement and the International Purchase Agreement. By delivery of a
certificate or certificates therefor such Selling Shareholder will transfer
to the Underwriters who have purchased such Securities pursuant to the U.S.
Purchase Agreement and the International Purchase Agreement (without notice
of any defect in the title of such Selling Shareholder and who are
otherwise bona fide purchasers for purposes of the Uniform Commercial Code)
valid and marketable title to such Securities, free and clear of any
pledge, lien, security interest, charge, claim, equity or encumbrance of
any kind.
A-2-2
<PAGE>
[FORM OF LOCK-UP FROM DIRECTORS, OFFICERS OR OTHER STOCKHOLDERS PURSUANT TO
SECTION 5(J)]
Exhibit B
., 1998
MERRILL LYNCH INTERNATIONAL
Bear, Stearns International Limited
Morgan Stanley & Co. International Limited
Smith Barney Inc.
Donaldson, Lufkin & Jenrette International
J. Henry Schroder & Co. Limited
ABN AMRO Rothschild
Credit Lyonnais Securities
Kleinwort Benson Limited
as Lead Managers of the several International Managers
c/o Merrill Lynch International
Ropemaker Place
25 Ropemaker Street
London EC24 9L4
England
B-1
<PAGE>
Re: Proposed Public Offering by Federal-Mogul Corporation
-----------------------------------------------------
Dear Sirs:
The undersigned, a stockholder and an officer and/or director of Federal-
Mogul Corporation, a Michigan corporation (the "Company"), understands that
Merrill Lynch International ("Merrill Lynch") and Bear, Stearns International
Limited, Morgan Stanley & Co. International Limited, Smith Barney Inc.,
Donaldson, Lufkin & Jenrette International, J. Henry Schroder & Co. Limited, ABN
AMRO Rothschild, Credit Lyonnais Securities and Kleinwort Benson Limited
propose(s) to enter into an International Purchase Agreement (the "International
Purchase Agreement") with the Company providing for the public offering of
shares (the "Securities") of the Company's common stock, without par value (the
"Common Stock"). In recognition of the benefit that such an offering will
confer upon the undersigned as a stockholder and an officer and/or director of
the Company, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the undersigned agrees with each
underwriter to be named in the International Purchase Agreement that, during a
period of . days from the date of the International Purchase Agreement, the
undersigned will not, without the prior written consent of Merrill Lynch,
directly or indirectly, (i) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant for the sale of, or otherwise dispose of or
transfer any shares of the Company's Common Stock or any securities convertible
into or exchangeable or exercisable for Common Stock, whether now owned or
hereafter acquired by the undersigned or with respect to which the undersigned
has or hereafter acquires the power of disposition, or file any registration
statement under the Securities Act of 1933, as amended, with respect to any of
the foregoing or (ii) enter into any swap or any other agreement or any
transaction that transfers, in whole or in part, directly or indirectly, the
economic consequence of ownership of the Common Stock, whether any such swap or
transaction is to be settled by delivery of Common Stock or other securities, in
cash or otherwise.
Very truly yours,
Signature: _____________________________
Name: ________________________
B-2
<PAGE>
EXHIBIT 3.2
- -------------------------------------------------------------------------------
MICHIGAN DEPARTMENT OF CONSUMER AND INDUSTRY SERVICES
CORPORATION, SECURITIES AND LAND DEVELOPMENT BUREAU
- -------------------------------------------------------------------------------
Date Received (FOR BUREAU USE ONLY)
- ----------------------------------------
- ----------------------------------------
========================================
Name
Jennifer Evans
- ----------------------------------------
Address
26555 Northwestern Highway
- ----------------------------------------
City State Zip Code
Southfield MI 48034 EFFECTIVE DATE:
======================================== -------------------------------------
Document will be returned to the name
and address you enter above
CERTIFICATE OF AMENDMENT TO THE ARTICLES OF INCORPORATION
For use by Domestic Profit Corporations
(Please read information and instructions on the last page)
Pursuant to the provisions of Act 284, Public Acts of 1972 (profit
corporations), or Act 162, Public Acts of 1982 (nonprofit corporations), the
undersigned corporation executes the following Certificate:
- -------------------------------------------------------------------------------
1. The present name of the corporation is:
Federal-Mogul Corporation
----------------------
2. The identification number assigned by the Bureau is: 142-176
----------------------
3. The location of its registered office is:
26555 Northwestern Highway Southfield , Michigan 48034
- -------------------------------------------------------------------------------
(Street Address) (Zip Code)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4. Article III of the Articles of Incorporation is hereby amended to read as
follows:
A.1. The total number of shares of stock which the Corporation shall have the
authority to issue is as follows: 260,000,000 shares of Common Stock, no par
value (Common Stock); and 5,000,000 shares of Preferred Stock (Preferred Stock).
[Except as set forth herein, Article 3 remains unchanged.]
- -------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
5. (For amendments adopted by unanimous consent of Incorporators before the
first meeting of the board of directors or trustees.)
The foregoing amendment to the Articles of Incorporation was duly adopted on
the ________day of _________, 19__, in accordance with the provisions of the
Act by the unanimous consent of the incorporator(s) before the first meeting
of the Board of Directors or Trustees.
Signed this_________day of_________, 19__.
----------------------------------- ---------------------------------------
(Signature) (Signature)
----------------------------------- ---------------------------------------
(Type or Print Name) (Type or Print Name)
----------------------------------- ---------------------------------------
(Signature) (Signature)
----------------------------------- ---------------------------------------
(Type or Print Name) (Type or Print Name)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6. (For profit corporations, and for nonprofit corporations whose articles
state the corporation is organized on a stock or on a membership basis.)
The foregoing amendment to the Articles of Incorporation was duly adopted on
the 20th day of May, 1998 by the shareholders if a profit corporation, or by
the shareholders or members if a nonprofit corporation (check one of the
following)
[X] at a meeting. The necessary votes were cast in favor of the amendment.
[_] by written consent of the shareholders or members having not less than
the minimum number of votes required by statute in accordance with
Section 407(1) and (2) of the Act if a nonprofit corporation, or Section
407(1) of the Act if a profit corporation. Written notice to
shareholders or members who have not consented in writing has been
given. (Note: Written consent by less than all of the shareholders or
members is permitted only if such provision appears in the Articles of
Incorporation.)
[_] by written consent of all the shareholders or members entitled to vote
in accordance with section 407(3) of the Act if a nonprofit corporation,
or Section 407(2) of the Act if a profit corporation.
Signed this 20th day of May, 1998.
By /s/ Edward W. Gray, Jr.
------------------------------------------
(Signature of President, Vice President,
Chairperson, Vice Chairperson)
Edward W. Gray, Jr. Senior Vice President
---------------------------------------------
(Type or Print Name) (Type or Print Title)
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT 5
[FEDERAL-MOGUL CORPORATION LETTERHEAD]
June 3, 1998
Federal-Mogul Corporation
26555 Northwestern Highway
Southfield, Michigan 48034
Ladies and Gentlemen:
I am Associate General Counsel of Federal-Mogul Corporation, a Michigan
corporation (the "Company"), and in that capacity I am familiar with the
Articles of Incorporation and the By-Laws of the Company, as amended, and with
its corporate proceedings and records, including the minutes of meetings of its
Board of Directors and of Committees of its Board of Directors.
I refer to the filing by the Company with the Securities and Exchange
Commission (the "Commission") of a Registration Statement on Form S-3
(Registration No. 333-50413) (the "Registration Statement"), relating to (i)
shares of common stock of the Company ("Common Stock"), (ii) shares of preferred
stock of the Company ("Preferred Stock") and (iii) debt securities of the
Company, which may be senior debt securities (the "Senior Debt Securities") or
subordinated debt securities (the "Subordinated Debt Securities," together with
the Senior Debt Securities, the "Debt Securities"). The Common Stock, Preferred
Stock and Debt Securities are referred to herein collectively as the "Offered
Securities." The Common Stock to be sold will include Common Stock to be issued
and sold by the Company ("Company Shares") and Common Stock to be sold by
Selling Shareholders named in the Registration Statement upon conversion into
Common Stock of shares of the Series E Mandatory Exchangeable Preferred Stock
("Series E Stock") currently held by them ("Secondary Shares"). The Offered
Securities being registered under the Registration Statement, together with
securities registered under a previously filed registration statement
(Registration No. 33-54717), will have an aggregate initial offering price of up
to $2,577,343,750 or the equivalent thereof in foreign currencies or composite
currencies and will be offered on a continued or delayed basis pursuant to the
provisions of Rule 415 under the Securities Act of 1933, as amended (the "Act").
The Common Stock will be issued pursuant to the Articles of Incorporation,
as amended. The Preferred Stock will be issued pursuant to a Certificate of
Designations (the "Certificate of Designations") relating to a particular series
of Preferred Stock. Unless otherwise provided in any prospectus supplement
forming a part of the Registration Statement relating to a particular series of
Debt Securities, the Senior Debt Securities will be issued under an Indenture
(the "Senior Indenture") to be entered into between the Company and The Bank of
New York, as Trustee, and the Subordinated Debt Securities will be issued under
an Indenture (the
<PAGE>
"Subordinated Indenture") to be entered into between the Company and The Bank of
New York, as Trustee.
I have reviewed the originals or copies certified or otherwise identified
to my satisfaction of all such corporate records of the Company and such other
instruments and other certificates of public officials, officers and
representatives of the Company and such other persons, and I have made such
investigations of law, as I have deemed appropriate as a basis for the opinions
expressed below.
In rendering the opinions expressed below, I have assumed the authenticity
of all documents submitted to me as originals and the conformity to the
originals of all documents submitted to me as copies. In addition, I have
assumed and have not verified the accuracy as to factual matters of each
document I have reviewed.
Based upon the foregoing, and assuming that (i) the Registration Statement
and any amendments thereto (including post-effective amendments) will have
become effective and comply with all applicable laws at the time the Offered
Securities are offered or issued as contemplated by the Registration Statement;
(ii) a prospectus supplement and/or pricing supplement will have been prepared
or filed with the Commission describing the Offered Securities offered thereby
and will comply with all applicable laws; (iii) all Offered Securities will be
issued and sold in compliance with applicable federal and state laws and in the
manner stated in the Registration Statement and the appropriate prospectus
supplement and/or pricing supplement; (iv) any definitive purchase, underwriting
or similar agreement and any other necessary agreement with respect to any
Offered Securities offered or issued will have been duly authorized and validly
executed and delivered by the parties thereto; (vi) the Offered Securities will
be sold and delivered at the price and in accordance with the terms of such
agreement and as set forth in the Registration Statement and the prospectus
supplement(s) and/or pricing supplement(s) referred to therein; (vii) the
Company will authorize the offering and issuance of the Offered Securities and
the terms and conditions thereof and will take any other appropriate additional
corporate action; and (viii) certificates representing the Offered Securities
will have been duly executed and delivered and, to the extent required,
authenticated, I am of the opinion that:
1. The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Michigan.
2. The Company Shares will, upon issuance against payment therefor in the
manner described in the Registration Statement, be validly issued,
fully paid and nonassessable.
3. The Secondary Shares have been duly authorized by such necessary
corporate action of the Company and upon issuance of the Secondary
Shares to the Selling Shareholders upon conversion of the Series E
Stock pursuant to the Certificate of Designations therefor, will be
validly issued, fully paid and nonassessable.
2
<PAGE>
4. The shares of Preferred Stock will, upon issuance against payment
therefor, be validly issued, fully paid and nonassessable.
5. The Debt Securities to be issued under either the Senior Indenture or
the Subordinated Indenture, assuming the (i) due qualification of the
Trustee and the applicable Indenture under the Trust Indenture Act of
1939 and (ii) due authorization, execution and delivery of the
applicable Indenture by the Trustee, such Debt Securities will, upon
issuance against payment therefor, be legal, valid and binding
obligations of the Company and will be entitled to the benefits of the
applicable Indenture.
Insofar as my opinion relates to the validity, binding effect or
enforceability of any agreement or obligation of the Company, it is subject to
applicable bankruptcy, insolvency, reorganization, fraudulent conveyance,
moratorium or other similar laws affecting creditors' rights generally from time
to time in effect and subject to general principles of equity, regardless of
whether such is considered in a proceeding in equity or at law.
The foregoing opinions are limited to the federal laws of the United States
of America and the law of the State of Michigan.
I hereby consent to the use of my name in the prospectuses and prospectus
supplements constituting a part of the Registration Statement under the heading
"Legal Matters" as counsel for the Company who has passed upon the legality of
the Common Stock, Preferred Stock and the Debt Securities being registered by
the Registration Statement and as having prepared this opinion, and to the use
of this opinion as a part (Exhibit 5) of the Registration Statement. In giving
such consent, I do not thereby admit that I am within the category of persons
whose consent is required under Section 7 of the Act or the Rules and
Regulations of the Commission thereunder.
Sincerely,
/s/ David M. Sherbin
--------------------------
David M. Sherbin, Esq.
Associate General Counsel
3
<PAGE>
Exhibit 12.1
FEDERAL-MOGUL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(unaudited)
(In thousands except for ratios)
<TABLE>
<CAPTION>
Three months
ended Year ended December 31,
March 31, ---------------------------------------------------
1998 1997 1996 1995 1994 1993
------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Fixed charges:
Interest expense $15,500 $ 32,000 $ 42,600 $37,300 $ 21,200 $25,900
Estimated interest portion of rents 5,363 9,700 11,267 11,333 8,300 7,033
Amortization of debt issuance expense 200 1,288 1,827 1,803 1,053 1,090
------- -------- --------- ------- -------- -------
Total fixed charges $21,063 $ 42,988 $ 55,694 $50,436 $ 30,553 $34,023
Earnings:
Earnings before fixed charges $ 1,600 $ 99,500 $(228,700) $(3,300) $102,100 $57,600
Fixed charges 21,063 42,988 55,694 50,436 30,553 34,023
------- -------- --------- ------- -------- -------
Adjusted earnings $22,663 $142,488 $(173,006) $47,136 $132,653 $91,623
Ratio of Earnings to Fixed Charges 1.076 3.315 (3.106) 0.935 4.342 2.693
======= ======== ========= ======= ======== =======
</TABLE>
<PAGE>
Exhibit 12.2
FEDERAL-MOGUL CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDENDS
(unaudited)
(In thousands except ratios)
<TABLE>
<CAPTION>
Three months
ended Year ended December 31,
March 31, ----------------------------------------------------
1998 1997 1996 1995 1994 1993
------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Fixed charges:
Interest expense $15,500 $ 32,000 $ 42,600 $37,300 $ 21,200 $ 25,900
Distributions on preferred stock 2,510 10,450 16,336 16,714 17,182 15,410
Estimated interest portion of rents 5,363 9,700 11,267 11,333 8,300 7,033
Amortization of debt issuance expense 200 1,288 1,827 1,803 1,053 1,090
------- -------- --------- ------- -------- --------
Total fixed charges $23,573 $ 53,438 $ 72,030 $67,150 $ 47,735 $ 49,433
Earnings:
Earnings before fixed charges $ 1,600 $ 99,500 $(228,700) $(3,300) $102,100 $ 57,600
Fixed charges 23,573 53,438 72,030 67,150 47,735 49,433
------- -------- --------- ------- -------- --------
Adjusted earnings $25,173 $152,938 $(156,670) $63,850 $149,835 $107,033
Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends 1.068 2.862 (2.175) 0.951 3.139 2.165
======= ======== ========= ======= ======== ========
</TABLE>
