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SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [ ]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[X] Preliminary proxy statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
[COMPANY NAME]
- -------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
[COMPANY NAME]
- -------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing
fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
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[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
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(2) Form, schedule or registration statement no.:
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(4) Date filed:
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[logo]
Federal-Mogul
26555 Northwestern Highway
Southfield, Michigan 48034
April 27, 1998
To Our Shareholders:
You are invited to attend the 1998 Annual Meeting of Shareholders, which will be
held at the Corporation's World Headquarters, 26555 Northwestern Highway
(southwest corner of Northwestern Highway and Lahser Road), Southfield, Michigan
on Wednesday, May 20, 1998. The meeting will start promptly at 10:30 a.m., local
time. After the formal business session, there will be an update on the business
of the Corporation and its restructuring. A discussion period will follow the
report.
The attached notice of the meeting and Proxy Statement describe the items of
business to be transacted: (i) the election of nine directors; (ii) the approval
of the appointment of Ernst & Young LLP as independent accountants for the
Corporation for 1998; (iii) the approval of the Amended and Restated 1997 Long
Term Incentive Plan; (iv) the approval of the amendment and restatement of the
Corporation's Articles of Incorporation to increase the number of the
Corporation's authorized common shares; and (v) such other business as may
properly come before the meeting.
Whether or not you plan to attend the meeting, we urge you to sign, date and
return your proxy in the addressed envelope enclosed for your convenience so
that as many shares as possible may be represented at the meeting. No postage is
required if the envelope is mailed in the United States. The granting of the
proxy will not affect your right to attend the meeting, nor, if you choose to
revoke the proxy, your right to vote in person.
Richard A. Snell
Chairman of the Board,
Chief Executive Officer
and President
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[logo]
Federal-Mogul
26555 Northwestern Highway, Southfield, MI 48034
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON MAY 20, 1998
Southfield, Michigan
April 27, 1998
To the Shareholders of Federal-Mogul Corporation:
The Annual Meeting of Shareholders of Federal-Mogul Corporation will be held at
the World Headquarters of the Corporation, 26555 Northwestern Highway (southwest
corner of Northwestern Highway and Lahser Road) Southfield, Michigan, on
Wednesday, May 20, 1998, at 10:30 a.m., local time, for the following purposes:
1. to elect nine directors of the Corporation to hold office until the
next Annual Meeting of Shareholders or until their successors are
elected and qualified;
2. to approve the appointment of Ernst & Young LLP as independent public
accountants for 1998;
3. to approve the Amended and Restated 1997 Long Term Incentive Plan;
4. to approve the amended and restated Articles of Incorporation of the
Corporation to increase the number of the Corporation's authorized
common shares; and
5. to transact such other business as may properly come before the meeting
or any adjournment thereof.
Holders of the Corporation's Common Stock and Series C ESOP Convertible
Preferred Stock of record on March 30, 1998, will be eligible to vote as one
class at this meeting. Only holders of record at the close of business on that
date will be entitled to vote at the meeting.
By order of the Board of Directors.
Edward W. Gray, Jr.
Senior Vice President, General Counsel
and Secretary
YOU ARE URGED TO DATE, SIGN AND MAIL THE ENCLOSED FORM OF PROXY IN THE
ACCOMPANYING ADDRESSED ENVELOPE AT YOUR EARLIEST OPPORTUNITY, THEREBY SAVING
YOUR CORPORATION THE EXPENSE OF FURTHER SOLICITATION OF PROXIES.
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[logo]
Federal-Mogul
26555 Northwestern Highway, Southfield, Michigan 48034
April 27, 1998
PROXY STATEMENT
This Proxy Statement is furnished in connection with the solicitation of proxies
by the Board of Directors of Federal-Mogul Corporation in connection with the
Annual Meeting of Shareholders, to be held on Wednesday, May 20, 1998, at the
World Headquarters of the Corporation, 26555 Northwestern Highway, Southfield,
Michigan beginning at 10:30 a.m., local time, and at any adjournment thereof.
The mailing address of the principal executive office of the Corporation is
26555 Northwestern Highway, Southfield, Michigan 48034.
This Proxy Statement and the accompanying form of proxy, which is being
solicited by the Board of Directors of the Corporation, will be first sent or
given to shareholders on or about April 27, 1998.
I. NOMINEES FOR ELECTION AS DIRECTORS
The nominees proposed herein for election as directors have indicated their
willingness to serve, and it is intended that the persons named as proxies in
the accompanying form of proxy will vote for their election unless shareholders
specify otherwise in their proxies. The term of office of directors elected at
the Annual Meeting will continue until the next Annual Meeting or until their
successors are elected and qualified. If any nominee is unable to serve, or
otherwise is unavailable for election, and if other nominees are designated, the
persons named in such proxy will have discretionary authority to vote or refrain
from voting on such other nominees. If any nominees are substituted by the Board
of Directors, the persons named as proxies in the accompanying form of proxy
intend to vote for such nominees. Management is not aware of the existence of
any circumstances that would render any nominee named herein unavailable for
election. Seven nominees are currently directors of the Corporation, and two are
new nominees.
PHOTO RICHARD A. SNELL, 56. Chairman of the Board, Chief
Executive Officer and President, Federal-Mogul
Corporation.
Mr. Snell has served as Chairman of the Board, Chief
Executive Officer and President and a director of the
Corporation 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 the Corporation.
Mr. Snell is also a member of the Board of Directors
of Schneider National, Inc.
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PHOTO JOHN J. FANNON, 64. Retired Vice Chairman, Simpson
Paper Company and Business Consultant.
Mr. Fannon has served as a director of the
Corporation 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.
PHOTO RODERICK M. HILLS, 67. President and Chief Executive
Officer, Hills Enterprises Ltd.
Mr. Hills has served as a director of the Corporation
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.
PHOTO PAUL SCOTT LEWIS, 61. Retired Deputy Chairman,
Tate & Lyle plc
Mr. Lewis will join the Corporation's Board of
Directors at the completion of the Corporation's 1998
Annual Meeting.
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.
PHOTO ANTONIO MADERO, 60. Founder, Chairman of the
Board and Chief Executive Officer, SANLUIS
Corporacion S.A. de C.V. ("Sanluis").
Mr. Madero has served as a director of the
Corporation since February 1994. He is a member of
the Audit, Nominating and Compensation Committees.
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Mr. Madero founded 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 Board 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.
PHOTO ROBERT S. MILLER, JR., 56. Chairman of the
Board and Chief Executive Officer, Waste Management,
Inc.
Mr. Miller has served as a director of the
Corporation 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
the Corporation.
Since 1993, Mr. Miller has served as Vice President
and Treasurer, and as a director, of Moore Mill &
Lumber Co., 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
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.
PHOTO JOHN C. POPE, 49. Chairman of the Board, MotivePower
Industries, Inc.
Mr. Pope has served as a director of the Corporation
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.
PHOTO H. MICHAEL SEKYRA, 56. Chairman and Chief
Executive Officer of C.H. CHEM, a.s. and Chairman of
the Supervisory Board of Bohler Uddeholm AG.
Dr. Sekyra has served as a director of the
Corporation since 1991. He is a member of the
Compensation, Nominating, and Pension Committees.
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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.
PHOTO SIR GEOFFREY WHALEN C.B.E., 62. Retired Managing
Director and Deputu Cjairman, Peugeot Talbot
Motor Company plc.
Sir Geoffrey Whalen will join the Corporation's Board
of Directors at the completion of the Corporation's
1998 Annual Meeting.
Between 1984 and 1995, Sir Geoffrey 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; Coventry 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.
The Corporation's Board of Directors met eight times during 1997. During 1997,
all directors attended more than 75% of the aggregate number of meetings of the
Board of Directors and the standing committees on which they served, except for
Mr. Madero, who had conflicting commitments outside the United States.
The Board has, among others, standing Audit, Compensation, Nominating and
Pension Committees. The functions performed by these committees are as follows:
AUDIT COMMITTEE. The Audit Committee held three meetings during 1997. This
Committee (a) annually recommends to the Board independent accountants to serve
as auditors of the books, records and accounts of the Corporation and its
consolidated subsidiaries, (b) reviews the scope of the independent accountants'
audits, (c) reviews the independent accountants' audit reports, management
letters and fees, (d) reviews the annual program of the internal auditing staff,
(e) reviews transactions and proposed transactions between the Corporation and
its officers, directors or principal shareholders or between the Corporation and
another company for which such officers, directors or principal shareholders
serve in similar capacities, and (f) reviews such special reports and comments
as may be submitted by management or the internal auditing staff.
COMPENSATION COMMITTEE. The Compensation Committee met six times during 1997.
This Committee (a) recommends to the Board the remuneration of officers of the
Corporation, (b) establishes the formula used to determine the amount available
for awards for members of the Corporation's Advisory Board under the 1977
Supplemental Compensation Plan and recommends to the Board amounts to be paid
under the Plan, (c) recommends to the Board the granting of stock options to
officers and other employees, (d) recommends to the Board changes in the various
compensation, benefit and stock option plans of the Corporation, (e)
periodically examines the compensation and benefit structure for executives to
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determine that the Corporation is rewarding its executive personnel in a manner
consistent with sound business practices, and (f) performs such other duties as
are its responsibility under the various compensation, benefit and stock option
plans of the Corporation that are applicable to officers.
NOMINATING COMMITTEE. The Nominating Committee met twice during 1997. This
Committee (a) recommends, when it deems appropriate, increasing or decreasing
the number of members of the Board, (b) evaluates persons considered for
nomination as directors, including current directors, and recommends to the
Board the persons who should be considered for election as directors, (c)
maintains for future use a current list of qualified candidates for nomination
to the Board, (d) reviews and recommends to the Board the annual compensation to
be paid to non-employee directors, (e) recommends to the Board the names of
directors to serve each year on the standing committees of the Board, and (f)
reviews periodically with the Chief Executive Officer his plan for management's
succession. The Committee will consider shareholder nominees for election at the
1999 Annual Meeting provided that such nominations are submitted in writing to
the Secretary of the Corporation prior to December 29, 1998, together with the
written consent of such nominees, the name, address and number of shares owned
by the proponent, and all information required to be disclosed in solicitations
of proxies for election of directors. Such dates are subject to change if the
date of the 1999 Annual Meeting is significantly different from the date of the
1998 Annual Meeting.
PENSION COMMITTEE. The Pension Committee met twice during 1997. This Committee
conducts periodic meetings with and/or reviews the performance of: Investment
Managers; Trustees; and Retirement Program Committee and Plan Administrators.
This Committee also recommends funding policy to the Board after consultation
with one or more of the following: the Retirement Programs Committee, trustee
actuary, Investment Managers and other consultants retained by the Committee,
the Retirement Programs Committee of the Corporation.
COMPENSATION OF DIRECTORS. Directors who are not employees of the Corporation
(currently six directors) are paid cash retainers of $4,000 for each calendar
quarter. In addition, they receive $1,000 for each Board meeting and $1,000 for
each Board committee meeting they attend. Committee Chairpersons receive an
additional $1,000 for each Committee meeting they attend. A plan permitting
directors to defer compensation is available to all non-employee directors of
the Corporation. Any deferred compensation remains part of the general funds of
the Corporation and, until paid to the director or his beneficiary, will earn
interest at a rate per annum equal to the 10-year U.S. Treasury Bill rate plus
1%, or at the director's option, will be valued as though invested in the
Corporation's Common Stock.
In addition to the cash portion of the annual retainer, for the 5-year period
beginning January 1, 1996, the Corporation credited to each non-employee
director on such date a lump sum deposit of $25,000 into a Non-Employee Director
Deferred Compensation Plan, representing an annual increase in the director's
retainer fee of $5,000 over the 5-year period. The amount is valued as though
invested in the Corporation's Common Stock and vests over five years in
one-fifth increments for each year of service beginning on January 1, 1996.
During 1993, the Corporation implemented the Non-Employee Director Stock Award
Plan (the "Award Plan"), which was approved by shareholders in 1994. Under the
Award Plan, non-employee directors received a one-time grant of 1,000 shares of
Common Stock (subject to transfer restrictions lapsing over 5 years) on the date
the Board approved the Award Plan, and future non-employee directors will
receive a similar grant at the time they first become directors. The Award Plan
also permits non-employee directors to elect to receive all or a portion of
their annual retainer fees in Common Stock rather than cash.
Under the Corporation's Directors' Retirement Income Plan, a former director who
was a member of the Board on or after January 1, 1985, and who has never been
employed by the Corporation, is entitled to receive a quarterly payment
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which is equal to the amount of the quarterly retainer payable to the
Corporation's non-employee directors at the time such person ceases to be a
director. A director will be credited with a quarter-year of service for each
3-month period or part thereof during which the director served continuously as
a member of the Board. Such amount is payable to the retired director or his
surviving spouse over a period of time commencing on his retirement date and
expiring on the expiration of a period of time equal to the number of
quarter-years of the director's service on the Board. In the event that a
director with 5 or more years of service on the Board dies before retiring, the
director's surviving spouse will receive a lump sum payment equal to 5 times the
annual retainer payable to directors on the date of death.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE ELECTION OF THE PERSONS NAMED
ABOVE AS DIRECTORS OF THE CORPORATION. Directors will be elected by a plurality
of the votes cast.
II. APPROVAL OF APPOINTMENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors recommends that the shareholders approve the Board's
appointment of Ernst & Young LLP as independent accountants to audit the
financial statements of the Corporation and its consolidated subsidiaries for
the year 1998. The firm has conducted the audits for the Corporation for many
years. If the appointment is not approved, the Board of Directors will appoint
another independent accounting firm to audit the financial statements of the
Corporation and its consolidated subsidiaries for the year 1998 without further
action by the shareholders.
Representatives of Ernst & Young LLP are expected to be present at the Annual
Meeting and will be available to respond to appropriate questions of
shareholders. Such representatives will have the opportunity to make a statement
if they desire to do so.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF THE APPOINTMENT OF
ERNST & YOUNG LLP AS INDEPENDENT ACCOUNTANTS TO AUDIT THE FINANCIAL STATEMENTS
OF THE CORPORATION AND ITS CONSOLIDATED SUBSIDIARIES FOR THE YEAR 1998.
III. APPROVAL OF THE AMENDED AND RESTATED 1997 LONG TERM INCENTIVE PLAN
At the Annual Meeting, the shareholders will consider and act upon a proposal to
adopt an amendment and restatement of the Federal-Mogul Corporation 1997 Long
Term Incentive Plan (the "Plan"). On February 4, 1998, the Compensation
Committee adopted the Plan as amended and restated and recommended its approval
by the Board. On February 4, 1998, the Board also adopted the Plan as amended
and restated, subject to approval by the shareholders. The Plan as amended and
restated will become effective immediately upon approval by the shareholders.
The Plan will continue to terminate 5 years after its original effective date.
The Plan is intended to assist the Corporation in attracting, retaining and
motivating directors, officers and employees and to provide it with the ability
to offer incentives more directly linked to the profitability of its business
and increases in shareholder value.
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Description of the Plan
The following is a summary of important features of the Plan, which is qualified
in its entirety by reference to the copy of the Plan attached as Annex A to this
Proxy Statement:
Administration. The Plan will be administered by the Compensation Committee or
such other committee of the Board as the Board may from time to time designate
(the "Committee"). Among other things, the Committee will select officers and
employees to whom awards may be granted, determine the type of award and the
number of shares of Common Stock to be covered by each award, and determine the
terms and conditions of such awards. The Committee also will have the authority
to adopt, alter and repeal such administrative rules, guidelines and practices
governing the Plan as it deems advisable, to interpret the terms and provisions
of the Plan and any awards issued thereunder and otherwise to supervise the
administration of the Plan. All decisions made by the Committee will be final
and binding.
No member of the Board or the Committee will be liable for any action or
determination made in good faith with respect to the Plan or any award granted
under the Plan.
Eligibility. All officers and employees of the Corporation designated by the
Committee may be granted awards under the Plan. The Plan, also provides for
annual awards of 2,000 stock options to nonemployee directors and permits such
directors to receive the value of their accrued benefit under the Directors
Retirement Income Plan (the "Director Retirement Plan") which was terminated
December 31, 1997, in the form of stock. The Board currently estimates that
approximately 10,000 persons may participate in the Plan.
Plan Features. The Plan authorizes the grant of awards covering up to 4,200,000
shares of the Corporation's Common Stock pursuant to the grant or exercise of
stock options, including incentive stock options ("ISOs"), nonqualified stock
options, stock appreciation rights ("SARs"), restricted stock and performance
units, plus shares not issued under the 1989 Performance Incentive Stock Plan
(the "1989 Plan"), including shares under the 1989 Plan that are subject to
awards that are forfeited, lapsed, returned to the Corporation in consideration
of participants' obligations or settled in cash, provided that awards of
restricted stock may not exceed 420,000 shares. No participant may be granted
awards covering more than 450,000 shares of Common Stock over the life of the
Plan. Subject to these limits, the Committee will determine how and to whom
shares available under the Plan may be divided. The shares subject to grant
under the Plan are to be made available from authorized but unissued shares or
from treasury shares. The Plan provides that shares not issued under awards due
to forfeiture, lapse of an award or settlement of an award in cash or otherwise,
or shares received by the Corporation in settlement of an obligation under the
Plan or due to tax withholding are again available for issuance and may be
granted for such terms as the Committee may determine, except that the term of
an ISO may not exceed 10 years from its date of grant. No awards outstanding on
the termination date of the Plan will be affected by such termination. Awards
will not be transferable, except by will and the laws of descent and
distribution and, in the case of nonqualified stock options, pursuant to a
qualified domestic relations order or as a gift to an optionee's spouse or
descendants. The Committee has broad authority to fix the terms and conditions
of individual agreements with participants.
Several types of awards may be made under the Plan, as described below:
Stock Options. The Committee may grant options to purchase Common Stock at an
exercise price of not less than 100% of its fair market value on the date of
grant. Optionees may pay the exercise price in cash, stock (valued at its fair
market value on the date of exercise), attestation of stock to be delivered in
the future or by "cashless exercise" through a broker or the
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Corporation, or any combination of the above. The Committee may arrange for the
Corporation to grant a loan to an employee or may guarantee a loan from a third
party. The terms of the loan will be determined by the Committee. The term of
options will be determined by the Committee, but may be no longer than 10 years
from the date of grant in the case of ISOs. The Committee also has the
discretion to cash out options upon their exercise. The Committee will determine
the times and other conditions under which options will become exercisable, and
the extent to which options will be exercisable after the optionee's employment
terminates. Generally, options will terminate upon the optionee's termination of
employment for Cause (as defined in the Plan), and will remain exercisable for
not more than 3 years after the optionee's death, not more than 3 years after
the optionee's employment terminates because of disability, not more than 5
years after the optionee's retirement, and not more than 3 months after the
optionee's employment terminates for any other reason. Options may be granted
either as ISOs or nonqualified options. The principal difference between ISOs
and nonqualified options is their tax treatment. See "Federal Income Tax
Consequences", below. The Plan prohibits the reissuance and repricing of stock
options.
SARs. The Committee may grant SARs in conjunction with all or part of any stock
option. A SAR will entitle the optionee, in lieu of exercising an option, to
receive the excess of the fair market value of a share of stock on the date of
exercise over its option price multiplied by the number of shares for which the
optionee is exercising the SAR. This amount will be paid to the holder in either
stock (valued at its fair market value on the date of exercise) or cash or a
combination thereof. A SAR may be granted as an alternative to a previously or
contemporaneously granted nonqualified option, but may only be granted upon
grant of an ISO. Because a SAR is an alternative to an option, the option will
be canceled to the extent that the SAR is exercised, and the SAR will be
canceled to the extent the option is exercised.
Restricted Stock. The Committee may grant restricted stock to individuals with
such restriction periods and/or performance goals as the Committee may
designate. The minimum restriction period for awards under the Plan will be at
least three years in the case of time-based awards and at least one year in the
case of performance based awards Performance goals must be based on the
attainment of one or more of the following: specified levels of earnings per
share from continuing operations, operating income, revenues, return on assets,
return on equity, return on invested capital, shareholder value, economic value
added, shareholder return and/or total shareholder return, achievement of cost
control, production targets or the price of the Common Stock of the Corporation.
The provisions of restricted stock awards (including any applicable Performance
Goals) need not be the same with respect to each participant and may relate to
the Corporation as a whole or to the subsidiary, business unit, division or
department within which the participant is employed. Restricted stock may not be
sold, assigned, transferred, pledged or otherwise encumbered. Unvested
restricted stock is forfeited upon termination of employment, unless otherwise
provided by the Committee. Other than these restrictions on transfer and any
other restrictions the Committee may impose, the participant will have all the
rights of a holder of stock.
Performance Units. The Committee may grant performance units payable in cash or
shares of Common Stock, conditioned upon continued service and/or the attainment
of Performance Goals determined by the Committee during an award cycle. An award
cycle consists of a period of consecutive fiscal years or portions of years
designated by the Committee over which performance units are to be earned. While
the Committee has wide discretion in determining how performance units will be
paid at the end of a cycle, payment will generally be based on (a) the number of
performance units earned as a result of the attainment of Performance Goals, in
which case, at the conclusion of an award cycle, the Committee will determine
the number of performance units granted to a participant that have been earned
and will deliver to the participant the number of shares of Common Stock (or the
cash equivalent) equal to the number of earned performance units; and/or (b) the
value of performance units awarded
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<PAGE> 12
determined with reference to the achievement of Performance Goals, in which case
at the conclusion of an award cycle, the Committee will deliver to the
participant (i) the number of shares of Common Stock, valued at their fair
market value, equal to the value of the performance units and/or (ii) cash equal
to the value of such performance units or a combination of cash and stock. The
maximum value of cash that any participant may receive in any year with respect
to performance units is $3,000,000. The Committee may permit participants to
defer the receipt of or payment for performance units, provided that the
election is made prior to the commencement of the applicable award cycle.
The Committee will determine to whom and when performance units will be awarded,
and the terms and conditions of an award. In the event that a participant's
employment is terminated (other than for Cause) or in the event of a
participant's retirement, the Committee may, subject to certain limitations,
waive all remaining payment limitations.
Director Stock Options. The amended and restated Plan provides that upon
approval by the shareholders at the 1998 annual meeting and at each annual
shareholder meeting thereafter during the term of the Plan, each non-employee
director of the Corporation will be granted an option to purchase 2,000 shares
of Common Stock. The first such grant was made on February 3, 1998, the date on
which the Board approved termination of its pension plan. The exercise price for
such options will be the fair market value of the Common Stock on the grant date
and stock options will be fully vested and exercisable on the grant date. Each
director who is entitled to receive his accrued benefits under the Director
Retirement Plan upon its termination in 1998 may elect to receive the value of
the accrued benefit under the Director Retirement Plan in the form of stock
options. Those options have an exercise price equal to the fair market value of
the Common Stock or the grant date and are fully vested but may not be
exercisable for at least six months. All options granted to directors have a 10
year term and are generally subject to the other terms and conditions of stock
options granted to officers and employees.
Amendment and Discontinuance. The Plan may be amended, altered or discontinued
by the Board of Directors, but no amendment, alteration or discontinuance may be
made that would (i) impair the rights of an optionee under an option or a
recipient of a SAR, restricted stock award or performance unit award previously
granted without the optionee's or recipient's consent, except an amendment made
to qualify the Plan or any award or option granted thereunder for the exemption
provided by Rule 16b-3 under the Securities Exchange Act of 1934, or (ii)
disqualify the Plan or any award from such exemption. Except as provided in the
Plan, no amendment to the Plan will be made without shareholder approval to the
extent such approval is required by law or agreement. Any shares not subject to
issuance upon discontinuance or termination of the Plan, as well as any shares
received from the forfeiture or lapse of an award, settlement of an award in
cash or the return of shares in satisfaction of an obligation may be transferred
to a successor plan.
In the event of a change in corporate capitalization, such as a stock split, or
a corporate transaction, such as a merger, consolidation, separation, spin-off
or other distribution of property, or a reorganization or partial or complete
liquidation of the Corporation, the Committee or the Board may substitute or
adjust the aggregate number and kind of shares and other awards that may be
issued under the Plan. In the event of a Change in Control, as defined in the
Plan, (i)all SARs and stock options outstanding as of the date of the Change in
Control which are not then exercisable and vested will become fully exercisable
and vested, (ii) the restrictions vesting requirements and deferral limitations
applicable to restricted stock will lapse, (iii) all performance units will be
considered to be earned and payable in full, all restrictions will lapse and all
performance units will be settled in cash as promptly as practicable, and (iv)
stock options may be surrendered, subject to certain limitations, at any time
during the 60-day period following a Change in Control, for a cash payment (or,
in certain circumstances, an equivalent
11
<PAGE> 13
number of shares of Common Stock) equal to the spread between the exercise price
of the option and the Change in Control Price (as defined in the Plan).
Federal Income Tax Consequences
The following discussion is intended only as a brief summary of the Federal
income tax consequences relating to stock options, SARs, restricted stock and
performance units. The laws governing tax aspects of such awards are highly
technical and such laws are subject to change.
A. Nonqualified Options and SARs. Upon the grant of a nonqualified option (with
or without an SAR), the optionee will not recognize any taxable income and the
Corporation will not be entitled to a deduction. Upon the exercise of an option
or SAR, the excess of the fair market value of the shares acquired on the
exercise of the option over the option price (the "spread"), or the
consideration paid to the optionee upon exercise of the SAR, will constitute
compensation taxable as ordinary income. In determining the amount of the spread
or the amount of consideration paid to the optionee, the fair market value of
the stock on the date of exercise is generally used. The Corporation, will
generally be entitled to a tax deduction in an amount equal to the compensation
taxable to the optionee.
B. ISOs. An optionee will not recognize taxable income on the grant or exercise
of an ISO. However, the spread at exercise will constitute an item includible in
alternative minimum taxable income, and may subject the optionee to the
alternative minimum tax payable even though the optionee receives no cash upon
the exercise of an ISO. Upon the disposition of shares of stock acquired
pursuant to the exercise of an ISO after the later of (a) two years from the
date of grant of the ISO or (b) one year after the transfer of the shares to the
optionee (the "ISO Holding Period"), the optionee will recognize long-term
capital gain or loss, as the case may be, measured by the difference between the
stock's selling price and the exercise price. The Corporation is not entitled to
any tax deduction by reason of the grant or exercise of an ISO, or by reason of
a disposition of stock received upon exercise of an ISO if the ISO Holding
Period is satisfied. Different rules apply if the optionee disposes of the
shares of stock acquired pursuant to the exercise of an ISO before the
expiration of the ISO Holding Period.
C. Restricted Stock. Generally, a grant of restricted stock will be taxed as
compensation income at the date on which the restrictions imposed on the shares
expire; any dividends paid on stock subject to the restrictions are also
compensation income to the participant. The Corporation is generally entitled to
an income tax deduction for compensation income taxed to the participant,
subject to the provisions of Section 162(m) of the Internal Revenue Code ("IRC")
(see below).
D. Performance Units. A participant who has been granted a performance unit
award will not realize taxable income until the applicable award cycle expires
and the participant receives the stock subject to the award or an equivalent
amount of cash, either of which will be taxable as ordinary income. At that
time, the Corporation will be allowed a corresponding tax deduction equal to the
compensation taxable to the award recipient, subject to the provisions of IRC
Section 162(m) (see below).
The Plan has been designed to take into account tax laws that impose limits on
the ability of a public corporation to claim tax deductions for compensation
paid to certain highly compensated executives. IRC Section 162(m) generally
denies a corporate tax deduction for annual compensation exceeding $1 million
paid to the Chief Executive Officer and the four other most highly compensated
officers of a corporation (the "Covered Officers"). Certain types of
compensation, including options granted with a fair-market-value exercise price
and performance-based stock awards, are generally excluded from this deduction
limit. In an effort to ensure that awards and payments under the Plan will
qualify for this exclusion, the Plan has been submitted to
12
<PAGE> 14
shareholders for approval at the 1998 Annual Meeting. By approving the Plan, the
shareholders will be approving, among other things, the performance measures,
eligibility requirements and limits on various stock awards for purposes of IRC
Section 162(m).
New Plan Benefits
It cannot be determined at this time what benefits or amounts, if any, will be
received by or allocated to any person or group of persons under the Plan if the
Plan is approved, or what benefits or amounts would have been received by or
allocated to any person or group of persons for the last fiscal year if the Plan
had been in effect.
Vote Required
Approval of the Amended and Restated 1997 Long Term Incentive Plan requires the
affirmative vote of the holders of a majority of the outstanding shares of the
Corporation's Common Stock and its Series C ESOP Preferred Stock, voting as one
class, present in person or by proxy at the annual meeting.
The Board of Directors believes that approval of the Amended and Restated 1997
Long Term Incentive Plan is in the best interests of all shareholders and,
accordingly, recommends a vote FOR approval of the proposed Amended and Restated
1997 Long Term Incentive Plan.
IV. APPROVAL OF THE AMENDED AND RESTATED ARTICLES OF INCORPORATION TO
INCREASE THE CORPORATION'S AUTHORIZED COMMON STOCK
The Board of Directors of the Corporation recommends that the shareholders adopt
an amendment to the Restated Articles of Incorporation of the Corporation to
increase the authorized number of shares of Common Stock from 60,000,000 to
260,000,000.
General
The Corporation's Restated Articles of Incorporation provide that the authorized
number of shares of stock of the Corporation is 65,000,000, consisting of
60,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock. As of
March 30, 1998, there were 40,473,072 shares of Common Stock outstanding. The
Corporation also has reserved (a) an additional 4,413,973 shares of Common Stock
for issuance under the Corporation's existing stock-based compensation plans
(including conversion of Series C Shares issued thereunder, (b) an additional
11,165,049 shares of Common Stock for conversion of debentures issued by the
Corporation to Federal-Mogul Financing Trust upon conversion of convertible
preferred securities issued by Federal-Mogul Financing Trust and a non-employee
director stock award plan. As of March 30, 1998 there were only 3,947,906 shares
of Common Stock available for use by the Corporation.
The purposes of the proposed increase in the number of authorized shares of
Common Stock are: (i) for the proposed offering of Common Stock by the
Corporation (the "Primary Offering") in order to repay certain indebtedness of
the Corporation; (ii) for the conversion or exchange of shares of Series E
Mandatory Exchangeable Preferred Stock issued in connection with the acquisition
of Fel-Pro Incorporated and certain affiliated entities ("Fel-Pro"), which are
convertible or exchangeable into 5,151,628 shares of Common Stock (subject to
adjustment in certain circumstances); and (iii) to establish a reserve of
authorized but unissued shares of Common Stock for future use in connection with
acquisitions, efforts to raise additional capital for the Corporation and other
general corporate purposes. Except for a) its existing stock-based compensation
plans, b) conversion of debentures
13
<PAGE> 15
issued by the Corporation to Federal-Mogul Financing Trust, c) the Primary
Offering and d) the conversion or exchange of shares of Series E Stock, the
Corporation has no current plans or commitments that would involve the issuance
of additional shares of Common Stock.
The issuance of additional shares of Common Stock for the purposes mentioned
above will result in the dilution of the ownership interest of the current
shareholders of the Corporation. The Corporation's Common Stock is not entitled
to any preemptive rights. No solicitation of further authorization by the
holders of Common Stock for the proposed issuance of the additional Common Stock
is anticipated prior to any such issuance.
If approved by the shareholders, the initial paragraph of Article III of the
Corporation's Restated Articles of Incorporation will be 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 (Common Stock); and 5,000,000 shares of Preferred Stock
(Preferred Stock).
Primary Offering of Common Stock
The Corporation intends to utilize a portion of the shares of the Common Stock
proposed to be authorized for a general public offering for cash. The proceeds
to the Corporation from the Primary Offering will depend upon the market for the
Corporation's Common Stock. While the number of shares to be sold in the Primary
Offering has not yet been firmly established and there can be no assurances as
to prices prevailing for the Common Stock at the time of the Primary Offering,
the Corporation currently hopes to offer a sufficient number of shares of Common
Stock to retire at least $500 million of indebtedness. There can be no
assurances that such an offering will be made or, if made, of the number of
shares that will be offered or the price at which the shares will be offered.
The Corporation intends (i) to apply the net proceeds of the Primary Offering to
prepay the entire principal amount outstanding under the Amended and Restated
Senior Subordinated Credit Agreement among the Corporation, The Chase Manhattan
Bank ("Chase"), as Administrative Agent, and Chase Securities Inc., as Arranger,
dated as of December 18, 1997, which is currently $500 million (the "Senior
Subordinated Loans"), and (ii) to apply any remaining balance of the net
proceeds to repay a portion of the $1 billion principal amount of interim loans
(the "Interim Loans") outstanding under the Second Amended and Restated Credit
Agreement among the Corporation, certain of the Corporation's subsidiaries,
Chase, as Administrative Agent, and the lenders named therein, dated as of
December 18, 1997. The Senior Subordinated Loans currently bear 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%
(which will increase to 5.5% on September 12, 1998 and to 6% on December 12,
1998). The Interim Loans bear interest at a floating rate based, at the
Corporation's option, upon either, (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%, 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%. If the gross proceeds of
the Primary Offering are less than $500 million, the proceeds will be applied
solely to prepay the Interim Loans. The Senior Subordinated Loans are scheduled
to mature on March 12, 1999. If such loans have not been converted 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, 1998. The Interim Loans are scheduled to mature on
September 12, 1999. Amounts borrowed under the Senior
14
<PAGE> 16
Subordinated Loans and the Interim Loans were used as part of the financing of
the acquisition of T&N plc and the financing of the acquisition of Fel-Pro.
Exchange or Conversion of Series E Stock
On February 24, 1998, the Corporation issued 1,030,325.6 shares of Series E
Stock to the owners of the Fel-Pro entities as partial compensation for the
acquisition of Fel-Pro. All of these shares remain outstanding.
The following discussion of exchangeability, conversion, voting rights,
registration rights and dividends and distributions of shares of Series E Stock
is intended to summarize certain terms of the Certificate of Designations of the
Series E Stock filed with the Michigan Department of Consumer & Industry
Services on February 20, 1998 and contractual arrangements with the holders of
Series E Stock.
A. Exchangeability. 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 the Corporation executed for the benefit of
holders of Series E Stock and (iii) February 24, 1999; however, no such exchange
shall be made before the Corporation's Restated Articles of Incorporation have
been amended to authorize additional shares of Common Stock. If the Series E
Stock has not been exchanged by February 24, 1999, the mandatory exchange will
take place fifteen days after the Corporation's Restated Articles of
Incorporation have been amended to authorize additional shares of Common Stock.
The issuance of Common Stock upon the conversion or exchange of the Series E
Stock will have no effect on the rights or privileges of existing shareholders
except for the dilutive effect of such issuance. If the required vote of
shareholders is obtained for approval of this proposal, the Corporation intends
to conduct the mandatory exchange of Common Stock for Series E Stock not later
than February 24, 1999.
B. Dividends and Distributions. Holders of Series E Stock receive a 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. This increasing dividend feature was required by the sellers of
Fel-Pro to provide an incentive to the Corporation to seek promptly, and to its
shareholders to approve, an increase in the number of shares of authorized
Common Stock to facilitate exchange of the Series E Stock. The shares of the
Series E Stock are not subject to any sinking fund or redemption provisions and
have no preemptive rights. There is no restriction upon repurchase of shares of
Series E Stock during any arrearage in the payment of dividends. The shares of
the Series E Stock were issued in a transaction exempt from registration under
the Securities Act of 1933 and such shares may be resold only pursuant to a
registration statement under the Securities Act of 1933 or an exemption
thereunder. The shares of the Series E Stock rank senior to Common Stock as to
the payment of dividends and in parity with the Common Stock as to distribution
of assets on liquidation, dissolution and winding up of the Corporation. The
first scheduled quarterly dividend of $.60 per share of Series E Stock, due
Marcj 31, 1998, was paid to the holders of Series E Stock.
15
<PAGE> 17
C. Voting and Appraisal Rights. Holders of the Series E Stock have no voting
rights until 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 will have the same number of votes equal to 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, which is currently five votes per
share.
D. Registration Rights. The holders of a majority of the Common Shares into
which the Series E Stock is convertible or exchangeable or has been converted or
exchanged 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. These demand registration rights
terminate at any point at which there are fewer than 3,000,000 shares of Common
Stock eligible for registration and the shares may be sold without restriction
under Rule 144(k) of the Securities Act of 1933.
E. Conversion for the Secondary Offering. The Corporation is contractually
obligated to use its best efforts to include in the next underwritten offering
of Common Stock prior to January 1, 1999 shares of Common Stock corresponding
to, and issued in conversion of up to 25% of the initially issued Series E
Stock, if the Corporation's Restated Articles of Incorporation have been amended
to authorize additional shares of Common Stock for issuance. If the shareholders
approve this proposal, the Corporation expects to convert the shares of Series E
Stock and arrange for the Common Stock to be offered (the "Secondary Offering")
through the underwriting arrangements in place for the Primary Offering. The
Corporation is also considering making an offer to convert additional Series E
Stock for inclusion in the Secondary Offering in exchange for release by holders
of Series E Stock of certain portions of their demand registration rights.
Effective Date
The effective date of this amendment to the Restated Articles of Incorporation
of the Corporation if approved by the shareholders will be the date of the
filing of the Certificate of Amendment in the office of the Michigan Department
of Consumer and Industry Services. The Certificate of Amendment will be filed as
soon as reasonably practicable after adoption and approval of the proposal by
the Corporation's shareholders.
Vote Required
Approval of the amendment to the Restated Articles of Incorporation of the
Corporation set forth above requires the affirmative vote of the holders of a
majority of the outstanding shares of the Corporation's Common Stock and its
Series C ESOP Preferred Stock, voting as one class, present in person or by
proxy at the annual meeting.
The Board of Directors believes that approval of the amendment to the Restated
Articles of Incorporation of the Corporation is in the best interests of all
shareholders and, accordingly, recommends a vote FOR approval of this amendment
to the Restated Articles of Incorporation of the Corporation.
V. INFORMATION ON EXECUTIVE COMPENSATION
Set forth below is information concerning annual and long-term compensation for
services rendered in all capacities to the Corporation and its subsidiaries for
the fiscal years ended December 31, 1997, 1996 and 1995, for (i) each person who
served as Chief Executive Officer during 1997, and (ii) the four most highly
compensated executive officers of the Corporation (other than persons who served
as its Chief Executive Officer) serving on December 31, 1997.
16
<PAGE> 18
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Compensation Long Term Compensation Awards
--------------------------------------------- --------------------------------------------
Securities
Other Annual Restricted Performance Underlying
Salary Bonus Compensation Stock Awards Stock Awards Options/SARs
Year ($) ($) ($) ($) (No.) (No.)
------ --------- --------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Name and Principal Position
R. A. Snell (b), ( c), (d) .... 1997 600,000 -- 186,070 -- -- 140,400
Chairman of the Board, Chief 1996 100,000 -- -- 1,300,938(e) 57,500(f) 300,000
Executive Officer and President
A. C. Johnson (b), ( c) ....... 1997 300,000 100,000 -- -- -- 35,950
Executive Vice President 1996 261,600 75,000 28,344 -- -- --
1995 229,993 -- -- 273,750(h) 25,000(i) --
W. A. Schmelzer (b), ( c) ..... 1997 237,000 65,000 -- -- -- 23,800
Vice President and Group 1996 222,180 66,000 -- -- -- --
Executive - Engine and 1995 212,280 -- -- 54,750(h) 7,000(i) --
Transmission Products
T. W. Ryan (b),(c),(d) ........ 1997 220,820 50,000 -- 5,000(j) 15,000(k) 43,000
Sr. Vice President and
Chief Financial Officer
* D.L. Kaye (b),(c),(d) ....... 1997 206,666 50,000 -- -- -- 16,750
Vice President, General 1996 189,996 33,750 -- -- -- --
Counsel and Secretary 1995 121,768 -- -- -- -- --
<CAPTION>
All Other
Compensation (a)
($)
-------------
<S> <C>
Name and Principal Position
R. A. Snell (b), ( c), (d) .... 12,867
Chairman of the Board, Chief 992,610(g)
Executive Officer and President
A. C. Johnson (b), ( c)........ 21,113
Executive Vice President 26,113
26,272
W. A. Schmelzer (b), ( c) ..... 29,640
Vice President and Group
Executive - Engine and 33,571
Transmission Products
T. W. Ryan (b),(c),(d) ........ 4,858
Sr. Vice President and
Chief Financial Officer
* D.L. Kaye (b),(c),(d) ....... 8,267
Vice President, General 7,600
Counsel and Secretary --
</TABLE>
* D.L. Kaye was employed by the Corporation until March 12, 1998.
<PAGE> 19
(a) Includes (i) Corporation Match and ESOP contributions to the Salaried
Employees' Investment Program, (ii) Contributions under the Supplemental
Executive Retirement Plan, and (iii) Contributions or allocations for split
life, which, respectively for 1997 were: R.A. Snell ($12,867, $0, and $0);
A.C. Johnson ($12,000, $0, and $9,113); W.A. Schmelzer ($9,480, $8,732, and
$11,428); T.W. Ryan ($4,858, $0, and $0); and D.L. Kaye ($8,267, $0, and
$0).
(b) Aggregate restricted stock holdings at December 31, 1997, and the market
value of such holdings at such date, based upon a closing market price of
$40.50 per share are as follows : R.A. Snell - 46,000 shares/$1,863,000;
A.C. Johnson - 6,000 shares/$243,000; W.A. Schmelzer - 1,200
shares/$48,600; T.W. Ryan - 4,000 shares/$162,000; and D.L. Kaye - 15,200
shares/$615,600. Dividends are payable on such shares to such individuals
when and as declared and such individuals may vote such shares.
(c) The Corporation is a party to Executive Severance Agreements with R.A.
Snell, A.C. Johnson, W.A. Schmelzer, T.W. Ryan and D.L. Kaye. Benefits will
be payable only if an actual or constructive termination of employment
occurs within 36 months following a change in control of the Corporation.
The benefits will consist of amounts up to 2.999 times annualized reported
taxable income during the 5-year period preceding the change in control for
those years in which service were performed for the Corporation.
(d) R.A. Snell, T.W. Ryan and D.L. Kaye first became executive officers of the
Corporation in November 1996, February 1997 and April 1995, respectively.
(e) Restricted shares of Common stock awarded November 1, 1996, subject to
time-based vesting, valued at the closing price of such date of $22.625.
(f) Restricted shares of Common Stock awarded November 1, 1996, subject to
performance-based vesting. Shares vested on July 9, 1997.
(g) Includes compensation for certain losses incurred by R. A. Snell, including
a loss of $350,000 in bonus compensation that he would have received had he
remained with his former employer, and an advance of $600,000 (subject to
adjustment in 1997) against losses under certain compensation plans of his
former employer as a result of his having terminated his employment with
his former employer.
(h) Restricted Shares of Common Stock awarded February 8, 1995, valued at the
closing price of $18.25 on their grant date. Shares were awarded as follows
: A.C. Johnson - 15,000 shares; and W.A. Schmelzer - 3,000 shares. Awards
vest at the rate of 20% of the awards per year for 5 years following the
date of the grant.
(i) Restricted shares of Common Stock awarded February 8, 1995, subject to
performance-based vesting. Awards vest upon the attainment of two
conditions : (i) the minimum average market price of the Corporation and
(ii) three years of continuous employment. Awards also vest fully upon
retirement, death, total disability or certain changes of control of the
Corporation.
(j) Restricted shares of Common Stock awarded on March 4, 1997, subject to
time-based vesting, valued at the closing price as of such date of
$25.0625. Awards vest at a rate of 20% of the awards per year for 5 years
following the date of the grant.
(k) Restricted shares of common stock awarded March 4, 1997, subject to
performance-based vesting. Shares vested on July 9, 1997.
<PAGE> 20
STOCK OPTIONS/STOCK APPRECIATION RIGHTS. The following table summarizes
information with respect to the grant of stock options during fiscal 1997, all
of which were granted without stock appreciation rights.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS DURING FISCAL 1997
- ------------------------------------------------------------------------------------------------------------------------------
Individual Grants
- ---------------------------------------------------------------------------------------------
Number of Percent of Total
Securities Options/SARs Potential Realizable Value at
Underlying Granted to Exercise or Assumed Annual Rates of
Option/SARs Employees in Base Price Expiration Stock Price Appreciation For
Name Granted (#) Fiscal Year ($/Sh) Date Option Term
- ------------------- ----------- ---------------- ----------- ---------- -----------------------------
5% ($) 10% ($)
------ -------
<S> <C> <C> <C> <C> <C> <C>
R.A. Snell 75,000 8.0% 41.28125 12/04/02 855,394 1,890,196
65,400 7.0% 23.68750 2/06/02 428,005 945,779
A.C. Johnson 18,000 1.9% 41.28125 12/04/02 205,294 453,647
17,950 1.9% 23.68750 2/06/02 117,472 259,583
W.A. Schmelzer 10,000 1.1% 41.28125 12/04/02 114,052 252,026
13,800 1.5% 23.68750 2/06/02 90,313 199,568
T.W. Ryan 18,000 1.9% 41.28125 12/04/02 205,294 453,647
25,000 2.7% 25.06250 3/05/02 173,108 382,523
D.L. Kaye 7,500 0.8% 41.28125 12/04/02 85,539 189,020
9,250 1.0% 23.68750 2/06/02 60,536 133,768
</TABLE>
In 1997, Corporation granted options to approximately 3,000 salaried and
non-union employees throughout the world.
The following table summarizes information with respect to options held by each
of the named executive officers as of December 31, 1997. The values shown are
hypothetical and depend on the future performance of the Corporation's Common
Stock. No stock appreciation rights are outstanding.
Aggregated Opton/SAR Exercises in Last
Fiscal Year and December 31, 1997 Option/SAR Value
<TABLE>
<CAPTION>
Number of Securities Value of Unexcercised
Shares Underlying Unexercised In-The-Money
Acquired on Value Options/SARs at Fiscal Options/SARs at Fiscal
Exercise Realized Year End (#) Year-End ($)
(#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
----------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
R.A. Snell - - 180,000/260,400 3,217,500/3,244,538
A.C.Johnson - - 16,379/38,571 281,706/344,703
W.A. Schmelzer - - 1,049/25,440 17,177/258,868
T.W. Ryan - - 0/43,000 0/385,938
D.L. Kaye - - 0/16,750 0/155,516
</TABLE>
RETIREMENT PLANS. Under the Corporation's Personal Retirement Account Plan (the
"PRA") benefits are payable upon retirement to salaried employees in the form of
a lump-sum or annuity at the employee's election. The PRA is a defined benefit
pension plan. Accrued pension benefits for participants are expressed as an
account balance. Annual credits of 2.0, 2.5, 3.0, 4, 5.0, 6.0, 7.0, 8.0 or 9.0%
of earnings are made to participants' accounts based on the employee's age.
Earnings are defined as an employee's base pay plus overtime, commissions,
incentive compensation, gainsharing, bonuses and other variable compensation.
Benefits vest based on a graded 5-year schedule.
Estimated annual retirement benefits that may be provided by the PRA upon
retirement at age 65, which is the mandatory retirement age for officers,
assuming the employee converts the combined account balances into a single
monthly life annuity, are as follows: R. A. Snell -- $23,721; A. C. Johnson --
$111,536; W. A. Schmelzer -- $65,012; T. W. Ryan -- $57,540; and D. L. Kaye --
$79,918.
17
<PAGE> 21
CERTAIN RELATED TRANSACTIONS.
Employment Agreement.
The terms of R. A. Snell's employment as Chairman of the Board, Chief Executive
Officer and President of the Corporation are set forth in a five-year employment
agreement dated as of December 1, 1996. Mr. Snell's base salary for 1998 is
$850,000, subject to increase in future years by the Board. His 1998 bonus
compensation, set by the Board, can range from no bonus to a maximum amount
equal to two times his base salary. He is generally eligible for the plans and
benefits provided by the Corporation's senior executives, though he is not
eligible to participate in the Corporation's Supplemental Retirement Program
("SERP") and instead receives the retirement benefits described below.
The Corporation agreed to pay to him, following his separation from the
Corporation, supplemental retirement benefits equal to the difference between
(i) the retirement benefits that he would have received under two plans
maintained by his former employer if he had remained employed by the former
employer until his separation from the Corporation (under the former employer's
plans as in effect on December 1, 1996 and based on his combined employment and
salary history with the former employer and the Corporation) and (ii) the sum of
the amounts that he is entitled to receive under the former employer's plans and
the Corporation's Personal Retirement Account Plan. Similar protections from
potential loss caused by Mr. Snell's change of employment were provided with
respect to death and disability benefits.
Loans. Loans under the Federal-Mogul Loan Programs (the "Programs") were
outstanding during 1997 to A. C. Johnson in the amount of $133,428.86. The
purpose of the Program is to encourage executives to retain ownership of the
Corporation's Common Stock and stock options by providing loans, evidenced by
promissory notes, which are secured by an assignment of proceeds from the sale
of shares of Federal-Mogul Common Stock acquired upon the exercise of employee
stock options or the sale of restricted share grants. The maximum term of the
loans is 5 years. The Program also provides that interest on the outstanding
principal balance of the loans is variable and is reset quarterly based on
current broker margin account rates. At December 31, 1997, the average interest
rate applicable to outstanding principal loan balances was 7.25% per annum.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
Pursuant to rules adopted by the Securities and Exchange Commission, the
Compensation Committee of the Corporation's Board of Directors has furnished the
following report on executive compensation:
Role of Compensation Committee
The Compensation Committee is composed entirely of independent, non-employee
directors of the Corporation. The Compensation Committee has supervised the
development and implementation of the Corporation's compensation programs and as
appropriate, with the assistance of independent compensation consultants,
initiated new compensation policies designed to closely align the rewards to
senior managers with an increase in the value of the Corporation's stock.
The Compensation Committee makes recommendations to the Board on compensation
actions involving its executive officers and selected senior management. The
Compensation Committee meets at least three times each year and recommends its
compensation decisions to the Board, which has final authority on such matters.
In determining compensation, the Committee considers the recommendations of the
Chief Executive Officer, except with respect to his own compensation.
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<PAGE> 22
Compensation Philosophy
Total compensation plans for senior managers are designed to 1) provide a strong
incentive to maximize the company's shareowner value and 2) attract and retain
proven management talents.
These goals are achieved by:
- Direct linkage of cash compensation awards to growth in
Economic Value Added (EVA(R)), which the Compensation
Committee believes to be the best operating performance
measure of shareowner value.
- Federal-Mogul common stock ownership requirements, supported
by equity based incentive plans, which promote alignment of
senior management with shareowners.
- Straightforward, definitive plan design that balances risk and
reward and visibly ties management rewards to growth in
shareowner value.
When the performance goals are achieved, the compensation programs provide a
total remuneration package competitive with similar international enterprises.
Base Salary
The base salary of executive management is determined by market-based surveys
provided by an independent consultant and the individual executive's
performance, experience and demonstrated capabilities in meeting the
requirements of the position. The Chief Executive Officer's base salary is
generally determined by the Committee's evaluation of his attainment of stated
overall goals and targets for the Corporation and his individual contribution
and performance.
Supplemental Compensation
The Corporation's Supplemental Compensation Program provides the opportunity for
annual incentive awards to its senior managers and executive officers, including
the Chief Executive Officer. Each year targeted goals are set with the
recommendation of the Compensation Committee. If met, such goals create a plan
fund of a certain amount. The fund is adjusted based upon attainment of the
target and reduced if the target is not met. In 1997, the targeted goal was
based on return on invested capital, cash from operations and earnings per
share. Actual 1997 results exceeded the targeted standards, and as a result,
supplemental compensation was paid. The Compensation Committee revised its
philosophy to more closely align compensation to EVA(R) targets, as described
above.
Long-Term Incentive Compensation
In 1997 and previous years, Long-Term Incentive Compensation for the
Corporation's executive officers was awarded in stock options and restricted
stock. Periodic grants of stock options and awards of restricted stock were made
to executive officers based on their contribution to the long-term direction and
success of the organization. The grant price was regularly set at or above the
market price average of the Corporation's Common Stock on the day of the grant.
Internal Revenue Code Section 162(m)
Section 162(m) of the Internal Revenue Code disallows deductions for
compensation in excess of $1 million per year to the Chief Executive Officer and
four other most highly compensated executives of the Corporation (the "Covered
Officers"), unless such compensation is performance based. The
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<PAGE> 23
Committee intends that all incentive or long-term compensation payable to
Covered Officers will be performance based.
COMPENSATION COMMITTEE
/s/ J.J. Fannon, Chairman
/s/ A. Madero
/s/ J.C. Pope
April ___, 1998
STOCK PERFORMANCE CHART
The graph below compares the cumulative total shareholder return on the
Corporation's Common Stock for the last five fiscal years with the cumulative
total return of the S&P Midcap 400 Index and the Corporation's per group. The
Corporation's peer group consists of: Borg Warner Automotive, Inc.; Breed
Technologies, Inc.; Cooper Industries, Inc.; Dana Corporation; Echlin Inc.;
Hayes Lemmerz International, Inc.; Lear Corporation; Magna International Inc.;
SPX Corporation; Tower Automotive, Inc. The graph assumes an initial investment
of $100 and quarterly reinvestment of all dividends.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
TOTAL SHAREHOLDER RETURNS
(DIVIDENDS REINVESTED)
INDEXED RETURNS
YEARS ENDING
<TABLE>
<CAPTION>
BASE
PERIOD
COMPANY NAME/INDEX DEC92 DEC93 DEC94 DEC95 DEC96 DEC97
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FEDERAL-MOGUL CORP 100 182.42 128.84 128.75 148.02 276.68
S&P MIDCAP 400 INDEX 100 113.95 109.87 143.86 171.49 226.80
PEER GROUP 100 124.81 102.79 120.78 145.26 184.77
</TABLE>
VI. INFORMATION ON SECURITIES
Only holders of the Corporation's Common Stock and of its Series C ESOP
Convertible Preferred Stock of record at the close of business on March 30, 1998
will be entitled to vote at the Annual Meeting. On that date there were
outstanding 40,473,072 shares of Common Stock and 762,939 shares of Series C
ESOP Convertible Preferred Stock, which constitute all of the outstanding voting
securities of the Corporation. The Common Stock and the Series C ESOP
Convertible Preferred Stock will vote together as a single class on all matters
to be voted upon at the Annual Meeting. The holders of shares of Common Stock
are entitled to cast one vote per share on all matters to be acted upon, and the
holders of shares of Series C ESOP Convertible Preferred Stock are entitled to
cast two votes per share on each such matter. Accordingly, there will be
45,477,150 votes eligible to be cast upon each matter to be voted upon at the
Annual Meeting.
STOCK OWNERSHIP OF MANAGEMENT. As of March 30, 1998, shares of the Corporation's
Common Stock and its Series C ESOP Convertible Preferred Stock were owned
beneficially by its directors and officers as set forth in the following tables.
20
<PAGE> 24
<TABLE>
<CAPTION>
COMMON STOCK
Number of Deferred
Shares Beneficially Stock
Name Owned (a),(b),( c) Units (d) Total
---- -------------------- ---------- -----
Directors:
<S> <C> <C> <C>
R.A. Snell 264,973(e) - 264,973
J.J. Fannon 1,281 8,267 9,548
R.M. Hills 21,900(f) 39,337 61,237
A. Madero 1,060 4,644 5,704
R.S. Miller, Jr 2,000 1,321 3,321
J.C. Pope 6,100(f) 8,705 14,805
H.M. Sekyra 4,908 1,235 6,143
Nominees:
P.S. Lewis - - -
G. Whalen - - -
Non-Director Officers:
A. C. Johnson 49,081(e),(f) - 49,081
W. A. Schmelzer 14,588(e),(f) - 14,588
T. W. Ryan 12,627(e),(f) - 12,627
D. L. Kaye 17,833(e),(f) - 17,833
All directors
and officers
as a group
(24 persons,
including those
named above) 2,414,107 63,509 2,477,616
</TABLE>
(a) Unless otherwise indicated, beneficial owners have sole voting power and
sole investment power with respect to all shares.
(b) Includes shares that may be acquired by the exercise of stock options
granted by the Corporation and exercisable on or before April 1, 1998:
R.A. Snell - 180,000 shares; A.C. Johnson - 13,379 shares; W.A.
Schmelzer - 1,049 shares; T.W. Ryan - 0 shares; D. L. Kaye - 0 shares
and all officers as a group - 372,944 shares. The shares issuable to
each of the foregoing individuals upon exercise of their options were
regarded as outstanding for calculating the percentage of Common Stock
beneficially owned by such individual.
(c) As of February 28, 1998, each officer and director owned less than 1%
of the outstanding shares of Common Stock.
(d) Deferred Stock Units - Under a plan adopted by the Board of Directors,
non-employee directors may elect to defer receipt of all or a portion of
their compensation by converting amounts deferred into units valued as
though invested in Common Stock. These stock units are credited with
dividend equivalents in the form of additional stock units. Amounts also
include 1,235 restricted deferred stock units awarded to each
non-employee director; such units vest over 5 years.
(e) Includes 46,000 shares of restricted stock granted under the 1989
Performance Incentive Stock Plan to R.A. Snell; 6,000 shares to A.C.
Johnson; 1,200 shares to W.A. Schmelzer; 4,000 shares to T.W. Ryan;
15,200 shares to D.L. Kaye; and 120,200 shares to officers as a group.
(f) J.C. Pope shares voting power with respect to 400 such shares; R.M.
Hills has voting power to 16,500 shares held in a Family Partnership;
and D.L. Kaye holds 2,331 shares in a Trust.
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<PAGE> 25
SERIES C ESOP CONVERTIBLE PREFERRED STOCK
Number of
Shares
Beneficially
Name Owned(a),(b)
R. A. Snell . . . . . . . . . . . . . . . . . . . . . . 69
A. C. Johnson . . . . . . . . . . . . . . . . . . . . . 1,223
W. A. Schmelzer . . . . . . . . . . . . . . . . . . . . 819
T. W. Ryan. . . . . . . . . . . . . . . . . . . . . . . 68
D. L. Kaye. . . . . . . . . . . . . . . . . . . . . . . 118
All other directors . . . . . . . . . . . . . . . . . . --
All directors and officers as a
group (24 persons, including
those named above) . . . . . . . . . . . . . . . . . . 8,803
- --------------------
(a) Shares allocated to personal accounts under the Salaried Employees'
Investment Program of the Corporation. Participants share dispositive power over
such shares with the Trustee for the Program. Such shares are voted (at the rate
of two votes per share) by the Trustee in accordance with instruction from
participants. Only directors who are employees of the Corporation (or were at
the time such shares were issued) are eligible to receive Series C ESOP
Convertible Preferred Stock.
(b) Less than 1% of the class of Series C ESOP Convertible Preferred Stock for
any one director or officer.
OTHER BENEFICIAL OWNERS. Each person listed in the table below has filed a
Schedule 13G with the Securities and Exchange Commission or otherwise has
informed the Corporation that it "beneficially owned" more than 5% of the Common
Stock as of December 31, 1997. The Corporation knows of no person or group that
beneficially owns more than 5% of the Common Stock, except as noted below.
<TABLE>
<CAPTION>
Number of Percent of
Name and Address of Beneficial Owner Shares Class(a)
<S> <C> <C>
Janus Capital Corporation 6,014,135 14.86%
100 Fillmore Street
Denver, CO 80206
The Capital Group Companies, Inc.(b) 4,549,300 11.24%
333 South Hope Street
Los Angeles, CA 90071
</TABLE>
22
<PAGE> 26
Merrill Lynch Asset Management 2,556,000 6.32%
800 Scudders Mill Road
Plainsboro, NJ 08536
- --------------------
(a) Percentages are calculated based on outstanding shares of Common Stock as of
March 30, 1998, of 40,473,072 shares and assume conversion of the Corporation's
Series C ESOP Convertible Preferred Stock.
(b) According to a Schedule 13G filed by The Capital Group Companies, Inc., as
of December 31, 1997, it had beneficial ownership of 4,549,300 shares of the
Corporation's Common Stock as follows: Capital Research and Management Company,
a registered investment adviser and one of its operating subsidiaries, had
beneficial ownership of 2,195,000 of said shares; and the remaining shares were
reported as being beneficially owned by other subsidiaries of The Capital Group
Companies, Inc., none of which by itself owns 5% or more of the outstanding
securities.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT. Based on the Corporation's
records and other information, the Corporation believes that all filing
requirements with the SEC, the New York Stock Exchange and the Pacific Exchange
applicable to its directors and officers were complied with for 1997.
VII. OTHER INFORMATION
A proxy may be revoked at any time before its exercise upon written notice to
the Secretary of the Corporation. Unless revoked, the shares represented by the
proxy will be voted in accordance with the specifications made. If no
specifications are made, such shares will be voted for the election of directors
as proposed in this Proxy Statement, in favor of the approval of the appointment
of Ernst & Young LLP as independent accountants, in favor of the approval of the
Amended and Restated 1997 Long Term Incentive Plan and in favor of the approval
of the amendment and restatement of the Corporation's Articles of Incorporation
to increase the Corporation's authorized common shares
Shares for which proxies are marked "abstain" will be treated as shares present
for the purpose of determining the presence of a quorum. Proxies relating to
"street name" shares that are voted by brokers on only some of the matters to be
considered and acted upon at the Annual Meeting will nevertheless be treated as
present for purposes of determining the presence of a quorum, but will not be
entitled to vote on any such matter as to which the broker does not have
discretionary voting power and has not received instructions from the beneficial
owner ("broker non-votes"). In tabulating the votes, abstentions and broker
non-votes will be treated as votes not cast.
The form of proxy used in the solicitation pursuant to this Proxy Statement
names R.A. Snell, R.M. Hills and J.J. Fannon, and each of them, with full power
of substitution, as proxies for the shareholders, with power to vote their
shares at the Annual Meeting and any adjournment thereof. The Board of Directors
does not intend to present any other matters at the meeting. However, should any
other matters properly come before the meeting, it is the intention of such
proxy holders to vote the Proxy in accordance with their best judgment.
All costs of solicitation of proxies will be borne by the Corporation. In
addition to solicitation by mail, the officers and employees of the Corporation,
who will receive no additional compensation therefor, may solicit proxies
personally or by telephone. Also, the Corporation has engaged the firm of D.F.
King & Co. Inc., to solicit proxies; the Corporation estimates that the fees
paid to D. F. King & Co. Inc. will be approximately $7,000, plus reasonable
costs and expenses. The Corporation will reimburse brokers, custodians, nominees
and fiduciaries for their expenses in mailing proxy materials.
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<PAGE> 27
The Annual Report of the Corporation to shareholders, including financial
statements, for the fiscal year ended December 31, 1997, is being sent to all
shareholders with this Proxy Statement. The Management's Discussion and Analysis
of Financial Conditions and Results of Operation, Summary of Selected Financial
Data, Report of Independent Public Accountants and Financial Statements and
Notes sections of such Annual Report are hereby incorporated by reference into
this Proxy Statement. Certain historical and pro forma financial information
relating to T&N plc and Fel-Pro has been included in this Proxy Statement as
Annex B.
SHAREHOLDER PROPOSALS. Proposals of shareholders intended to be presented at the
1999 Annual Meeting of Shareholders must be received by the Secretary of the
Corporation no later than December 28, 1998.
By order of the Board of Directors.
Edward W. Gray, Jr.
Senior Vice President, General Counsel
and Secretary
24
<PAGE> 28
Federal-Mogul Corporation
World Headquarters
26555 Northwestern Highway
Southfield, Michigan 48034
[logo]
Printed on Recycled Paper
[logo]
Federal-Mogul
25
<PAGE> 29
ANNEX A
FEDERAL-MOGUL CORPORATION 1997 LONG TERM INCENTIVE PLAN
(As Amended and Restated effective in 1998)
SECTION 1. INTRODUCTION; PURPOSE; DEFINITIONS
Federal-Mogul Corporation adopted the 1997 Long Term Incentive Plan, which plan
was initially approved by shareholders at the 1997 annual meeting of
shareholders. Federal-Mogul Corporation hereby amends and restates the 1997
Long Term Incentive Plan, which amendment and restatement shall apply to all
Awards granted after the Plan's approval by shareholders as amended and
restated, and the Plan as amended and restated shall apply to Awards granted
prior to this amendment and restatement to the extent not inconsistent with the
terms of the Award and to the extent that such amendment and restatement does
not result in any increased liability to any person, the regrant of an Award or
a violation of law. The purpose of the Plan is to assist the Corporation and
its subsidiaries in attracting, retaining and motivating directors, officers
and employees and to provide the Corporation and its subsidiaries with a stock
plan providing incentives more directly linked to the profitability of the
Corporation's businesses and increases in shareholder value.
For purposes of the Plan, the following terms are defined as set forth below:
(a) "Affiliate" means a corporation or other entity controlled by the
Corporation and designated by the Committee from time to time as such.
(b) "Award" means a Stock Appreciation Right, Stock Option, Restricted Stock or
Performance Unit.
(c) "Award Cycle" shall mean a period of consecutive fiscal years or portions
thereof designated by the Committee over which Awards are to be earned or
are to vest.
(d) "Board" means the Board of Directors of the Corporation.
(e) "Cause" means (1) conviction of a participant for committing a felony under
federal law or the law of the state in which such action occurred, (2)
dishonesty in the course of fulfilling a participant's employment duties or
(3) willful and deliberate failure on the part of a participant to perform
employment duties in any material respect, or such other events as shall be
determined by the Committee. The Committee shall have the sole discretion
to determine whether "Cause" exists, and its determination shall be final.
(f) "Change of Control" and "Change in Control Price" have the meanings set
forth in Sections 10(b) and (c), respectively.
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<PAGE> 30
(g) "Code" means the Internal Revenue Code of 1986, as amended from time to
time, and any successor thereto.
(h) "Commission" means the Securities and Exchange Commission or any successor
agency.
(i) "Committee" means the Committee, as defined in Section 2.
(j) "Common Stock" means the shares of the regular voting Common Stock, no par
value per share, whether presently or hereafter issued, and any other stock
or security resulting from adjustment thereof as described hereinafter or
the common stock of any successor to the Corporation which is designated
for the purpose of this Plan.
(k) "Corporation" means Federal-Mogul Corporation, a Michigan corporation, and
includes any successor or assignee corporation or corporations into
which the Corporation may be merged, changed or consolidated; any
corporation for whose securities all or substantially all of the securities
of the Corporation shall be exchanged; and any assignee of or successor to
substantially all of the assets of the Corporation.
(l) "Covered Employee" means a participant designated prior to the grant of
shares of Restricted Stock or Performance Units by the Committee who is or
may be a "covered employee" within the meaning of Section 162(m)(3) of the
Code in the year in which Restricted Stock or Performance Units are
expected to be taxable to such participant.
(m) "Director" means, when the context refers to a participant or participation
in the Plan, a member of the Board of Directors who is neither an officer
nor employee of the Corporation, its subsidiaries or an Affiliate.
(n) "Disability" means permanent and total disability as determined under
procedures established by the Committee for purposes of the Plan.
(o) "Early Retirement" means retirement from active employment with the
Corporation, a subsidiary or an Affiliate pursuant to the early retirement
provisions of the applicable pension plan of such employer.
(p) "Exchange Act" means the Securities Exchange Act of 1934, as amended from
time to time, and any successor thereto.
(q) "Fair Market Value" means, except as provided in Section 5(j) and
7(b)(ii)(2), as of any given date, the mean between the highest and lowest
reported sales prices of the Common Stock on the New York Stock Exchange
Composite Tape or, if not listed on such exchange, on any other national
securities exchange on which the Common Stock is listed or on NASDAQ. If
there is no regular public trading market for such
2
<PAGE> 31
Common Stock, the Fair Market Value of the Common Stock shall be determined
by the Committee in good faith.
(r) "Incentive Stock Option" means any Stock Option designated as, and
qualified as, an "Incentive Stock Option" within the meaning of Section of
the Code.
(s) "Nonqualified Stock Option" means any Stock Option that is not an Incentive
Stock Option.
(t) "Non-Employee Director" means a member of the Board who qualifies as a
Non-Employee Director as defined in Rule 16b-3(b)(3), as promulgated by the
Commission under the Exchange Act, or any successor definition adopted by
the Commission and who qualifies as an "outside director" under Section
162(m) of the Code.
(u) "Normal Retirement" means retirement from active employment with the
Corporation, a subsidiary or an Affiliate at or after age 65.
(v) "Performance Goals" means the performance goals established by the
Committee prior to the grant of Restricted Stock or Performance Units
that are based on the attainment of one or any combination of the
following: Specified levels of earnings per share from continuing
operations, operating income, revenues, return on assets, return on
equity, return on invested capital, shareholder value, economic value
added, shareholder return (measured in terms of stock price appreciation)
and/or total shareholder return (measured in terms of stock price
appreciation and/or dividend growth), achievement of cost control,
production targets, or the price of the Common Stock, fixed on a
Corporation-wide basis or with reference to the subsidiary, business unit,
division or department of the Corporation for or within which the
participant is primarily employed, and that are intended to qualify under
Section 162(m)(4)(C) of the Code. Such Performance Goals also may be based
upon attaining specified levels of performance under one or more of the
measures described above relative to the performance of other
corporations. Such Performance Goals shall be set by the Committee within
the time period prescribed by Section 162(m) of the Code and related
regulations.
(w) "Performance Units" means an Award made pursuant to Section 9.
(x) "Plan" means the Federal-Mogul Corporation 1997 Long Term Incentive Plan,
as set forth herein and as hereinafter amended from time to time.
(y) "Restricted Stock" means an award granted under Section 8.
(z) "Retirement" means Normal or Early Retirement.
(aa) "Rule 16b-3" means Rule 16b-3, as promulgated by the Commission under
Section 16(b) of the Exchange Act, as amended from time to time.
3
<PAGE> 32
(bb) "Stock Appreciation Right" means a right granted under Section 7.
(cc) "Stock Option" means an option granted under Section 5 or Section 6.
(dd) "Termination of Employment" means the termination of the participant's
employment with the Corporation and any subsidiary or Affiliate. A
participant employed by a subsidiary or an Affiliate shall also be deemed
to incur a Termination of Employment if the subsidiary or Affiliate ceases
to be such a subsidiary or an Affiliate, as the case may be, and the
participant does not immediately thereafter become an employee of the
Corporation or another subsidiary or Affiliate. Temporary absences from
employment because of illness, vacation or leave of absence and transfers
among the Corporation and its subsidiaries and Affiliates shall not be
considered Terminations of Employment. With respect to a participant who
is a Director, the cessation of the person's serving as a member of the
Board of Directors shall constitute a Termination of Employment, provided
such participant is not thereafter an employee or officer of the
Corporation, its subsidiaries or an Affiliate, in which case the other
provisions of this dd. shall apply.
In addition, certain other terms used herein have definitions given to them in
the first place in which they are used.
SECTION 2. ADMINISTRATION
The Plan shall be administered by the Compensation Committee or such other
committee of the Board as the Board may from time to time designate (the
"Committee"), which shall be composed of not less than two Non-Employee
Directors, each of whom shall be required to be an "outside director" for
purposes of Section 162(m)(4) of the Code, and shall be appointed by and serve
at the pleasure of the Board.
The Committee shall have plenary authority to grant Awards pursuant to the
terms of the Plan to Directors, officers and employees of the Corporation and
its subsidiaries and Affiliates.
Among other things, the Committee shall have the authority, subject to the
terms of the Plan:
(a) To select the persons to whom Awards may from time to time be granted;
(b) Determine whether and to what extent Incentive Stock Options, Nonqualified
Stock Options, Stock Appreciation Rights, Restricted Stock and Performance
Units or any combination thereof are to be granted hereunder;
4
<PAGE> 33
(c) Determine the number of shares of Common Stock to be covered by each Award
granted hereunder;
(d) Determine the terms and conditions of any Award granted hereunder
(including, but not limited to, the option price (subject to Section 5(a)),
any vesting condition, restriction or limitation (which may be related to
the performance of the participant, the Corporation or any subsidiary or
Affiliate) and any vesting acceleration or forfeiture waiver regarding any
Award and the shares of Common Stock relating thereto, based on such
factors as the Committee shall determine;
(e) Modify, amend or adjust the terms and conditions of any Award, at any time
or from time to time, including but not limited to Performance Goals;
provided however, that the Committee may not adjust upwards the amount
payable to a designated Covered Employee with respect to a particular Award
upon the satisfaction of applicable Performance Goals;
(f) Determine to what extent and under what circumstances Common Stock and
other amounts payable with respect to an Award shall be deferred; and
(g) Determine under what circumstances and/or in what proportions an Award may
be settled in cash or Common Stock under Sections 5(j) and 9(b)(i).
The Committee shall have the authority to adopt, alter and repeal such
administrative rules, guidelines and practices governing the Plan as it shall
from time to time deem advisable, to interpret the terms and provisions of the
Plan and any Award issued under the Plan (and any agreement relating thereto)
and to otherwise supervise the administration of the Plan.
The Committee may act only by a majority of its members then in office, except
that the members thereof may (i) delegate to an officer of the Corporation the
authority to make decisions pursuant to paragraphs (c), (f), (g), (h), (i) and
(j) of Section 5 (provided that no such delegation may be made that would cause
any Award or transaction under the Plan to cease to be exempt from Section
16(b) of the Exchange Act or cause any Award or payment made in respect thereof
to be "applicable employee remuneration" under Section 162(m)(4)(A) of the
Code) and (ii) authorize any one or more of their number or any officer of the
Corporation to execute and deliver documents on behalf of the Committee.
Any determination made by the Committee or pursuant to delegated authority
pursuant to the provisions of the Plan with respect to any Award shall be made
in the sole discretion of the Committee or such delegate at the time of the
grant of the Award or, unless in contravention of any express term of the Plan,
at any time thereafter. All decisions made by the Committee or any
appropriately delegated officer pursuant to the provisions of the Plan shall be
final and binding on all persons, including the Corporation and Plan
participants. Actions of the Compensation Committee shall be given full force
and effect
5
<PAGE> 34
notwithstanding that one or more members of the Compensation Committee is not a
Non-Employee Director or an outside director under Section 162(m) of the Code.
SECTION 3. COMMON STOCK SUBJECT TO PLAN
The total number of shares of Common Stock reserved and available for issue
under the Plan shall be 1,300,000, no more than 130,000 of which shares shall
be granted as Awards of Restricted Stock, plus such additional shares of Common
Stock as may be transferred to the Plan from the Corporation's 1989 Performance
Incentive Stock Plan (including shares under that plan that would become
available after the date hereof due to forfeiture, cancellation, settlement of
an award for cash or other property, transfer in consideration of an obligation
of a participant or otherwise). No participant may be granted Awards covering
in excess of 350,000 shares of Common Stock over the life of the Plan,
including Awards that expire or terminate unexercised. Shares subject to an
Award under the Plan may be authorized and unissued shares or may be treasury
shares.
The Committee shall have full authority to determine the number of shares of
Common Stock available for issue, and in its discretion may include (without
limitation) as available for distribution any shares of Common Stock that have
ceased to be subject to an Award, any shares of Common Stock subject to any
Award that is forfeited or cancelled, any shares subject to an Award that is
exercised or terminates without the issuance of shares of Common Stock being
made to the participant, or any shares (whether or not restricted) of Common
Stock that are received by the Corporation in connection with the exercise of
an Award, including the satisfaction of a tax withholding obligation. If any
shares could not again be available for Awards to a particular participant or
for a particular type of Award, such shares shall be available exclusively for
Awards to other participants or for other Awards which are not subject to such
limitations. The number of shares of Common Stock available for issuance under
Incentive Stock Options shall be limited to 1,300,000, and such number shall be
determined without regard to any provision that would cause the Plan not to
state the aggregate number of shares that may be issued thereunder.
No person shall have any rights of a shareholder as to shares of Common Stock
subject to an Award until, after proper exercise of the Award or other action
required, such shares shall have been recorded on the Corporation's official
shareholder records as having been issued and transferred. Upon exercise of
the Award or any portion thereof, the Corporation will have a reasonable time
in which to issue the shares, and the participant will not be treated as a
shareholder for any purpose whatsoever prior to such issuance and transfer. No
adjustment shall be made for cash dividends or other rights for which the
record date is prior to the date such shares are recorded as issued and
transferred in the Corporation's official shareholder records, except as
provided herein or in an Award.
In the event of any change in corporate capitalization, such as a stock split
or a corporate transaction, such as any merger, consolidation, separation,
including a spin-off, or other
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distribution of stock or property of the Corporation, any reorganization
(whether or not such reorganization comes within the definition of such term in
Section 368 of the Code) or any partial or complete liquidation of the
Corporation, the Committee or Board may make such substitution or adjustments
in the aggregate number and kind of shares reserved for issuance under the
Plan, in the number, kind and option price of shares subject to outstanding
Stock Options and Stock Appreciation Rights, in the number and kind of shares
subject to other outstanding Awards granted under the Plan and/or such other
equitable substitution or adjustments as it may determine to be appropriate in
its sole discretion; provided however, that the number of shares subject to any
Award shall always be a whole number. Such adjusted option price shall also be
used to determine the amount payable by the Corporation upon the exercise of
any Stock Appreciation Right associated with any Stock Option.
SECTION 4. ELIGIBILITY
Directors, officers and employees of the Corporation, its subsidiaries and
Affiliates who are responsible for or contribute to the management, growth and
profitability of the business of the Corporation, its subsidiaries and
Affiliates are eligible to be granted Awards under the Plan.
SECTION 5. STOCK OPTIONS
Stock Options may be granted alone or in addition to other Awards granted under
the Plan and may be of two types, Incentive Stock Options and Nonqualified
Stock Options. Any Stock Option granted under the Plan shall be in such form as
the Committee may from time to time approve.
The Committee shall have the authority to grant any optionee Incentive Stock
Options, Nonqualified Stock Options or both types of Stock Options (in each
case with or without Stock Appreciation Rights); provided however, that grants
hereunder are subject to the aggregate limit on grants to individual
participants set forth in Section 3. Incentive Stock Options may be granted
only to employees of the Corporation and its subsidiaries (within the meaning
of Section 424(f) of the Code). To the extent that any Stock Option is not
designated as an Incentive Stock Option or even if so designated does not
qualify as an Incentive Stock Option, it shall constitute a Nonqualified Stock
Option.
Stock Options shall be evidenced by option agreements, the terms and provisions
of which may differ among and between participants. An option agreement shall
indicate on its face whether it is intended to be an agreement for an Incentive
Stock Option or a Nonqualified Stock Option. The grant of a Stock Option shall
occur on the date on which the Committee by resolution selects an individual to
be a participant in any grant of a Stock Option, determines the number of
shares of Common Stock to be subject to such Stock Option to be granted to such
individual and specifies the terms and provisions of
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<PAGE> 36
the Stock Option. The Corporation shall notify a participant of any grant of a
Stock Option, and a written option agreement or agreements shall be duly
executed and delivered by the Corporation to the participant. Such agreement or
agreements shall become effective upon execution by the Corporation and the
participant. The Committee may determine the content of any written option
agreement, and whether the agreement need be signed and other procedural
aspects of the grant.
Anything in the Plan to the contrary notwithstanding, no term of the Plan
relating to Incentive Stock Options shall be interpreted, amended or altered
nor shall any discretion or authority granted under the Plan be exercised so as
to disqualify the Plan under Section 422 of the Code or, without the consent of
the optionee affected, to disqualify any Incentive Stock Option under said
Section 422.
Stock Options granted under the Plan shall be subject to the following terms
and conditions and shall contain such additional terms and conditions as the
Committee shall deem desirable:
(a) Option Price. The option price per share of Common Stock purchasable under
a Stock Option shall be determined by the Committee and set forth in the
option agreement, but shall not be less than the Fair Market Value of the
Common Stock subject to the Stock Option on the date of grant.
(b) Option Term. The term of each Stock Option shall be fixed by the Committee,
but no Incentive Stock Option shall be exercisable more than ten years
after the date on which the Stock Option is granted.
(c) Exercisability. Except as otherwise provided herein, Stock Options shall be
exercisable at such time or times and subject to such terms and conditions
as shall be determined by the Committee. If the Committee provides that any
Stock Option is exercisable only in installments, the Committee may at any
time waive such installment exercise provisions, in whole or in part, based
on such factors as the Committee may determine. In addition, the Committee
may at any time accelerate the exercisability of any Stock Option.
(d) Method of Exercise. Subject to the provisions of this Section 5, Stock
Options may be exercised, in whole or in part, at any time during the
option term by giving written notice of exercise (whether by writing,
telephone or otherwise) to the Corporation specifying the number of shares
of Common Stock subject to the Stock Option to be purchased.
Such notice shall be accompanied by payment in full of the purchase price
by certified or bank check or such other instrument as the Corporation may
accept. If approved by the Committee, payment, in full or in part, may also
be made in the form of unrestricted Common Stock already owned by the
optionee (based on the Fair Market Value of the Common Stock on the date
the Stock Option is exercised) and
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<PAGE> 37
which has been held by the optionee for at least 6 months; provided
however, that, in the case of an Incentive Stock Option the right to make a
payment in the form of already owned shares of Common Stock may be
authorized only at the time the Stock Option is granted.
In the discretion of the Committee, payment for any shares subject to a
Stock Option may also be made by delivering a properly executed exercise
notice to the Corporation, together with a copy of irrevocable instructions
to a broker to deliver promptly to the Corporation the amount of sale or
loan proceeds to pay the purchase price, and, if requested, by the amount
of any federal, state, local or foreign withholding taxes by certifying
ownership of shares of Common Stock owned by the participant to the
satisfaction of the Committee for later delivery to the Corporation as
specified by the Corporation; or by any combination of the foregoing. To
facilitate the foregoing, the Corporation may enter into agreements for
coordinated procedures with one or more brokerage firms.
In addition, in the discretion of the Committee, payment for any shares
subject to a Stock Option may also be made by instructing the Committee to
withhold a number of such shares having a Fair Market Value on the date of
exercise equal to the aggregate exercise price of such Stock Option, or by
permitting the participant to certify or attest to ownership of shares of
Common Stock owned by the participant to the satisfaction of the Committee
for latter delivery to the Corporation as specified by the Committee.
No shares of Common Stock shall be issued until full payment therefore has
been made. An optionee shall have all of the rights of a shareholder of the
Corporation holding the class or series of Common Stock that is subject to
such Stock Option (including, if applicable, the right to vote the shares
and the right to receive dividends), when the optionee has given written
notice of exercise, has paid in full for such shares and, if requested, has
given the representation described in Section 13(a).
(e) Corporation Loan or Guarantee. Upon the exercise of any Stock Option and
subject to the pertinent Award and the discretion of the Committee, the
Corporation may at the request of the participant:
(i) lend to the participant, an amount equal to such portion of the option
price as the Committee may determine; or
(ii) guarantee a loan obtained by the participant from a third-party for the
purpose of tendering the option price.
The terms and conditions of any loan or guarantee, including the term,
interest rate, whether the loan is with recourse against the participant
and any security interest thereunder, shall be determined by the Committee,
except that no extension of credit or guarantee shall obligate the
Corporation for an amount to exceed the lesser of the
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<PAGE> 38
aggregate fair market value per share of the Common Stock on the date of
exercise, (less the par value of the shares of Common Stock to be purchased
upon the exercise of the Award, if required by law) or the amount permitted
under applicable laws or the regulations and rules of the Federal Reserve
Board and any other governmental agency having jurisdiction.
(f) Nontransferability of Stock Options. No Stock Option shall be transferable
by the optionee other than (a) by will or by the laws of descent and
distribution; or (b) in the case of a Nonqualified Stock Option, pursuant
to (i) a qualified domestic relations order (as defined in the Code or
Title I of the Employee Retirement Income Security Act of 1974, as amended,
or the rules thereunder) or (ii) a gift to such optionee's spouse or
descendants, whether directly or indirectly or by means of a trust or
partnership or otherwise, if expressly permitted under the applicable
option agreement. All Stock Options shall be exercisable, subject to the
terms of this Plan, during the optionee's lifetime, only by the optionee or
by the guardian or legal epresentative of the optionee or, in the case of a
Nonqualified Stock Option, its alternative payee pursuant to such qualified
domestic relations order or the recipient of a gift permitted under the
applicable option agreement, it being understood that the terms "holder"
and "optionee" include the guardian and legal representative of the
optionee named in the option agreement and any person to whom an option is
transferred by will or the laws of descent and distribution or, in the case
of a Nonqualified Stock Option, pursuant to (i) a qualified domestic
relations order or (ii) a gift permitted under the applicable option
agreement.
(g) Termination by Death. Unless otherwise determined by the Committee, if an
optionee's employment terminates by reason of death, any Stock Option held
by such optionee may thereafter be exercised in full, whether or not then
exercisable, or on such accelerated basis as the Committee may determine,
for a period of 3 years (or such other period as the Committee may specify
in the option agreement) from the date of such death or until the
expiration of the stated term of such Stock Option, whichever period is the
shorter.
(h) Termination by Reason of Disability. Unless otherwise determined by the
Committee, if an optionee's employment terminates by reason of Disability,
any Stock Option held by such optionee may thereafter be exercised by the
optionee, to the extent it was exercisable at the time of termination, or
on such accelerated basis as the Committee may determine, for a period of 3
years (or such shorter period as the Committee may specify in the option
agreement) from the date of such termination of employment or until the
expiration of the stated term of such Stock Option, whichever period is the
shorter; provided however, that if the optionee dies within such period,
any unexercised Stock Option held by such optionee shall, notwithstanding
the expiration of such period, continue to be exercisable to the extent to
which it was exercisable at the time of death for a period of 1 year from
the date of such death or until the expiration of the stated term of such
Stock Option, whichever period is the shorter. In the event of termination
of employment by reason of Disability, if an Incentive Stock
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Option is exercised after the expiration of the exercise periods that apply
for purposes of Section 422 of the Code, such Stock Option will thereafter
be treated as a Nonqualified Stock Option.
(i) Termination by Reason of Retirement. Unless otherwise determined by the
Committee, if an optionee's employment terminates by reason of Retirement,
any Stock Option held by such optionee may thereafter be exercised by the
optionee, to the extent it was exercisable at the time of such Retirement,
or on such accelerated basis as the Committee may determine, for a period
of 5 years (or such shorter period as the Committee may specify in the
option agreement) from the date of such termination of employment or until
the expiration of the stated term of such Stock Option, whichever period is
the shorter; provided however, that if the optionee dies within such
period, any unexercised Stock Option held by such optionee shall,
notwithstanding the expiration of such period, continue to be exercisable
to the extent to which it was exercisable at the time of death for a period
of 12 months from the date of such death or until the expiration of the
stated term of such Stock Option, whichever period is the shorter. In the
event of termination of employment by reason of Retirement, if an Incentive
Stock Option is exercised after the expiration of the exercise periods that
apply for purposes of Section 422 of the Code, such Stock Option will
thereafter be treated as a Nonqualified Stock Option.
(j) Other Termination. Unless otherwise determined by the Committee: (i) If an
optionee incurs a Termination of Employment for Cause, all Stock Options
held by such optionee shall thereupon terminate; and (ii) If an optionee
incurs a Termination of Employment for any reason other than death,
Disability or Retirement or for Cause, any Stock Option held by such
optionee, to the extent then exercisable, or on such accelerated basis as
the Committee may determine, may be exercised for the lesser of 3 months
from the date of such Termination of Employment or the balance of such
Stock Option's term; provided however, that if the optionee dies within
such 3-month period, any unexercised Stock Option held by such optionee
shall, notwithstanding the expiration of such 3-month period, continue to
be exercisable to the extent to which it was exercisable at the time of
death for a period of 12 months from the date of such death or until the
expiration of the stated term of such Stock Option, whichever period is the
shorter. Notwithstanding the foregoing, if an optionee incurs a Termination
of Employment at or after a Change in Control (as defined Section ), other
than by reason of death, Disability or Retirement, any Stock Option held by
such optionee shall be exercisable for the lesser of (1) six months and one
day from the date of such Termination of Employment, and (2) the balance of
such Stock Option's term. In the event of Termination of Employment, if an
Incentive Stock Option is exercised after the expiration of the exercise
periods that apply for purposes of Section of the Code, such Stock Option
will thereafter be treated as a Nonqualified Stock Option.
(k) Cashing Out of Stock Option. Upon receipt of written notice of exercise,
the Committee may elect to cash out all or part of the portion of the
shares of Common
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Stock for which a Stock Option is being exercised by paying the optionee an
amount, in cash or Common Stock, equal to the excess of the Fair Market
Value of the Common Stock over the option price times the number of shares
of Common Stock for which the Option is being exercised on the effective
date of such cash-out.
(l) Change in Control Cash-Out. Notwithstanding any other provision of the
Plan, during the 60-day period from and after a Change in Control (the
"Exercise Period"), unless the Committee shall determine otherwise at the
time of grant, an optionee shall have the right, whether or not the Stock
Option is fully exercisable and in lieu of the payment of the exercise
price for the shares of Common Stock being purchased under the Stock Option
and by giving notice to the Corporation, to elect (within the Exercise
Period) to surrender all or part of the Stock Option to the Corporation and
to receive cash, within 30 days of such notice, in an amount equal to the
amount by which the Change in Control Price per share of Common Stock on
the date of such election shall exceed the exercise price per share of
Common Stock under the Stock Option (the "Spread") multiplied by the number
of shares of Common Stock granted under the Stock Option as to which the
right granted under this Section shall have been exercised.
(m) Repricing. Notwithstanding anything in the Plan to the contrary, no Stock
Option shall be reissued or repriced.
(n) Deferred Delivery. The Committee has discretion to permit the deferred
delivery of shares of Common Stock upon the exercise of a Stock Option.
SECTION 6. DIRECTOR STOCK OPTIONS
(a) Annual Grant. Each person who is a Director (as defined in Section (1)(m)
on and after the date of the 1998 annual shareholder meeting shall become a
participant in the Plan and shall, on the date of the 1998 annual
shareholder meeting and on each subsequent annual shareholders' meeting (or
such other annual date as selected by the Committee) ("Director Grant
Date") for as long as such person remains a Director (or until the
termination of the Plan, whichever date occurs earlier), without further
action by the Board or the Committee, be granted a Stock Option to purchase
2,000 shares of Common Stock. If any Director is required to retire
pursuant to the policies of the Board during the 12-month period beginning
on any Director Grant Date, or if the Director has notified the Board that
he or she intends to resign for any reason during the 12-month period
beginning on any Director Grant Date, said Director shall instead be
granted on the relevant Director Grant Date a Stock Option to purchase the
number of shares of Common Stock equal to (i) 2,000 multiplied by (ii) a
fraction, the numerator of which is the number of full calendar months the
Director will serve during the period beginning on the Grant Date and
ending on the Director's last date of service and the denominator of which
is 12. If, after 1998, a Director is elected or appointed to the Board
effective on any date other than the date of the annual
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shareholders' meeting, said Director shall automatically be granted on the
Director Grant Date he or she joins the Board a Stock Option to purchase
the number of shares of Common Stock equal to (i) 2,000, multiplied by (ii)
a fraction, the numerator of which is the number of full months such
Director will serve on the Board during the period beginning on the date he
or she joins the Board and ending on the date of the next following annual
shareholders' meeting and the denominator of which is 12. If the number of
shares of Common Stock available to grant under the Plan on a scheduled
date of grant is insufficient to make all automatic grants required to be
made pursuant to the Plan on such date, then each eligible Director shall
receive a Stock Option to purchase a pro rata number of the remaining
shares of Common Stock available under the Plan; provided further, however,
that if such proration results in fractional shares of Common Stock, then
such Stock Option shall be rounded down to the nearest number of whole
shares of Common Stock. If there is no whole number of shares remaining to
be granted, then no grants shall be made under the Plan.
(b) Exercisability. Subject to Section 10 or the provisions of any Award
agreement, each Stock Option granted to a Director under Section 6(a) shall
be fully vested on of the Director Grant Date, but shall not be exercisable
for six months from the Director Grant Date (but subject to Section 10) or
until such later date as provided in an Award agreement.
(c) Special Grant. The Corporation shall grant a Stock Option to each Director
who has elected distribution of his or her accrued benefit upon termination
of the Director's Retirement Income Plan in the form of a Stock Option
equal to the value of such accrued benefit. The value and number of shares
of Common Stock subject to such Stock Option shall be determined by the
Committee as of a date selected by the Committee and by applying a
valuation method which valuation shall be binding on all parties hereto.
Each Stock Option granted under this Section 6(c) shall be fully vested,
but may not be exercisable for six months from the date of grant (but
subject to Section 10), or until such later date as provided in an Award
agreement, and shall contain such additional terms and provisions as the
Committee may determine.
(d) Termination of a Director. Unless otherwise provided in an Award
agreement, the term of any Stock Option granted pursuant to this Section 6
shall terminate on the tenth anniversary of the Director Grant Date (which
term shall include the date of grant under Section 6(c).
(e) Other. Each Stock Option granted to a Director shall be evidenced by an
agreement in a form approved by the Committee, which shall embody the terms
and conditions of such Stock Option and which shall be subject to the
express terms and conditions set forth in the Plan. Such Award shall
become effective upon execution by the participant. The provisions of
Section 5 (other than Section 5(g), (h), (i) and (j)) shall apply to all
Stock Options granted under this Section 6 to the extent not inconsistent
with the provisions of this Section 6.
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SECTION 7. STOCK APPRECIATION RIGHTS
(a) Grant and Exercise. Stock Appreciation Rights may be granted in
conjunction with all or part of any Stock Option granted under the Plan.
In the case of a Nonqualified Stock Option, such rights may be granted
either at or after the time of grant of such Stock Option. In the case of
an Incentive Stock Option, such rights may be granted only at the time of
grant of such Stock Option. A Stock Appreciation Right shall terminate and
no longer be exercisable upon the termination or exercise of the related
Stock Option.
A Stock Appreciation Right may be exercised by an optionee in accordance
with Section 7(b) by surrendering the applicable portion of the related
Stock Option in accordance with procedures established by the Committee.
Upon such exercise and surrender, the optionee shall be entitled to receive
an amount determined in the manner prescribed in Section 7(b). Stock
Appreciation Rights may be granted in conjunction with all or part of any
Stock Option granted under this Plan in which case the exercise of the
Stock Appreciation Right shall require the cancellation of a corresponding
portion of the Stock Option, and the exercise of the Stock Option will
result in cancellation of a corresponding portion of the Stock Appreciation
Right. Stock Options which have been so surrendered shall no longer be
exercisable to the extent the related Stock Appreciation Rights have been
exercised.
(b) Terms and Conditions. Stock Appreciation Rights shall be subject to such
terms and conditions as shall be determined by the Committee, including the
following:
(i) Stock Appreciation Rights shall be exercisable only at such time
or times and to the extent that the Stock Options to which they
relate are exercisable in accordance with the provisions Section
5 and this Section 7.
(ii) Upon the exercise of a Stock Appreciation Right, an optionee
shall be entitled to receive an amount in cash, shares of
Common Stock or both, equal in value to the excess of the Fair
Market Value of one share of Common Stock over the option price
per share specified in the related Stock Option multiplied by
the number of shares in respect of which the Stock Appreciation
Right shall have been exercised, with the Committee having the
right to determine the form of payment.
(iii) Stock Appreciation Rights shall be transferable only to
permitted transferees of the underlying Stock Option in
accordance with Section 5(f).
(iv) Upon the exercise of a Stock Appreciation Right, the Stock
Option or part thereof to which such Stock Appreciation Right
is related shall be deemed to have been exercised for the
purpose of the limitation set forth in Section 3 on
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the number of shares of Common Stock to be issued under the
Plan, but only to the extent of the number of shares covered by
the Stock Appreciation Right at the time of exercise based on
the value of the Stock Appreciation Right at such time.
SECTION 8. RESTRICTED STOCK
(a) Administration. Shares of Restricted Stock may be awarded either alone or
in addition to other Awards granted under the Plan. The Committee shall
determine the officers and employees to whom and the time or times at which
grants of Restricted Stock will be awarded, the number of shares to be
awarded to any participant (subject to the aggregate limit on grants to
individual participants set forth in Section 3), the conditions for
vesting, the time or times within which such Awards may be subject to
forfeiture and any other terms and conditions of the Awards, in addition to
those contained in Section 8(c).
The Committee may, prior to grant, condition vesting of Restricted Stock
upon the attainment of Performance Goals. The Committee may, in addition to
requiring satisfaction of Performance Goals, condition vesting upon the
continued service of the participant. The provisions of Restricted Stock
Awards (including the applicable Performance Goals) need not be the same
with respect to each recipient. All Performance Goals applicable to Awards
of Restricted Stock shall be approved by the Committee in writing as
required by Section 162(m) of the Code and the rules and regulations
thereunder in order for the value of the Restricted Stock delivered
pursuant to such Award to be deductible.
(b) Awards and Certificates. Shares of Restricted Stock shall be evidenced in
such manner as the Committee may deem appropriate, including book-entry
registration or issuance of one or more stock certificates. Any certificate
issued in respect of shares of Restricted Stock shall be registered in the
name of such participant and shall bear an appropriate legend referring to
the terms, conditions and restrictions applicable to such Award,
substantially in the following form:
"THE TRANSFERABILITY OF THIS CERTIFICATE AND THE SHARES OF STOCK
REPRESENTED HEREBY ARE SUBJECT TO THE TERMS AND CONDITIONS (INCLUDING
FORFEITURE) OF FEDERAL-MOGUL CORPORATION 1997 LONG TERM INCENTIVE PLAN
AND A RESTRICTED STOCK AGREEMENT. COPIES OF SUCH PLAN AND AGREEMENT
ARE ON FILE AT THE OFFICES OF THE SECRETARY OF FEDERAL-MOGUL
CORPORATION, 26555 NORTHWESTERN HIGHWAY, SOUTHFIELD, MICHIGAN."
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The Committee may require that the certificates evidencing such shares be
held in custody by the Corporation until the restrictions thereon shall
have lapsed and that, as a condition of any Award of Restricted Stock, the
participant shall have delivered a stock power, endorsed in blank, relating
to the Common Stock covered by such Award.
(c) Terms and Conditions. Shares of Restricted Stock shall be subject to the
following terms and conditions:
(i) Subject to the provisions of the Plan and the Restricted Stock
Agreement referred to in Section 8(c)(vi), during the
period, if any, set by the Committee, commencing with the date
of such Award for which such participant's continued service
is required (the "Restriction Period") (which period shall
ordinarily be not less than one year), and until the later of
(i) the expiration of the Restriction Period and (ii) the date
the applicable Performance Goals (if any) are satisfied, the
participant shall not be permitted to sell, assign, transfer,
pledge or otherwise encumber shares of Restricted Stock;
provided, that the foregoing shall not prevent a participant
from pledging Restricted Stock as security for a loan, the
sole purpose of which is to provide funds to pay the option
price for Stock Options. Within these limits, the Committee
may provide for the lapse of restrictions based upon period of
service in installments or otherwise and may accelerate or
waive, in whole or in part, restrictions based upon period of
service or upon performance; provided however, that in the
case of Restricted Stock subject to Performance Goals granted
to a participant who is a Covered Employee, the applicable
Performance Goals have been satisfied.
(ii) Except as provided in this paragraph (ii) and Section 8(c)(i)
and the Restricted Stock Agreement, the participant shall
have, with respect to the shares of Restricted Stock, all of
the rights of a shareholder of the Corporation holding the
class or series of Common Stock that is the subject of the
Restricted Stock, including, if applicable, the right to vote
the shares and the right to receive any cash dividends. If so
determined by the Committee in the applicable Restricted Stock
Agreement and subject to Section 13(e) of the Plan, (1) cash
dividends on the class or series of Common Stock that is the
subject of the Restricted Stock Award shall be automatically
deferred and reinvested in additional Restricted Stock, held
subject to vesting of the underlying Restricted Stock, or held
subject to meeting Performance Goals applicable only to
dividends, and (2) dividends payable in Common Stock shall be
paid in the form of Restricted Stock of the same class as the
Common Stock with which such dividend was paid, held subject
to vesting of the underlying Restricted Stock, or held subject
to meeting Performance Goals applicable only to dividends.
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(iii) Except to the extent otherwise provided in the applicable
Restricted Stock Agreement and Sections 8(c)(i), 8(c)(iv) and
(ii), upon a participant's Termination of Employment for any
reason during the Restriction Period or before the applicable
Performance Goals are satisfied, all shares still subject to
restriction shall be forfeited by the participant.
(iv) Except to the extent otherwise provided in Section 10(a)(ii),
in the event that a participant retires or such participant's
employment is involuntarily terminated (other than for Cause),
the Committee shall have the discretion to waive, in whole or
in part, any or all remaining restrictions (other than, in the
case of Restricted Stock with respect to which a participant
is a Covered Employee, satisfaction of any applicable
Performance Goals unless the participant's employment is
terminated by reason of death or Disability) with respect to
any or all of such participant's shares of Restricted Stock.
(v) If and when any applicable Performance Goals are satisfied and
the Restriction Period expires without a prior forfeiture of
the Restricted Stock, unlegended certificates for such shares
shall be delivered to the participant upon surrender of the
legended certificates.
(vi) Each Award shall be confirmed by, and be subject to, the
terms of a Restricted Stock Agreement.
SECTION 9. PERFORMANCE UNITS
(a) Administration. Performance Units may be awarded either alone or in
addition to other Awards granted under the Plan. The Committee shall
determine the officers and employees to whom and the time or times at which
Performance Units shall be awarded, the number of Performance Units to be
awarded to any participant (subject to the aggregate limit on grants to
individual participants set forth in Section 3), the duration of the Award
Cycle and any other terms and conditions of the Award, in addition to those
contained in Section 9(b).
The Committee may, prior to grant, condition the settlement of Performance
Units upon continued employment and/or the attainment of Performance Goals.
The provisions of such Awards (including the applicable Performance Goals)
need not be the same with respect to each recipient. All Performance Goals
applicable to Awards of Performance Units awarded during an Award Cycle
shall be approved by the Committee in writing as required by Section 162(m)
of the Code and the rules and regulations thereunder in order for the cash
and/or property delivered pursuant to such Award to be deductible.
(b) Terms and Conditions. Performance Units Awards shall be subject to the
following terms and conditions:
17
<PAGE> 46
(i) Subject to the provisions of the Plan and the Performance
Units Agreement referred to in Section 9(b)(vi), Performance
Units may not be sold, assigned, transferred, pledged or
otherwise encumbered during the Award Cycle. At the expiration
of the Award Cycle, the Committee shall evaluate the
Corporation's performance in light of the Performance Goals
for such Award to the extent applicable, and shall determine
the value of Performance Units granted to the participant
which have been earned, and the Committee may then elect to
deliver (1) a number of shares of Common Stock equal to the
value of Performance Units determined by the Committee to have
been earned, or (2) cash equal to the Fair Market Value of
such number of shares of Common Stock to the participant. The
maximum value of cash and property that any participant may
receive with respect to Performance Units in any year is
$3,000,000.
(ii) Except to the extent otherwise provided in the applicable
Performance Unit Agreement and Sections 9(b)(iii) and
10(a)(iii), upon a participant's Termination of Employment for
any reason during the Award Cycle or before any applicable
Performance Goals are satisfied, the rights to the shares
still covered by the Performance Units Award shall be
forfeited by the participant.
(iii) Except to the extent otherwise provided in Section
10(a)(iii), in the event that a participant's employment is
terminated (other than for Cause) or in the event a
participant retires, the Committee shall have the discretion
to waive, in whole or in part, any or all remaining payment
limitations (other than, in the case of Performance Units with
respect to which a participant is a Covered Employee,
satisfaction of any applicable Performance Goals unless the
participant's employment is terminated by reason of death or
Disability) with respect to any or all of such participant's
Performance Units.
(iv) A participant may elect to further defer receipt of the
Performance Units payable under an Award (or an installment of
an Award) for a specified period or until a specified event,
subject in each case to the Committee's approval and to such
terms as are determined by the Committee (the "Elective
Deferral Period"). Subject to any exceptions adopted by the
Committee, such election must generally be made prior to
commencement of the Award Cycle for the Award (or for such
installment of an Award).
(v) If and when any applicable Performance Goals are satisfied and
the Elective Deferral Period expires without a prior
forfeiture of the Performance Units, payment in accordance
with Section 9(b)(i) hereof shall be made to the participant.
(vi) Each Award shall be confirmed by, and be subject to, the terms
of a Performance Unit Agreement.
18
<PAGE> 47
SECTION 10. CHANGE IN CONTROL PROVISIONS
(a) Impact of Event. Notwithstanding any other provision of the Plan to the
contrary, in the event of a Change in Control:
(i) Any Stock Options and Stock Appreciation Rights outstanding as
of the date such Change in Control is determined to have occurred,
and which are not then exercisable and vested, shall become
fully exercisable and vested to the full extent of the original
grant.
(ii) The restrictions and deferral limitations applicable to any
Restricted Stock shall lapse, and such Restricted Stock shall
become free of all restrictions and become fully vested and
transferable to the full extent of the original grant.
(iii) All Performance Units shall be considered to be earned and
payable in full, and any deferral or other restriction shall
lapse and such Performance Units shall be settled in cash as promptly
as is practicable.
(b) Definition of Change in Control. For purposes of the Plan, a "Change in
Control" shall mean the happening of any of the following events:
(i) The acquisition by any individual, entity or group (within the meaning
of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) (a "Person") of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 20% or more of either (1) the then outstanding shares
of Common Stock of the Corporation (the "Outstanding Corporation
Common Stock") or (2) the combined voting power of the then
outstanding voting securities of the Corporation entitled to vote
generally in the election of directors (the "Outstanding Corporation
Voting Securities"); provided, however, that for purposes of this
subsection (i), the following acquisitions shall not constitute a
Change of Control; (1) any acquisition directly from the Corporation,
(2) any acquisition by the Corporation, (3) any acquisition by an
employee benefit plan (or related trust) sponsored or maintained by
the Corporation or any corporation controlled by the Corporation or
(4) any acquisition by any corporation pursuant to a transaction which
complies with clauses (1), (2) and (3) of subsection (iii) of this
Section 10(b); or
(ii) Individuals who, as of the date hereof, constitute the Board (the
"Incumbent Board") cease for any reason to constitute at least a
majority of the Board; provided, however, that any individual becoming
a director subsequent to the date hereof whose election, or nomination
for election by the Corporation's shareholders, was approved by a vote
of at least a majority of the directors then comprising the Incumbent
Board shall be considered as though such individual were a member of
the Incumbent Board, but excluding, for this purpose, any such
individual whose initial assumption of office occurs as a result of an
actual or
19
<PAGE> 48
threatened election contest with respect to the election or removal of
directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board; or
(iii) Approval of a reorganization, merger or consolidation or sale or other
disposition of all or substantially all of the assets of the
Corporation (a "Business Combination"), in each case, unless,
following such Business Combination, (1) all or substantially all of
the individuals and entities who were the beneficial owners,
respectively, of the Outstanding Corporation Common Stock and
Outstanding Corporation Voting Securities immediately prior to such
Business Combination beneficially own, directly or indirectly, more
than 50% of, respectively, the then outstanding shares of Common Stock
and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors, as
the case may be, of the corporation resulting from such Business
Combination (including, without limitation, a corporation which as a
result of such transaction owns the Corporation or all or
substantially all of the Corporation's assets either directly or
through one or more subsidiaries) in substantially the same
proportions as their ownership, immediately prior to such Business
Combination of the Outstanding Corporation Common Stock and
Outstanding Corporation Voting Securities, as the case may be, (2) no
Person (excluding any corporation resulting from such Business
Combination or any employee benefit plan (or related trust) of the
Corporation or such corporation resulting from such Business
Combination) beneficially owns, directly or indirectly, 20% or more
of, respectively, the then outstanding shares of common stock of the
corporation resulting from such Business Combination or the combined
voting power of the then outstanding voting securities of such
corporation except to the extent that such ownership existed prior to
the Business Combination and (3) at least a majority of the members of
the Board resulting from such Business Combination were members of the
Incumbent Board at the time of the execution of the initial agreement,
or of the action of the Board, providing for such Business
Combination; or
(iv) Approval by the shareholders of the Corporation of a complete
liquidation or dissolution of the Corporation.
(c) Change in Control Price. For purposes of the Plan, "Change in Control
Price" means the higher of (i) the highest reported sales price, regular
way, of a share of Common Stock in any transaction reported on the New York
Stock Exchange Composite Tape or other national exchange on which such
shares are listed or on NASDAQ during the 60-day period prior to and
including the date of a Change in Control or (ii) if the Change in Control
is the result of a tender or exchange offer or a corporate Transaction, the
highest price per share of Common Stock paid in such tender or exchange
offer or Corporate Transaction; provided however, that in the case of
Incentive Stock Options and Stock Appreciation Rights relating to Incentive
Stock Options, the Change in Control Price shall be in all cases the Fair
Market Value of the
20
<PAGE> 49
Common Stock on the date such Incentive Stock Option or Stock
Appreciation Right is exercised. To the extent that the consideration paid
in any such transaction described above consists all or in part of
securities or other noncash consideration, the value of such securities or
other noncash consideration shall be determined in the sole discretion of
the Board.
SECTION 11. TERM, AMENDMENT AND TERMINATION
The Plan will terminate 5 years after the effective date of the Plan. Awards
outstanding as of such date shall not be affected or impaired by the
termination of the Plan. Any shares of Common Stock not then subject to an
Award, and any shares that thereafter cease to be subject to an Award due to
the forfeiture or cancellation of an Award, or any shares for which settlement
is in cash, or any shares that are received by the Corporation in consideration
of a participant's obligation may be transferred to a successor plan.
The Board may amend, alter or discontinue the Plan, but no amendment,
alteration or discontinuation shall be made which would (i) impair the rights
of an optionee under a Stock Option or a recipient of a Stock Appreciation
Right, Restricted Stock Award or Performance Unit Award therefore granted
without the optionee's or recipient's consent, except such an amendment made to
cause the Plan to qualify for the exemption provided by Rule 16b-3, or (ii)
disqualify the Plan or any Award or transaction thereunder from the exemption
provided by Rule 16b-3. In addition, no such amendment shall be made without
the approval of the Corporation's shareholders to the extent such approval is
required by law or agreement.
The Committee may amend the terms of any Stock Option or other Award
theretofore granted, prospectively or retroactively, but no such amendment
shall impair the rights of any holder without the holder's consent except such
an amendment made to cause the Plan, or Award, transaction or payment made
under the Plan, to qualify for the exemption provided by Rule 16b-3.
Subject to the above provisions, the Board shall have authority to amend the
Plan to take into account changes in law and tax and accounting rules as will
as other developments, and to grant Awards which qualify for beneficial
treatment under such rules with shareholder approval.
SECTION 12. UNFUNDED STATUS OF PLAN
It is presently intended that the Plan shall constitute an "unfunded" plan for
incentive and deferred compensation. The Committee may authorize the creation
of trusts or other arrangements to meet the obligations created under the Plan
to deliver Common Stock or make payments; provided however, that unless the
Committee otherwise determines, the existence of such trusts or other
arrangements is consistent with the "unfunded" status of the Plan.
21
<PAGE> 50
SECTION 13. GENERAL PROVISIONS
(a) The Committee may require each person purchasing or receiving shares
pursuant to an Award to represent to and agree with the Corporation in
writing that such person is acquiring the shares without a view to the
distribution thereof. The certificates for such shares may include
anylegend which the Committee deems appropriate to reflect any restrictions
on transfer.
Notwithstanding any other provision of the Plan or agreements made pursuant
thereto, the Corporation shall not be required to issue or deliver any
certificate or certificates for shares of Common Stock under the Plan prior
to fulfillment of all of the following conditions:
(i) Listing or approval for listing upon notice of issuance of such
shares on the New York Stock Exchange, Inc., or such other securities
exchange as may at the time be the principal market for the Common
Stock;
(ii) Any registration or other qualification of such shares of the
Corporation under any state or federal law or regulation, or
maintaining in effect any such registration or other qualification
which the Committee shall, in its absolute discretion upon the
advice of counsel, deem necessary or advisable; and
(iii) Obtaining any other consent, approval or permit from any state
or federal governmental agency which the Committee shall, in
its absolute discretion after receiving the advice of counsel,
determine to be necessary or advisable.
(b) Nothing contained in the Plan shall prevent the Corporation or any
subsidiary or Affiliate from adopting other or additional compensation
arrangements for its employees.
(c) Neither adoption of the Plan nor the grant or any Award thereunder shall
confer upon any employee any right to continued employment, nor shall it
interfere in any way with the right of the Corporation or any subsidiary or
Affiliate to terminate the employment of any employee at any time.
(d) No later than the date as of which an amount first becomes includible in
the gross income of the participant for federal income tax purposes with
respect to any Award under the Plan, the participant shall pay to the
Corporation, or make arrangements satisfactory to the Corporation regarding
the payment of, any federal, state, local or foreign taxes of any kind
required by law to be withheld with respect to such amount.
(e) Unless otherwise determined by the Corporation, withholding obligations may
be settled with Common Stock, including Common Stock that is part of the
Award that
22
<PAGE> 51
gives rise to the withholding requirement. The obligations of the
Corporation under the Plan shall be conditioned upon such payment or
arrangements, and the Corporation and its Affiliates shall, to the extent
permitted by law, have the right to deduct any such taxes from any payment
otherwise due to the participant. The Committee may establish such
procedures as it deems appropriate, including making irrevocable elections,
for settlement of withholding obligations with Common Stock.
(f) Reinvestment of dividends in additional Restricted Stock at the time of any
dividend payment shall only be permissible if sufficient shares of Common
Stock are available under Section 3 for such reinvestment (taking into
account then outstanding Stock Options and other Awards).
(g) The Committee shall establish such procedures as it deems appropriate for a
participant to designate a beneficiary to whom any amounts payable in the
event of the participant's death are to paid or by whom any rights of the
participant, after the participant's death, may be exercised.
(h) In the case of a grant of an Award to any employee of a subsidiary of the
Corporation, the Corporation may, if the Committee so directs, issue or
transfer the shares of Common Stock, if any, covered by the Award to the
subsidiary, for such lawful consideration as the Committee may specify,
upon the condition or understanding that the subsidiary will transfer the
shares of Common Stock to the employee in accordance with the terms of the
Award specified by the Committee pursuant to the provisions of the Plan.
(i) Notwithstanding the foregoing, if any right granted pursuant to this Plan
would make a Change in Control transaction ineligible for pooling-
of-interests accounting under APB No. 16 that but for the nature of such
grant would otherwise be eligible for such accounting treatment, the
Committee shall have the ability to substitute for any cash payable
pursuant to such right Common Stock with a Fair Market Value equal to the
cash that would otherwise be payable hereunder.
(j) Notwithstanding anything in this Plan to the contrary, no transaction
between a participant and the Corporation that requires as a condition of
its exemption from Section 16 of the Exchange Act approval in the manner
set forth in paragraph (d)(1) or (d)(2) of Rule 16b-3 shall be consummated
until such approval is obtained; but failure to obtain such approval shall
not cause a transaction consummated to be void or voidable without the
consent of such participant nor shall it disqualify the transaction from
the benefit of any of available exemption from said Section 16.
(k) Unless the Committee shall otherwise determine or any provision of the Plan
shall otherwise specifically require, no delivery of cash and/or property
shall be made to any "covered employee", as that term is defined in Section
162(m)(3) of the Code, or any transferee to whom the right of such covered
employee to receive such cash and/or property has been transferred as the
result of a transfer permitted by the Plan, in any year to the extent that
the value such cash and/or property, together with the
23
<PAGE> 52
value of all other cash and/or property delivered to such covered employee
or transferee in such year, shall not be deductible by the Corporation as a
result of the operation of Section 162(m) of the Code. Any cash and/or
property not deliverable because of the application of the previous
sentence shall be delivered in each succeeding year to the extent that the
value of such cash and/or property, together with the value of all other
cash and/or property delivered to such covered employee or transferee in
such year, is so deductible, until such cash and/or property shall have
been delivered in full and such undelivered cash and/or property shall bear
interest from the date on which it was first payable, but for the
application of this Section (j), until paid in full, at a rate of interest
per annum to be determined by the Committee in accordance with any rules
adopted under said Section 162; for purposes of computing such interest,
the Committee shall determine the value of such property, based upon (i)
its Fair Market Value (adjusted as the Committee shall see fit, but at
least quarterly) if it is Common Stock or if its value is determinable with
reference to the price of Common Stock or (ii) as the Committee shall
determine in all other cases. This Section (j) shall cease to have effect
upon the occurrence of a Change in Control and the Plan shall thereafter be
construed as if this Section (j) had never been part thereof, except in
respect of the obligation of the Corporation to pay interest pursuant to
the provisions of this Section (j); without limiting the generality of this
sentence, (i) all cash and/or property deliverable as a result of such
occurrence shall be delivered when due as if this Section (j) were not part
of the Plan and (ii) all cash and/or property deliverable, but for the
provisions of this Section (j), shall become deliverable upon such Change
in Control, together with interest accrued thereon.
(l) The Plan and all Awards made and actions taken thereunder shall be governed
by and construed in accordance with the laws of the State of Delaware,
without reference to principles of conflict of laws.
SECTION 14. EFFECTIVE DATE OF PLAN
The Plan as amended and restated shall be effective as of the date it is
approved by at least a majority of the outstanding shares of Common Stock of
the Corporation.
24
<PAGE> 53
AMENDMENT TO
THE 1989 PERFORMANCE
INCENTIVE STOCK PLAN
Federal-Mogul Corporation hereby amends the 1989 Performance Incentive Stock
Plan (the "Plan"), effective March 1, 1998, as follows:
I.
Section 4.1 of the Plan is amended by inserting Section 4.1(d) into the Plan to
read as follows:
"(d) The shares of Common Stock which are not subject to an award of any type
as of March 1, 1998, shall be transferred to, and applied to satisfy awards
under, the Federal-Mogul Corporation 1997 Long-Term Incentive Plan, as amended
or restated (the "LTIP"). Any shares of Common Stock that are released from an
award of any type or received by the Corporation (i) due to the forfeiture or
cancellation (for whatever reason) of an award of any type, (ii) as
consideration for the exercise of any type of award hereunder, (iii) in
satisfaction of a participant's payment of tax withholding ,or (iv) due to the
settlement of an award in cash whether on March 1, 1998, or thereafter, shall
be transferred to the 1997 LTIP."
II.
Except as herein amended, the Plan shall remain in full force and effect.
Executed this __________ day of __________, 1998.
FEDERAL-MOGUL CORPORATION
By ________________________________
<PAGE> 54
ANNEX B
Financial Statements
Operating Businesses of the
Fel-Pro Group
At December 28, 1997 and December 29, 1996
and for the three fiscal years ended December 28, 1997
with Report of Independent Auditors
<PAGE> 55
Operating Businesses of the
Fel-Pro Group
Financial Statements
At December 28, 1997 and December 29, 1996
and for the three fiscal years ended December 28, 1997
with Report of Independent Auditors
CONTENTS
Report of Independent Auditors...........................................1
Audited Financial Statement
Balance Sheets...........................................................2
Statements of Operations.................................................4
Statements of Cash Flows.................................................5
Notes to Financial Statements............................................6
<PAGE> 56
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 its
operations and its cash flows for each of the three fiscal years in the period
ended December 28, 1997 in conformity with generally accepted accounting
principles.
February 13, 1998
1
<PAGE> 57
Operating Businesses of the
Fel-Pro Group
Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29,
1997 1996
--------------------------------
<S> <C> <C>
ASSETS
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 assets 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
===========================
</TABLE>
See notes to financial statements.
2
<PAGE> 58
Operating Businesses of the
Fel-Pro Group
Balance Sheets
(In Thousands)
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 29,
1997 1996
----------------------------
<S> <C> <C>
LIABILITIES AND EQUITY
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.
3
<PAGE> 59
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.
4
<PAGE> 60
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
5
<PAGE> 61
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 Fel-Pro Specialty Sealing Products L.P.
subsidiaries (Felt) (SSP)
Fel-Pro Mexico S.A. de C.V. Fel-Pro Chemical Products L.P.
(FP Mexico) (Chemical)
Meridian Parts Corporation (Meridian) FP Performance Products L.P.
(Performance)
FP Diesel L.P. (Diesel)
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.
6
<PAGE> 62
Operating Businesses of the
Fel-Pro Group
Notes to Financial Statements (Continued)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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.
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.
7
<PAGE> 63
Operating Businesses of the
Fel-Pro Group
Notes to Financial Statements (Continued)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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.
8
<PAGE> 64
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
--------------------------------------------------------------------------------
(In Thousands)
COST FAIR VALUE COST FAIR VALUE
--------------------------------------------------------------------------------
<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.
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
9
<PAGE> 65
Operating Businesses of the
Fel-Pro Group
Notes to Financial Statements (Continued)
4. INCOME TAXES (CONTINUED)
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:
1996
---------------------
(In Thousands)
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
=======
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>
10
<PAGE> 66
Operating Businesses of the
Fel-Pro Group
Notes to Financial Statements (Continued)
4. INCOME TAXES (CONTINUED)
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.
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.
11
<PAGE> 67
Operating Businesses of the
Fel-Pro Group
Notes to Financial Statements (Continued)
5. OWNERS' EQUITY (CONTINUED)
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
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.
12
<PAGE> 68
Operating Businesses of the
Fel-Pro Group
Notes to Financial Statements (Continued)
6. EMPLOYEE BENEFIT PLANS AND OTHER POSTRETIREMENT BENEFITS (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:
13
<PAGE> 69
Operating Businesses of the
Fel-Pro Group
Notes to Financial Statements (Continued)
6. EMPLOYEE BENEFIT PLANS AND OTHER POSTRETIREMENT BENEFITS (CONTINUED)
OTHER POSTRETIREMENT BENEFITS (CONTINUED)
<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.
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.
14
<PAGE> 70
Operating Businesses of the
Fel-Pro Group
Notes to Financial Statements (Continued)
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.
15
<PAGE> 71
T&N PLC
FINANCIAL STATEMENTS
Year ended 31 December 1997
<PAGE> 72
T&N plc
FINANCIAL STATEMENTS
YEAR ENDED 31 DECEMBER 1997
CONTENTS
Independent auditor's report 1
Consolidated profit and loss accounts 2
Consolidated balance sheets as at 31 December 4
Consolidated cash flow statements 6
Statements of total recognised gains and losses 8
Notes 9
17
<PAGE> 73
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.
Chartered Accountants
Registered Auditor
London, England
17 February 1998
18
<PAGE> 74
CONSOLIDATED PROFIT AND LOSS ACCOUNTS
FOR THE YEARS ENDED 31 DECEMBER
<TABLE>
<CAPTION>
1997 1996 1995
(POUND STERLING)M (POUND STERLING)M (POUND STERLING)M
<S> <C> <C> <C> <C>
TURNOVER
Turnover including share of associated 1,883.3 2,037.9 2,164.5
undertakings
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 1777.0
Acquisitions 29.6 - -
------- ------- -------
Total continuing operations 1,764.3 1,814.4 1777.0
Discontinued operations 34.8 141.6 314.5
Total turnover excluding associated 2(a) 1,799.1 1,956.0 2,091.5
undertakings
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 164.0 167.4 214.0
costs
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 2(d) 177.2 (335.8) 174.5
ACTIVITIES
Profit/(loss) on disposal of discontinued 3 14.5 (1.0) 1.5
operations
Release/(charge) of provision against loss on 3 - 1.4 (1.4)
disposals
Provision for loss on disposal of properties
(continuing operations) (3.1) (2.0) -
Release of provision/(provision against) fixed 4
asset investments: Kolbenschmidt costs 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
------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements
19
<PAGE> 75
<TABLE>
<CAPTION>
1997 1996 1995
(POUND STERLING)M (POUND STERLING)M (POUND STERLING)M
<S> <C> <C> <C>
PROFIT/(LOSS)ON ORDINARY ACTIVITIES BEFORE 190.1 (388.3) 120.1
TAXATION
Tax on profit/(loss) on ordinary activities 6 (62.8) (8.0) (41.4)
----- ----- -----
PROFIT/(LOSS) ON ORDINARY ACTIVITIES AFTER 127.3 (396.3) 78.7
TAXATION
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 14.8p 22.7p
Dividends per share 7 9.2p 3.0p 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
20
<PAGE> 76
CONSOLIDATED BALANCE SHEETS AS AT 31 DECEMBER
<TABLE>
<CAPTION>
BEFORE 1997 ASBESTOS TOTAL TOTAL
ASBESTOS 1997 1996
RELATED ITEMS RELATED ITEMS
(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 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
======= ====== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements
21
<PAGE> 77
<TABLE>
<CAPTION>
TOTAL TOTAL
1997 1996
(POUND (POUND
STERLING)M STERLING)M
<S> <C> <C> <C>
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
22
<PAGE> 78
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE YEARS ENDED 31 DECEMBER
<TABLE>
<CAPTION>
Note BEFORE
ASBESTOS ASBESTOS
RELATED RELATED 1997
FLOWS FLOWS 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
========
<CAPTION>
Note BEFORE
ASBESTOS ASBESTOS
RELATED RELATED 1996 1995
FLOWS FLOWS TOTAL 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
23
<PAGE> 79
<TABLE>
<CAPTION>
RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT 1997 1996 1995
(POUND (POUND (POUND
STERLING)M STERLING)M STERLING)M
<S> <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
24
<PAGE> 80
STATEMENTS OF TOTAL RECOGNISED GAINS AND LOSSES
FOR THE YEARS ENDED 31 DECEMBER
<TABLE>
<CAPTION>
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 21
currency net investments (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>
RECONCILIATIONS OF MOVEMENTS IN SHAREHOLDERS' FUNDS
FOR THE YEARS ENDED 31 DECEMBER
<TABLE>
<CAPTION>
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
25
<PAGE> 81
NOTES
(forming part of the 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.
26
<PAGE> 82
NOTES (continued)
ACCOUNTING POLICIES (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.
27
<PAGE> 83
NOTES (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.
<TABLE>
<CAPTION>
1997 1996 1995
(POUND (POUND (POUND
STERLING)M STERLING)M STERLING)M
<S> <C> <C> <C>
(A) TURNOVER
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
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
(POUND (POUND (POUND
STERLING)M STERLING)M 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 (POUND (POUND (POUND
STERLING)M STERLING)M STERLING)M 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>
28
<PAGE> 84
<TABLE>
<CAPTION>
BY ORIGIN
1997 1996 1995
(POUND (POUND (POUND
STERLING)M STERLING)M STERLING)M
<S> <C> <C> <C>
REGIONAL
UK 442.1 431.5 418.6
Mainland Europe 640.2 724.4 720.6
North America 563.1 527.7 503.2
South Africa 101.7 111.2 115.0
Other countries 17.2 19.6 19.6
-------- -------- --------
Continuing operations 1,764.3 1,814.4 1,777.0
Discountinued operations 34.8 141.6 314.5
-------- -------- --------
1,799.1 1,956.0 2,091.5
======== ======== ========
<CAPTION>
BY Destination
1997 1996 1995
(POUND (POUND (POUND
STERLING)M STERLING)M STERLING)M
<S> <C> <C> <C>
REGIONAL
UK 283.3 280.4 271.8
Mainland Europe 715.0 785.3 791.9
North America 568.1 540.2 518.7
South Africa 93.1 93.0 99.8
Other countries 104.8 115.5 94.8
-------- -------- --------
Continuing operations 1,764.3 1,814.4 1,777.0
Discountinued operations 34.8 141.6 314.5
-------- -------- --------
1,799.1 1,956.0 2,091.5
======== ======== ========
</TABLE>
Inter-group turnover between product groupings and regions is not material.
29
<PAGE> 85
ANALYSIS RESULTS (continued)
<TABLE>
(B) OPERATING PROFIT BEFORE ASBESTOS - RELATED 1997 1996 1995
COSTS (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>
<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
Discounting operations 2.6 14.5 26.5
-------- ------- -------
177.2 179.2 226.6
======== ======= =======
</TABLE>
30
<PAGE> 86
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)
Product groupings M M
<S> <C> <C>
Bearings 128.1 121.5
Scaling 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
====== ======
<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>
31
<PAGE> 87
NOTES (continued)
ANALYSIS OF RESULTS (CONTINUED)
(d) Continuing and discontinued activities
<TABLE>
<CAPTION>
Continuing Acquisitions Discontinued 1997 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
======== ====== ====== =========
<CAPTION>
Continuing Discontinued 1996 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)
======== ====== ========
<CAPTION>
Continuing Discontinued 1995 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.
32
<PAGE> 88
NOTES (CONTINUED)
ANALYSIS OF RESULTS (continued)
(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 milions) 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>
33
<PAGE> 89
<TABLE>
<CAPTION>
1997
(pound sterling)
3 SALE OF DISCONTINUED OPERATIONS 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
====
<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>
Flexitallic Tenmat Others T&N Total
S Africa
Net assets at date of disposal (pound sterling) (pound sterling) (pound sterling) (pound sterling) (pound 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.
34
<PAGE> 90
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)
- - repayble 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>
35
<PAGE> 91
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>
<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).
36
<PAGE> 92
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.
37
<PAGE> 93
NOTES (continued)
8 EARNINGS/(LOSS) PER SHARE
<TABLE>
<CAPTION>
1997 1997 1996 1996 1995 1995
pence per (pound pence per (pound pence per (pound
share sterling) share sterling) share sterling)
M M 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>
Employment costs 1997 1996 1995
(pound (pound (pound
sterling) sterling) sterling)
M M M
<S> <C> <C> <C>
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>
38
<PAGE> 94
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.
39
<PAGE> 95
11 TANGIBLE FIXED ASSETS
<TABLE>
<CAPTION>
Land & buildings Plant & 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>
Depreciation Land & buildings Plant & machinery Total
pound sterling pound sterling pound sterling
millions millions millions
<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>
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).
40
<PAGE> 96
TANGIBLE FIXED ASSETS (continued)
<TABLE>
<CAPTION>
NET BOOK VALUE OF LAND AND BUILDINGS 1997 1996
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
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>
CAPITALISED LEASES INCLUDED IN PLANT AND MACHINERY 1997 1996
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
Cost 24.1 28.4
Depreciation (20.9) (23.8)
----- -----
Net book value 3.2 4.6
===== =====
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL COST OF TANGIBLE FIXED ASSETS LAND & PLANT &
BUILDINGS MACHINERY TOTAL
(POUND STERLING)M (POUND STERLING)M (POUND STERLING)M
<S> <C> <C> <C>
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>
41
<PAGE> 97
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
COST OF VALUATION
<S> <C> <C> <C> <C>
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).
42
<PAGE> 98
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>
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>
43
<PAGE> 99
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>
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>
44
<PAGE> 100
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.
45
<PAGE> 101
19 PROVISIONS FOR LIABILITIES AND CHARGES
<TABLE>
<CAPTION>
POST-
DEFERRED EMPLOYMENT ASBESTOS OTHER
TAXATION BENEFITS RELATED PROVISIONS TOTAL
(POUND STERLING)M (POUND STERLING)M (POUND STERLING)M (POUND STERLING)M (POUND 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>
ISSUED AND ISSUED AND
AUTHORISED AUTHORISED FULLY PAID FULLY PAID
NO. OF SHARES (POUND STERLING)M NO. OF SHARES (POUND STERLING)M
ORDINARY SHARES
<S> <C> <C> <C> <C>
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.
46
<PAGE> 102
<TABLE>
<CAPTION>
SHARE OPTION SCHEMES EXECUTIVE SAVINGS-RELATED TOTAL
NO. OF SHARES NO. OF SHARES NO. OF SHARES
<S> <C> <C> <C>
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
=========== =========== ===========
<CAPTION>
SHARE OPTION SCHEMES EXECUTIVE SAVINGS-RELATED TOTAL
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
The interests in the Company, of those who were directors at 31 1997 1996
December 1997, were as follows:
<S> <C> <C>
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>
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.
47
<PAGE> 103
21 RESERVES
<TABLE>
<CAPTION>
ASSOCIATED
SHARE SHARES TO SPECIAL REVAL- UNDER-
PREMIUM BE ISSUED RESERVE UATION TAKINGS
ACCOUNT RESERVES RESERVES
--------------------------------------------------------------------------------------------------
(POUND STERLING)M (POUND STERLING)M (POUND STERLING)M (POUND STERLING)M (POUND STERLING)M
<S> <C> <C> <C> <C> <C>
AT 1 JANUARY 1995 - - - 34.3 7.8
Currency translation on - - - 0.1 (1.0)
overseas assets
Currency translation on net - - - - -
debt
Transfer to profit & loss - - - - 6.1
Realisation of revaluation - - - 1.6 -
surplus
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 - - - (1.7) (5.9)
overseas assets
Currency translation on net - - - - -
debt
Transfer to profit & loss - - - - (2.7)
Realisation of revaluation - - - (5.6) -
surplus
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 - - 3 19.4 - -
special reserve
Currency translation on - - - (0.4) (4.9)
overseas assets
Currency translation on net - - - - -
debt
Transfer to profit and loss - - - - (0.8)
Realisation of revaluation - - 5.2 (5.3) -
surplus
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 - - - - (0.3)
disposal
Executive share options - 0.7 - - -
Other movements - - - - (1.1)
----- ----- ----- ----- -----
AT 31 DECEMBER 1997 2.7 0.7 63.2 14.2 (2.1)
===== ===== ===== ===== =====
</TABLE>
48
<PAGE> 104
<TABLE>
<CAPTION>
GOODWILL PROFIT &
WRITE OFF LOSS
RESERVE ACCOUNT
--------------------------------------
(POUND STERLING)M (POUND STERLING)M
<S> <C> <C>
AT 1 JANUARY 1995 (186.1) 127.9
Currency translation on - 14.4
overseas assets
Currency translation on net - (15.1)
debt
Transfer to profit & loss - 32.3
Realisation of revaluation - -
surplus
Premium on share issues - 6.6
Goodwill arising on (7.5) -
acquisitions
Goodwill arising on formation (3.5) -
of Turkish joint venture
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 - (58.1)
overseas assets
Currency translation on net - 42.6
debt
Transfer to profit & loss - (414.1)
Realisation of revaluation - 5.6
surplus
Premium on share issues - -
Goodwill arising on (0.3) -
acquisitions
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 - (21.0)
overseas assets
Currency translation on net - 8.9
debt
Transfer to profit and loss - 73.7
Realisation of revaluation - 0.1
surplus
Revaluations - -
Premium on share issues - -
Scrip dividend (Note 7) - 15.4
Goodwill arising on (10.0) -
acquisitions
Goodwill on disposals 2.9 -
Realisation of reserves on - 0.3
disposal
Executive share options - -
Other movements - 1.1
------- --------
AT 31 DECEMBER 1997 (182.9) 76.1
======== ========
</TABLE>
49
<PAGE> 105
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.
(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.
50
<PAGE> 106
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 STERLING)M (POUND STERLING)M (POUND 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 260.8 280.5 298.6
asbestos-related payments
Asbestos-related payments (149.4) (64.8) (55.7)
------- -------- -------
Cash inflow from operating activities after 111.4 215.7 242.9
asbestos-related payments ======= ======== =======
<CAPTION>
(B) RETURNS ON INVESTMENT AND SERVICING OF FINANCE 1997 1996 1995
(POUND STERLING)M (POUND STERLING)M (POUND 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)
======= ======= ======
<CAPTION>
(C) TAXATION 1997 1996 1995
(POUND STERLING)M (POUND STERLING)M (POUND STERLING)M
<S> <C> <C> <C>
UK tax paid (8.5) (9.3) (5.0)
Overseas tax paid (11.6) (19.6) (3.3)
------ ------ -----
(20.1) (28.9) (8.3)
====== ====== =====
</TABLE>
51
<PAGE> 107
<TABLE>
<CAPTION>
(D) CAPITAL EXPENDITURE AND FINANCIAL INVESTMENT 1997 1996 1995
(POUND STERLING)M (POUND STERLING)M (POUND 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 (14.7) (13.6) (6.0)
Kolbenschmidt)
Disposal of trade investments (Kolbenschmidt) 13.2 0.1 -
-------- -------- -------
(101.9) (125.5) (155.6)
======== ======== =======
<CAPTION>
(E) ACQUISITIONS AND DISPOSALS 1997 1996 1995
(POUND STERLING)M (POUND STERLING)M (POUND 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
====== ====== ======
<CAPTION>
(F) MANAGEMENT OF LIQUID RESOURCES 1997 1996 1995
(POUND STERLING)M (POUND STERLING)M (POUND 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
====== ===== ====
<CAPTION>
(G) FINANCING 1997 1996 1995
(POUND STERLING)M (POUND STERLING)M (POUND 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 22.8 (30.1) (3.2)
lease financing
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.
52
<PAGE> 108
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 ACCOUNTING
AT POLICY OTHER FAIR
ACQUISITION ALIGNMENT ADJUSTMENTS 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
=====
<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).
53
<PAGE> 109
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>
CASH PAID FOR ACQUISITIONS (POUND STERLING)M
<S> <C>
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>
AT 1 OTHER NON
JANUARY CASH CASH DEBT
1997 FLOW MOVEMENTS 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)
======== ======== ======== ========
<CAPTION>
EXCHANGE MOVEMENT ON
AT 31
OPENING MOVEMENT DECEMBER
BALANCES 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)
------ ------ -------
Debt due within one year (3.6) (2.0) 34.8
------ ------ -------
3.9 (0.6) (37.5)
10.5 1.5 (282.6)
0.3 - (3.9)
------ ------ -------
14.7 0.9 (324.0)
------ ------ -------
(0.2) (0.9) 94.1
- - 8.0
------ ------ -------
(0.2) (0.9) 102.1
------ ------ -------
10.9 (2.0) (187.1)
====== ====== =======
</TABLE>
Included within the closing balance of short ter m deposits is (pound
sterling) 78.2m in the asbestos fund.
54
<PAGE> 110
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>
55
<PAGE> 111
<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 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.
56
<PAGE> 112
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>
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.
57
<PAGE> 113
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.
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.
58
<PAGE> 114
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 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.
59
<PAGE> 115
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.
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.
60
<PAGE> 116
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.
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.
61
<PAGE> 117
ASSOCIATED UNDERTAKINGS
The Group' 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, 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>
62
<PAGE> 118
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 1.8 77.7
reconciling items
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>
63
<PAGE> 119
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 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.
64
<PAGE> 120
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.
65
<PAGE> 121
Item 7(b) Unaudited Pro Forma Financial Information
As previously reported in the Company's Form 8-K filed March 11, 1998, the
Company completed the acquisition of Fel-Pro, Incorporated and certain
affiliated entities (Fel-Pro) for $716.8 million on February 24, 1998. Fel-Pro
is a leading manufacturer of gaskets and seals headquartered in Skokie,
Illinois. The acquisition has been accounted for using the purchase method of
accounting. The purchase price consists of 1,030,325.6 shares of newly issued
Series E Mandatory Exchangeable Preferred Stock (exchangeable into 5,151,628
shares of common stock) with an imputed value of $225 million and $491.8
million in cash. The cash was provided through an existing revolving credit
facility provided by a syndicate led by The Chase Manhattan Bank and three
short-term loans, each in the amount of $50 million, from The Chase Manhattan
Bank, ABN Amro Bank NV and First Chicago NBD Bank, respectively.
Also, as previously reported in the Company's Form 8-K filed March 23, 1998, the
Company completed its cash offer announced October 16, 1997 to acquire all the
outstanding common stock of T&N plc (T&N) for 260 pence per share on March 6,
1998. T&N, based in Manchester, England, manufactures and supplies high
technology engineered automotive components and industrial materials including
pistons, piston rings, friction products, bearings, composites, camshafts and
sealing products. The acquisition has been accounted for using the purchase
method of accounting. The purchase price of approximately $2,434.2 million was
funded primarily through a $2.75 billion floating rate Senior Credit Agreement
(consisting of a $2.35 billion 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 The Chase Manhattan Bank. These credit
facilities also refinanced the borrowings used to finance the cash portion of
the purchase price for Fel-Pro. Additional funds for the acquisition of T&N were
obtained through the December 1997 sale of 7% Trust Convertible Preferred
Securities (generating gross proceeds of $575 million) by Federal-Mogul
Financing Trust, a subsidiary of the Company. The Company intends to put into
place a permanent capital structure with an appropriate combination of debt and
equity which will partially replace the Senior Credit Agreement and Senior
Subordinated Credit Agreement debt.
The estimated cost of the acquisitions of Fel-Pro and T&N are computed as
follows:
<TABLE>
<CAPTION>
(in millions)
Fel-Pro T&N
------------------ ----------------
<S> <C> <C>
Cash $491.8 $2,434.2
Series E Mandatory Exchangeable Preferred Stock 225.0 -
Expected proceeds from exercisable options - (52.6)
Direct transaction costs .9 29.3
------------------ ----------------
Estimated acquisition cost $717.7 $2,410.9
================== ================
</TABLE>
66
<PAGE> 122
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>
(in millions)
Fel-Pro T&N
------------------ ----------------
<S> <C> <C>
Current assets $ 173.1 $ 1,087.6
Liabilities assumed* (133.1) (3,143.9)
Property, plant and equipment 110.2 1,055.4
Identifiable intangible assets 16.7 315.7
Other noncurrent assets 31.4 525.9
Purchased research and development - 18.6
Goodwill 519.4 1,990.7
Estimated fair value of Bearings Business (see below) - 560.9
------- --------
Total $ 717.7 $2,410.9
======= ========
</TABLE>
* Includes an increase of $329 million ot 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
Bearings Business.
In connection with securing regulatory approvals for the acquisition of T&N, the
Company executed an Agreement Containing Consent Order with the Federal Trade
Commission on February 27, 1998. Pursuant to this agreement the Company must
divest of certain assets of T&N within eight months from the date of the
consent order and must provide for independent management of those assets
pending such divestiture. The assets to be divested consist principally of T&N's
thinwall and dry bearings (polymer bearings) operations (the Bearings
Business). The agreement stipulates that the 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 Bearings Business or have contact with the Bearings Business outside of
normal business activities.
The Company has separately identified the estimated effect of the divestiture
of the Bearings Business in the unaudited pro forma statement of operations and
balance sheet. The estimated net cash flows from operations of the 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.
67
<PAGE> 123
The unaudited pro forma statement of operations for the year ended December 31,
1997 has been prepared to illustrate the effect of the acquisitions of T&N and
Fel-Pro as if they had occurred on January 1, 1997. The unaudited pro forma
statement of operations includes only the results of ongoing operations and
excludes such impacts as extraordinary items, one-time items relating to the
acquisitions and synergies and expected cost savings associated with the
integration of the acquisitions. The unaudited pro forma balance sheet as of
December 31, 1997 has been prepared to illustrate the effect of the acquisitions
of T&N and Fel-Pro as if they had occurred on that date.
The unaudited pro forma financial information gives effect to the acquisition
transactions using the purchase method of accounting. The pro forma adjustments
are described in the accompanying notes to the unaudited pro forma financial
information and are based upon preliminary available information and upon
certain assumptions made by management. 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 the Company'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 the Company, as well as the audited financial statements of the acquired
companies.
68
<PAGE> 124
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
DISPOSITION
FEDERAL- OF
MOGUL T&N FEL-PRO BEARINGS
HISTORICAL HISTORICAL HISTORICAL BUSINESS
------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Sales $ 1,806.6 $ 2,948.4 $ 489.3 $ (393.1) (a)
Cost of products sold 1,381.8 2,187.6 268.5 (295.4) (a)
------------ ------------ ------------ -------------
Gross margin 424.8 760.8 220.8 (97.7)
Selling general and administrative expenses 286.2 500.3 173.8 (46.1) (a)
Restructuring charges (credits) (1.1) - - -
Reengineering and other related charges (benefits) (1.6) - - -
Adjustment of assets held for sale to fair value 2.4 - - -
Interest expense 32.0 60.5 - (16.9) (a)
Interest income (7.1) (17.9) - 2.3 (a)
International currency exchange losses 0.6 4.4 - (0.3) (a)
British pound currency option, net 10.5 - - -
Gain on sale of Kolbenschmidt AG share purchase options - (21.7) - -
Other (income) expense, net 3.4 (14.5) - (1.3) (a)
------------ ------------ ------------ -------------
Earnings before income taxes, extraordinary item
and nonrecurring charges 99.5 249.7 47.0 (35.4)
Income tax expense (benefit) 27.5 159.3 25.5 (9.4) (a)
------------ ------------ ------------ -------------
Net earnings (loss) before extraordinary item
and nonrecurring charges $ 72.0 $ 90.4 $ 21.5 $ (26.0)
============ ============ ============ =============
Earnings (loss) per common share:
Basic $ 1.81
Diluted $ 1.67
Weighted average shares outstanding (thousands):
Basic 36,647
============
Diluted 41,854
============
<CAPTION>
T&N FEL-PRO
PRO FORMA PRO FORMA
ADJUSTMENTS ADJUSTMENTS COMBINED
---------------- ---------------- --------------
<S> <C> <C> <C>
Sales $ (15.3) (b) $ (11.9) (i) $ 4,824.0
Cost of products sold (0.9) (c) (6.9) (j) 3,534.7
----------- ------------- ------------
Gross margin (14.4) (5.0) 1,289.3
Selling general and administrative expenses 58.9 (d) 13.0 (k) 986.1
Restructuring charges (credits) - - (1.1)
Reengineering and other related charges (benefits) - - (1.6)
Adjustment of assets held for sale to fair value - - 2.4
Interest expense 148.5 (e) 38.2 (l) 262.3
Interest income 13.7 (f) - (9.0)
International currency exchange losses - - 4.7
British pound currency option, net - - 10.5
Gain on sale of Kolbenschmidt AG share purchase options - - (21.7)
Other (income) expense, net 36.9 (g) - 24.5
----------- ------------- ------------
Earnings before income taxes, extraordinary item
and nonrecurring charges (272.4) (56.2) 32.2
Income tax expense (benefit) (85.2) (h) (24.2) (m) 93.5
----------- ------------- ------------
Net earnings (loss) before extraordinary item
and nonrecurring charges $ (187.2) $ (32.0) $ (61.3)
=========== ============= ============
Earnings (loss) per common share:
Basic $ (2.16)
Diluted $ (2.16)
Weighted average shares outstanding (thousands):
Basic 36,647
============
Diluted 47,006
============
</TABLE>
See accompanying notes to Unaudited Pro Forma Statement of Operations.
69
<PAGE> 125
Notes to the Unaudited Pro Forma Statement of Operations
(in millions unless otherwise noted)
Relating to the divestiture of the Bearings Business:
(a) To eliminate the historical statement of operations of the Bearings
Business.
Relating to the purchase of T&N:
(b) To eliminate intercompany sales between the Company and T&N.
70
<PAGE> 126
Notes to the Unaudited Pro Forma Statement of Operations
(in millions unless otherwise noted)
(c) To reflect the net effect of the following adjustments:
<TABLE>
<S> <C> <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 the Company and T&N (15.3)
Elimination of profit in ending inventory on intercompany sales between the
Company and T&N 0.8
Increase in pension expense - elimination of amortization of deferred gain 8.7
Decrease in postretirement benefits expense - elimination of amortization of
deferred loss (0.5)
-------
$ (0.9)
=======
</TABLE>
(d) To reflect the net effect of the following adjustments:
<TABLE>
<S> <C> <C>
Amortization of additional goodwill resulting from the purchase of T&N
(to be amortized over a period of 40 years) $ 43.0
Amortization of other identifiable intangible assets acquired to
estimated fair value (to be amortized over periods from 10 to 24
years) 15.9
-------
$ 58.9
=======
</TABLE>
(e) To reflect the net effect of the following adjustments:
<TABLE>
<S> <C> <C>
Increase in interest expense relating to the net debt incurred for the net
purchase of T&N (see unaudited pro forma balance sheet footnote 1) $ 148.2
Reduction in historical interest expense of T&N relating to the elimination
of historical outstanding debt (23.4)
Amortization of debt issuance costs (to be amortized over a period
of 12 to 96 months) 23.7
-------
$ 148.5
=======
</TABLE>
(f) To reflect the net effect of the following adjustments:
<TABLE>
<S> <C> <C>
Reduction in interest income as a result of the use of existing cash balances
of the Company to finance a portion of the T&N transaction $ 2.2
Reduction in interest income as a result of the use of existing
cash balances of T&N 11.5
-------
$ 13.7
=======
</TABLE>
(g) To record an additional eleven months of minority interest-preferred
securities of affiliates expense.
(h) To record the income tax effects of the statement of operations
adjustments.
Relating to the purchase of Fel-Pro:
(i) To eliminate intercompany sales between the Company and Fel-Pro
71
<PAGE> 127
Notes to the Unaudited Pro Forma Statement of Operations
(in millions unless otherwise noted)
(j) To reflect the net effect of the following adjustments:
<TABLE>
<S> <C> <C>
Increase in depreciation expense relating to the adjustment of property,
plant and equipment acquired to estimated fair value (to be depreciated
over an average period of 10 years) $ 3.0
Elimination of intercompany cost of products sold between the Company and
Fel-Pro (11.9)
Elimination of profit in ending inventory on intercompany sales between the
Company and Fel-Pro 0.6
Increase in postretirement benefits expense - elimination of amortization of 1.4
deferred loss --------
$ (6.9)
========
</TABLE>
(k) To record the amortization of goodwill resulting from the purchase of
Fel-Pro (to be amortized over a period of 40 years)
(l) To record interest expense relating to the debt incurred for the purchase
of Fel-Pro
(m) To record the income tax effects of the statement of operations
adjustments
The unaudited pro forma statement of operations discloses the income (loss) from
continuing operations before nonrecurring charges directly attributable to the
transactions. The following nonrecurring charges were not considered in the
unaudited pro forma statement of operations:
<TABLE>
<S> <C>
Penalty for early retirement of private placement debt of T&N $25.0
Estimated purchased research and development costs 18.6
Adjustment of inventory to estimated fair value 35.0
-----
$78.6
=====
</TABLE>
<TABLE>
<S> <C>
Loss per share as calculated for the pro forma combined entity:
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>
72
<PAGE> 128
Unaudited Pro Forma Balance Sheet
December 31, 1997
<TABLE>
<CAPTION>
FEDERAL- T&N
MOGUL T&N FEL-PRO PRO FORMA
HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS
-------------- --------------- -------------- ------------------
<S> <C> <C> <C> <C>
Cash and equivalents $ 541.4 $ 319.2 $ - $ (765.3) (1)
Accounts receivable 158.9 458.8 83.4 (2.6) (2)
Investment in accounts receivable securitization 48.7 - - -
Inventories 277.0 365.1 61.0 10.2 (3)
Prepaid expenses and income tax benefits 113.2 58.2 4.7 10.7 (4)
--------- --------- ------- ---------
Total current assets 1,139.2 1,201.3 149.1 (747.0)
Property, plant and equipment 313.9 1,089.5 80.6 75.4 (5)
Goodwill 143.8 342.2 - 1,715.0 (6)
Other intangible assets 48.4 17.9 16.7 297.8 (7)
Business investments and other assets 156.8 469.2 23.7 161.5 (8)
--------- --------- ------- ---------
Total Assets $ 1,802.1 $ 3,120.1 $ 270.1 $ 1,502.7
========= ========= ======= =========
Short-term debt $ 28.6 $ 125.4 $ - $ -
Accounts payable 102.3 326.3 22.7 (2.6) (2)
Accrued compensation 36.8 57.6 24.1 -
Accrued customer incentives 22.4 - 10.5 -
Restructuring reserves 31.5 - - 150.0 (9)
Current portion of asbestos liability - 101.3 - -
Other accrued liabilities 108.0 305.3 19.4 -
--------- --------- ------- ---------
Total current liabilities 329.6 915.9 76.7 147.4
Long-term debt 273.1 469.5 - 1,220.4 (1)
Postemployment benefits 190.9 223.7 46.8 6.4 (10)
Noncurrent portion of asbestos liability - 948.7 329.0 (11)
Other accrued liabilities 64.2 53.8 6.6 53.7 (12)
--------- --------- ------- ---------
Total liabilities 857.8 2,611.6 130.1 1,756.9
Minority interest-preferred securities of affiliates 575.0 - - -
Minority interest, other - 42.0 - -
Series C ESOP preferred stock 49.0 - - -
Series E preferred stock - -
Common stock 201.0 361.1 - (361.1) (13)
Additional paid-in capital 332.6 4.4 - (4.4) (13)
Retained earnings (Accumulated deficit),
currency translation and other (191.5) 101.0 140.0 111.3 (14)
Unearned ESOP compensation (21.8) - - -
- -
--------- --------- ------- ---------
Total equity 369.3 466.5 140.0 (254.2)
--------- --------- ------- ---------
$ 1,802.1 $ 3,120.1 $ 270.1 $ 1,502.7
========= ========= ======= =========
<CAPTION>
FEL-PRO DISPOSITION
PRO FORMA OF BEARINGS PRO FORMA
ADJUSTMENTS BUSINESS COMBINED
----------------- ----------------- ----------------
<S> <C> <C> <C>
Cash and equivalents $ (0.9) (15) $ (38.0) (28) $ 56.4
Accounts receivable (4.2) (16) (49.4) (28) 645.0
Investment in accounts receivable securitization - - 48.7
Inventories 23.4 (17) (42.3) (28) 694.4
Prepaid expenses and income tax benefits 2.2 (18) (5.8) (28) 183.1
------- -------- ---------
Total current assets 20.5 (135.5) 1,627.6
Property, plant and equipment 29.6 (19) (109.4) (28) 1,479.6
Goodwill 519.4 (20) (66.8) (28) 2,653.6
Other intangible assets - - 380.8
Business investments and other assets 7.7 (21) (74.9) (28) 744.0
------- -------- ---------
Total Assets $ 577.2 $ (386.6) $ 6,885.6
======= ======== =========
Short-term debt $ - $ (0.5) (28) $ 153.5
Accounts payable (2.0) (22) (38.5) (28) 408.2
Accrued compensation - (10.9) (28) 107.6
Accrued customer incentives - - 32.9
Restructuring reserves 15.0 (23) - 196.5
Current portion of asbestos liability - - 101.3
Other accrued liabilities - (22.0) (28) 410.7
------- -------- ---------
Total current liabilities 13.0 (71.9) 1,410.7
Long-term debt 491.8 (15) (2.1) (28) 2,452.7
Postemployment benefits (18.0) (24) (12.3) (28) 437.5
Noncurrent portion of asbestos liability - - 1,277.7
Other accrued liabilities 6.0 (25) (43.5) (28) 140.8
------- -------- ---------
Total liabilities 492.8 (129.8) 5,719.4
Minority interest-preferred securities of affiliates - - 575.0
Minority interest, other - - 42.0
Series C ESOP preferred stock - - 49.0
Series E preferred stock 225.0 (26) 225.0
Common stock - - 201.0
Additional paid-in capital - - 332.6
Retained earnings (Accumulated deficit),
currency translation and other (140.6) (27) (256.8) (236.6)
Unearned ESOP compensation - - (21.8)
-
------- -------- ---------
Total equity 84.4 (256.8) 549.2
------- -------- ---------
$ 577.2 $ (386.6) $ 6,885.6
======= ======== =========
</TABLE>
See accompanying notes to Unaudited Pro Forma Balance Sheet.
73
<PAGE> 129
Notes to the Unaudited Pro Forma Balance Sheet
(in millions unless otherwise noted)
Relating to the purchase of T&N:
(1) To reflect the net effect of the following adjustments:
<TABLE>
<CAPTION>
Cash Debt
------------- -------------
<S> <C> <C>
Proceeds from the issuance of debt $ 2,300.0 $2,300.0
Acquisition of T&N shares (2,434.2) -
Payoff of existing T&N debt (469.5) (469.5)
Cash used from T&N asbestos fund to pay down debt (130.0) (130.0)
Proceeds from the exercise of T&N stock options
at close 52.6 -
Estimated proceeds from sale of the Bearings Business 560.9 -
Pay down debt and other liabilities using proceeds from sale
of the 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 Kolben Schmidt 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 the Company and T&N
(3) To reflect the net effect of the following adjustments:
<TABLE>
<CAPTION>
<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
74
<PAGE> 130
Notes to the Unaudited Pro Forma Balance Sheet
(in millions unless otherwise noted)
(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>
<CAPTION>
<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 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)
Elimation of the profit in ending inventory on intercompany sales between
the Company and T&N (0.7)
-------
$ 111.3
=======
</TABLE>
Relating to the purchase of Fel-Pro:
(15) To reflect the net effect of the following adjustments:
<TABLE>
<CAPTION>
Cash Debt
------------- -------------
<S> <C> <C>
Proceeds from the issuance of debt $491.8 $491.8
Acquisition of Fel-Pro (491.8) -
Other fees (.9) -
====== ======
$ (.9) $491.8
====== ======
</TABLE>
(16) To reflect the net effect of the following adjustments:
<TABLE>
<S> <C>
Elimination of intercompany accounts receivable $(2.0)
Increase in allowance for doubtful accounts (2.2)
-----
$(4.2)
=====
</TABLE>
(17) To reflect the net effect of the following adjustments:
<TABLE>
<S> <C>
Adjustment of inventories acquired to estimated fair value $24.0
Elimination of intercompany profit in ending inventory (0.6)
-----
$23.4
=====
</TABLE>
(18) To record the current deferred income tax effects of the balance sheet
adjustments
(19) To adjust property, plant and equipment acquired to estimated fair
value
75
<PAGE> 131
Notes to the Unaudited Pro Forma Balance Sheet
(in millions unless otherwise noted)
(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 the Company 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 Bearings Business:
(28) To eliminate the historical balance sheet of the Bearings Business.
The estimated effects of the sale of the Bearings Business are located
in the T&N pro forma adjustments.
76
<PAGE> 132
(30) To reflect the net effect of the following adjustments:
<TABLE>
<S> <C>
Elimination of the historical goodwill of the Bearings Business. $ (66.8)
Elimination of acquired goodwill relating to the Bearings Business as the
excess of the estimated proceeds to be received over the net assets to
be sold. (268.2)
Elimination of the goodwill adjustment of property, plant & equipment
acquired to estimated fair value 60.9
Elimination of the adjustment of deferred tax assets relating to the balance
sheet adjustments of the Bearings Business (20.7)
-------
$(294.8)
=======
</TABLE>
(31) To reflect the net effect of the following adjustments:
<TABLE>
<S> <C>
Elimination of the historical other assets of the Bearings Business. $ (74.9)
Elimination of the adjustment of deferred tax assets relating to the balance
sheet adjustments of the Bearings Business 20.7
-------
$( 54.2)
=======
</TABLE>
(32) To reduce the debt incurred for the purchase of T&N, which is included
in the previous T&N pro forma adjustments, as a result of the estimated
proceeds of the sale of the Bearings Business.
77
<PAGE> 133
EXHIBIT INDEX
23.1 Consent of Ernst & Young LLP
23.2 Consent of KPMG Audit Plc
<PAGE> 134
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Form S-8 Registration Statement
No. 333-38961, effective October 29, 1997, Form S-3 Registration Statement No.
33-55135, effective September 2, 1994, Form S-3 Registration Statement No.
33-54717, effective August 5, 1994, Form S-3 Registration Statement No.
33-54301, effective June 24, 1994, Form S-3 Registration Statement No. 33-51265,
effective January 13, 1994, Form S-8 Registration Statement No. 33-51403,
effective December 10, 1993, Form S-8 Registration Statement No. 33-32429,
effective December 31, 1989, Form S-8 Registration Statement No. 33-32323,
effective December 22, 1989, Form S-8 Registration Statement No. 33-30172,
effective August 21, 1989, and Form S-8 Registration Statement No. 2-93179,
effective October 1, 1984, of our report dated February 13, 1998, with respect
to the financial statements of The Operating Businesses of the Fel-Pro Group
included in Federal Mogul Corporation's Form 8-K/A dated April 6, 1998.
/s/ Ernst & Young LLP
April 6, 1998
Chicago, Illinois
<PAGE> 135
EXHIBIT 23.2
[KPMG Audit Plc Letterhead]
The Directors
Federal-Mogul Corporation
World Headquarters Our ref rr/ss/560
26555 Northwestern Highway
Southfield
MICHIGAN 48034
7 April 1998
Dear Sirs
T&N PLC FINANCIAL STATEMENTS
We consent to the incorporation by reference in the registration statements
(33-55135, 33-54717, 33-54301 and 33-51265) on Form S-3 and the registration
statements (333-38961, 33-51403, 33-32429, 33-32323, 33-30172 and 2-93179) on
Form S-8 of Federal-Mogul Corporation of our report dated 17 February 1998,
with respect to the consolidated balance sheets of T&N plc and its subsidiaries
at 31 December 1997 and 31 December 1996, and the related consolidated profit
and loss accounts, reconciliations of movements in shareholders' funds and
consolidated cash flow statements for each of the years in the three-year period
ended 31 December 1997.
Yours sincerely
KPMG Audit Plc
KPMG Audit Plc
London, England
